AzurRx BioPharma, Inc. — Form 10-Q for quarter ended June 30, 2019
Issuer identification: The supplied filing is for AzurRx BioPharma, Inc. (Nasdaq: AZRX), not Gridai Technologies Corp. The summary below reflects the filing provided.
Business context and reporting period
AzurRx is a clinical-stage biotechnology company developing non-systemic biologics for gastrointestinal disorders. It reported unaudited results for the three and six months ended June 30, 2019, compared with the same periods in 2018. The company has no approved products and has generated no product-sale revenue.
Its lead candidate, MS1819-SD, is being developed for exocrine pancreatic insufficiency associated with cystic fibrosis and chronic pancreatitis. The Phase 2 OPTION study reached its enrollment target of 30 patients in June 2019; topline results were expected in the third quarter of 2019. In July 2019, the company launched a separate Phase 2 combination study in Hungary, with approximately 24 patients planned and completion anticipated in 2020. Its AZX1103 and AZX1101 beta-lactamase compounds remain in preclinical development; development plans for AZX1101 were under review.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | No product revenue reported | No product revenue reported |
| Research and development expense | $2.74 million (2019); $0.93 million (2018) | $4.86 million (2019); $2.60 million (2018) |
| General and administrative expense | $2.19 million (2019); $2.17 million (2018) | $4.68 million (2019); $4.08 million (2018) |
| Operating loss | $4.93 million (2019); $3.26 million (2018) | $9.54 million (2019); $6.85 million (2018) |
| Net loss | $5.04 million (2019); $3.31 million (2018) | $9.70 million (2019); $6.94 million (2018) |
| Basic and diluted loss per share | $0.25 (2019); $0.22 (2018) | $0.51 (2019); $0.50 (2018) |
For the first half of 2019, operating cash use was $6.65 million, compared with $4.86 million in 2018. Investing cash use was $13,337. Financing provided $6.90 million, principally from the April and May share offerings and $2.0 million of convertible notes. Cash increased by $228,114 before a $31,770 adverse foreign-exchange effect, ending at $1.31 million, versus $7.42 million at June 30, 2018.
At June 30, 2019, total assets were $9.61 million, current assets $3.63 million, and current liabilities $6.22 million. Working capital was negative approximately $2.59 million. Total liabilities were $6.66 million; these included $1.84 million of net convertible debt, a $64,714 note payable, and amounts due to Mayoly. Stockholders’ equity was $2.95 million, down from $4.47 million at December 31, 2018. The filing reports no income-tax expense. Gross margin is not meaningful because the company reported no product revenue.
Material changes and unusual items
- R&D expense increased $1.81 million for the quarter and $2.25 million for the half year, primarily reflecting the startup of U.S. R&D operations and OPTION study costs. Management expected R&D spending to rise as candidates advance through clinical trials.
- Six-month G&A expense rose $595,000, primarily due to higher personnel costs, investor-relations activity, and stock-based compensation. Interest expense rose to $168,000 from $95,000 for the half year, primarily because of the 2019 notes.
- Under a March 2019 asset purchase agreement, AzurRx acquired all rights to MS1819-SD from Mayoly. The recorded patent asset was $3.80 million, funded through shares, future milestone consideration, assumed liabilities, and forgiveness of amounts owed by Mayoly. The company also granted Mayoly royalty-bearing commercialization rights in certain territories.
- April and May 2019 public offerings generated approximately $2.5 million and $2.55 million in net proceeds, respectively. Common shares outstanding rose to 21.10 million at June 30 from 17.70 million at year-end.
- In February 2019, AzurRx issued $2.0 million of senior convertible notes to ADEC, an entity controlled by a significant stockholder. The notes bear 10% interest (reducible to 6% if repaid in full before December 31, 2019), are convertible at ADEC’s option at $2.50 per share subject to ownership limits, and are secured by interests in expected French R&D tax credits. The company also repriced certain ADEC-affiliate warrants to $1.50 per share.
- Subsequent to quarter-end, a July public offering of 5.0 million shares at $1.00 per share generated approximately $4.5 million net proceeds; underwriters also received warrants and an option to buy additional shares.
- On August 8, 2019, management reported a cyber-related fraud involving approximately $400,000 in vendor-directed payments. As of August 12, the company was investigating and could not determine the ultimate loss or recovery.
Outlook, risks, and controls
Management stated that the company’s losses and negative operating cash flows, together with negative working capital, raise substantial doubt about its ability to continue as a going concern. It depended on additional external funding and said cash, including recent equity proceeds, was not expected to fund working-capital needs beyond the next 12 months. Further financing will be needed for clinical development and operations; availability and terms are uncertain. The filing also identifies the risk that ownership changes could limit use of U.S. net operating loss carryforwards.
Management expected OPTION topline results in Q3 2019 and anticipated increased clinical-development and administrative spending. It cautioned that interim results are not necessarily indicative of full-year results. The CEO and CFO concluded disclosure controls were effective; no material change in internal control over financial reporting was reported. The filing lists no legal proceedings.
Important facts for investors to verify
- Confirm the issuer and ticker: the filing supplied is AzurRx BioPharma (AZRX), despite the request metadata naming Gridai Technologies Corp.
- Check the actual timing and results of the OPTION study and progress of the combination trial against the stated expectations.
- Assess cash burn, financing needs, and whether subsequent financing was sufficient to address the disclosed going-concern uncertainty.
- Review the ADEC note terms, related-party relationship, collateral tied to tax credits, and potential conversion and warrant dilution.
- Determine the final financial impact and recovery prospects from the reported approximately $400,000 cyber-related fraud.
- Verify the Mayoly purchase obligations, royalty terms, and any milestones or payments due.