ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in
conjunction with our consolidated financial statements, including
the notes thereto contained in this Annual Report. This discussion
contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking
statements as a result of a variety of certain factors, including
those set forth under “Risk Factors Associated with Our
Business” and elsewhere in this Annual
Report.
Overview
We are engaged in the research and development of targeted,
non-systemic therapies for the treatment of patients with
gastrointestinal (“GI”) diseases. Non-systemic therapies are
non-absorbable drugs that act locally, i.e. in the intestinal
lumen, skin or mucosa, without reaching an individual’s
systemic circulation.
We are currently focused on developing our pipeline of
gut-restricted GI clinical drug candidates. Our lead drug candidate
is MS1819, a recombinant lipase for the treatment of exocrine
pancreatic insufficiency (“EPI”)
in patients withcystic
fibrosis (“CF”) and chronic pancreatitis
(“CP”), currently in two
Phase 2 CF clinical trials. In 2021, we plan to launch two clinical
programs using proprietary formulations of niclosamide, a
pro-inflammatory pathway inhibitor; FW-420, for Grade 1 Immune
Checkpoint Inhibitor-Associated Colitis (“ICI-AC”)
and diarrhea in oncology patients, and FW-1022, for Severe
Acute Respiratory Syndrome Coronavirus 2
(“COVID-19”)
GI infections.
COVID-19 Update
In March 2020, the WHO declared the novel coronavirus disease, or
COVID-19, outbreak a global pandemic. To limit the spread
of COVID-19, governments have taken various actions including
the issuance of stay-at-home orders and physical distancing
guidelines. Accordingly, businesses have adjusted, reduced or
suspended operating activities. Beginning in March 2020, the
majority of our workforce began working from home. Disruptions
caused by the COVID-19 pandemic, including the effects of the
stay-at-home orders and work-from-home policies, have impacted
productivity, including delayed enrollment of new patients at
certain of our clinical trial sites, and may further disrupt our
business and delay our development programs and regulatory
timelines, the magnitude of which will depend, in part, on the
length and severity of the restrictions and other limitations on
our ability to conduct business in the ordinary course. As a
result, our expenses may vary significantly if there is an
increased impact from COVID-19 on the costs and timing
associated with the conduct of our clinical trials and other
related business activities.
We have implemented business continuity plans designed to address
and mitigate the impact of the ongoing COVID-19 pandemic on our
employees and our business. We continue to operate normally with
the exception of enabling all of our employees to work productively
at home and abiding by travel restrictions issued by federal, state
and local governments. Our current plans to return to the
office remain fluid as federal, state and local guidelines, rules
and regulations continue to evolve.
Financial Operations Overview
Revenue
To date, we have not generated any revenue from the sale of
our drug candidates or otherwise. In the future, we expect that we
will seek to generate revenue primarily from product sales, but we
may also generate non-product revenue from sources including, but
not limited to, research funding, development and milestone
payments, and royalties on future product sales in connection with
any out-license or other strategic relationships and/or government grants we may establish.
Our drug candidates are at an early
stage of development and may never be successfully developed or
commercialized.
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Research and Development Expense
Conducting research and development is central to our business.
Historically, the majority of our research and development expenses
have been focused on the development of our lead drug candidate,
MS1819.
Research and development expenses consist primarily of internal and
external costs incurred for our development activities, which
include, among other things:
●
personnel-related
costs, which include salaries, benefits, and stock-based
compensation expense;
●
fees
paid to third parties for services directly related to our drug
development and regulatory efforts;
●
Expenses
incurred under agreements with clinical research organizations
(CROs), investigative sites and consultants and contractors that
conduct or provide other services relating to our clinical trials
and research activities;
●
the
cost of acquiring drug product, drug supply and clinical trial
materials from contract development and manufacturing organization
(CDMOs) and third-party contractors;
●
costs
associated with preclinical and non-clinical
activities;
●
payments and other costs in connection with the
acquisition our drug candidates under licensing agreements;
and
●
amortization
of intangible assets, including patents, in-process research and
development and license agreements.
Costs incurred in connection with research and development
activities are expensed as incurred.
We expect our research and development expenses to increase for the
foreseeable future as wefocus
our efforts on the clinical developmentof our drug candidates,
including MS1819, and niclosamide throughlate-stage clinical trials, as well as chemistry,
manufacturing and controls (“CMC”) efforts. The process of
conducting non-clinical studies and clinical trials necessary to
obtain regulatory approval is costly and time-consuming. It is
difficult to determine with certainty the duration and costs of any
non-clinical study or clinical trial that we may conduct.In addition, if our product
development efforts are successful, we expect to incur substantial
costs to prepare for potential commercialization of any late-stage
drug candidates and, in the event any of our drug candidates
receives regulatory approval, to potentially fund the launch and
sales and marketing efforts of the product.
The probability of success for any of our current or future drug
candidates will depend on numerous factors, including competition,
manufacturing capability and commercial viability. We will
determine which programs to pursue and how much to fund each
program in response to the scientific and clinical success of each
drug candidate, as well as an assessment of each drug
candidate’s commercial potential.
We do
not record or maintain information regarding costs incurred in
research
and development on a program or project specific
basis. Our research and
development staff, outside consultants, contractors, CROs,
and CDMOs are deployed across several programs and/or
indications. Additionally, many of our costs are not
attributable to individual programs and/or
indications. Therefore, we believe that allocating costs on
the basis of time incurred by our personnel does not accurately
reflect the actual costs of a project.
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General and Administrative Expense
General and administrative expenses consist primarily of
personnel-related expenses, including salaries, benefits and
stock-based compensation, related to our executive, finance,
business development and support functions, legal fees
relating to both intellectual property and corporate matters,
insurance, costs associated with
operating as a public company, including corporate
communications and investor relations expense,information
technology, professional fees for
accounting, auditing and other professional
services,
and facility-related costs.
We anticipate our general and
administrative expensesto
increasefor the foreseeable
future tosupport of our
expanded research and development activities, intellectual
property, patent and corporate legal expense, insurance, andcosts
associated with operating as a public company, including
corporate communications and investor relations expense. Additional
increases in general and
administrative expenses are expected in connection with
increased business development
efforts, including potential partnership and/or collaboration
agreements and financing activities, expanding infrastructure,
including information technology administration, and the hiring of
additionalpersonneland consultants, among other
expenses.
Liquidity and Capital Resources
To date, we have not generated any revenues and have experienced
net losses and negative cash flows from our
activities.
As of December 31, 2020, we had cash and cash equivalents of
approximately $6.1 million, negative working capital of
approximately $7.7 million, and had sustained cumulative losses
attributable to common stockholders of approximately $95.4 million.
Subsequent to December 31, 2020, we have raised aggregate gross
proceeds of approximately $18.0 from the sale of preferred stock
and Common Stock in public offerings and private placement
transactions, and we have received gross cash proceeds of
approximately $4.6 million from the exercise of warrants. We have
not yet achieved profitability and anticipate that we will continue
to incur net losses for the foreseeable future. We expect that
our expenses will continue to grow and, as a result, we will need
to generate significant product revenues to achieve profitability.
We may never achieve profitability. As such, we are dependent on
obtaining, and are continuing to pursue, the necessary funding from
outside sources, including obtaining additional funding from the
sale of securities in order to continue our operations. Without
adequate funding, we may not be able to meet our obligations. We
believe these conditions may raise substantial doubt about our
ability to continue as a going concern.
Our primary sources of liquidity come from capital raises
through additional equity and/or debt financings. This may be impacted by the COVID-19 pandemic,
which is evolving and could negatively impact our ability to raise
additional capital in the future.
We have funded our operations to date primarily through the
issuance of debt, convertible debt securities, preferred stock, as
well as the issuance of Common Stock in variouspublic offerings and private placement
transactions. We expect to incur substantial expenditures in the
foreseeable future for the development of MS1819, niclosamide and
any other drug candidates. We will require additional financing to
develop our drug candidates, run clinical trials, prepare
regulatory filings and obtain regulatory approvals, fund operating
losses, and, if deemed appropriate, establish manufacturing, sales
and marketing capabilities. Our current financial condition raises
substantial doubt about our ability to continue as a going concern.
Our failure to raise capital as and when needed would have a
material adverse impact on our financial condition, our ability to
meet our obligations, and our ability to pursue our business
strategies. We will seek funds through additional equity and/or
debt financings, collaborative or other arrangements with corporate
sources, or through other sources of financing.
On
December 31, 2020, to finance our entry into the First Wave License
Agreement with First Wave, we entered into a purchase agreement to
raise aggregate gross proceeds of $8.0 million from the sale of
shares of Series C Preferred Stock and warrants, in a combined
private placement and registered direct offering, which closed in
January 2021. On March 7, 2021, we
entered into a securities purchase agreement to raise
aggregate gross proceeds of $10.0 million in a registered direct offering priced at the
market under Nasdaq rules. Additionally, between January and March
2021, we received gross cash proceeds of approximately $4.6 million
from the exercise of warrants.
Although, we are primarily focused on the development of our drug
candidates, including MS1819 and niclosamide, we are also
opportunely focused on expanding our product pipeline of clinical
assets through collaborations, and also through acquisitions of
products and companies. We are continually evaluating potential
asset acquisitions business combinations, and other partnership
opportunities. To finance such acquisitions, we might raise
additional equity capital, incur additional debt, or
both.
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Consolidated Results of Operations for the Years Ended December 31,
2020 and 2019
The following table summarizes our consolidated results of
operations for the periods indicated:
Year Ended December 31, Increase
Operating expenses:
Revenues
We have not yet achieved revenue-generating status from any of our
drug candidates. Since inception, we have devoted
substantially all of our time and efforts to developing our lead
drug candidate, MS1819. As a result, we did not have any
revenue during the years ended December 31, 2020 and 2019,
respectively.
Research and Development Expense
Research and development expenses include cash and non-cash
expenses primarily relating to the development of our lead drug
candidate, MS1819 and the acquisition of our licensed niclosamide
drug candidates.
Research and development expenses for the year ended December 31,
2020 totaled approximately $19.1 million, an increase of
approximately $10.5 million, or 121% over the approximately $8.7
million recorded for the year ended December 31, 2019. Non-cash
expenses, including stock-based compensation, stock expense
and depreciation and amortization totaled approximately $0.5 million for the year
ended December 31, 2020 and approximately $1.4 million for the year
ended December 31, 2019. Cash research and development expenses for the year
ended December 31, 2020 totaled approximately $5.4 million, a
decrease of approximately $1.9 million, or 26% over the
approximately $7.3 million recorded for the year ended December 31,
2019.
The increase in total research and development expenses was
primarily attributable to the $13.3 million of expense related to
the acquisition of our niclosamide drug candidates through the
First Wave License Agreement entered into on December 31, 2020, and
increases of approximately $1.1 million in CMC related costs,
offset by decreases of approximately $2.9 million in clinical
related expenses in connection with reduced clinical activity in
2020 as compared to 2019 partly due to COVID-19, and approximately
$0.9 million in non-cash expenses.
General and Administrative Expense
General and administrative expenses include cash and non-cash
expenses primarily consisting of costs associated with our overall
operations and being a public company. These costs include
personnel, legal and financial professional services, insurance,
corporate communication and investor relations, compliance related
fees, and expenses associated with obtaining and maintaining
intellectual property and patents, among others.
General and administrative expenses for the year ended December 31,
2020 totaled approximately $7.3 million, an increase of
approximately $1.6 million, or 27% over the approximately $5.7
million recorded for the year ended December 31, 2019. Non-cash
expenses, including stock-based compensation, stock expense
and depreciation and amortization totaled approximately $0.7 million for the year
ended December 31, 2020, and approximately $0.7 million recorded
for the year ended December 31, 2019. Cash general and administrative expenses for the year
ended December 31, 2020 totaled approximately $6.6 million, an
increase of approximately $1.6 million, or 32% over the
approximately $5.0 million recorded for the year ended December 31,
2019.
The increase in total general and administrative expenses was due
primarily to increases in legal expenses of approximately $0.7
million, personnel costs of approximately $0.4 million, business
development related expense of approximately $0.3 million,
directors and officer’s insurance of approximately $0.3
million, and costs associated with being a publicly reporting
company of approximately $0.1 million offset by decreases in travel
and entertainment of $0.1 million, accounting and auditing of $0.1
million, and directors fees of approximately $0.1
million.
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Other Expense
Other expenses for the year ended December 31, 2020 totaled
approximately $6.3 million, an increase of approximately $5.5
million, or 686% over the approximately $0.8 million recorded for
the year ended December 31, 2019. Interest expense was
approximately $5.8 million and $0.4 million for the year ended
December 31, 2020 and 2019, respectively. The increased interest
expense is due to amortization of debt discount and accrued
interest related to the convertible debt issued in December 2019
and January 2020.
Net Loss
As a result of the factors above, our net loss for the year ended
December 31, 2020 totaled approximately $32.7 million, an increase
of approximately $17.5 million, or 115% over the approximately
$15.2 million recorded for the year ended December 31,
2019.
Cash Flows for the Years Ended December 31, 2020 and
2019
The following table summarizes our cash flows for the periods
indicated:
Year Ended December 31,
Net cash provided by (used in):
Net increase (decrease) in cash and cash equivalents $5,911,933 $(912,621)
Operating Activities
Net cash used in operating activities during the year
ended December 31, 2020 of approximately $11.2 million was
primarily attributable to our net loss of approximately $32.7
million adjusted for addbacks of non-cash expenses of approximately
$7.3 million, which includes accretion of debt discount of
approximately $4.6 million, loss on debt extinguishment of
approximately $0.6 million, amortization of approximately $0.5
million, and stock-based compensation of approximately $0.5 million
and a net increase of working capital of approximately $14.2
million.
Net cash used in operating activities during the year
ended December 31, 2019 of approximately $14.0 million was
primarily attributable to our net loss of approximately $15.2
million adjusted for addbacks of non-cash expenses of approximately
$2.8 million, which includes amortization of approximately $1.0
million, stock expense of approximately $0.6 million, and
stock-based compensation of approximately $0.6 million and a net
decrease of working capital of approximately $1.7
million.
Investing Activities
Net cash provided by investing activities during the year ended
December 31, 2020 of approximately 87,000 was primarily
attributable to the and sale of equipment related to the closure of
our laboratory in France.
Net cash used in investing activities during the year ended
December 31, 2019 of approximately $24,000 was primarily
attributable to the net purchaseof property and equipment.
Financing Activities
Net cash provided by financing activities of approximately $17.0
million for the year ended December 31, 2020 was primarily due
to the net proceeds from theissuance of convertible debtof approximately $3.2
million in January 2020 and theissuance of the preferred stockof
approximately $13.2 millionin
theSeries B Private
Placement in July 2020offset
by repayments of approximately $0.5 million related to the ADEC
Notes and approximately $0.7 million related to the note
payable.
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Net cash provided by financing activities of approximately $13.1
million for the year ended December 31, 2019 was primarily due to
the net proceeds from our public offerings inApril, May, and July 2019of approximately $9.5
million,and issuance of the
convertible debtof approximately $5.0
millionfrom the ADEC Note
Offering, and the December 2019 Promissory Note Offering offset by
repayments of approximately $1.6 million related to the ADEC Notes
and approximately $0.3 million related to the note
payable.
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations is based on our financial
statements, which have been prepared in accordance with generally
accepted accounting principles generally accepted in the United
States of America (“GAAP”). The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amount of revenue and expense 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.
Stock-Based Compensation
We account for share-based payment awards issued to employees and
members of our Board by measuring the fair value of the award on
the date of grant and recognizing this fair value as stock-based
compensation using a straight-line basis over the requisite service
period, generally the vesting period. For awards issued
to non-employees, the measurement date is the date when the
performance is complete or when the award vests, whichever is the
earliest. Accordingly, non-employee awards are remeasured at each
reporting period until the final measurement date. The fair value
of the award is recognized as stock-based compensation over the
requisite service period, generally the vesting
period.
Debt and Equity Instruments
We analyze debt and equity instruments for various features that
would generally require either bifurcation and derivative
accounting, or recognition of a debt discount or premium under
authoritative guidance.
Detachable warrants issued in conjunction with debt are measured at
their relative fair value, if they are determined to be equity
instrument, or their fair value, if they are determined to be
liability instruments, and recorded as a debt
discount.
Conversion features that are in the money at the commitment date
constitute a beneficial conversion feature that is measured at its
intrinsic value and recognized as debt discount or deemed dividend.
Debt discount is amortized as interest expense over the maturity
period of the debt using the effective interest
method.
Intangible Assets
Our definite-lived intangible assets had a carrying value of
approximately $2.9 million and $3.4 million at December 31, 2020,
and 2019, respectively. These assets include patents, in-process
research and development and license agreements. These intangible
assets were recorded at historical cost and are stated
net of accumulated amortization.
The patents, 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.
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In addition, we test for impairment of definite-lived intangible
assets when events or circumstances indicate that the carrying
value of the assets may not be recoverable. Judgment is used in
determining when these events and circumstances arise. If we
determine that the carrying value of the assets may not be
recoverable, judgment and estimates are used to assess the fair
value of the assets and to determine the amount of any impairment
loss. No events or circumstances arose in the years ended
December 31, 2020 and 2019 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 SAS
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 was approximately $2.1 million and
$1.9 million, at December 31, 2020 and 2019, respectively. If
actual results are not consistent with our estimates or
assumptions, we may be exposed to an impairment charge that could
be material.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in the
Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and
may remain an emerging growth company until December 31, 2022. For
so long as we remain an emerging growth company, we are permitted
and intend to rely on exemptions from certain disclosure
requirements that are applicable to other public companies that are
not emerging growth companies. These exemptions
include:
●
reduced disclosure
about our executive compensation arrangements;
●
no non-binding stockholder advisory votes on executive compensation
or golden parachute arrangements; and
●
exemption from the auditor attestation requirement in the
assessment of our internal control over financial
reporting.
We have taken advantage of reduced reporting requirements in this
Annual Report on Form 10-K and may continue to do so until
such time that we are no longer an emerging growth company. We will
remain an “emerging growth company” until the earliest
of (a) the last day of the fiscal year in which we have total
annual gross revenues of $1.07 billion or more, (b) December 31,
2021, the last day of the fiscal year following the fifth
anniversary of the completion of ourIPO, (c) the date on which
we have issued more than $1.0 billion in nonconvertible debt during
the previous three years or (d) the date on which we are deemed to
be a large accelerated filer under the rules of the
SEC. Section 107 of the JOBS Act provides that an
emerging growth company can take advantage of the extended
transition period for complying with new or revised accounting
standards. We have irrevocably elected not to avail ourselves of
this extended transition period and, as a result, we will adopt new
or revised accounting standards on the relevant dates on which
adoption of such standards is required for other public
companies.
In addition, we are also a smaller reporting company as defined in
the Exchange Act. We may continue to be a smaller reporting company
even after we are no longer an emerging growth company. We may take
advantage of certain of the scaled disclosures available to smaller
reporting companies and will be able to take advantage of these
scaled disclosures for so long as (i) our voting
and non-voting common stock held by non-affiliates is
less than $250.0 million measured on the last business day of our
second fiscal quarter or (ii) our annual revenue is less than
$100.0 million during the most recently completed fiscal year and
our voting and non-voting common stock held
by non-affiliates is less than $700.0 million
measured on the last business day of our second fiscal
quarter.
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Off-Balance Sheet Items
We had the following contractual obligations over the periods
indicated:
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
applicable.
ITEM 8. FINANCIALSTATEMENTS
The audited consolidated financial statements of AzurRx BioPharma,
Inc., including the notes thereto, together with the report thereon
of Mazars USA LLP, our independent registered public accounting
firm, are included in this Annual Report as a separate section
beginning on page F-1.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) is (1) recorded,
processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms and
(2) accumulated and communicated to our management, including
our principal executive officer and principal financial officer, to
allow timely decisions regarding required disclosure.
As of December 31, 2020, our senior management, with the
participation of our principal executive officer and principal
financial officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act). Our senior management recognizes
that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving their
objectives, and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures. Our principal executive officer and principal financial
officer have concluded based upon the evaluation described above
that, as of December 31, 2020 our disclosure controls and
procedures were effective at the reasonable assurance
level.
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Management’s Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as such
term is defined in Exchange Act Rules 13a-15(f) and