●
reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls, and compliance with the Mayoly APA, we provided to Mayoly the following consideration for the purchase of MS1819-SD:
(i)
we assumed certain of Mayoly’s liabilities with respect to MS1819-SD;legal and regulatory requirements;
(ii)●
we forgave all amounts currently owed to AzurRx SAScoordinating the oversight by Mayoly under the JDLA;our Board of Directors of our code of business conduct and our disclosure controls and procedures;
(iii)●
we agreed to pay, within 30 days after the execution of the Mayoly APA, all amounts incurred by Mayolyestablishing procedures for the maintenanceconfidential and/or anonymous submission of patents related to MS1819-SD from January 1, 2019 through the date of the Mayoly APA;concerns regarding accounting, internal controls or auditing matters; and
(iv)●
reviewing and approving related-person transactions.
Our we madeAudit Committee currently consists of Messrs. Borkowski and Casamento and Dr. Riddell, with Mr. Borkowski serving as the Chairman. The rules of the Nasdaq Stock Market require our Audit Committee to consist entirely of at least three directors, all of whom must be deemed to be independent directors under the Listing Rules of the Nasdaq Stock Market. Our Board has affirmatively determined that Messrs. Borkowski and Casamento, and Dr. Riddell, each meet the definition of “independent director” for purposes of serving on an initial payment to MayolyAudit Committee under the Nasdaq Stock Market Listing Rules. Our Board of € 800,000, which amount was paid by the issuanceDirectors has determined that Messrs. Borkowski and Casamento each qualify as an “audit committee financial expert,” as such term is defined in Item 407(d)(5) of 400,481 shares of our common stock at a price of $2.29 per share (the “Closing Payment Shares”): andRegulation S-K.
Compensation Committee
The Compensation Committee is responsible for, among other matters:
●
reviewing key employee compensation goals, policies, plans and programs;
(v)●
we agreed to pay to Mayoly an additional € 1,500,000, payable in a mix of cashreviewing and sharesapproving the compensation of our common stock as follows (the “Milestone Payments”): (y) on December 31, 2019, a cash payment of € 400,000directors and 200,240 shares of common stock at a price of $2.29 per share (the “2019 Escrow Shares”) and (z) on December 31, 2020, a cash payment of € 350,000 and 175,210 shares of common stock at a price of $2.29 per share (the “2020 Escrow Shares” and, together with the 2019 Escrow Shares, the “Escrow Shares”).executive officers;
●
reviewing and approving employment agreements and other similar arrangements between us and our executive officers; and
●
appointing and overseeing any compensation consultants or advisors.
Our Compensation Committee consists of Messrs. Borkowski and Casamento and Dr. Riddell, with Dr. Riddell serving as Chair. The rules of the Nasdaq Stock Market require our Compensation Committee to consist entirely of independent directors. Our Board has affirmatively determined that Mr. Borkowski and Dr. Riddell meet the definition of “independent director” for purposes of serving on a Compensation Committee under the Listing Rules of the Nasdaq Stock Market.
Nominating and Corporate Governance Committee
The purpose of the Nominating and Corporate Governance Committee is to assist the Board in identifying qualified individuals to become members of the Board, determining the composition of the Board, and monitoring the activities of the Board to assess overall effectiveness. In addition, the Nominating and Corporate Governance Committee will be responsible for developing and recommending to our Board corporate governance guidelines applicable to the Company and advising our Board on corporate governance matters. Our Nominating and Corporate Governance Committee consists of Messrs. Borkowski and Casamento and Dr. Riddell, with Mr. Borkowski serving as the Chairman.
Board Attendance at Board of Directors, Committee and Stockholder Meetings
The Closing Payment SharesOur Board met eight times and acted by unanimous written consent 13 times during the fiscal year ended December 31, 2019. Our Audit Committee met three times and our Compensation Committee met once during the same period. Our Nominating and Corporate Governance Committee did not meet, instead the full Board met and acted on its behalf during the fiscal year ended December 31, 2019. Each of our directors serving during fiscal 2019 attended at least 75% of the meetings of the Board of Directors and the Escrow Shares were all issued upon executioncommittees of the Mayoly APA;provided,however, perBoard upon which such director served that were held during the termsterm of the Mayoly APA, the Escrow Shares will be held in escrow until the applicable Milestone Payment date, at which time the respective Escrow Shares will be released to Mayoly.his service.
Corporate History
On May 21, 2014, we entered intoWe do not have a stock purchase agreement (the “SPA”) with Protea Biosciences Group, Inc. (“Protea Group”) and its wholly-owned subsidiary, Protea Biosciences, Inc. (“Protea Sub” and, together with Protea Group, “Protea”), to acquire 100%formal policy regarding attendance by members of the outstanding capital stockBoard of AzurRx SAS (formerly ProteaBio Europe SAS), a wholly-owned subsidiaryDirectors at our annual meeting of Protea Sub. On June 13, 2014, we completed the acquisition in exchange for the payment of $600,000 and the issuance of shares of our Series A Convertible Preferred Stock (“Series A Preferred”) convertible into 33% of our outstanding common stock and agreedstockholders, but directors are encouraged to make certain milestone and royalty payments to Protea. Subsequently, on December 14, 2018, we purchased from Protea Group and Protea Sub the rights to any milestone payments, royalty payments, and transaction value consideration.
Product Programs
Our current product pipeline consists of two therapeutic programs under development, each of which are described below.
MS1819-SD
MS1819-SD is the active pharmaceutical ingredient, or API, derived from Yarrowia lipolytica, an aerobic yeast naturally found in various foods such as cheese and olive oil that is widely used as a biocatalyst in several industrial processes. MS1819-SD is an acid-resistant secreted lipase naturally produced by Yarrowia lipolytica, known as LIP2, that we are developing through recombinant DNA technology for the treatment of EPI associated with CP and CF. We previously held the exclusive right to commercialize MS1819-SD in the U.S. and Canada, South America (excluding Brazil), Asia (excluding China and Japan), Australia, New Zealand and Israel pursuant to a sublicense from Mayoly under the JDLA, which also granted us joint commercialization rights for Brazil, Italy, China and Japan. As disclosed under“Recent Developments - Asset Purchase Agreement with Mayoly”above, on March 27, 2019, we purchased all rights, title and interest in and to MS1819-SD from Mayoly.
Background
The pancreas is both an endocrine gland that produces several important hormones, including insulin, glucagon, and pancreatic polypeptide, as well as a digestive organ that secretes pancreatic juice containing digestive enzymes that assist the absorption of nutrients and digestion in the small intestine.attend.
The targeted indicationBoard Leadership Structure
Currently,Mr. James Sapirstein serves as our President and Chief Executive Officer and Mr. Edward J. Borkowski serves as Chair of MS1819-SDour Board. Our Board of Directors has determined that it is in the compensation of EPI, which is observed when the exocrine functionsbest interests of the pancreas are below 10% of normal. The symptomatology of EPI is essentially dueBoard and the Company to maintain separate the deficiency of pancreatic lipase, an enzyme that hydrolyses triglycerides into monoglyceridesroles for the Chief Executive Officer and free fatty acids. The pancreatic lipase enzymatic activity is hardly compensated by extrapancreatic mechanisms, because gastric lipase has nearly no lipolytic activity in the pH rangeChair of the intestine. OnBoard. The Board believes this structure increases the other hand, when they are impaired,Board’s independence from management and, in turn, leads to better monitoring and oversight of management. Although the pancreatic amylaseBoard believes the Company is currently best served by separating the role of Board Chairman and proteases (enzymes that break up starchesChief Executive Officer, the Board of Directors will review and protein, respectively) activities can be compensatedconsider the continued appropriateness of this structure on an annual basis.
Risk Oversight
Our Board of Directors oversees a company-wide approach to risk management, determines the appropriate risk level for us generally, assesses the specific risks faced by us and reviews the salivary amylase,steps taken by management to manage those risks. Although our Board of Directors has ultimate oversight responsibility for the intestinal glycosidase, the gastric pepsin, and the intestinal peptidases, all of which are components of the gastric juice secreted by the stomach walls. Lipid maldigestion due to lipase deficiencyrisk management process, its committees oversee risk in certain specified areas.
Specifically, our Compensation Committee is responsible for weight loss, steatorrhea featuredoverseeing the management of risks relating to our executive compensation plans and arrangements, and the incentives created by greasy diarrhea,the compensation awards it administers. Our Audit Committee oversees management of enterprise risks and fat-soluble vitamin deficiencies (i.e. A, D, E and K vitamins).financial risks, as well as potential conflicts of interests. Our Board of Directors will be responsible for overseeing the management of risks associated with the independence of our Board.
CP,Code of Business Conduct and Ethics
Our Board of Directors adopted a code of business conduct and ethics that applies to our directors, officers and employees. A copy of this code is available on our website. We intend to disclose on our website any amendments to the most common causeCode of EPI, is a long-standing inflammationBusiness Conduct and Ethics and any waivers of the pancreasCode of Business Conduct and Ethics that alters its normal structure andapply to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions. In the United States, its prevalence rate is of 42 cases per 100,000 inhabitants, resulting in approximately 132,000 cases. Approximately 60% of patients affected with CP display EPI, resulting in approximately 80,000 patients requiring substitution therapy in the U.S. In Western societies, CP is caused by chronic alcoholic consumption in approximately 55-80% of cases. Other relatively frequent etiologies include the genetic form
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the diseaseExchange Act, requires our officers, directors, and persons who beneficially own more than 10% of our common stock to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater-than-ten-percent stockholders are also required by the SEC to furnish us with copies of all Section 16(a) forms that is inherited as an autosomal dominant condition with variable penetrance, pancreatic trauma and idiopathic causes.they file.
CF, another dominant etiologyBased solely upon a review of EPI, is a severe genetic disease associated with chronic morbiditythese forms that were furnished to us, we believe that all reports required to be filed by these individuals and life-span decrease of most affected individuals. In most Caucasian populations, CF prevalence is of 7-8 cases per 100,000 inhabitants, but is less common in other populations, resulting in approximately 30,000 affected individuals inpersons under Section 16(a) were filed during the U.S. CF is inherited as monogenic autosomal recessive disease due toyear ended December 31, 2019 and that such filings were timely, except for the defect at a single gene locus that encodes the Cystic Fibrosis Transmembrane Regulator protein (“CFTR”), a regulated chloride channel. Mutation of both alleles of this chloride channel gene results in the production of thick mucus, which causes a multisystem disease of the upper and lower respiratory tracts, digestive system, and the reproductive tract. The progressive destruction of the pancreas results in EPI that is responsible for malnutrition and contributes to significant morbidity and mortality. About 80-90% of patients with CF develop EPI, resulting in approximately 25,000-27,000 patients in the U.S. that require substitution therapy.following:
Current treatments for EPI stemming from CP and CF rely on porcine pancreatic extracts, or PPEs, which have been on the market since the●
Mr. Borkowski, a director, filed two late 1800s. The PPE market is well established with estimated sales in the U.S.Form 4s reporting an aggregate of $1.2 billion in 2018 and has been growing for the past five years at a compound annual growth rate of approximately 20%. In spite of their long-term use, however, PPEs suffer from poor stability, formulation problems, possible transmission of conventional and non-conventional infectious agents due to their animal origins, and possible adverse events at high doses in patients with CF and limited effectiveness.four transactions;
History of the Program●
Mr. Casamento, a director, filed a late Form 4 reporting one transaction;
In 1998, Mayoly,●
Dr. Dupret, the former Chief Scientific Officer, filed a European pharmaceutical company focusing primarily on gastroenterology disorders, launched a program for the discovery and characterization of novel lipases of non-animal origin that could be used in replacement therapy for EPI. The program was conducted in collaboration with INRA TRANSFERT, a subsidiary of the French academic laboratory, National Institute for Agricultural Research, or INRA. In 2000, Mayoly and INRA discovered that the yeast Yarrowia lipolytica secreted a lipase named LIP2. During the ensuing years, Mayoly investigated the in vitro enzymatic activities of LIP2 in collaboration with the Laboratory of Enzymology at Interfaces and Physiology of Lipolysis ("EIPL"), a French public-funded research laboratory at the French National Scientific Research Centre laboratory ("CNR"), which focuses on the physiology and molecular aspects of lipid digestion.late Form 4 reporting two transactions;
Pre-Clinical Program●
Dr. Pennington, the Chief Medical Officer, filed a late Form 4 reporting one transaction;
The efficacy of MS1819-SD has been investigated in normal minipigs, which are generally considered as●
Dr. Riddell, a relevant model for digestive drug development when considering their physiological similarities with humans and their omnivore diet. Experimental pancreatitis was induced by pancreatic duct ligation, resulting in severe EPI with baseline coefficient of fat absorption (“CFA”) around 60% post-ligature. CFA isdirector, filed a measurement obtained by quantifying the amount of fat ingested orally over a defined time period and subtracting the amount eliminated in the stool to ascertain the amount of fat absorbed by the body. Pigs were treated with either MS1819-SD or enteric-coated PPE, both administered as a single-daily dose.late Form 4 reporting one transaction;
At doses ranging from 10.5 to 211mg, MS1819-SD increased the CFA by +25 to +29%●
Mr. Ross Jr., an individual who owns in comparison to baseline (p<0.05 at all doses), whereas the 2.5 mg dose had milder activity. Similar efficacy was observed in pigs receiving 100,000 U lipaseexcess of enteric-coated porcine pancreatic extract. These findings demonstrate the in vivo activity5% of MS1819-SD inour common stock, filed a relevant in vivo model at a level similar to the PPEs at dosages of 10.5mg or greater. The results of a trial are statistically significant if they are unlikely to have occurred by chance. Statistical significance of the trial results is typically based on widely used, conventional statistical methods that establish the p-value of the results. A p-value of 0.05 or less is required to demonstrate statistical significance. As such, these CFA levels are considered to be statistically significant.late Form 4 reporting five transactions; and
To date, two non-clinical toxicology studies have been conducted. Both show that MS1819-SD lipase is clinically well tolerated at levels up to 1000mg/kg in rats and 250 mg/kg in minipigs up to 13 weeks. MS1819-SD is therefore considered non-toxic in both rodent and non-rodent species up to●
Dr. Schramm, a maximum feasible dose (“MFD”) of 1000 mg/kg/day in the rats over six months of administration.director, filed a late Form 4 reporting one transaction.
Clinical Program
We believe that there are two principal therapeutic indications for EPI compensation by MS1819-SD: (i) adult patients with CP, and (ii) children and adults affected by CF. Because of their different pathophysiology and clinical presentation, we intend to separately investigate each of these indications and have determined, based on market size and expected dose requirements, to pursue the indication for adults first.
During 2010 and 2011, a phase I/IIa clinical trial of MS1819-SD was conducted in conjunction with Mayoly in a single center in France. The study was an exploratory study mainly designed to investigate the safety of MS1819-FD (freeze-dried) and was a randomized, double blind, placebo controlled, parallel clinical trial in 12 patients affected with CP or pancreatectomy and severe EPI. The primary efficacy endpoint of the study was defined as the relative change in steatorrhea (an established surrogate biomarker of EPI correction) in comparison to baseline. The study found that MS1819-SD was well tolerated with no serious adverse events. Only two adverse events were observed: constipation (two patients out of eight with MS1819-SD) and hypoglycemia (two patients out of eight with MS1819-SD, and one patient out of four with placebo). A non-statistically significant difference of the primary endpoint, possibly due to the small group size, was found between the two groups both in intention-to-treat, a group that included three patients who received the in-patient facility study diet but did not fulfill the protocol’s inclusion criteria, and per-protocol analysis. This study was not designed, nor did it aim, to demonstrate statistically significant changes of CFA or steatorrhea under MS1819-FD.
We received regulatory approval in Australia and New Zealand in 2016, with the addition of a 2018 regulatory approval in France, to conduct a phase II multi-center dose escalation study of MS1819-SD in CP and pancreatectomy. The primary endpoint of this study was to evaluate the safety of escalating doses of MS1819-SD in 11 CP patients. The secondary endpoint was to investigate the efficacy of MS1819-SD in these patients by analysis of the CFA and its change from baseline. On September 24, 2018, we announced that in pre-planned analyses, both the study’s primary and secondary endpoints were reached with a statistically significant (p=0.002) improvement in the CFA of 21.8%, in a per protocol analysis, with the highest evaluated dose of 2,240 mg/day of MS1819-SD. Statistical significance of the trial results is typically based on widely used, conventional statistical methods that establishes the p-value of the results. A p-value of 0.05 or less is required to demonstrate statistical significance. As such, these CFA levels are considered to be statistically significant.
On December 19, 2018, we announced that we initiated the Phase II OPTION study to investigate MS1819-SD in CF patients with EPI. The Phase II multi-center study is designed to investigate the safety, tolerability and efficacy of MS1819-SD in a head-to-head comparison against the current porcine enzyme replacement therapy standard of care. Planned enrollment is expected to include approximately 30 CF patients, who are 18 years of age or older, with study completion anticipated in 2019. The OPTION study employs a six-week non-inferiority CFA primary efficacy endpoint comparing MS1819-SD to porcine enzyme replacement therapy. On February 20, 2019, we announced that we have dosed the first patients in our Phase II OPTION study.
B-Lactamase Program
Our b-lactamase program focuses on products with an enzymatic combination of bacterial origin for the prevention of hospital-acquired infections and antibiotic-associated diarrhea (“ITEM 11. EXEAAD”) by resistant bacterial strains induced by parenteral administration of several antibiotic classes. Currently, we have two compounds in pre-clinical development in this program, AZX1101 and AZX1103. Both AZX1101 and AZX1103 are composed of several distinct enzymes that break up individual classes of antibiotic molecules. AZX1103 is a b-lactamase enzyme combination that has shown positive pre-clinical activity, with degradation of amoxicillin in the presence of clavulanic acid in the upper gastrointestinal tract in the Gottingen minipig model. Currently, we are focused on advancing pre-clinical development of AZX1103 and expect to file an Investigational New Drug application (an “IND”) for AZX1103 with the U.S. Food and Drug Administration (“FDA”) in 2019.CUTIVE COMPENSATION
AZX1101Summary Compensation Table
AZX1101 is a recombinant b-lactamase enzyme combinationThe following table provides information regarding the compensation paid during the years ended December 31, 2019 and 2018 to our principal executive officer, principal financial officer and certain of bacterial origin under development for the prevention of hospital-acquired infections by resistant bacterial strains induced by parenteral administration of several classes of antibiotics (knownour other executive officers, who are collectively referred to as nosocomial infections), as well as the prevention of antibiotic-associated diarrhea ("AAD").
“named executive officers” elsewhere in this Annual Report.
Current Named Executive Officers (1) | Year | | | | | | |
| | | | | | | | |
| James Sapirstein | 2019 | $102,404 | $- | $232,900 | (3) | $- | $335,304 |
| President and Chief Executive Officer | 2018 | $- | $- | - | (4) | $- | - |
| | | | | | | |
| James E. Pennington | 2019 | $255,000 | $75,000 | $115,000 | (3) | $- | $445,000 |
| Chief Medical Officer | 2018 | $148,718 | $- | $155,475 | (5) | $- | $304,193 |
| | | | | | | |
Former Named Executive Officers (2) | | | | | | | |
| Johan M. (Thijs) Spoor | 2019 | $340,177 | $-(6) | $157,500 | (3) | $- | $497,677 |
Former President, Chief Executive Officer and Director
| 2018 | $425,000 | $212,500 | $608,000 | (5) | $- | $1,245,500 |
| | | | | | | |
Maged Shenouda (3) | 2019 | $308,035 | $-(7) | $105,000 | (5) | $- | $413,035 |
| Former Chief Financial Officer | 2018 | $296,666 | $82,500 | $207,300 | (5) | $- | $586,466 |
| | | | | | | |
| Daniel Dupret | 2019 | $151,393 | $- | $- | | $- | $151,393 |
| Former Chief Scientific Officer | 2018 | $234,999 | $- | $169,980 | (5) | $- | $404,979 |
(1) | Daniel Schneiderman was appointed as Chief Financial Officer subsequent to the year ended December 31, 2019, and therefore is excluded from the table. Mr. Sapirstein was appointed as President and Chief Executive Officer effective October 8, 2019 and received no compensation prior to his employment. Dr. Pennington was appointed as Chief Medical Officer effective May 30, 2018 and received no compensation prior to his employment. |
|
|
(2) | Mr. Spoor’s employment with the Company as President and Chief Executive Officer terminated effective October 8, 2019 due to his resignation. In addition, Mr. Spoor resigned as a member of the Board on April 29, 2020. Mr. Shenouda’s employment with the Company as Chief Financial Officer terminated effective November 30, 2019 due to his resignation. Dr. Dupret retired and resigned from his position as President of AzurRx SAS, a wholly owned French subsidiary of the Company effective July 1, 2019. |
(3) | Represents the grant date fair value of restricted stock and stock options issued during the year ended December 31, 2019, calculated in accordance with ASC Topic 718. The assumptions used in the calculation of these amounts are included in Note 13 of the notes to the consolidated financial statements contained in the Company’s 10-K, filed with the SEC on March 30, 2020. |
(4) | Mr. Sapirstein received no compensation during this period or prior to his appointments as the Company’s President and Chief Executive Officer effective October 8, 2019. |
(5) | Represents the grant date fair value of restricted stock and stock options issued during the year ended December 31, 2018, calculated in accordance with ASC Topic 718. The assumptions used in the calculation of these amounts are included in Note 13 of the notes to the consolidated financial statements contained in the Company’s 10-K, filed with the SEC on April 1, 2019. |
(6) | On June 28, 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, 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. This bonus has been excluded from the table. In addition, 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 forfeited the right to receive 241,667 earned, but unissued shares of restricted stock in connection with his resignation from the Board on April 29, 2020. |
(7) | On June 28, 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 was not owed, and the Company reversed the accrual in the quarter ended December 31, 2019. This bonus has been excluded from the table. |
AgreementsOverview of Our Fiscal 2019 and Collaborations2018 Executive Compensation
Protea Stock Purchase AgreementElements of Compensation
Our executive compensation program consisted of the following components of compensation in 2019 and 2018:
On May 21, 2014, we entered into the SPABase Salary. Each named executive officer receives a base salary commensurate with Proteatheir respective expertise, skills, knowledge and experience offered to acquire 100% of the outstanding capital stock of ProteaBio Europe (the “Acquisition”). On June 13, 2014, we completed the Acquisition in exchange for the paymentour management team. Base salaries are periodically adjusted to Protea of $600,000 and the issuance of shares of our Series A Preferred convertible into 33% of our outstanding common stock. Pursuant to the SPA, Protea Sub assigned (i) to Protea Europe all of its rights, assets, know-how and intellectual property rights in connection with program PR1101 and those granted under that certain Joint Research and Development Agreement, by and among Protea Sub, Protea Europe and Mayoly, dated March 22, 2010; and (ii) to us all amounts, together with any right of reimbursement, due to Protea Sub in connection with outstanding shareholder loans.reflect:
Pursuant to the SPA, we were obligated to pay certain other contingent consideration upon the satisfaction of certain events, including (a) a one-time milestone payment of $2.0 million due within ten days of receipt of the first approval by the FDA of an New Drug Application (“NDA”) or Biological License Application (“BLA”) for a Business Product (as such term is defined in the SPA); (b) royalty payments equal to 2.5% of net sales of Business Product up to $100.0 million and 1.5% of net sales of Business Product in excess of $100.0 million; and (c) 10% of the Transaction Value (as defined in the SPA) received in connection with a sale or transfer of the pharmaceutical development business of Protea Europe.
Protea Asset Sale and Purchase Agreement
On December 7, 2018, we entered into the Protea Purchase Agreement with Protea Biosciences Group, Inc. and Protea, its wholly owned subsidiary, pursuant to which we agreed to purchase the rights to any milestone payments, royalty payments, and transaction value consideration due from the Company to the Protea now or in the future, arising from that certain Stock Purchase and Sale Agreement dated May 21, 2014 between the Company and the Protea.
Protea previously filed for Chapter 11 protection under the United States Bankruptcy Code on December 1, 2017. On November 27, 2018, we participated in a bankruptcy auction for the Purchased Assets and were chosen as the successful bidder at the conclusion of the auction. On December 10, 2018, the transaction was approved by Judge Patrick J. Flatley of the United States Bankruptcy Court for the Northern District of West Virginia.
On December 14, 2018, we closed the transactions contemplated by the Protea Purchase Agreement. In accordance with the terms of the Protea Purchase Agreement,we purchased the Purchased Assets from Protea for an aggregate purchase price of $1,550,000. We paid $250,000 of the Purchase Price in cash, and the remaining $1,300,000 was paid by the issuance of shares of our common stock, at a price of $1.77 per share, a price per share that was $0.01 higher than the closing price of our common stock on the Closing Date, as reported on the Nasdaq Capital Market, resulting in the issuance of 734,463 shares of our common stock to Protea.
Mayoly JDLA and Subsequent Asset Purchase Agreement
Effective March 22, 2010, Protea and AzurRx SAS entered into the JDLA with Mayoly pursuant to which Mayoly sublicensed certain of its exclusive rights to a genetically engineered yeast strain cell line on which our MS1819-SD is based that derive from a Usage and Cross-Licensing Agreement dated February 2, 2006 (the “INRA Agreement”) between Mayoly and INRA, in charge of patent management acting for and on behalf of the National Centre of Scientific Research (“CNRS”) and INRA.
Effective January 1, 2014, Protea entered into an amended and restated JDLA with Mayoly, pursuant to which Protea acquired the exclusive right to Mayoly patents and technology, with the right to sublicense, develop, manufacture and commercialize human pharmaceuticals based on the MS1819-SD lipase within the following territories: U.S. and Canada, South America (excluding Brazil), Asia (excluding China and Japan), Australia, New Zealand and Israel. The JDLA further provided Mayoly the exclusive right to Protea’s patents and technology, with the right to sublicense, develop, manufacture and commercialize human pharmaceuticals based on the MS1819-SD lipase within the following territories: Mexico, Europe (excluding Italy, Portugal and Spain) and any other country not granted to us alone, or jointly with Mayoly. Prior to the execution of the Mayoly APA, rights to the following territories were held jointly with Mayoly: Brazil, Italy, Portugal, Spain, China and Japan. In addition, the Mayoly Agreement required Protea to pay 70% of all development costs and required each of the parties to use reasonable efforts to:
●
devote sufficient personnelthe nature, responsibilities, and facilities required forduties of the performance of its assigned tasks;officer’s position;
●
make available appropriately qualified personnel to supervise, analyzethe officer’s expertise, demonstrated leadership ability, and report on the results obtained in the furtherance of the development program; andprior performance;
●
deploy such scientific, technical, financialthe officer’s salary history and other resources as is necessary to conduct the development program.total compensation, including annual cash incentive awards and annual equity incentive awards; and
●
the competitiveness of the officer’s base salary.
Each named executive officer’s base salary for fiscal 2019 and 2018 is listed under the heading “Salary” in the Summary Compensation Table above.
Employment Agreements and Potential Payments upon Termination or Change of Control
Current Named Executive Officers
James Sapirstein
Effective October 8, 2019, the Company entered into an employment agreement with Mr. Sapirstein to serve as its President and Chief Executive Officer for a term of three years, subject to further renewal upon agreement of the parties. The employment agreement with Mr. Sapirstein provides for a base salary of $450,000 per year. In addition to the base salary, Mr. Sapirstein is eligible to receive (i) a cash bonus of up to 40% of his base salary on an annual basis, based on certain milestones that are yet to be determined; (ii) 1% of net fees received by the Company upon entering into license agreements with any third-party with respect to any product current in development or upon the sale of all or substantially all assets of the Company; (iii) a grant of 200,000 restricted stock units (“RSUs”) which are scheduled to vest as follows (a) 100,000 shares upon the first commercial sale of MS1819 in the U.S. and (b) 100,000 shares upon the total market capitalization of the Company exceeding $1.0 billion for 20 consecutive trading days; (iv) a grant of 300,000 10-year stock options to purchase shares of common stock with an exercise price equal to $0.56 per share, which are scheduled to vest as follows (a) 50,000 shares upon the Company initiating its next Phase II clinical trial in the U.S. for MS1819, (b) 50,000 shares upon the Company completing its next or subsequent Phase II clinical trial in the U.S. for MS1819, (c) 100,000 shares upon the Company initiating a Phase III clinical trial in the U.S. for MS1819, and (d) 100,000 shares upon the Company initiating a Phase I clinical trial in the U.S. for any product other than MS1819. Mr. Sapirstein is entitled to receive 20 days of paid vacation, participate in full employee health benefits and receive reimbursement for all reasonable expenses incurred in connection with his services to the Company.
As disclosed under “Recent Developments – Asset Purchase Agreement with Mayoly” above, on March 27, 2019, we entered intoIn the Mayoly APA pursuantevent 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 whichreceive any payments beyond amounts already earned, and any unvested equity awards will terminate. In the JDLA wasevent 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. Sapistein’s premiums to cover COBRA for a period of twelve months following the termination date; and we acquired all rights, title and interest in and to MS1819-SD. In addition, we executed(iii) a Patent License Agreement with Mayoly pursuant to which we granted to Mayoly an exclusive, royalty-bearing right to revenue received from commercialization of MS1819-SD within certain territories.prorated annual bonus.
INRA AgreementDaniel 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 February 2006, INRA, acting on behalfthe 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 CNRS and Institut National de la Recherche Agronomique, entered intoControl, 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 Usage and Cross-licensing Agreement with Mayolyperiod of six months following the termination date or the remaining term of the employment agreement; (iv) payment of premiums to specify their respective rightscover COBRA for a period of six months following the termination date; (v) a prorated annual bonus equal to the usetarget annual milestone bonus, if any, for the year of (i) French patent application no. FR9810900 (the "INRA CNRS Patent Application"), (ii) international patent application no. WO2000FR0001148 (the "Mayoly Patent Application"),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 (iii) the technology and know-how associated with both patent applications.immediate accelerated vesting of any unvested options or other unvested awards.
The agreement covers extensions of both patent applications. Specifically, the INRA CNRS Patent Application encompasses application no. FR9810900 as well as PCT/FR99/02079 with national phase entry in the U.S. (no. 09/786,048, now US patent 6,582,951), Canada (no. 2,341,776) and Europe (no. 99.940.267.0, now EP 1 108 043 B1). The Mayoly Patent Application encompasses WO2000FR0001148 with the national phase entered in Europe (now EP 1 276 874 B1). 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 provided Mayoly 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 world-wide use in human therapy, nutraceuticals, and cosmetology and provides INRA with world-wide (i) use of lipase as an enzymatic catalyst throughout this field, including the production of pharmaceuticals, and (ii) treatmentsole discretion of the environment, food production processes, cleaning processes and other fields, excluding human therapies, neutraceuticals and cosmetology.Board based on his attainment of certain financial, clinical development, and/or business milestones established annually by the Board or Compensation Committee. The agreement provides for shared use in the production of lipase in the veterinary field (livestock and pets). As consideration for the agreement, Mayoly agreed to pay INRA an annual lump sum of €5,000 until marketing. Upon marketing, Mayoly agreed to pay INRA a lump sum of €100,000 and royalties on net sales of the product. Unless earlier terminated in accordance with its terms, the agreement with INRA expires upon the expiration of the patents in each country in which the license has been granted. The partiesCompany may terminate theDr. 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 party breaches its obligations therein, whichthan for Cause, Dr. Pennington is entitled to three months’ severance payable over such period. In the event of termination shall become effective three months following written notice thereof toby the breaching party. The breaching party shall have the right to cure such breach or default during such three-month period. Upon execution of the Mayoly APA in March 2019, Mayoly transferred the INRA Agreement to us.
TransChem Sublicense
On August 7, 2017, we entered into a Sublicense Agreement with TransChem pursuant to which TransChem granted to us an exclusive license to certain patents (the“Licensed Patents”) relating to Helicobacter pylori 5’methylthioadenosine nucleosidase inhibitors. We may terminate the Sublicense Agreement and the licenses granted thereinCompany other than 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 incurredCause in connection with the preparation, filing, and maintenancea Change 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 royaltiesControl as such term is defined in the event certain performance-based milestones and commercial sales involving the Licensed Patents are achieved. The Licensed PatentsDr. Pennington’s employment agreement, Dr. Pennington will allow us to develop compounds for treating gastrointestinal, lung and other infections that are specific to individual bacterial species.H. pyloribacterial infections are a major cause of chronic gastritis, peptic ulcer disease, gastric cancer and other diseases.receive six months’ severance payable over such period.
Intellectual PropertyFormer Named Executive Officers
Our goal is Johan (Thijs) Spoor
On January 3, 2016, the Company entered into an employment agreement with its former President and Chief Executive Officer, Johan Spoor. The employment agreement provided for a term expiring January 2, 2019. Although Mr. Spoor’s employment agreement expired, he remained employed as the Company’s President and Chief Executive Officer under the terms of his prior employment agreement through his resignation from all positions with the Company on October 8, 2019. In addition, Mr. Spoor resigned as a member of the Board on April 29, 2020.
The employment agreement with Mr. Spoor provided for a base salary of $425,000 per year. At the sole discretion of the Board or the Compensation Committee of the Board, following each calendar year of employment, Mr. Spoor was eligible to obtain, maintainreceive an additional cash bonus based on his attainment of certain financial, clinical development, and/or business milestones to be established annually by the Board or the Compensation Committee. Mr. Spoor’s employment agreement was terminable by either party at any time. In the event of termination by us without Cause or by Mr. Spoor for Good Reason not in connection with a Change of Control, as those terms are defined in Mr. Spoor’s employment agreement, he was entitled to twelve months’ severance payable over such period. In the event of termination by us without Cause or by Mr. Spoor for Good Reason in connection with a Change of Control, as those terms are defined in Mr. Spoor’s employment agreement, he was eligible to receive eighteen months’ worth of his base salary in a lump sum as severance.
Mr. Spoor was originally entitled to 10-year stock options to purchase 380,000 shares of common stock, pursuant to the 2014 Plan. During the year ended December 31, 2017, stock options to purchase 100,000 shares of common stock with an exercise price of $4.48 per share with a grant date fair value of $386,900 were granted and enforce patent protection for our product candidates, formulations, processes, methodsvested. On September 29, 2017, Mr. Spoor was granted 100,000 shares of restricted common stock subject to milestone-based vesting, in satisfaction of the Company’s obligation to issue an additional 280,000 options to Mr. Spoor, with an estimated grant date fair value of $425,000. During the year ended December 31, 2018, all 100,000 shares of restricted common stock vested, but the stock options were cancelled as a result of Mr. Spoor’s resignation as the Company’s President and any other proprietary technologies, preserve our trade secrets, and operate without infringing onChief Executive Officer.
On June 29, 2019, the proprietary rights of other parties, bothCompany accrued an incentive bonus in the United Statesamount of $255,000. Subsequent to Mr. Spoor’s resignation, the Compensation Committee reviewed the accrued bonus and in other countries. Our policydetermined that such amount was not owed and the Company, which determination is to actively seek to obtain, where appropriate, the broadest intellectual property protection possible for our current product candidates and any future product candidates, proprietary information and proprietary technology through a combination of contractual arrangements and patents, both in the United States and abroad. However, patent protection may not afford us with complete protection against competitors who seek to circumvent our patents.being challenged by Mr. Spoor.
We also depend uponMr. Spoor received no additional or severance compensation and all unvested stock options and shares of restricted common stock granted to Mr. Spoor were cancelled as a result of Mr. Spoor’s resignation. As of December 31, 2019, there were 241,667 earned, but unissued shares of restricted common stock due to Mr. Spoor. However, Mr. Spoor forfeited the skills, knowledge, experience and know-how of our management and research and development personnel, as well as that of our advisors, consultants and other contractors. To help protect our proprietary know-how, which is not patentable, and for inventions for which patents may be difficultright to enforce, we currently rely and willreceive these shares on April 29, 2020 in connection with his resignation from the future rely on trade secret protection and confidentiality agreements to protect our interests. To this end, we require all of our employees, consultants, advisors and other contractors to enter into confidentiality agreements that prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas, developments, discoveries and inventions important to our business.Board.
MS1819-SDMaged Shenouda
On The MS1819-SD program is protected bySeptember 26, 2017, the Company entered into an employment agreement with Mr. Shenouda to serve as its Executive Vice-President of Corporate Development and Chief Financial Officer for a term of three years, during which time he received a base salary of $275,000. In addition to the base salary, Mr. Shenouda was eligible to receive an annual milestone cash bonus based on the achievement of certain financial, clinical development, and/or business milestones, which milestones were established annually at the sole discretion of the Company’s Board or the Compensation Committee. Mr. Shenouda’s employment agreement provided for the issuance of stock options to purchase 100,000 shares of common stock, pursuant to the 2014 Plan, with an exercise price of $4.39 per share and a term of ten years. These stock options vested according to the following seriesperformance-based criteria, so long as Mr. Shenouda served as either Executive Vice-President of issued patents that we have licensed under the Mayoly Agreement covering the method for transformation of Yarrowia lipolytica,the sequenceCorporate Development or as Chief Financial Officer of the LIP2 enzymeCompany: (i) 75% upon FDA acceptance of a U.S. IND application for MS1819, and its production process:(ii) 25% upon the Company completing a Phase IIa clinical trial for MS1819. These stock options vested during the year ended December 31, 2018.
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PCT/FR99/02079 patent family (includingMr. Shenouda’s employment agreement provided that the patents EP1108043 B1, and US6582951) “MethodCompany may terminate Mr. Shenouda’s employment agreement at any time, with or without Cause, as such term is defined in the agreement. If the Company terminated the agreement without Cause, or if the agreement was terminated due to a Change of Control, as such term is defined in the agreement, Mr. Shenouda was entitled to (i) all salary owed through the date of termination; (ii) any unpaid annual milestone bonus; (iii) severance in the form of continuation of his salary for non-homologous transformation of Yarrowia lipolytica,” concerns the integrationgreater of a geneperiod of interest into12 months following the genometermination date or the remaining term of aYarrowiastrain devoidhis employment agreement; (iv) payment of zeta sequences, by transforming said strain usingpremiums to cover COBRA for a vector bearing zeta sequences. This modified strain is usedperiod of 12 months following the termination date; (v) a prorated annual bonus equal to the target annual milestone bonus, if any, for the current production process. This patent has been issuedyear of termination multiplied by the formula set forth in the U.S., Canada,agreement; and validated in several European countries, including Austria, Belgium, Switzerland, Cyprus, Germany, Denmark, Spain, Finland, Great Britain, Greece, Ireland, France, Italy, Lithuania, Luxembourg, Netherlands, Portugal and Sweden. This patent expires September 1, 2019;
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PCT/FR2000/001148 patent family (includingOn June 28, 2019, the patent EP1276874 B1) “CloningCompensation Committee approved the accrual of an incentive bonus in the amount of $100,000. Subsequent to Mr. Shenouda’s resignation, the Compensation Committee reviewed the accrued bonus and expressing an acid-resistant extracellular lipase of Yarrowia lipolytica” describes the coding sequences of acid-resistant extracellular lipases, in particular CandidaernobiiorYarrowia lipolyticayeastsdetermined that such amount was not owed, and the production of said lipasesCompany reversed the accrual in their recombinant form. This patent has been validated in several European countries, including Italy, France and Great Britain. This patent expires April 28, 2020; and
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PCT/FR2006/001352 patent family (includingMr. Shenouda resigned from his position as the patent EP2035556Company’s Chief Financial Officer effective November 30, 2019. Mr. Shenouda received no additional or severance compensation and patent US8,334,130all unvested stock options and US8,834,867) “Method for producing lipase, transformedYarrowia lipolyticacell capableshares of producing said lipase and their uses” describesrestricted common stock granted to Mr. Shenouda were cancelled as a method for producingYarrowia lipolyticaacid-resistant recombinant lipase utilizingresult of Mr. Shenouda’s resignation. Mr. Shenouda has a culture medium without any productsperiod of animal origin or non-characterized mixtures such as tryptone, peptone or lactoserum, in additiontwelve months following his resignation to its uses. The European patents expire June 15, 2026, U.S. patent 8,334,130 expires September 11, 2028, and U.S. patent 8,834,867 expires September 15, 2026.
B-Lactamase Program
To date, we own one patent application covering different compositions, which has been filed in France. This application was filed internationally (“PCT”) on October 13, 2015 as PCT/FR2015/052756 claiming priority to French patent application 1459935 dated October 16, 2014. This application was published as WO/2016/059341 titled “Hybrid Proteinaceous Molecule Capable Of Inhibiting At Least One Antibiotic And Pharmaceutical Composition Containing It.” At present, all PCT contracting states are designated. The term of patent protection available is typically 20 years from the filing date of the earliest international (PCT) application. Patents are territorial rights, meaning that the rights conferred are only applicable in the country or region in which a patent has been filed and granted, in accordance with the law of that country or region. Patent enforcement is only possible after a patent is granted and before the expiration of the patent term. Any patent issuing from PCT/FR2015/052756 will expire on October 13, 2035, unless the patent term is extended pursuant to specific laws of the granting country. We expect to file additional patent applications covering the production process and formulation of AZX1101.
Manufacturing
MS1819-SD API is obtained by fermentation in bioreactors using our engineered and proprietaryYarrowia lipolyticastrain. MS1819-SD is currently manufactured at a contract facility located in Capua, Italy owned by DSM. The proprietary yeast cell line from which the API is derived is kept at a storage facility maintained by Charles River. Because the manufacturing process is fairly straightforward, we believe there are multiple alternative contract manufacturers capable of producing the product we need for clinical trials. The Company is in the process of establishing alternative manufacturers and manufacturing sites for the product; however, there is no guarantee that the processes are easily reproducible and transferrable.
AZX1101 API and AZX1103 API production are still under development in-house with outside contract manufacturing organizations (CMO’s) producing material for animal work including proof-of-concept and toxicological work. To date, the manufacturing process appears fairly straightforward with multiple options leading us to believe that there are multiple alternative contract manufacturers capable of producing the products we will need for clinical trials however there are no guarantees that the processes will scale up or be considered acceptable for clinical trial use.
CompetitionOutstanding Equity Incentive Awards At Fiscal Year-End
The pharmaceuticalfollowing table sets forth information regarding unexercised options, stock that has not vested and biotechnology industries are characterizedequity incentive awards held by rapidly evolving technology and intense competition. Many companies of all sizes, including major pharmaceutical companies and specialized biotechnology companies, are engaged in the development and commercialization of therapeutic agents designed for the treatmenteach of the same diseases and disorders that we target. ManyNamed Executive Officers outstanding as of our competitors have substantially greater financial and other resources, larger research and development staff and more experience in the regulatory approval process. Moreover, potential competitors have or may have patents or other rights that conflict with patents covering our technologies.December 31, 2019:
With respect to MS1819-SD, we will compete with PPEs, a well-established market that is currently dominated by a few large pharmaceutical companies, including AbbVie Inc., Johnson & Johnson and Allergan plc. There are currently six PPE products that have been approved by the FDA for sale in the U.S. We believe our ability to compete in this market, if we are successful in developing and obtaining regulatory approval to market MS1819-SD, will depend on our ability (or that of a corporate partner) to convince patients, their physicians, healthcare payors and the medical community of the benefits of using a non-animal based product to treat EPI, as well as by addressing other shortcomings associated with PPEs.| | | | |
| | Number of securities underlying unexercised options (#) exercisable | Equity incentive plan awards: Number of underlying unexercised unearned options (#) | Option exercise price ($) | | Number of shares or units of stock that have not vested (#) | Market value of shares or units of stock that have not vested ($) | Equity incentive plan awards: Number of Unearned shares, units or other rights that have not vested (#) | Equity incentive plan awards: Market or Payout value of unearned shares, units or other rights that have not vested ($) |
| | | | | | | | | | |
Current Named Executive Officers (1) |
| | | | | | | | | | |
| James Sapirstein | 10/8/2019 | - | 300,000(2) | $0.56 | 10/7/2029 |
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| 10/8/2019 | | | | | - | - | 200,000 (3) | 112,000 |
| | | | | | | | | |
| James E. Pennington | 6/28/2018 | 75,000 | - | $3.04 | 6/27/2023 | | | | |
| 6/13/2019 | - | 110,000 | $1.70 | 6/12/2024 | | | | |
| | | | | | | | | |
Former Named Executive Officers
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| | | | | | | | | |
| Maged Shenouda | 2/3/2017 | 30,000 | - | $4.48 | 2/2/2027 | | | | |
| 9/26/2017 | 100,000 | - | $4.39 | 9/24/2027 | | | | |
| 6/28/2018 | 100,000 | - | $3.04 | 6/27/2023 | | | | |
| Johan M. (Thijs) Spoor (4) | - | - | - | - | - | - | - | - | - |
| (1) | Daniel Schneiderman was appointed as Chief Financial Officer subsequent to the year ended December 31, 2019, and therefore is excluded from the table. |
With respect to AZX1101 and AZX1103, we are aware of only one beta-lactamase under active development by a U.S. specialty pharmaceutical company for the prevention of c. difficileinfection, although the compounds being developed appear to have very limited efficacy to a narrower set of antibiotics rather than the broader group of antibiotics expected to be covered by our compound.(2) | Represents stock options issued to Mr. Sapirstein on October 8, 2019 under the terms of his employment agreement, which options will vest as follows: (i) 50,000 upon initiating its next U.S. Phase II clinical trial MS1819, (ii) 50,000 upon completing the next U.S. Phase II clinical trial, (iii) 100,000 upon the Company initiating a Phase III clinical trial in the U.S. for MS1819, and (iv) 100,000 upon initiating a U.S. Phase I clinical trial for any product other than MS1819. |
Government Regulation and Product Approval| (3) | Represents the restricted stock unit (“RSU”) award issued to Mr. Sapirstein on October 8, 2019 under the terms of his employment agreement, which RSU will vest as follows: (i) 100,000 upon the first commercial sale in the U.S. of MS1819, and (ii) 100,000 upon our total market capitalization exceeding $1.0 billion for 20 consecutive trading days. |
| (4) | As of December 31, 2019, there were 241,667 earned, but unissued shares of restricted common stock due to Mr. Spoor. However, Mr. Spoor forfeited the right to receive these shares on April 29, 2020 in connection with his resignation from the Board. |
Government authorities in the United States, at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, post-approval monitoring and reporting, marketing and export and import of products such as those we are developing. To date, our research and development efforts have been conducted in France. We expect to continue to perform substantially all of our basic research activities in France in order to leverage our human capital expertise as well as to avail ourselves of tax credits awarded by the French government to research companies. We expect to continue to conduct early stage development work in France, with late stage development work, including the MS1819-SD Phase IIb study and subsequent Phase III trials in Europe and also in the U.S., as North America is our principal target market for any products that we may successfully develop.
FDA Approval Process
In the United States, pharmaceutical products are subject to extensive regulation by the FDA. The Federal Food, Drug, and Cosmetic Act, or the FDC Act, the Public Health Services Act or the PHS Act, and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling, and import and export of pharmaceutical products. Failure to comply with applicable U.S. requirements may subject a company to a variety of administrative or judicial sanctions, such as FDA refusal to approve pending new drug applications, or NDAs, refusal to approve pending biologic license applications, or BLAs, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, civil penalties, and criminal prosecution.
Pharmaceutical product development in the U.S. typically involves preclinical laboratory and animal tests, the submission to the FDA of either a notice of claimed investigational exemption or an IND, which must become effective before clinical testing may commence, and adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval requirements typically takes many years and the actual time required may vary substantially based upon the type, complexity, and novelty of the product or disease.
Preclinical tests include laboratory evaluation of product chemistry, formulation, and toxicity, as well as animal trials to assess the characteristics and potential safety and efficacyNon-Executive Director Compensation
For 2019, each of the product. The conductCompany’s non-executive directors received (i) an annual retainer of $35,000 for their service on the preclinical tests must comply with federal regulationsBoard which is payable in either cash or shares of common stock in quarterly installments, at the Company’s discretion; and requirements, including good laboratory practices. The results(ii) an annual grant of preclinical testing are submitted30,000 shares of common stock in quarterly installments. During the year ended December 31, 2019, the Company elected to pay the FDA as part of an IND along with other information, including information about product chemistry, manufacturing and controls, and a proposed clinical trial protocol. Long term preclinical tests, such as animal tests of reproductive toxicity and carcinogenicity, may continue after the IND is submitted.
Clinical trials involve the administration of the investigational new drugannual retainer to healthy volunteers or patients under the supervision of a qualified investigator. Clinical trials must be conducted: (i)non-executive directors in compliance with federal regulations; (ii) in compliance with good clinical practice, or GCP, an international standard meant to protect the rights and health of patients and to define the roles of clinical trial sponsors, administrators, and monitors; as well as (iii) under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol involving testing on U.S. patients and subsequent protocol amendments must be submitted to the FDA as part of the IND.cash.
The FDA may orderfollowing table provides information regarding compensation paid to non-employee directors for the temporary, or permanent, discontinuation year ended December 31, 2019. Messrs. Sapirstein, Shenouda and Spoor did not receive compensation for their service on the Board as employee directors for the year ended December 31, 2019. Information regarding executive compensation paid to Messrs. Sapirstein, Shenouda and Spoor during 2019 is reflected in the Summary Compensation table under “Executive Compensation” of a clinical trial at any time, or impose other sanctions if it believes that the clinical trial either is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The study protocol and informed consent information for patients in clinical trials must also be submitted to an institutional review board (“IRB”) for approval. An IRB may also require the clinical trial at the site to be halted, either temporarily or permanently, for failure to comply with the IRB’s requirements, or may impose other conditions.this Form 10-K/A.
Clinical trials to support NDAs or BLAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase 1, the initial introduction of the drug into healthy human subjects or patients, the drug is generally tested to assess metabolism, pharmacokinetics, pharmacological actions, side effects associated with increasing doses,| Name(1) | Fees Earned or Paid in Cash | | | | |
| Edward J. Borkowski | $35,000 | $43,350 | $31,500 | $- | $109,850 |
| Charles J. Casamento | $35,000 | $43,350 | $31,500 | $- | $109,850 |
| Alastair Riddell | $35,000 | $43,350 | $31,500 | $- | $109,850 |
| Vern L. Schramm | $35,000 | $43,350 | $31,500 | $- | $109,850 |
| (1) | Mr. Oakes was appointed to the board effective April 13, 2020, and therefore has been excluded from the table. |
| (2) | Represents the aggregate grant date fair value of an aggregate of 30,000 shares of common stock issued to each of our non-employee directors in 2019 as partial payment of fees payable for each director’s service on the Board in 2019, calculated in accordance with ASC Topic 718. |
| (3) | Represents the aggregate grant date fair value of 30,000 stock options issued to each of our non-employee directors on June 13, 2019, calculated in accordance with ASC Topic 718. |
Compensation Committee Interlocks and if possible, early evidence on effectiveness. Phase II usually involves trials in a limited patient population to determine the effectiveness of the drug for a particular indication, dosage tolerance, and optimum dosage, and to identify common adverse effects and safety risks. If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to obtain the additional information about clinical efficacy and safety in a larger number of patients, typically at geographically dispersed clinical trial sites, to permit the FDA to evaluate the overall benefit-risk relationship of the drug and to provide adequate information for the labeling of the drug.Insider Participation
After completionNone of our executive officers currently serves, or has served during the required clinical testing, an NDA is prepared and submitted tolast three years, on the FDA for small molecule drugs,compensation committee of any other entity that has one or a BLA is prepared and submitted for biologics. Section 351 of the Public Health Service Act (the “PHS Act”) defines a biological productmore officers serving as a “virus, therapeutic serum, toxin, antitoxin, vaccine, blood, blood component or derivative, allergenic product, or analogous product… applicable to the prevention, treatment, or curemember of a disease or conditionour Board of human beings.” Similarly, FDA regulations and policies have established that biological products include blood-derived products, vaccines, in vivo diagnostic allergenic products, immunoglobulin products, products containing cells or microorganisms, and most protein products (including cytokines and enzymes). Biological products subject to the PHS Act also meet the definition of drugs under FDC Act, and therefore are regulated under provisions of both statutes. FDA approval of the NDA or BLA is required before marketing of the product may begin in the U.S. The NDA or BLA must include the results of all preclinical, clinical, and other testing and a compilation of data relating to the product’s pharmacology, chemistry, manufacture, and controls. The cost of preparing and submitting an NDA or a BLA is substantial.Directors.
Once the submission is accepted for filing, the FDA begins an in-depth review. Priority review can be applied to drugs that the FDA determines offer major advances in treatment or provideAlthough Mr. Shenouda was a treatment where no adequate therapy exists. The FDA may refer applications for novel drug products, or drug products which present difficult questions of safety or efficacy, to an advisory committee — typically a panel that includes clinicians and other experts — for review, evaluation, and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA or BLA, the FDA will typically inspect one, or more, clinical sites to assure compliance with GCP. Additionally, the FDA will inspect the facility or the facilities at which the drug is manufactured. The FDA will not approve the product unless compliance with current good manufacturing practices, or GMP — a quality system regulating manufacturing — is satisfactory and the NDA or BLA contains data that provide substantial evidence that the drug is safe and effective in the indication studied. The issuance of a biologics license is a determination that the product, the manufacturing process, and the manufacturing facilities meet applicable requirements to ensure the continued safety, purity and potencymember of the biologic product.
After the FDA evaluates the NDA or BLA and the manufacturing facilities, it issues either an approval letter (with the U.S. license number, in the case of a biologic license) or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing, or information, in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA or BLA, the FDA will issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDA or BLA approval, the FDA may require a risk evaluation and mitigation strategy (“REMS”), to help ensure that the benefits of the drug outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals, and elements to assure safe use (“ETASU”). ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The requirement for a REMS can materially affect the potential market and profitability of the drug. Moreover, product approval may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.
The BPCIA
The Biologics Price Competition and Innovation Act (“BPCIA”) was enacted as part of the Affordable Care Act on March 23, 2010. The BPCIA creates an abbreviated licensure pathway for biological products shown to be biosimilar to, or interchangeable with, an FDA-licensed biological reference product. The objectives of the BPCIA are conceptually similar to those of the Hatch-Waxman Act, which established abbreviated pathways for the approval of small molecule drug products under the FDC Act. The implementation of an abbreviated licensure pathway for biological products can present challenges given the scientific and technical complexities that may be associated with the larger and typically more complex structure of biological products, as well as the processes by which such products are manufactured. Most biological products are produced in a living system such as a microorganism, or plant or animal cells, whereas small molecule drugs are typically manufactured through chemical synthesis.
A “biosimilar” product is a follow-on version of another biological product for which marketing approval is sought or has been obtained based on a demonstration that it is “biosimilar” to the original reference product. Section 351(k) of the PHS Act, added by the BPCIA, sets forth the requirements for an application for a proposed biosimilar product and an application or a supplement for a proposed interchangeable product. Section 351(i) defines biosimilarity to mean “that the biological product is highly similar to the reference product notwithstanding minor differences in clinically inactive components” and that “there are no clinically meaningful differences between the biological product and the reference product in terms of the safety, purity, and potency of the product.” A 351(k) application must contain, among other things, information demonstrating that the biological product is biosimilar to a reference product based upon data derived from analytical studies, animal studies, and a clinical study or studies, unless the FDA determines, in its discretion, that certain studies are unnecessary. To meet the additional standard of “interchangeability,” an applicant must provide sufficient information to demonstrate biosimilarity, and also to demonstrate that the biological product can be expected to produce the same clinical result as the reference product in any given patient and, if the biological product is administered more than once to an individual, the risk in terms of safety or diminished efficacy of alternating or switching between the use of the biological product and the reference product is not greater than the risk of using the reference product without such alternation or switch. Biosimilar drugs are not generic drugs, which are shown to be the same as the reference product. However, biosimilar products that are also determined to be interchangeable may be substituted for the reference product without the intervention of the prescribing healthcare provider.
In many cases, biosimilars may be brought to market without conducting the full suite of clinical trials typically required of originators. The law establishes a period of 12 years of data exclusivity for reference products in order to preserve incentives for future innovation and outlines statutory criteria for science-based biosimilar approval standards that take into account patient safety considerations. Under this framework, data exclusivity protects the data in the innovator’s regulatory application by prohibiting others, for a period of 12 years, from gaining FDA approval based in part on reliance on or reference to the innovator’s data in their application to the FDA. Moreover, a biosimilar applicant cannot file their application until 4 years after the reference biological product was first licensed. The law does not change the duration of patents granted on biologic products but does provide procedures for resolving patent disputes based on a biosimilar application.
The FDA maintains lists of biological products, including any biosimilar and interchangeable biological products licensed by the FDA under the PHS Act in a book titled “Lists of Licensed Biological Products with Reference Product Exclusivity and Biosimilarity or Interchangeability Evaluations” (the “Purple Book”). The Purple Book includes the date a biological product was licensed under 351(a) of the PHS Act and whether the FDA evaluated the biological product for reference product exclusivity. If the FDA has determined that a biological product is protected by a period of reference product exclusivity, the list will identify the date of first licensure and the date that reference product exclusivity (including any attached pediatric exclusivity) will expire. The list will not identify periods of orphan exclusivity and their expiration dates for biological products as those dates are available at the searchable database for Orphan Designated and/or Approved Products. The Purple Book also identifies whether a biological product licensed under section 351(k) of the PHS Act has been determined by the FDA to be biosimilar to or interchangeable with a reference biological product. Biosimilar and interchangeable biological products licensed under section 351(k) of the PHS Act are listed under the reference product to which biosimilarity or interchangeability was demonstrated.
Advertising and Promotion
Once an NDA or BLA is approved, a product will be subject to certain post-approval requirements. For instance, the FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the internet.
Drugs may be marketed only for the approved indications and in accordance with the provisions of the approved labeling. Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, require submission and FDA approval of a new NDA or BLA or supplement to same, before the change can be implemented. An NDA or BLA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing NDA and BLA supplements as it does in reviewing NDAs and BLAs.
Adverse Event Reporting and GMP Compliance
Adverse event reporting and submission of periodic reports is required following FDA approval of an NDA or BLA. The FDA also may require post-marketing testing, known as Phase IV testing, risk minimization action plans, and surveillance to monitor the effects of an approved product, or the FDA may place conditions on an approval that could restrict the distribution or use of the product. In addition, quality-control, drug manufacture, packaging, and labeling procedures must continue to conform to current good manufacturing practices (“cGMPs”) after approval. Drug manufacturers and certain of their subcontractors are required to register their establishments with FDA and certain state agencies. Registration with the FDA subjects entities to periodic unannounced inspections by the FDA, during which the agency inspects manufacturing facilities to assess compliance with cGMPs. Accordingly, manufacturers must continue to expend time, money, and effort in the areas of production and quality-control to maintain compliance with cGMPs. Regulatory authorities may withdraw product approvals or request product recalls if a company fails to comply with regulatory standards, if it encounters problems following initial marketing, or if previously unrecognized problems are subsequently discovered.
Pediatric Information
Under the Pediatric Research Equity Act (“PREA”), NDAs, BLAs or supplements to the same must contain data to assess the safety and effectiveness of the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may grant full or partial waivers, or deferrals, for submission of data. Unless otherwise required by regulation, PREA does not apply to any drug for an indication for which orphan designation has been granted.
The Best Pharmaceuticals for Children Act (“BPCA”) provides NDA and BLA holders a six-month extension of any exclusivity — patent or non-patent — for a drug if certain conditions are met. Conditions for exclusivity include the FDA’s determination that information relating to the use of a new drug in the pediatric population may produce health benefits in that population, the FDA making a written request for pediatric studies, and the applicant agreeing to perform, and reporting on, the requested studies within the statutory timeframe. Applications under the BPCA are treated as priority applications, with all of the benefits that designation confers.
Foreign Regulatory Issues
Sales of pharmaceutical products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. Whether or not FDA approval has been obtained, approval of a product by a comparable regulatory authority of a foreign country must generally be obtainedCompany’s Compensation Committee prior to the commencement of marketing in that country. Although the time required to obtain such approval may be longer or shorter than that required for FDA approval, the requirements for FDA approval are among the most detailed in the world.
Employees
As of December 31, 2018, we had twelve full-time employees, of whom five were employed by AzurRx SAS and located in France and seven were employed by us and located in our offices in Brooklyn, NY, Montclair, NJ, and Hayward, CA.
Available Information
As a public company, we are required to file our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements on Schedule 14A and other information (including any amendments) with the Securities and Exchange Commission (the “SEC”). The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. You can find our SEC filings at the SEC’s website athttp://www.sec.gov.
Our Internet address iswww.azurrx.com. Information contained on our website is not part of this Annual Report. Our SEC filings (including any amendments) will be made available free of charge onwww.azurrx.com,his appointment as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
We are subject to various risks that could have a negative effect on us and our financial condition. These risks could cause actual operating results to differ from those expressed in certain “forward looking statements” contained in this Annual Report as well as in other communications.
Risks Related to Our Business and Industry
We are a development stage company and have a limited operating history upon which to base an investment decision.
We are a clinical development stage biopharmaceutical company. Since inception, we have engaged primarily in research and development activities, have not generated any revenue from product sales and have incurred significant net losses. We have not demonstrated our ability to perform the functions necessary for the successful commercialization of any products. The successful commercialization of any of our products will require us to perform a variety of functions, including:
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continuing to undertake pre-clinical development and clinical trials;
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participating in regulatory approval processes;
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formulating and manufacturing products; and
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conducting sales and marketing activities.
Our operations to date have been limited to organizing and staffing, acquiring, developing and securing the proprietary rights for, and undertaking pre-clinical development and clinical trials of our product candidates. These operations provide a limited basis for our stockholders and prospective investors to assess our ability to complete development of or commercialize any products and the advisability of investing in our securities.
We have incurred significant operating losses and negative cash flows from operations since inception, had working capital at December 31, 2018 of approximately $1,804,000 and had an accumulated deficit at December 31, 2018 of approximately $47,517,000. We are dependent on obtaining, and are continuing to pursue, the necessary funding from outside sources, including obtaining additional funding from the sale of securities in order to continue our operations. Without adequate funding, we may not be able to meet our obligations. We believe these conditions raise substantial doubt about our ability to continue as a going concern.
Our product candidates are at an early stage of development and may not be successfully developed or commercialized.
Our three product candidates, MS1819-SD, AZX1101 and AZX1103, are in the early stages of development and will require substantial further capital expenditures, development, testing, and regulatory clearances prior to commercialization. The development and regulatory approval process take several years, and it is not likely that any such products, even if successfully developed and approved by the FDA or any comparable foreign regulatory authority, would be commercially available for at least three to five years or more. Of the large number of drugs in development, only a small percentage successfully completes the regulatory approval process and is commercialized. Accordingly, even if we are able to obtain the requisite financing to fund our development programs, we cannot assure you that our product candidates will be successfully developed or commercialized. Our failure to develop, manufacture or receive regulatory approval for or successfully commercialize any of our product candidates, could result in the failure of our business and a loss of all of your investment in our company.
Any product candidates we advance into clinical development are subject to extensive regulation, which can be costly and time consuming, cause unanticipated delays or prevent the receipt of the required approvals to commercialize our product candidates.
The clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing and distribution of our product candidates are subject to extensive regulation by the FDA in the United States and by comparable health authorities in foreign markets, including Health Canada’s Therapeutic Products Directorate, or the TPD, and the European Medicines Agency, or the EMA. In the United States, we are not permitted to market our product candidates until we receive approval of an NDA or BLA from the FDA. The process of obtaining such approval is expensive, often takes many years and can vary substantially based upon the type, complexity and novelty of the products involved. In addition to the significant clinical testing requirements, our ability to obtain marketing approval for these products depends on obtaining the final results of required non-clinical testing, including characterization of the manufactured components of our product candidates and validation of our manufacturing processes. The FDA may determine that our product manufacturing processes, testing procedures or facilities are insufficient to justify approval. Approval policies or regulations may change and the FDA has substantial discretion in the pharmaceutical approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. Despite the time and expense invested in clinical development of product candidates, regulatory approval is never guaranteed.
The FDA, the TPD and/or the EMA can delay, limit or deny approval of a product candidate for many reasons, including, but not limited to:
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disagreement with the design or implementation of our clinical trials;
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failure to demonstrate to their satisfaction that a product candidate is safe and effective for any indication;
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failure to accept clinical data from trials which are conducted outside their jurisdiction;
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the results of clinical trials may not meet the level of statistical significance required for approval;
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we may be unable to demonstrate that a product candidate’s clinical and other benefits outweigh its safety risks;
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such agencies may disagree with our interpretation of data from preclinical studies or clinical trials;
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failure to approve the manufacturing processes or facilities of third-party manufacturers with which we or our collaborators contract for clinical and commercial supplies; or
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changes in the approval policies or regulations of such agencies may significantly change in a manner rendering our clinical data insufficient for approval.
Any delay in obtaining, or inability to obtain, applicable regulatory approvals would prevent us from commercializing our product candidates.
If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons. The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the trial until its conclusion. The enrollment of patients depends on many factors, including:
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the patient eligibility criteria defined in the protocol;
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the size of the patient population;
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the proximity and availability of clinical trial sites for prospective patients;
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the design of the trial;
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our ability to recruit clinical trial investigators with the appropriate competencies and experience;
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our ability to obtain and maintain patient consents; and
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the risk that patients enrolled in clinical trials will drop out of the trials before completion.
Our clinical trials will compete with other clinical trials for product candidates that are in the same therapeutic areas as our product candidates. This competition will reduce the number and types of patients and qualified clinical investigators available to us, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors or clinical trial sites may not allow us to conduct our clinical trial at such site if competing trials are already being conducted there. Since the number of qualified clinical investigators is limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials in such clinical trial site. We may also encounter difficulties finding a clinical trial site at which to conduct our trials.
Delays in patient enrollment may result in increased costs or may affect the timing or outcome of our planned clinical trials, which could prevent completion of these clinical trials and adversely affect our ability to advance the development of our product candidates.
Because the results of preclinical studies and early clinical trials are not necessarily predictive of future results, any product candidate we advance into clinical trials may not have favorable results in later clinical trials, if any, or receive regulatory approval.
Pharmaceutical development has inherent risk. We will be required to demonstrate through well-controlled clinical trials that our product candidates are effective with a favorable benefit-risk profile for use in their target indications before we can seek regulatory approvals for their commercial sale. Our principal product candidate, MS1819-SD, has only completed a phase IIa clinical trial, while our other products, AZX1101 and AZX1103, have only been tested in a pre-clinical setting. Success in pre-clinical studies or early clinical trials does not mean that later clinical trials will be successful, as product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing. We also may need to conduct additional clinical trials that are not currently anticipated. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results.
Any product candidate we advance into clinical trials may cause unacceptable adverse events or have other properties that may delay or prevent their regulatory approval or commercialization or limit their commercial potential.
Unacceptable adverse events caused by any of our product candidates in clinical trials could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications and markets. This, in turn, could prevent us from commercializing the affected product candidate and generating revenues from its sale. We have not yet completed testing of any of our product candidates for the treatment of the indications for which we intend to seek product approval in humans, and we currently do not know the extent of adverse events, if any, that will be observed in patients who receive any of our product candidates. If any of our product candidates cause unacceptable adverse events in clinical trials, we may not be able to obtain regulatory approval or commercialize such product or, if such product candidate is approved for marketing, future adverse events could cause us to withdraw such product from the market.
Delays in the commencement or completion of our clinical trials could result in increased costs and delay our ability to pursue regulatory approval.
Although we commenced a Phase II clinical trial for MS1819-SD in late-2018, and currently anticipate completing the preclinical work necessary to file an IND for AZX1101 by the end of 2019, the commencement of clinical trials can be delayed for a variety of reasons, including delays in:
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obtaining regulatory clearance to commence a clinical trial;
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identifying, recruiting and training suitable clinical investigators;
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reaching agreement on acceptable terms with prospective clinical research organizations (“CROs”) and trial sites, the terms of which can be subject to extensive negotiation, may be subject to modification from time to time and may vary significantly among different CROs and trial sites;
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obtaining sufficient quantities of a product candidate for use in clinical trials;
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obtaining Investigator Review Board (“IRB”) or ethics committee approval to conduct a clinical trial at a prospective site;
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identifying, recruiting and enrolling patients to participate in a clinical trial;
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retaining patients who have initiated a clinical trial but may withdraw due to adverse events from the therapy, insufficient efficacy, fatigue with the clinical trial process or personal issues; and
Any delays in the commencement of our clinical trials will delay our ability to pursue regulatory approval for our product candidates. In addition, many of the factors that cause, or lead to, a delay in the commencement of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.
We may be required to suspend, repeat or terminate our clinical trials if they are not conducted in accordance with regulatory requirements, the results are negative or inconclusive or the trials are not well designed.
Regulatory agencies, IRBs or data safety monitoring boards may at any time recommend the temporary or permanent discontinuation of our clinical trials or request that we cease using investigators in the clinical trials if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements, or that they present an unacceptable safety risk to participants. Clinical trials must be conducted in accordance with current cGCPs or other applicable foreign government guidelines governing the design, safety monitoring, quality assurance and ethical considerations associated with clinical studies. Clinical trials are subject to oversight by the FDA, other foreign governmental agencies and IRBs at the study sites where the clinical trials are conducted. In addition, clinical trials must be conducted with product candidates produced in accordance with applicable cGMPs, which are the FDA’s regulations governing the design, monitoring and control of manufacturing processes and facilities. Clinical trials may be suspended by the FDA, other foreign governmental agencies, or us for various reasons, including:
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deficiencies in the conduct of the clinical trials, including failure to conduct the clinical trial in accordance with regulatory requirements or clinical protocols;
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deficiencies in the clinical trial operations or trial sites;
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the product candidate may have unforeseen adverse side effects;
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deficiencies in the trial design necessary to demonstrate efficacy;
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fatalities or other adverse events arising during a clinical trial due to medical problems that may not be related to clinical trial treatments;
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the product candidate may not appear to be more effective than current therapies; or
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the quality or stability of the product candidate may fall below acceptable standards.
If we elect or are forced to suspend or terminate a clinical trial of any other of our product candidates, the commercial prospects for that product will be harmed and our ability to generate product revenue from that product may be delayed or eliminated. Furthermore, any of these events could prevent us or our partners from achieving or maintaining market acceptance of the affected product and could substantially increase the costs of commercializing our product candidates and impair our ability to generate revenue from the commercialization of these products either by us or by our collaboration partners.
Because we license some of our product candidates from third parties, any dispute with our licensors or non-performance by us or by our licensors may adversely affect our ability to develop and commercialize the applicable product candidates.
Some of our product candidates, including related intellectual property rights, were licensed from third parties. Under the terms of our license agreements, the licensors generally have the right to terminate such agreements in the event of a material breach by us. Our licenses require us to make annual, milestone or other payments prior to commercialization of any product and our ability to make these payments depends on our ability to generate cash in the future. These agreements generally require us to use diligent and reasonable efforts to develop and commercialize the product candidate.
If there is any conflict, dispute, disagreement or issue of non-performance between us and our licensing partner regarding our rights or obligations under the license agreement, including any conflict, dispute or disagreement arising from our failure to satisfy payment obligations under such agreement, our ability to develop and commercialize the affected product candidate may be adversely affected. Any loss of our rights under our license agreements could delay or completely terminate our product development efforts for the affected product candidate.
We may form or seek strategic alliances or enter into additional licensing arrangements in the future, and we may not realize the benefits of such alliances or licensing arrangements.
From time to time, we may form or seek strategic alliances, create joint ventures or collaborations or enter into additional licensing arrangements with third parties that we believe will complement or augment our development and commercialization efforts with respect to our product candidates and any future product candidates that we may develop. Any of these relationships may require us to incur non-recurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. These relationships also may result in a delay in the development of our product candidates if we become dependent upon the other party and such other party does not prioritize the development of our product candidates relative to its other development activities. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenue or specific net income that justifies such transaction. We rely completely on third parties to manufacture our preclinical and clinical pharmaceutical supplies and expect to continue to rely on third parties to produce commercial supplies of any approved product candidate, and our dependence on third party suppliers could adversely impact our business.
We rely completely on third parties to manufacture our preclinical and clinical pharmaceutical supplies and expect to continue to rely on third parties to produce commercial supplies of any approved product candidate, and our dependence on third party suppliers could adversely impact our business.
The proprietary yeast strain used to manufacture MS1819-SD API is located in a storage facility maintained by Charles River Laboratories in Malvern, Pennsylvania, and such manufacturing is conducted by DSM Capua SPA in Italy. We are completely dependent on these third parties for product supply and our MS1819-SD development programs would be adversely affected by a significant interruption in our ability to receive such materials. Furthermore, our third-party suppliers will be required to maintain compliance with cGMPs and will be subject to inspections by the FDA or comparable regulatory authorities in other jurisdictions to confirm such compliance. In the event that the FDA or such other authorities determine that our third-party suppliers have not complied with cGMP, our clinical trials could be terminated or subjected to a clinical hold until such time as we are able to obtain appropriate replacement material. Any delay, interruption or other issues that arise in the manufacture, packaging, or storage of our products as a result of a failure of the facilities or operations of our third-party suppliers to pass any regulatory agency inspection could significantly impair our ability to develop and commercialize our products.
We do not expect to have the resources or capacity to commercially manufacture any of our proposed products, if approved, and will likely continue to be dependent upon third party manufacturers. Our dependence on third parties to manufacture and supply us with clinical trial materials and any approved products may adversely affect our ability to develop and commercialize our products on a timely basis or at all.
We rely on third parties to conduct our clinical trials. If these third parties do not meet our deadlines or otherwise conduct the trials as required, our clinical development programs could be delayed or unsuccessful and we may not be able to obtain regulatory approval for or commercialize our product candidates when expected or at all.
We do not have the ability to conduct all aspects of our preclinical testing or clinical trials ourselves. We use CROs to conduct our planned clinical trials and will rely upon such CROs, as well as medical institutions, clinical investigators and consultants, to conduct our trials in accordance with our clinical protocols. Our CROs, investigators and other third parties will play a significant role in the conduct of these trials and the subsequent collection and analysis of data from the clinical trials.
There is no guarantee that any CROs, investigators and other third parties upon which we rely for administration and conduct of our clinical trials will devote adequate time and resources to such trials or perform as contractually required. If any of these third parties fail to meet expected deadlines, fail to adhere to our clinical protocols or otherwise perform in a substandard manner, our clinical trials may be extended, delayed or terminated. If any of our clinical trial sites terminate for any reason, we may experience the loss of follow-up information on patients enrolled in our ongoing clinical trials unless we are able to transfer the care of those patients to another qualified clinical trial site. In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be jeopardized.
We will face intense competition and may not be able to compete successfully.
We operate in highly competitive segments of the biotechnology and biopharmaceutical markets. We face competition from many different sources, including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies, and private and public research institutions. Our product candidates, if successfully developed and approved, will compete with established therapies, as well as new treatments that may be introduced by our competitors. Many of our competitors have significantly greater financial, product development, manufacturing and marketing resources than us. Large pharmaceutical companies have extensive experience in clinical testing and obtaining regulatory approval for drugs. In addition, many universities and private and public research institutes are active in cancer research, some in direct competition with us. We also may compete with these organizations to recruit management, scientists and clinical development personnel. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. New developments, including the development of other biological and pharmaceutical technologies and methods of treating disease, occur in the pharmaceutical and life sciences industries at a rapid pace. Developments by competitors may render our product candidates obsolete or noncompetitive. We will also face competition from these third parties in recruiting and retaining qualified personnel, establishing clinical trial sites and patient registration for clinical trials and in identifying and in-licensing new product candidates.
Our success will depend upon intellectual property, proprietary technologies and regulatory market exclusivity periods, and we may be unable to protect our intellectual property.
Our success will depend, in large part, on obtaining and maintaining patent protection and trade secret protection for our product candidates and their formulations and uses, as well as successfully defending these patents against third-party challenges. If we or our licensors fail to appropriately prosecute and maintain patent protection for our product candidates, our ability to develop and commercialize these product candidates may be adversely affected and we may not be able to prevent competitors from making, using and selling competing products. This failure to properly protect the intellectual property rights relating to these product candidates could have a material adverse effect on our financial condition and results of operations.
The patent application process is subject to numerous risks and uncertainties, and there can be no assurance that we or our partners will be successful in protecting our product candidates by obtaining and defending patents. These risks and uncertainties include the following:
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patent applications may not result in any patents being issued;
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patents that may be issued or in-licensed may be challenged, invalidated, modified, revoked, circumvented, found to be unenforceable, or otherwise may not provide any competitive advantage;
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our competitors, many of which have substantially greater resources than we or our partners and many of which have made significant investments in competing technologies, may seek, or may already have obtained, patents that will limit, interfere with, or eliminate our ability to make, use, and sell our potential products;
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there may be significant pressure on the United States government and other international governmental bodies to limit the scope of patent protection both inside and outside the United States for disease treatments that prove successful as a matter of public policy regarding worldwide health concerns;
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countries other than the United States may have patent laws less favorable to patentees than those upheld by United States courts, allowing foreign competitors a better opportunity to create, develop, and market competing products; and
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we may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming and unsuccessful.
In addition to patents, we and our partners also rely on trade secrets and proprietary know-how. Although we have taken steps to protect our trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties, and confidential information and inventions agreements with employees, consultants and advisors, third parties may still obtain this information or come upon this same or similar information independently. We may become subject to claims that we or consultants, advisors or independent contractors that we may engage to assist us in developing our product candidates have wrongfully or inadvertently disclosed to us or used trade secrets or other proprietary information of their former employers or their other clients.
We intend to rely on market exclusivity periods that may not be or remain available to us.
We intend to rely on our ability to obtain and maintain a regulatory period of market exclusivity for any of our biologic product candidates that are successfully developed and approved for commercialization. Although this period in the United States is currently 12 years from the date of marketing approval, reductions to this period have been proposed. This exclusivity period in Europe is currently 10 years from the date of marketing approval by the EMA. Once any regulatory period of exclusivity expires, depending on the status of our patent coverage and the nature of the product, we may not be able to prevent others from marketing products that are biosimilar to or interchangeable with our products, which would materially adversely affect us.
If we are unable to establish sales and marketing capabilities or fail to enter into agreements with third parties to market, distribute and sell any products we may successfully develop, we may not be able to effectively market and sell any such products and generate product revenue.
We do not currently have the infrastructure for the sales, marketing and distribution of any of our product candidates, and must build this infrastructure or make arrangements with third parties to perform these functions in order to commercialize any products that we may successfully develop. The establishment and development of a sales force, either by us or jointly with a partner, or the establishment of a contract sales force to market any products we may develop will be expensive and time-consuming and could delay any product launch. If we, or our partners, are unable to establish sales and marketing capability or any other non-technical capabilities necessary to commercialize any products we may successfully develop, we will need to contract with third parties to market and sell such products. We may not be able to establish arrangements with third-parties on acceptable terms, if at all.
If any product candidate that we successfully develop does not achieve broad market acceptance among physicians, patients, healthcare payors and the medical community, the revenues that it generates from their sales will be limited.
Even if our product candidates receive regulatory approval, they may not gain market acceptance among physicians, patients, healthcare payors and the medical community. Coverage and reimbursement of our product candidates by third-party payors, including government payors, generally is also necessary for commercial success. The degree of market acceptance of any approved products will depend on a number of factors, including:
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the efficacy and safety as demonstrated in clinical trials;
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the clinical indications for which the product is approved;
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acceptance by physicians, major operators of hospitals and clinics and patients of the product as a safe and effective treatment;
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acceptance of the product by the target population;
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the potential and perceived advantages of product candidates over alternative treatments;
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the safety of product candidates seen in a broader patient group, including its use outside the approved indications;
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the cost of treatment in relation to alternative treatments;
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the availability of adequate reimbursement and pricing by third parties and government authorities;
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relative convenience and ease of administration;
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the prevalence and severity of adverse events;
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the effectiveness of our sales and marketing efforts; and
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unfavorable publicity relating to the product.
If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, hospitals, healthcare payors and patients, we may not generate sufficient revenue from these products and may not become or remain profitable.
We may incur substantial product liability or indemnification claims relating to the clinical testing of our product candidates.
We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials, and claims could be brought against us if use or misuse of one of our product candidates causes, or merely appears to have caused, personal injury or death. Although we have and intend to maintain product liability insurance relating to our clinical trials, our coverage may not be sufficient to cover claims that may be made against us and we may be unable to maintain such insurance. Any claims against us, regardless of their merit, could severely harm our financial condition, strain our management and other resources or destroy the prospects for commercialization of the product which is the subject of any such claim. We are unable to predict if we will be able to obtain or maintain product liability insurance for any products that may be approved for marketing. Additionally, we have entered into various agreements where we indemnify third parties for certain claims relating to the testing and use of our product candidates. These indemnification obligations may require us to pay significant sums of money for claims that are covered by these indemnifications.
If we fail to attract and retain key management and clinical development personnel, we may be unable to successfully develop or commercialize our product candidates.
We are dependent on our management team and clinical development personnel and our success will depend on their continued service, as well as our ability to attract and retain highly qualified personnel. In particular, the continued service of our senior management team, including Johan M. (Thijs) Spoor, our President and Chief Executive Officer, Maged Shenouda, our Chief Financial Officer, and James Pennington, our Chief Medical Officer, is critical to our success. The market for the services of qualified personnel in the pharmaceutical industry is highly competitive. The loss of service of any member of our senior management team or key personnel could prevent, impair or delay the implementation of our business plan, the successful conduct and completion of our planned clinical trials and the commercialization of any product candidates that we may successfully develop. We do not carry key man insurance for any member of our senior management team.
We use biological materials and may use hazardous materials, and any claims relating to improper handling, storage or disposal of these materials could be time consuming or costly.
We may use hazardous materials, including chemicals and biological agents and compounds, that could be dangerous to human health and safety or the environment. Our operations also produce hazardous waste products. Federal, state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental laws and regulations may impair our product development efforts. In addition, we cannot entirely eliminate the risk of accidental injury or contamination from these materials or wastes. We do not carry specific biological or hazardous waste insurance coverage and our property and casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable for damages or penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended.
Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resultinghe resigned from the useCompensation Committee when he was appointed Chief Financial Officer of hazardous materials, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for environmental liability or toxic tort claims that may be asserted against usthe Company in connection with our storage or disposalOctober of biological or hazardous materials.
In addition, we may incur substantial costs2017 in order to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions.
If we or our partners are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.
Our success also depends upon our ability and the ability of any of our future collaborators to develop, manufacture, market and sell our product candidates without infringing the proprietary rights of third parties. Numerous United States and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing products, some of which may be directed at claims that overlap with the subject matter of our intellectual property. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product candidates or proprietary technologies may infringe. Similarly, there may be issued patents relevant to our product candidates of which we are not aware.
There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and biopharmaceutical industries generally. If a third party claims that we or any of our licensors, suppliers or collaborators infringe the third party’s intellectual property rights, we may have to:
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obtain licenses, which may not be available on commercially reasonable terms, if at all;
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abandon an infringing product candidate or redesign our products or processes to avoid infringement;
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pay substantial damages, including the possibility of treble damages and attorneys’ fees, if a court decides that the product or proprietary technology at issue infringes on or violates the third party’s rights;
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pay substantial royalties, fees and/or grant cross licenses to our technology; and/or
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defend litigation or administrative proceedings which may be costly whether we win or lose, and which could result in a substantial diversion of our financial and management resources.
Healthcare reform and restrictions on reimbursements may limit our financial returns.
Our ability or the ability of our collaborators to commercialize any of our product candidates that we successfully develop may depend, in part, on the extent to which government health administration authorities, private health insurers and other organizations will reimburse consumers for the cost of these products. These third parties are increasingly challenging both the need for and the price of new drug products. Significant uncertainty exists as to the reimbursement status of newly approved therapeutics. Adequate third-party reimbursement may not be available for our product candidates to enable us or our collaborators to maintain price levels sufficient to realize an appropriate return on their and our investments in research and product development.
Changes in healthcare law and implementing regulations, including government restrictions on pricing and reimbursement, as well as healthcare policy and other healthcare payor cost-containment initiatives, may negatively impact our ability to generate revenues.
The potential pricing and reimbursement environment for our drug product candidates and any future products may change in the future and become more challenging due to, among other reasons, policies advanced by the current or any new presidential administration, federal agencies, healthcare legislation passed by Congress, or fiscal challenges faced by all levels of government health administration authorities.
If we or any of our independent contractors, consultants, collaborators, manufacturers, vendors or service providers fail to comply with healthcare laws and regulations, we or they could be subject to enforcement actions, which could result in penalties and affect our ability to develop, market and sell our product candidates and may harm our reputation.
We are subject to federal, state, and foreign healthcare laws and regulations pertaining to fraud and abuse and patients’ rights. These laws and regulations include:
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the U.S. federal healthcare program anti-kickback law, which prohibits, among other things, persons and entities from soliciting, receiving or providing remuneration, directly or indirectly, to induce either the referral of an individual for a healthcare item or service, or the purchasing or ordering of an item or service, for which payment may be made under a federal healthcare program such as Medicare or Medicaid;
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the U.S. federal false claims and civil monetary penalties laws, which prohibit, among other things, individuals or entities from knowingly presenting or causing to be presented, claims for payment by government funded programs such as Medicare or Medicaid that are false or fraudulent, and which may apply to us by virtue of statements and representations made to customers or third parties;
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the U.S. federal Health Insurance Portability and Accountability Act (“HIPAA”), which prohibits, among other things, executing a scheme to defraud healthcare programs;
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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, imposes requirements relating to the privacy, security, and transmission of individually identifiable health information, and requires notification to affected individuals and regulatory authorities of certain breaches of security of individually identifiable health information;
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the federal Physician Payment Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to the Centers for Medicare & Medicaid Services, or CMS, information related to payments and other transfers of value to physicians, other healthcare providers and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members, which is published in a searchable form on an annual basis; and
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state laws comparable to each of the above federal laws, such as, for example, anti-kickback and false claims laws that may be broader in scope and also apply to commercial insurers and other non-federal payors, requirements for mandatory corporate regulatory compliance programs, and laws relating to patient data privacy and security.
If our operations are found to be in violation of any such health care laws and regulations, we may be subject to penalties, including administrative, civil and criminal penalties, monetary damages, disgorgement, imprisonment, the curtailment or restructuring of our operations, loss of eligibility to obtain approvals from the FDA, or exclusion from participation in government contracting, healthcare reimbursement or other government programs, including Medicare and Medicaid, any of which could adversely affect our financial results. Although effective compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, these risks cannot be entirely eliminated. Any action against us for an alleged or suspected violation could cause us to incur significant legal expenses and could divert our management’s attention from the operation of our business, even if our defense is successful. In addition, achieving and sustaining compliance with applicable laws and regulations may be costly to us in terms of money, time and resources.
We will need to grow the size of our organization, and we may experience difficulties in managing this growth.
As of December 31, 2018, we had twelve employees. As our development and commercialization plans and strategies develop, and as we continue to transition into operating as a public company, we expect to need additional managerial, operational, sales, marketing, financial and other personnel. Future growth would impose significant added responsibilities on members of management, including:
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identifying, recruiting, integrating, maintaining and motivating additional employees;
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managing our internal development efforts effectively, including the clinical, FDA and international regulatory review process for our product candidates, while complying with our contractual obligations to contractors and other third parties; and
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improving our operational, financial and management controls, reporting systems and procedures.
Our future financial performance and our ability to commercialize our product candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.
We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations, advisors and consultants to provide certain services, including substantially all aspects of regulatory approval, clinical management and manufacturing. There can be no assurance that the services of independent organizations, advisors and consultants will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval of our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and consultants on economically reasonable terms, or at all.
If we are not able to effectively expand our organization by hiring new employees and expanding our groups of consultants and contractors, we may not be able to successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research, development and commercialization goals.
Risks Relating to our Finances, Capital Requirements and Other Financial Matters
We are a development stage company with a history of operating losses that are expected to continue and we are unable to predict the extent of future losses, whether we will generate significant revenues or whether we will achieve or sustain profitability.
We are a company in the development stage and our prospects must be considered in light of the uncertainties, risks, expenses and difficulties frequently encountered by companies in their early stages of operations. We have generated operating losses since our inception, including losses of approximately $13,534,000 and $11,096,000 for the years ended December 31, 2018 and 2017, respectively. We expect to make substantial expenditures and incur increasing operating costs in the future and our accumulated deficit will increase significantly as we expand development and clinical trial activities for our product candidates. Our losses have had, and are expected to continue to have, an adverse impact on our working capital, total assets and stockholders’ equity. Because of the risks and uncertainties associated with product development, we are unable to predict the extent of any future losses, whether we will ever generate significant revenues or if we will ever achieve or sustain profitability.
We have incurred significant operating losses and negative cash flows from operations since inception, had working capital at December 31, 2018 of approximately $1,804,000 and had an accumulated deficit at December 31, 2018 of approximately $47,517,000. We are dependent on obtaining, and are continuing to pursue, the necessary funding from outside sources, including obtaining additional funding from the sale of securities, in order to continue our operations. Without adequate funding, we may not be able to meet our obligations. We believe these conditions raise substantial doubt about our ability to continue as a going concern.
We will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, curtail or eliminate one or more of our research and development programs or commercialization efforts.
Our operations have consumed substantial amounts of cash since inception. During the years ended December 31, 2018 and 2017, we incurred research and development expenses of approximately $4,986,000 and $2,395,000, respectively. We expect to continue to spend substantial amounts on product development, including conducting clinical trials for our product candidates and purchasing clinical trial materials from our suppliers. We will require substantial additional funds to support our continued research and development activities, as well as the anticipated costs of preclinical studies and clinical trials, regulatory approvals and potential commercialization. We could spend our available financial resources much faster than we currently expect.
Until such time, if ever, as we can generate a sufficient amount of product revenue and achieve profitability, we expect to seek to finance future cash needs through equity or debt financings or corporate collaboration and licensing arrangements. We currently have no other commitments or agreements relating to any of these types of transactions and we cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional capital, we will have to delay, curtail or eliminate one or more of our research and development programs.
Raising additional funds by issuing securities or through licensing or lending arrangements may cause dilution to our existing stockholders, restrict our operations or require us to relinquish proprietary rights.
To the extent that we raise additional capital by issuing equity securities, the share ownership of existing stockholders will be diluted. Any future debt financing may involve covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, redeem our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions, among other restrictions. In addition, if we raise additional funds through licensing arrangements, it may be necessary to relinquish potentially valuable rights to our product candidates or grant licenses on terms that are not favorable to us.
We have certain convertible promissory notes outstanding, in the total amount, including accrued interest, of $2,000,000. If we are unable to pay the convertible promissory notes when due, or otherwise restructure the convertible promissory notes, we will be in default.
Subsequent to the year ended December 31, 2018, in February 2019, we issued two convertible promissory notes in the aggregate principal amount of $2,000,000. The two convertible promissory notes are due on the earlier to occur of (i) the tenth business day following the receipt by ABS of the 2019 Tax Credit and 2020 Tax Credit, respectively, or (ii) December 31, 2019 and December 31, 2020, respectively. In the event we do not have the cash resources to pay the convertible promissory notes when due, such notes will be in default. As a result, our business, financial condition and future prospects could be negatively impacted.
Risks Associated with our Capital Stock
The limited public market for our securities may adversely affect an investor’s ability to liquidate an investment in us.
Although our common stock is currently listed on the Nasdaq Capital Market, there is limited trading activity. We can give no assurance that an active market will develop, or if developed, that it will be sustained. If an investor acquires shares of our common stock, the investor may not be able to liquidate our shares should there be a need or desire to do so.
The market price of our common stock may be volatile and may fluctuate in a way that is disproportionate to our operating performance.
Our stock price may experience substantial volatility as a result of a number of factors, including:
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sales or potential sales of substantial amounts of our common stock;
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delay or failure in initiating or completing pre-clinical or clinical trials or unsatisfactory results of these trials;
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announcements about us or about our competitors, including clinical trial results, regulatory approvals or new product introductions;
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developments concerning our licensors or product manufacturers;
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litigation and other developments relating to our patents or other proprietary rights or those of our competitors;
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conditions in the pharmaceutical or biotechnology industries;
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governmental regulation and legislation;
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variations in our anticipated or actual operating results;
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change in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations; foreign currency values and fluctuations; and
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overall economic conditions.
Many of these factors are beyond our control. The stock markets in general, and the market for pharmaceutical and biotechnological companies in particular, have historically experienced extreme price and volume fluctuations. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors could reduce the market price of our common stock, regardless of our actual operating performance.
We have never paid and do not intend to pay cash dividends. As a result, capital appreciation, if any, will be your sole source of gain.
We have never paid cash dividends on any of our capital stock and we currently intend to retain future earnings, if any, to fund the development and growth of our business. In addition, the terms of existing and future debt agreements may preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
Provisions in our restated certificate of incorporation, our restated by-laws and Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.
Provisions of our restated certificate of incorporation, our restated by-laws and Delaware law may have the effect of deterring unsolicited takeovers or delaying or preventing a change in control of our company or changes in our management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests. These provisions include:
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the inability of stockholders to call special meetings; and
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the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could include the right to approve an acquisition or other change in our control or could be used to institute a rights plan, also known as a poison pill, that would work to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors.
In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years, has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.
The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.
We are eligible to be treated as an “emerging growth company,” as defined in the JOBS Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (i) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (ii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, after which, in each case, we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, we would cease to be an emerging growth company immediately.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our shares or if our results of operations do not meet their expectations, our share price and trading volume could decline.
The trading market for our shares is influenced by the research and reports that industry or securities analysts publish about us or our business. We do not have any control over these analysts. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our results of operations do not meet their expectations, our share price could decline.
ITEM 1B.UNRESOLVED STAFF COMMENTSNone.
Facilities
Our executive offices are located in approximately 687 square feet of office space at 760 Parkside Avenue, Downstate Biotechnology Incubator, Suite 304, Brooklyn, NY 11226 that we occupy under a lease expiring on December 31, 2019 with the option for multiple year renewals. We have an additional administrative office located at 33 Plymouth Street, Suite 101, Montclair NJ 07042 that we occupy under a lease expiring on December 31, 2020 with the option for a 2-year renewal. Our U.S. research and development offices are located in approximately 1,990 square feet of office space at 22320 Foothill Boulevard, Suite 200, Hayward, CA 94541 that we occupy under a lease expiring on May 31, 2020. The operations of AzurRx SAS are conducted at approximately 4,520 square feet of office space located at 290 chemin de Saint Dionisy, Jardin des Entreprises, 30980 Langlade, France, that we occupy under a nine-year lease expiring in December 24, 2020.
As of the date hereof, we know of no material, existing or pending legal proceedings against us, nor are we the plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our directors, executive officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest. From time to time, we may be subject to various claims, legal actions and regulatory proceedings arising in the ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the Nasdaq Capital Market, or Nasdaq, under the symbol “AZRX.”
Holders
At April 1, 2019, there were 17,762,027 shares of our common stock issued and outstanding and approximately 108 shareholders of record.Compensation Committee independence requirements.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 20182019 regarding equity compensation plans approved by our security holders and equity compensation plans that have not been approved by our security holders:
| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | | | |
| Equity compensation plans approved by security holders | 994,000 | $3.58 | 471,764 |
| | | | |
| Equity compensation plans not approved by security holders | - | - | - |
| | | | |
| Total | 994,000 | $3.58 | 471,764 |
Transfer Agent| Plan category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans(1) |
| Equity compensation plans approved by security holders (1) | 1,677,500 | $2.30 | 1,274,819 |
| Equity compensation plans not approved by security holders | - | - | - |
| Total | 1,677,500 | $2.30 | 1,274,819 |
The transfer agent for our common stock is Colonial Stock Transfer, 66 Exchange Place, 1st Floor, Salt Lake City, Utah 84111, Tel: (801) 355-5740.| (1) | Includes 632,667 shares of common stock are reserved under the 2014 Plan as of December 31, 2019, subject to the issuance of restricted stock and RSUs.Subsequent to December 31, 2019, Mr. Spoor forfeited a total of 241,667 reserved shares in connection with his resignation from the Board on April 29, 2020. |
Unregistered Sales of Equity Securities
As disclosed under “Recent Developments- Asset Purchase Agreement with Mayoly” above, on March 27, 2019, we entered into the Mayoly APA pursuant to which we purchased all rights, interest and title to and in MS1819-SD. As partial consideration for this purchase, we issued to Mayoly an aggregate total of 775,931 unregistered shares of our common stock, of which 400,481 shares were issued to Mayoly on March 27, 2019 and the remaining 375,450 shares are currently being held in escrow and will be released to Mayoly in the following installments: (i) 200,240 shares will be released on December 31, 2019 and (ii) 175,210 shares will be released on December 31, 2020.
The issuance of the shares of common stock by the Company to Mayoly was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act. The shares have not been registered under the Securities Act or any other applicable securities laws, and unless so registered, may not be offered or sold in the United States except pursuant to an exemption from the registration requirements of the Securities Act.
ITEM 6. SELECTED FINANCIALDATAAs an “emerging growth company” as defined by the rules and regulations of the SEC, we are not required to provide this information.
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSAmended and Restated 2014 Omnibus Equity Incentive Plan
You should readThe Board and stockholders have adopted and approved the following discussion2014 Plan, which is a comprehensive incentive compensation plan under which we can grant equity-based and analysis in conjunctionother incentive awards to our officers, employees, directors, consultants and advisers. The purpose of the 2014 Plan is to help us attract, motivate and retain such persons with our financial statements, includingawards under the notes thereto contained in this Annual Report. This discussion contains forward-looking statements that involve risks, uncertainties2014 Plan and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of certain factors, including those set forth under “Risk Factors Associated with Our Business” and elsewhere in this Annual Report.
Critical Accounting Policies and Estimatesthereby enhance stockholder value.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“AdministrationU.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect2014 Plan is administered by the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dateCompensation Committee of the consolidated financial statements and the reported amountBoard, which consists of revenues and expenses during the reporting period. In our consolidated financial statements, estimates are used for, but not limited to, valuation of financial instruments and intangible assets, fair value of long-lived assets and contingent consideration, deferred taxes and valuation allowance, and the depreciable lives of long-lived assets.
On an ongoing basis, we evaluate these estimates and assumptions, including those described below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Due to the estimation processes involved, the following summarized accounting policies and their application are considered to be critical to understanding our business operations, financial condition and operating results.
Intangible Assets
Our definite-lived intangible assets had a carrying value of approximately $570,000 and $1,346,000, at December 31, 2018 and 2017, respectively. These assets include in-process research and development and license agreements. These intangible assets were recorded at historical cost and are stated net of accumulated amortization.
The in-process research and development and licenses are amortized over their remaining estimated useful lives, ranging from 5 to 12 years, based on the straight-line method. The estimated useful lives directly impact the amount of amortization expense recorded for these assets on a quarterly and annual basis.
In addition, we test for impairment of definite-lived intangible assets when events or circumstances indicate that the carrying valuethree members of the assets may not be recoverable. JudgmentBoard, each of whom is used in determining when these events and circumstances arise. If we determine thata “non-employee director” within the carrying valuemeaning of the assets may not be recoverable, judgment and estimates are used to assess the fair value of the assets and to determine the amount of any impairment loss. No events or circumstances arose in the years ended December 31, 2018 and 2017 that would indicate that the carrying value of any of our definite-lived intangible assets may not be recoverable.
Goodwill
Goodwill relates to the acquisition of ProteaBio Europe during 2014 and represents the excess of the total purchase consideration over the fair value of acquired assets and assumed liabilities, using the purchase method of accounting. Goodwill is not amortized but is subject to periodic review for impairment. As a result, the amount of goodwill is directly impacted by the estimates of the fair values of the assets acquired and liabilities assumed.
In addition, goodwill will be reviewed annually, and whenever events or changes in circumstances indicate that the carrying amount of the goodwill might not be recoverable. Judgment is used in determining when these events and circumstances arise. We perform our review of goodwill on our one reporting unit. If we determine that the carrying value of the assets may not be recoverable, judgment and estimates are used to assess the fair value of the assets and to determine the amount of any impairment loss.
The carrying value of goodwill at December 31, 2018 and 2017 was approximately $1,925,000 and $2,016,000, respectively. If actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material.
Income Taxes
We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The measurement of a deferred tax asset is reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. We have not identified any uncertain income tax positions that could have a material impact to the consolidated financial statements. We are subject to taxation in various U.S. and foreign jurisdictions and remain subject to examination by taxing jurisdictions for the calendar year 2014 and all subsequent periods due to the availability of net operating loss carryforwards. To the extent we prevail in matters for which a liability has been established or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement may reduce our effective income tax rate and would be recognized in the period of resolution.
Our effective income tax rate may be affected by changes in tax law, our level of earnings, and the results of tax audits.
Although we believe that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.
Jumpstart Our Business Startups Act of 2012
On April 5, 2012, the JOBS Act was enacted. The JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.
General
To date, we have not generated any revenue from operations, and at December 31, 2018, we had an accumulated deficit of approximately $47,517,000, primarily as a result of research and development (“R&D”) expense and general and administrative (“G&A”) expense. Although in the future we may generate revenue from a variety of sources, including license fees, research and development payments in connection with strategic partnerships and/or government grants, our product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future and there can be no assurance that we will ever generate significant revenues or net income.
R&D Expense
Conducting R&D is central to our business. R&D expense consists primarily of:
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employee-related expense, which include salaries and benefits, and rent expense;
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license fees and annual payments related to in-licensed products and intellectual property;
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expenses incurred under agreements with clinical research organizations, investigative sites and consultants that conduct or provide other services relating to our clinical trials and a substantial portion of our preclinical activities;
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the cost of acquiring clinical trial materials from third party manufacturers; and
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costs associated with non-clinical activities, patent filings and regulatory filings.
We expect to continue to incur substantial expense related to our R&D activities for the foreseeable future as we continue product development. Since product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later stage clinical trials, we expect that our R&D expense will increase in the future. In addition, if our product development efforts are successful, we expect to incur substantial costs to prepare for potential commercialization of any late-stage product candidates and, in the event one or more of these product candidates receive regulatory approval, to fund the launch of the product.
G&A Expense
G&A expense consists principally of personnel-related costs, professional fees for legal, consulting and audit services, rent and other general operating expenses not otherwise included in R&D. We anticipate G&A expense will increase in future periods, reflecting continued and increasing costs associated with:
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support of our expanded R&D activities;
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an expanding infrastructure and increased professional fees and other costs associated with the compliance with the Exchange Act, the Sarbanes-Oxley Act and stock exchange regulatory requirements and compliance; and
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business development and financing activities.
Liquidity and Capital Resources
We have experienced net losses and negative cash flows from operations since our inception. As of December 31, 2018, we had cash of approximately $1,114,000, working capital of approximately $1,804,000, and had sustained cumulative losses attributable to common stockholders of approximately $47,517,000. We are dependent on obtaining, and are continuing to pursue, the necessary funding from outside sources, including obtaining additional funding from the sale of securities in order to continue our operations. Without adequate funding, we may not be able to meet our obligations. We believe these conditions raise substantial doubt about our ability to continue as a going concern.
We have funded our operations to date primarily through the completion of our initial public offering in October 2016 (“IPO”), the issuance of debt and convertible debt securities, as well as the issuance of common stock in various private placement transactions and our public offering in May 2018. We expect to incur substantial expenditures in the foreseeable future for the development of our product candidates. We will require additional financing to develop, prepare regulatory filings and obtain regulatory approvals, fund operating losses, and, if deemed appropriate, establish manufacturing, sales and marketing capabilities.
During the quarter ended June 30, 2017, we issued a 12% Senior Secured Original Issue Discount Convertible Debenture (the “Debenture”) to Lincoln Park Capital Fund, LLC (“LPC”), resulting in gross proceeds of $1.0 million (the “Debenture Offering”). We incurred total expense in connection with the consummation of the Debenture Offering of approximately $85,000, resulting in net offering proceeds of $915,000. The Debenture was repaid in full in July 2018. In addition, in June and July of 2017 we issued Units resulting in net offering proceeds of approximately $4,645,000 and in January 2018 we received proceeds of $2,239,617 from the exercise of the Reprice Warrants.
On May 3, 2018, we completed the May 2018 Public Offering, an underwritten, public offering of 4,160,000 shares of our common stock at a public offering price per share of $2.50, resulting in gross proceeds of $10.4 million with associated expenses of approximately $800,000. The May 2018 Public Offering was completed pursuant to the terms of an underwriting agreement executed by the Company and Oppenheimer on May 1, 2018. After deducting the underwriting discount paid to Oppenheimer, legal fees, and other offering expenses payable by the Company, the Company received net proceeds of approximately $9.6 million.
On February 14, 2019, we sold and issued two Senior Convertible Notes to ADEC, resulting in gross proceeds to the Company of $2.0 million.
We expect to incur substantial expenditures in the foreseeable future for the development of our product candidates. We will require additional financing to develop, prepare regulatory filings and obtain regulatory approvals, fund operating losses, and, if deemed appropriate, establish manufacturing, sales and marketing capabilities. Our current financial condition raises substantial doubt about our ability to continue as a going concern. Our failure to raise capital as and when needed would have a material adverse impact on our financial condition, our ability to meet our obligations, and our ability to pursue our business strategies. We will seek funds through additional equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing.
We are focused on expanding our product pipeline through collaborations, and also through acquisitions of products and companies. We are continually evaluating potential asset acquisitions and business combinations. To finance such acquisitions, we might raise additional equity capital, incur additional debt, or both.
Cash Flows for the Years Ended December 31, 2018 and 2017
Net cash used in operating activities for the year ended December 31, 2018 was $10,869,320, which primarily reflected our net loss of $13,533,617plus adjustments to reconcile net loss to net cash used in operating activities of depreciation and amortization expense of $798,446, non-cash fair value adjustment of the contingent consideration of $210,000, non-cash stock-based compensation of $1,441,475, non-cash restricted stock granted to employees and directors of $1,038,822, non-cash restricted stock granted/accrued to consultants of $360,771, non-cash debt discount - warrants on a 12% Senior Secured Original Issue Discount Convertible Debenture issued to LPC in April 2017 of $97,837, and a non-cash warrant modification expense of $428,748. Changes in assets and liabilities are due to an increase in other receivables of $2,187,903 due primarily to the French R&D tax credit normally received in the following year not yet received for 2017 and to increased billings to Mayoly, an increase in prepaid expense of $243,330 due primarily to an increase in D&O insurance and the addition of insurance for upcoming clinical trials, an increase in deposits of $15,001 due to a new office space lease for the startup of U.S. R&D, and a decrease in interest payable of $7,192, offset by an increase in accounts payable and accrued expense of $741,624 due primarily to increased R&D expenses.
Net cash used in operating activities for the year ended December 31, 2017 was $7,184,638, which primarily reflected our net loss of $11,096,383 plus adjustments to reconcile net loss to net cash used in operating activities of depreciation and amortization expense of $753,998, non-cash fair value adjustment of the contingent consideration of $140,000, non-cash stock-based compensation of $609,369, non-cash restricted stock granted to consultants, employees, and directors of $869,017, non-cash warrant expense of $538,945, accreted interest on OID convertible debt of $104,328, a beneficial conversion feature of OID convertible debt of $395,589, and accreted interest on debt discount - warrants of $280,834, non-cash stock granted for OID Debt maturity extension of $90,300, and a non-cash warrant modification expense of $397,570. Changes in assets and liabilities are due to an increase in prepaid expenses of $43,491 and a decrease in accounts payable and accrued expenses of $233,777.
Net cash used in investing activities for the year ended December 31, 2018 was $305,573, which consisted of the cash portion of the purchase of Protea assets from bankruptcy of $250,000 and the purchase of property and equipment of $55,473. Net cash used in investing activities for the year ended December 31, 2017 was $32,168, which and $286,203 consisted of the purchase of property and equipment.
Net cash provided by financing activities for the year ended December 31, 2018 was $11,712,128, which consisted of $2,324,742 from the issuance of common stock in connection with the exercise of certain repriced warrants in January 2018, $9,578,063 from the sale of common stock offered in our public offering in May 2018, $286,203 from the proceeds of the issuance of a note payable offset by repayments of convertible debt of $286,529 and repayment of a note payable of $190,351.
Net cash provided by financing activities for the year ended December 31, 2017 was $6,013,218, which consisted of the gross proceeds resulting from the issuance of the Debentures to LPC of $1,000,000 and the net proceeds resulting from the June 2017 Private Placement of $5,009,225, proceeds from the issuance of notes payable from a financing agreement for our D&O insurance premiums of $296,338 offset by repayments of notes payable of $292,345.
Consolidated Results of Operations for the Years Ended December 31, 2018 and 2017
We have not yet achieved revenue-generating status from any of our product candidates or technologies. Since inception, we have devoted substantially all of our time and efforts to developing our principal product candidates, consisting of AZX1101, AZX1103 and MS1819-SD. As a result, we did not have any revenue during the years ended December 31, 2018 or 2017.
R&D expense was $4,985,553 for the year ended December 31, 2018, as compared to $2,395,478 for the year ended December 31, 2017, an increase of $2,590,075. The increase in R&D expense for the year ended December 31, 2018 as compared to the same period in 2017 is primarily due to patient enrollment thresholds having been met, thus triggering milestone-based payments for the ongoing Phase II study of MS1819-SD in chronic pancreatitis, the production of new batches of material for both the MS1819-SD program and the b-lactamase program, and the startup of an R&D function in the U.S. We expect R&D expense to increase in future periods as our product candidates continue through clinical trials and we seek strategic collaborations.
G&A expense was $8,236,218 for the year ended December 31, 2018, as compared to $7,685,706 for the year ended December 31, 2017, an increase of $550,512. The increase for the year ended December 31, 2018 as compared to the same period in 2017 was due primarily to an increase in non-cash restricted stock, stock-based compensation, and warrants granted accumulating to $581,327 due primarily to achieving certain milestones related to such grants, an increase in compensation of $390,644 due to the addition of a Chief Financial Officer as well as increased bonuses in 2018, offset by a decrease in legal and other professional fees of $455,898 due to less usage of these services in 2018. We expect G&A expense to increase going forward in anticipation of the commercialization of our product candidates.
Fair value adjustment of our contingent consideration was $210,000 and $140,000, respectively, for the years ended December 31, 2018 and 2017. The difference in fair value adjustments in year ended December 31, 2018 as compared to the same period in 2017 is due primarily to increased risk-free and corporate bond rates, a greater probability of achieving success due to the completion of the Phase IIa study of MS1819-SD, and getting closer to the time of expected royalty payments.
Interest expense for the year ended December 31, 2018 was $101,846 as compared to $875,199 for the year ended December 31, 2017. The lower interest expense is due to having lower amounts of the LPC Debenture outstanding during 2018 as compared to 2017.
Net loss was $13,533,617 and $11,096,383, respectively, for the years ended December 31, 2018 and 2017. The change in net loss for the year ended December 31, 2018 compared to the same period in 2017 is due to the changes in expense as noted above.
Off-Balance Sheet Items
The following table summarizes our contractual obligations over the periods indicated, as well as our total contractual obligations:
| Contractual Obligation | | | | | | |
| Operating Leases | $354,387 | $201,370 | $153,017 | $- | $- | $- |
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKAn emerging growth company is not required to provide the information required by this item.
ITEM 8. FINANCIALSTATEMENTSThe audited consolidated financial statements of AzurRx BioPharma, Inc., including the notes thereto, together with the report thereon of Mazars USA LLP, the Company’s independent registered public accounting firm, are included in this Annual Report as a separate section beginning on page F-1.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.
ITEM 9A.CONTROLS AND PROCEDURESEvaluation of disclosure controls and procedures. |
As required by Rule 13a-15(b)16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) our Chief Executive Officer, an “outside director” within the meaning of Section 162(m) of the Internal Revenue Code (the “Code”). Among other things, the Compensation Committee has complete discretion, subject to the express limits of the 2014 Plan, to determine the directors, employees and nonemployee consultants to be granted an award, the type of award to be granted the terms and conditions of the award, the form of payment to be made and/or the number of shares of common stock subject to each award, the exercise price of each option and base price of each stock appreciation right (“CEOSAR”) and our Chief Financial Officer (“CFO”) conducted, the term of each award, the vesting schedule for an evaluation asaward, whether to accelerate vesting, the value of the end ofcommon stock underlying the period covered by this Annual Report on Form 10-K, ofaward, and the effectiveness of our disclosure controlsrequired withholding, if any. The Compensation Committee may amend, modify or terminate any outstanding award, provided that the participant’s consent to such action is required if the action would impair the participant’s rights or entitlements with respect to that award. The Compensation Committee is also authorized to construe the award agreements, and procedures as defined in Rules 13a-15(e)agreements and 15d-15(e)may prescribe rules relating to the 2014 Plan. Notwithstanding the foregoing, the Compensation Committee does not have any authority to grant or modify an award under the Exchange Act. Based on2014 Plan with terms or conditions that evaluation, our CEO and our CFO each concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information requiredwould cause the grant, vesting or exercise thereof to be disclosed in the reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) is accumulated and communicatedconsidered nonqualified “deferred compensation” subject to our management, including our CEO and our CFO, as appropriate to allow timely decisions regarding required disclosure.Code Section 409A.
Management’s Annual Report on Internal Control over Financial Reporting. |
Grant of Awards; Shares Available for Awards. The 2014 Plan provides for the grant of stock options, SARs, performance share awards, performance unit awards, distribution equivalent right awards, restricted stock awards, restricted stock unit awards and unrestricted stock awards to non-employee directors, officers, employees and nonemployee consultants of the Company or its affiliates. The aggregate number of shares of common stock that may be issued under the 2014 Plan shall not exceed 10% of the issued and outstanding shares of common stock on an as converted basis (the “As Converted Shares”), on a rolling basis. For calculation purposes, the As Converted Shares shall include all shares of common stock and all shares of common stock issuable upon the conversion of outstanding preferred stock and other convertible securities, but shall not include any shares of common stock issuable upon the exercise of options, warrants and other convertible securities issued pursuant to the 2014 Plan. The number of authorized shares of common stock reserved for issuance under the 2014 Plan shall automatically be increased concurrently with our issuance of fully paid and non-assessable shares of As Converted Shares. Shares shall be deemed to have been issued under the 2014 Plan solely to the extent actually issued and delivered pursuant to an award. If any award expires, is cancelled, or terminates unexercised or is forfeited, the number of shares subject thereto is again available for grant under the 2014 Plan.
Our management is responsibleThe number of shares of common stock for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designedwhich awards may be granted under the supervision2014 Plan to a participant who is an employee in any calendar year is limited to 300,000 shares. Future new hires and additional non-employee directors and/or consultants would be eligible to participate in the 2014 Plan as well. The number of our principal executive officerstock options and/or shares of restricted stock to be granted to executives and principal financial officerdirectors cannot be determined at this time as the grant of stock options and/or shares of restricted stock is dependent upon various factors such as hiring requirements and job performance.
Stock Options. The 2014 Plan provides for either “incentive stock options” (“ISOs”), which are intended to provide reasonable assurance regardingmeet the reliabilityrequirements for special federal income tax treatment under the Code, or “nonqualified stock options” (“NQSOs”). Stock options may be granted on such terms and conditions as the Compensation Committee may determine; provided, however, that the per share exercise price under a stock option may not be less than the fair market value of financial reportinga share of common stock on the date of grant and preparationthe term of our financial statementsthe stock option may not exceed 10 years (110% of such value and five years in the case of an ISO granted to an employee who owns (or is deemed to own) more than 10% of the total combined voting power of all classes of the Company's capital stock or a parent or subsidiary of the Company). ISOs may only be granted to employees. In addition, the aggregate fair market value of common stock covered by one or more ISOs (determined at the time of grant), which are exercisable for external purposesthe first time by an employee during any calendar year may not exceed $100,000. Any excess is treated as a NQSO.
Stock Appreciation Rights. A SAR entitles the participant, upon exercise, to receive an amount, in cash or stock or a combination thereof, equal to the increase in the fair market value of the underlying common stock between the date of grant and the date of exercise. SARs may be granted in tandem with, or independently of, stock options granted under the 2014 Plan. A SAR granted in tandem with a stock option (i) is exercisable only at such times, and to the extent, that the related stock option is exercisable in accordance with generally accepted accounting principles.
Due to its inherent limitations, internal control over financial reportingthe procedure for exercise of the related stock option; (ii) terminates upon termination or exercise of the related stock option (likewise, the common stock option granted in tandem with a SAR terminates upon exercise of the SAR); (iii) is transferable only with the related stock option; and (iv) if the related stock option is an ISO, may not prevent or detect misstatements and, evenbe exercised only when determined to be effective, can only provide reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Projectionsthe value of any evaluation of effectiveness to future periods arethe stock subject to risk that controls may become inadequate as a result of changes in conditions or deterioration in the degree of compliance.
Understock option exceeds the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluationexercise price of the effectiveness of our internal control over financial reporting based onstock option. A SAR that is not granted in tandem with a stock option is exercisable at such times as the framework in Internal Control — Integrated Framework issued by theCompensation Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) issued in May 2013 and related COSO guidance. Based on our evaluation under this framework, our internal control over financial reporting was effective based upon those criteria.may specify.
This report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
Changes in internal controls over financial reporting. |
Changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Annual Report on Form 10-K that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting are improved resources and ability to identify, evaluate, and appropriately conclude on accounting and reporting treatment.
ITEM 9B.OTHER INFORMATIONNone.
PPerformance Shares and Performance Unit Awards. Performance share and performance unit awards entitle the participant to receive cash or shares of common stock upon the attainment of specified performance goals. In the case of performance units, the right to acquire the units is denominated in cash values.
Distribution Equivalent Right Awards. A distribution equivalent right award entitles the participant to receive bookkeeping credits, cash payments and/or common stock distributions equal in amount to the distributions that would have been made to the participant had the participant held a specified number of shares of common stock during the period the participant held the distribution equivalent right. A distribution equivalent right may be awarded as a component of another award under the 2014 Plan, where, if so awarded, such distribution equivalent right will expire or be forfeited by the participant under the same conditions as under such other award.
Restricted Stock Awards and Restricted Stock Unit Awards. A restricted stock award is a grant or sale of common stock to the participant, subject to our right to repurchase all or part of the shares at their purchase price (or to require forfeiture of such shares if issued to the participant at no cost) in the event that conditions specified by the Compensation Committee in the award are not satisfied prior to the end of the time period during which the shares subject to the award may be repurchased by or forfeited to us. Restricted stock units entitle the participant to receive a cash payment equal to the fair market value of a share of common stock for each restricted stock unit subject to such restricted stock unit award, if the participant satisfies the applicable vesting requirement.
Unrestricted Stock Awards. An unrestricted stock award is a grant or sale of shares of our common stock to the participant that is not subject to transfer, forfeiture or other restrictions, in consideration for past services rendered to the Company or an affiliate or for other valid consideration.
Change-in-Control Provisions. In connection with the grant of an award, the Compensation Committee may provide that, in the event of a change in control, such award will become fully vested and immediately exercisable.
Amendment and Termination. The Compensation Committee may adopt, amend and rescind rules relating to the administration of the 2014 Plan, and amend, suspend or terminate the 2014 Plan, but no such amendment or termination will be made that materially and adversely impairs the rights of any participant with respect to any award received thereby under the 2014 Plan without the participant’s consent, other than amendments that are necessary to permit the granting of awards in compliance with applicable laws.
ITEM 12. SECAURT IIIRITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS As of April 27, 2020, we had one class of voting stock outstanding: common stock. The following table sets forth information regarding shares of common stock beneficially owned as of April 27, 2020 by:
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE(i) | Each of our officers and directors; |
| (ii) | All officer and directors as a group; and |
| (iii) | Each person known by us to beneficially own five percent or more of the outstanding shares of our common stock. Percent ownership is calculated based on 27,457,651 shares of common stock outstanding at April 27, 2020. |
The information required by this item will be incorporated by reference from our definitive proxy statement, to be filed with the Securities and Exchange Commission on or before April 30, 2019.Beneficial Ownership of Common Stock
ITEM 11. | EXECUTIVE COMPENSATION |
Name and Address of Beneficial Owner (1) | | Percent Ownership of Class (3) |
Current Named Executive Officers and Directors
| | |
| James Sapirstein, President and Chief Executive Officer | - | * |
Daniel Schneiderman, Chief Financial Officer (4) | 28,917 | * |
James E. Pennington, Chief Medical Officer (5) | 75,000 | * |
Edward J. Borkowski, Chair of the Board of Directors (6) | 671,567 | 2.4% |
Charles J. Casamento, Director (7) | 151,998 | * |
Alastair Riddell, Director (8) | 194,294 | * |
Vern L. Schramm, Director (9) | 125,498 | * |
Gregory Oakes, Director (10) | - | |
Former Named Executive Officers
| | |
Johan M. (Thijs) Spoor, Former Chief Executive Officer, President and Director (11) | 298,468 | 1.1% |
Maged Shenouda, Former Chief Financial Officer (12)
| 230,000 | * |
Daniel Dupret, Former Chief Scientific Officer (13)
| 15,000 | * |
| All Directors, Executive Officers and Former Named Executive Officers as a group (11 persons) | 1,790,742 | 6.5% |
| | | |
| 5% Stockholders | | |
Edmund Burke Ross, Jr. (14) | 3,630,347 | 9.9% |
The information required by this item will be incorporated by reference from our definitive proxy statement, to be filed with the Securities and Exchange Commission on or before April 30, 2019.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
* Less than 1%.
The information required by this item will be incorporated by reference from our definitive proxy statement, to be filed with the Securities and Exchange Commission on or before April 30, 2019.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this item will be incorporated by reference from our definitive proxy statement, to be filed with the Securities and Exchange Commission on or before April 30, 2019.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this item will be incorporated by reference from our definitive proxy statement, to be filed with the Securities and Exchange Commission on or before April 30, 2019.
| (1) | Unless otherwise indicated, the address of such individual is c/o AzurRx BioPharma, Inc., 760 Parkside Avenue, Downstate Biotechnology Incubator, Suite 304, Brooklyn, NY 11226. |
| (2) | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. All entries exclude beneficial ownership of shares issuable pursuant to warrants, options or other derivative securities that have not vested or that are not otherwise exercisable as of the date hereof or which will not become vested or exercisable within 60 days of the Record Date. |
| (3) | Percentages are rounded to nearest percent. Percentages are based on 27,457,651 shares of common stock outstanding. Warrants, options or other derivative securities that are presently exercisable or exercisable within 60 days are deemed to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person. |
| (4) | Includes 1,000 shares of common stock and 27,917 shares of common stock issuable upon exercise of vested options. |
| (5) | Includes 75,000 shares of common stock issuable upon exercise of vested options. |
| (6) | Includes (i) 409,773 shares of common stock; (ii) 103,093 shares of common stock issuable upon the conversion of senior convertible promissory notes, (iii) 80,021 shares of common stock issuable upon the exercise of warrants;(iv) 65,000 shares of common stock issuable upon exercise of vested options; and (v) held 13,680 shares of common stock held by Mr. Borkowski’s spouse. Excludes (i) 45,000 restricted shares of common stock; and (ii) 75,000 shares of common stock issuable upon exercise of unvested options. |
| (7) | Includes (i) 107,998 shares of common stock; (ii) 35,000 shares of common stock issuable upon exercise of vested options; and (iii) 9,000 shares of common stock held by La Jolla Lenox Trust, a family trust of which the Trustee is someone other than Mr. Casamento. Mr. Casamento and members of his immediate family are the sole beneficiaries of the trust. Excludes 75,000 shares of common stock issuable upon exercise of unvested options. |
| (8) | Includes (i) 129,294 shares of common stock; and (ii) 65,000 shares of common stock issuable upon the exercise of vested options. Excludes (i) 30,000 unvested restricted shares of common stock; and (ii) 75,000 shares of common stock issuable upon exercise of unvested options. |
| (9) | Includes (i) 90,498 shares of common stock and (ii) 35,000 shares of common stock issuable upon exercise of vested options. Excludes 75,000 shares of common stock issuable upon exercise of unvested options. |
| (10) | Excludes 60,000 shares of common stock issuable upon exercise of unvested options. |
| (11) | Includes (i) 138,617 shares ofcommon stock; (ii) 20,000 shares ofcommon stockissuable upon exercise of vested options; (iii) 100,000 shares ofcommon stockthat may be purchased pursuant to options granted by third parties at an exercise price of $1.00 per share; and (iv) 39,851 shares ofcommon stockheld in a trust for the benefit of Mr. Spoor’s spouse and minor children. Mr. Spoor disclaims beneficial ownership with respect to such shares ofcommon stockheld in trust.Excludes (i) 60,000 shares of common stock issuable upon exercise of unvested options; and (ii) 241,667 shares of restricted common stock forfeited by Mr. Spoor on April 29, 2020. |
| (12) | Includes 230,000 shares of common stock issuable upon the exercise of vested options, which expire twelve months following the date of Mr. Shenouda’s termination. |
| (13) | Includes 15,000 shares of earned but unissued restricted common stock. |
| (14) | Based upon information contained in a Schedule 13D filed by Edmund Burke Ross, Jr. on February 26, 2019 and records maintained by the Company. Includes a total of (i) 1,750,8135 shares of common stock, (ii) 773,196 shares of common stock issuable upon the conversion of senior convertible promissory notes, and (iii) 1,106,338 shares of common stock issuable upon the exercise of warrants. Of these holdings, (i) 1,676,009 shares are held by ADEC Private Equity Investment, LLC, which include 1,031,268 shares of common stock, and 644,741 shares of common stock issuable upon exercise of warrants; (ii) 1,954,338 shares are held by EBR Ventures, LLC, which include 719,545 shares of common stock, 773,196 shares of common stock issuable upon the conversion of senior convertible promissory notes, and 461,597 shares of common stock issuable upon exercise of warrants. The 773,196 shares of common stock issuable upon the conversion of the of senior convertible promissory notes and 386,597 shares of common stock issuable upon the exercise of warrants issued to ERB Ventures, LLC are subject to 9.99% ownership blockers and are excluded from the beneficial ownership calculation. Mr. Ross, Jr. is the Manager of EBR Ventures, LLC, and ADEC Private Equity Investment, LLC, and has voting and dispositive power over the shares of common stock held by such entities. The address of Mr. Ross, Jr. and such entities are c/o JDJ Family Office Services, P.O. Box 962049, Boston, MA 02196. |
PAITEM 13. CERTAIN RELATIONSHIPS, RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCEJohan (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, and on April 29, 2020, Mr. Spoor resigned as a member of the Board.
On June 28, 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, 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.
As of December 31, 2019, Mr. Spoor was entitled to an aggregate of 241,667 shares of restricted common stock with an aggregate grant date fair value of $855,668 that have vested but not been issued. Mr. Spoor forfeited the right to receive these shares on April 29, 2020 in connection with his resignation from the Board.
Mr. Spoor received no additional or severance compensation and all unvested stock options and shares of restricted common stock granted to Mr. Spoor were cancelled as a result of Mr. Spoor’s resignation.
Maged Shenouda
From October 1, 2016 until his appointment as the Company’s Chief Financial Officer on September 25, 2017, the Company employed the services of Maged Shenouda as a financial consultant. Included in accounts payable at December 31, 2019 and 2018 is $10,000 and $50,000, respectively, for Mr. Shenouda’s services. On November 1, 2019, Mr. Shenouda submitted his resignation as Chief Financial Officer of the Company, effective November 30, 2019.
On June 28, 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 was not owed, and the Company reversed the accrual in the quarter ended December 31, 2019.
Mr. Shenouda resigned from his position as the Company’s Chief Financial Officer effective November 30, 2019. Mr. Shenouda received no additional or severance compensation and all unvested stock options and shares of restricted Common Stock granted to Mr. Shenouda were cancelled as a result of Mr. Shenouda’s resignation. Mr. Shenouda has a period of twelve months following his resignation to exercise all vested stock options.
Christine Rigby-Hutton
During the year ended December 31, 2015, the Company's President, Christine Rigby-Hutton, was employed through Rigby-Hutton Management Services (“RHMS”). Ms. Rigby-Hutton resigned from the Company effective April 20, 2015. Included in accounts payable at both December 31, 2019 and 2018 is $38,453 for RHMS for Ms. Rigby-Hutton’s services.
Policy and Procedures Governing Related Party Transactions
The Board of Directors is committed to upholding the highest legal and ethical conduct in fulfilling its responsibilities and recognizes that related party transactions can present a heightened risk of potential or actual conflicts of interest.
The SEC rules define a related party transaction to include any transaction, arrangement or relationship which: (i) we are a participant; (ii) the amount involved exceeds $120,000; and (iii) executive officer, director or director nominee, or any person who is known to be the beneficial owner of more than 5% of our common stock, or any person who is an immediate family member of an executive officer, director or director nominee or beneficial owner of more than 5% of our common stock had or will have a direct or indirect material interest.
Although we do not maintain a formal written procedure for the review and approval of transactions with such related persons, it is our policy for the disinterested members of our Board of Directors to review all related party transactions on a case-by-case basis. To receive approval, a related-party transaction must have a legitimate business purpose for us and be on terms that are fair and reasonable to us and our stockholders and as favorable to us and our stockholders as would be available from non-related entities in comparable transactions.
All related party transactions must be disclosed in our applicable filings with the SEC as required under SEC rules.
ITEM 14. PRTINCIPAL ACCOUNTANT FEES AND SERVICES Set forth below are fees billed or expected to be billed to us by our independent registered public accounting firm Mazars USA LLP for the years ended December 31, 2019 and 2018 for the professional services performed for us.
Audit Fees
The following table presents fees for professional services billed by Mazars USA LLP for the fiscal years ended December 31, 2019 and 2018.
| | For the years ended December 31, |
| | | |
| Audit fees (1) | $124,640 | $129,031 |
| Audit-related fees (2) | 71,500 | 28,101 |
| Tax fees (3) | 31,087 | 23,772 |
| All other fees (4) | - | - |
| Total | $227,227 | $180,904 |
(1)
Professional services rendered by the Mazars USA LLP for the audit of our annual financial statements and review of financial statements included in our Form 10-Q’s.
(2)
The aggregate fees billed for assurance and related services by Mazars USA LLP that are reasonably related to the performance of the audit or review of our financial statements and are not reported under Note 1 above, principally related to registration statement filings.
(3)
The aggregate fees billed for professional services rendered by Mazars USA LLP for tax compliance, tax advice, and tax planning.
(4)
The aggregate fees billed for products and services provided by Mazars USA LLP other than the services reported in Notes 1 through 3 above.
Audit Committee Pre-Approval Policies and Procedures
The Audit Committee has the sole authority for the appointment, compensation and oversight of the work of our independent accountants, who prepare or issue an audit report for us.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee has reviewed and discussed with management and Mazars USA LLP, our independent registered public accounting firm, the audited consolidated financial statements in the AzurRx BioPharma, Inc. Annual Report on Form 10-K for the year ended December 31, 2019. The Audit Committee has also discussed with Mazars USA LLP those matters required to be discussed by Public Company Accounting Oversight Board (“PCAOB”) Auditing Standard 1301.
Mazars USA LLP also provided the Audit Committee with the written disclosures and the letter required by the applicable requirements of the PCAOB regarding the independent auditor’s communication with the Audit Committee concerning independence. The Audit Committee has discussed with the registered public accounting firm their independence from our Company.
Based on its discussions with management and the independent registered public accounting firm, and its review of the representations and information provided by management and the independent registered public accounting firm, including as set forth above, the Audit Committee recommended to our Board of Directors that the audited consolidated financial statements be included in our Annual Report on Form 10-K for the year ended December 31, 2019.
| Dated: April 29, 2020 | Respectfully Submitted, Edward J. Borkowski, Chairman Alastair Riddell Charles J. Casamento |
The information contained above under the caption “Report of the Audit Committee of the Board of Directors” shall not be deemed to be soliciting material or to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into such filing.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE. | (a) | The following financial statements, schedules and exhibits are filed as part of this report: |
The exhibits listed in the accompanying index to exhibits are filed as part of, and incorporated by reference into, the 10-K.
| (b) | See Item 15(a)(2) above. |
Index
List of Exhibits.
The following is a list of exhibits filed as a part of this Annual Report on Form 10-K/A.
PART IV
ITEM 15. EXHIBITS
Exhibit No. | | Description |
| | | |
| | Form of Underwriting Agreement (Incorporated by reference from Exhibit 1.1 filed with Amendment No 1. to Registration Statement on Form S-1, filed July 29, 2016). |
| | Underwriting Agreement (Incorporated by reference from Exhibit 1.1 filed with Current Report on Form 8-K, filed May 4, 2018). |
| | Underwriting Agreement, dated July 17, 2019 (Incorporated by reference from Exhibit 1.1 filed with Current Report on Form 8-K, filed July 22, 2019). |
| | Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference from Exhibit 3.1 filed with Registration Statement on Form S-1, filed July 13, 2016). |
| | Amended and Restated Bylaws of the Registrant (Incorporated by reference from Exhibit 3.2 filed with Registration Statement on Form S-1, filed July 13, 2016). |
| | Certificate of Amendment to Certificate of Incorporation of the Registrant (Incorporated by reference from Exhibit 3.1 filed with Current Report on Form 8-K, filed December 30, 2019). |
| | Form of Common Stock Certificate (Incorporated by reference from Exhibit 4.1 filed with Amendment No 1. to Registration Statement on Form S-1, filed July 29, 2016). |
| | Form of Investor Warrant (Incorporated by reference from Exhibit 4.2 filed with Registration Statement on Form S-1, filed July 13, 2016). |
| | Form of Underwriter Warrant (Incorporated by reference from Exhibit 4.3 filed with Amendment No 1. to Registration Statement on Form S-1, filed July 29, 2016). |
| | Form of Underwriter Warrant (Incorporated by reference from Exhibit 4.1 filed with Current Report on Form 8-K, filed May 4, 2018). |
| | Form of Selling Agent Warrant (Incorporated by reference from Exhibit 4.1 filed with Current Report on Form 8-K, filed April 3, 2019). |
| | Form of Selling Agent Warrant (Incorporated by reference from Exhibit 4.1 filed with Current Report on Form 8-K, filed May 14, 2019). |
| | Form of Wainwright Warrant (Incorporated by reference from Exhibit 4.1 filed with Current Report on Form 8-K, filed July 22, 2019). |
| | Stock Purchase Agreement dated May 21, 2014 between the Registrant, Protea Biosciences Group, Inc. and its wholly-owned subsidiary, Protea Biosciences, Inc (Incorporated by reference from Exhibit 10.1 filed with Registration Statement on Form S-1, filed July 13, 2016). |
| | Amended and Restated Joint Research and Development Agreement dated January 1, 2014 between the Registrant and Mayoly (Incorporated by reference from Exhibit 10.2 filed with Registration Statement on Form S-1, filed July 13, 2016).2016. |
| | Amended and Restated AzurRx BioPharma, Inc. 2014 Omnibus Equity Incentive Plan (Incorporated by reference from Exhibit 10.3 filed with Registration Statement on Form S-1, filed July 13, 2016). |
| | Employment Agreement between the Registrant and Mr. Spoor (Incorporated by reference from Exhibit 10.4 filed with Registration Statement on Form S-1, filed July 13, 2016). |
| | Securities Purchase Agreement dated April 11, 2017 between the Registrant and Lincoln Park Capital Fund, LLC (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed April 12, 2017) |
| | 12% Senior Secured Original Issue Discount Convertible Debenture between the Registrant and Lincoln Park Capital Fund, LLC (Incorporated by reference from Exhibit 10.2 filed with Current Report on Form 8-K, filed April 12, 2017). |
| | Form of Series A Warrant dated April 11, 2017 between the Registrant and Lincoln Park Capital Fund, LLC (Incorporated by reference from Exhibit 10.3 filed with Current Report on Form 8-K, filed April 12, 2017). |
| | Registration Rights Agreement dated April 11, 2017 between the Registrant and Lincoln Park Capital Fund, LLC (Incorporated by reference from Exhibit 10.4 filed with Current Report on Form 8-K, filed April 12, 2017). |
| | Form of Securities Purchase Agreement dated June 5, 2017 (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed June 9, 2017). |
| | Form of Registration Rights Agreement dated June 5, 2017 (Incorporated by reference from Exhibit 10.2 filed with Current Report on Form 8-K, filed April 12, 2017). |
| | Form of Series A Warrant, dated June 5, 2017 (Incorporated by reference from Exhibit 10.3 filed with Current Report on Form 8-K, filed June 9, 2017). |
| | Form of Series A-1 Warrant, dated June 5, 2017 (Incorporated by reference from Exhibit 10.4 filed with Current Report on Form 8-K, filed June 9, 2017). |
| | Sublicense Agreement dated August 7, 2017 by and between the Registrant and TransChem, Inc. (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed August 11, 2017). |
| | Employment Agreement between the Registrant and Mr. Shenouda (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed October 2, 2017). |
| | Modification to 12% Senior Secured Original Issue Discount Convertible Debenture, dated November 10, 2017 (Incorporated by reference from Exhibit 10.1 filed with Quarterly Report on Form 10-Q, filed November 13, 2017). |
| | Form of Exercise Letter (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed January 5, 2018). |
| | Form of Partial Exercise Letter (Incorporated by reference from Exhibit 10.2 filed with Current Report on Form 8-K, filed January 5, 2018). |
| | Asset Sale and Purchase Agreement, dated December 7, 2018, by and between Protea Biosciences Group, Inc., Protea Biosciences, Inc. and AzurRx Biopharma, Inc. (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed December 13, 2018). |
| | Note Purchase Agreement, dated February 14, 2019 (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed February 20, 2019). |
| | Senior Convertible Note A, dated February 14, 2019 (Incorporated by reference from Exhibit 10.2 filed with Current Report on Form 8-K, filed February 20, 2019). |
| | Senior Convertible Note B, dated February 14, 2019 (Incorporated by reference from Exhibit 10.3 filed with Current Report on Form 8-K, filed February 20, 2019). |
| | Pledge Agreement, dated February 14, 2019 (Incorporated by reference from Exhibit 10.4 filed with Current Report on Form 8-K, filed February 20, 2019). |
| | Warrant Amendment, dated February 14, 2019 (Incorporated by reference from Exhibit 10.5 filed with Current Report on Form 8-K, filed February 20, 2019). |
| | Registration Rights Agreement, dated February 14, 2019 (Incorporated by reference from Exhibit 10.6 filed with Current Report on Form 8-K, filed February 20, 2019). |
| | Asset Purchase Agreement, by and between AzurRx BioPharma, Inc., AzurRx BioPharma SAS and Laboratoires Mayoly Spindler SAS, dated March 27, 2019 (Incorporated by reference from Exhibit 10.25 filed herewith.with Annual Report on Form 10-K, filed April 1, 2019). |
| | Patent License Agreement, by and between AzurRx BioPharma, Inc. and Laboratoires Mayoly Spindler SAS, dated March 27, 2019 (Incorporated by reference from Exhibit 10.26 filed herewith.with Annual Report on Form 10-K, filed April 1, 2019). |
| | Selling Agent Agreement, by and between AzurRx BioPharma, Inc. and Alexander Capital, L.P., dated April 1, 2019 (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed April 3, 2019). |
| | Selling Agent Agreement, by and between AzurRx BioPharma, Inc. and Alexander Capital, L.P., dated May 9, 2019 (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed April 3, 2019). |
| | Employment Agreement by and between AzurRx BioPharma, Inc. and James Sapirstein, dated October 8, 2019 (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed October 11, 2019). |
| | Securities Purchase Agreement, dated November 13, 2019 (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed November 14, 2019). |
| | Registration Rights Agreement, dated November 13, 2019 (Incorporated by reference from Exhibit 10.2 filed with Current Report on Form 8-K, filed November 14, 2019). |
| | Form of Note Purchase Agreement (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed December 30, 2019). |
| | Form of Senior Convertible Promissory Note (Incorporated by reference from Exhibit 10.2 filed with Current Report on Form 8-K, filed December 30, 2019). |
| | Form of Warrant (Incorporated by reference from Exhibit 10.3 filed with Current Report on Form 8-K, filed December 30, 2019). |
| | Form of Registration Rights Agreement (Incorporated by reference from Exhibit 10.4 filed with Current Report on Form 8-K, filed December 30, 2019). |
| | Employment Agreement by and between AzurRx BioPharma, Inc. and Daniel Schneiderman, dated January 1, 2020 (Incorporated by reference from Exhibit 10.1 filed with Current Report on Form 8-K, filed January 6, 2020). |
| | Code of Ethics of AzurRx BioPharma, Inc. Applicable To Directors, Officers And Employees (Incorporated by reference from Exhibit 14.1 filed with Registration Statement on Form S-1, filed July 13, 2016). |
| | Subsidiaries of the Registrant (Incorporated by reference from Exhibit 21.1 filed with Registration Statement on Form S-1, filed July 13, 2016). |
| | Consent of Mazars USA LLP, dated April 1, 2019, filed herewith.March 30, 2020. |
| | Certification of CEO as Required by Rule 13a-14(a)/15d-14, filed herewith. |
| | Certification of CFO as Required by Rule 13a-14(a)/15d-14, filed herewith. |
| | Certification of CEO and CFO as Required by Rule 13a-14(a) and Rule 15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code, filed herewith.Code. |
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* Filed as an exhibit to the Form 10-K filed with the SEC on March 30, 2020.
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Confidential treatment has been granted with respect to portions of this exhibit.