SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2019~~2020

[ ] TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

From the transition period from to

Commission File Number 001-37853

(Exact name of small business issuer as specified in its charter)

Delaware		46-4993860
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

Downstate Biotechnology Incubator, Suite 304

(Address of principal executive offices)

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

Large accelerated filer	[ ]	Accelerated filer	[ ]
Non-accelerated filer	[X]	Smaller reporting company	[X]
		Emerging growth company	[X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	AZRX	Nasdaq Capital Market

-i-

Table of Contents

PAPR~~ART~~T I

FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

In our opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our financial position, results of operations, and cash flows for the interim periods presented. We have condensed such financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Therefore, such financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the consolidated financial statements were issued by filing with the SEC.

These financial statements should be read in conjunction with our audited financial statements for the year ended December 31, ~~2018~~2019 included in our Annual Report filed on Form 10-K, filed with the SEC on ~~April 1, 2019.~~March 30, 2020.

The results of operations for the three and nine months ended September 30, ~~2019~~2020 are not necessarily indicative of the results to be expected for the fiscal year ended December 31, ~~2019.~~

2020.

AZURRX BIOPHARMA, INC.

Consolidated Balance Sheets (unaudited)

September 30,

December 31,

2019

2018

ASSETS

Current Assets:

Cash
$1,549,825
$1,114,343
Other receivables
  2,090,233
  3,172,676
Prepaid expenses
  89,756
  512,982
Total Current Assets
  3,729,814
  4,800,001



Property, equipment, and leasehold improvements, net
  95,367
  128,854



Other Assets:


In process research and development, net
  -
  258,929
License agreements, net
  -
  311,548
Patents, net
  3,538,971
  -
Goodwill
  1,832,915
  1,924,830
Operating lease right-of-use assets
  189,987
  -
Deposits
  48,669
  45,233
Total Other Assets
  5,610,542
  2,540,540
Total Assets
$9,435,723
$7,469,395



LIABILITIES AND STOCKHOLDERS' EQUITY





Current Liabilities:


Accounts payable and accrued expenses
$2,754,217
$2,070,396
Accounts payable and accrued expenses - related party
  525,520
  670,095
Note payable
  -
  255,032
Convertible debt
  1,947,073
  -
Other current liabilities
  592,676
  -
Total Current Liabilities
  5,819,486
  2,995,523



Other liabilities
  414,463
  -
Total Liabilities
  6,233,949
  2,995,523



Stockholders' Equity:


Convertible preferred stock - Par value $0.0001 per share; 10,000,000 shares authorized and 0 shares issued and outstanding at September 30, 2019 and December 31, 2018; liquidation preference approximates par value
  -
  -
Common stock - Par value $0.0001 per share; 100,000,000 shares authorized; 26,155,111 and 17,704,925 shares issued and outstanding, respectively, at September 30, 2019 and December 31, 2018
  2,615
  1,771
Additional paid-in capital
  65,969,414
  53,139,259
Accumulated deficit
  (61,413,109)
  (47,517,046)
Accumulated other comprehensive loss
  (1,357,146)
  (1,150,112)
Total Stockholders' Equity
  3,201,774
  4,473,872
Total Liabilities and Stockholders' Equity
$9,435,723
$7,469,395

Consolidated Balance Sheets (unaudited)

	September 30,	December 31,
	2020	2019
ASSETS

Current Assets:
Cash	$11,368,680	$175,796
Other receivables	20,688	2,637,303
Prepaid expenses	148,604	595,187
Total Current Assets	11,537,972	3,408,286

Property, equipment, and leasehold improvements, net	54,070	77,391

Other Assets:
Patents, net	3,011,423	3,407,084
Goodwill	1,968,519	1,886,686
Operating lease right-of-use assets	104,196	82,386
Deposits	45,841	41,047
Total Other Assets	5,129,979	5,417,203
Total Assets	$16,722,021	$8,902,880

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable and accrued expenses	$1,686,003	$1,754,682
Accounts payable and accrued expenses - related party	38,453	533,428
Note payable	-	444,364
Accrued Dividends Payable	408,043	-
Convertible debt	-	1,076,938
Other current liabilities	492,815	476,224
Total Current Liabilities	2,625,314	4,285,636

Other liabilities	31,469	-
Total Liabilities	2,656,783	4,285,636

Stockholders' Equity:
Common stock - Par value $0.0001 per share; 150,000,000 shares authorized; 28,881,984 and 26,800,519 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively.	2,888	2,680
Series B preferred stock- Par value $0.0001 per share; 5,194.805195 shares authorized; 2,878.455557 and 0 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively.	-	-
Additional paid-in capital	93,239,704	68,575,851
Accumulated deficit	(77,965,806)	(62,694,732)
Accumulated other comprehensive loss	(1,211,548)	(1,266,555)
Total Stockholders' Equity	14,065,238	4,617,244
Total Liabilities and Stockholders' Equity	$16,722,021	$8,902,880

See accompanying notes to consolidated financial statements

AZURRX BIOPHARMA, INC.

Consolidated Statements of Operations and Comprehensive Loss (unaudited)

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

09/30/19

09/30/18

09/30/19

09/30/18

Research and development expenses
$2,210,091
$1,168,874
$7,067,392
$3,772,679
General and administrative expenses
  1,871,983
  1,317,132
  6,550,516
  5,400,712
Fair value adjustment, contingent consideration
  -
  80,000
  -
  240,000





Loss from operations
  (4,082,074)
  (2,566,006)
  (13,617,908)
  (9,413,391)





Other:




   Interest expense
  (110,398)
  (5,629)
  (278,155)
  (100,418)
Total other
  (110,398)
  (5,629)
  (278,155)
  (100,418)





Loss before income taxes
  (4,192,472)
  (2,571,635)
  (13,896,063)
  (9,513,809)





Income taxes
  -
  -
  -
  -





Net loss
  (4,192,472)
  (2,571,635)
  (13,896,063)
  (9,513,809)





Other comprehensive loss:




  Foreign currency translation adjustment
  (138,241)
  (36,215)
  (207,034)
  (140,108)
Total comprehensive loss
$(4,330,713)
$(2,607,850)
$(14,103,097)
$(9,653,917)





Basic and diluted weighted average shares outstanding
  24,962,691
  16,889,519
  21,080,701
  14,895,323





Loss per share - basic and diluted
$(0.17)
$(0.15)
$(0.66)
$(0.64)

Consolidated Statements of Operations and Comprehensive Loss (unaudited)

	Three Months	Three Months	Nine Months	Nine Months
	Ended	Ended	Ended	Ended
	09/30/20	09/30/19	09/30/20	09/30/19

Research and development expenses	$1,795,684	$2,221,933	$4,438,229	$7,927,907
General and administrative expenses	1,916,250	1,860,141	4,595,860	5,690,001

Loss from operations	(3,711,934)	(4,082,074)	(9,034,089)	(13,617,908)

Other:
Interest expense	(1,203,404)	(110,398)	(5,838,417)	(278,155)
Gain (Loss) on Settlement	211,430		211,430
Gain (Loss) on Debt Extinguishment	(609,998)		(609,998)
Total other	(1,601,972)	(110,398)	(6,236,985)	(278,155)

Loss before income taxes	(5,313,906)	(4,192,472)	(15,271,074)	(13,896,063)

Income taxes	-	-	-	-

Net loss	(5,313,906)	(4,192,472)	(15,271,074)	(13,896,063)

Other comprehensive loss:
Foreign currency translation adjustment	108,712	(138,241)	(55,007)	(207,034)
Total comprehensive loss	$(5,205,194)	$(4,330,713)	$(15,326,081)	$(14,103,097)

Net loss	$(5,313,906)	$(4,192,472)	$(15,271,074)	$(13,896,063)
Deemed dividend of preferred stock	(8,155,212)	-	(8,155,212)	-
Net loss applicable to common stockholders	(13,469,118)	(4,192,472)	(23,426,286)	(13,896,063)

Basic and diluted weighted average shares outstanding	28,518,835	24,962,691	27,828,235	21,080,701

Net loss per share - basic and diluted	$(0.47)	$(0.17)	$(0.84)	$(0.66)

See accompanying notes to consolidated financial statements

-3-

Table of Contents

AZURRX BIOPHARMA, INC.

Consolidated Statements of Changes in Stockholders' Equity (unaudited)

Accumulated

Convertible

Additional

Other

Preferred Stock

Common Stock

Paid In

Subscriptions

Accumulated

Comprehensive

Shares

Amount

Shares

Amount

Capital

Receivable

Deficit

Loss

Total

Balance, January 1, 2018
  -
$-
  12,042,574
$1,205
$37,669,601
$(1,071,070)
$(33,983,429)
$(955,715)
$1,660,592










Common stock issued from public offering


  4,160,000
  416
  9,577,647



  9,578,063
Common stock issued to consultants


  118,818
  12
  360,759



  360,771
Common stock issued for warrant exercises


  503,070
  49
  1,253,623
  1,071,070


  2,324,742
Stock-based compensation




  306,966



  306,966
Restricted stock granted to employees/directors


  90,000
  9
  457,677



  457,686
Convertible debt converted into common stock


  26,000
  3
  68,670



  68,673
Warrant modification




  428,748



  428,748
Foreign currency translation adjustment







  (140,108)
  (140,108)
Net loss






  (9,513,809)

  (9,513,809)
Balance, September 30, 2018
  -
$-
  16,940,462
$1,694
$50,123,691
$-
$(43,497,239)
$(1,095,823)
$5,532,323




















Balance, January 1, 2019
  -
$-
  17,704,925
$1,771
$53,139,259
$-
$(47,517,046)
$(1,150,112)
$4,473,872










Common stock issued from public offerings


  7,522,097
  752
  9,491,265



  9,492,017
Common stock issued to consultants


  62,158
  6
  112,494



  112,500
Common stock issued to Mayoly for patents


  775,931
  77
  1,740,882



  1,740,959
Stock-based compensation




  541,725



  541,725
Restricted stock granted to employees/directors


  90,000
  9
  556,879



  556,888
Warrant modification




  325,320



  325,320

Received from stockholder in relation to warrant modification




  61,590



  61,590
Foreign currency translation adjustment







  (207,034)
  (207,034)
Net loss






  (13,896,063)

  (13,896,063)
Balance, September 30, 2019
  -
$-
  26,155,111
$2,615
$65,969,414
$-
$(61,413,109)
$(1,357,146)
$3,201,774
AZURRX BIOPHARMA, INC.

Consolidated Statements of Changes in Stockholders' Equity (unaudited)

	Convertible				Additional		Other
	Preferred Stock		Common Stock		Paid In	Accumulated	Comprehensive
	Shares	Amount	Shares	Amount	Capital	Deficit	Loss	Total

Balance, January 1, 2019	-	$-	17,704,925	$1,771	$53,139,259	$(47,517,046)	$(1,150,112)	$4,473,872

Common stock issued from public offerings			7,522,097	752	9,491,265			9,492,017
Common stock issued to consultants			62,158	6	112,494			112,500
Common stock issued to Mayoly for patents			775,931	77	1,740,882			1,740,959
Stock-based compensation					541,725			541,725
Restricted stock granted to employees/directors			90,000	9	556,879			556,888
Warrant modification					325,320			325,320
Received from stockholder in relation to warrant modification					61,590			61,590
Foreign currency translation adjustment							(207,034)	(207,034)
Net loss						(13,896,063)		(13,896,063)
Balance, September 30, 2019	-	$-	26,155,111	$2,615	$65,969,414	$(61,413,109)	$(1,357,146)	$3,201,774

Balance, January 1, 2020	-	$-	26,800,519	$2,680	$68,575,851	$(62,694,732)	$(1,266,555)	$4,617,244
Issuance of Series B preferred stock and warrants for cash, conversion of promissory notes, net of offering costs	2,912	-			14,460,155			14,460,155
Warrants issued in connection with Series B convertible preferred stock private placement					5,952,516			5,952,516
Warrants issued as inducement to exchange promissory notes into Series B convertible preferred stock private placement					986,526			986,526
Beneficial conversion feature of Series B preferred stock					8,155,212			8,155,212
Deemed dividend of preferred stock					(8,155,212)			(8,155,212)
Accrued dividends on Series B preferred stock					(412,829)			(412,829)
Deemed dividend related to exchange of promissory notes into Series B preferred stock					(1,129,742)			(1,129,742)
Conversion of Series B preferred shares into common stock	(34)	-	341,274	34	(34)			-
Issuance of common stock for accrued dividends upon conversion of Series B preferred stock			6,214	1	4,785			4,786
Common stock issued to settle accounts payable			105,937	11	131,126			131,137
Common stock issued to Lincoln Park for Equity Purchase agreement			1,495,199	149	988,199			988,348
Warrants issued in association with convertible debt issuance					1,252,558			1,252,558
Beneficial conversion feature on convertible debt issuances					1,838,422			1,838,422
Common stock issued to consultants			132,841	13	109,592			109,605
Settlement with former chief executive officer					85,770			85,770
Stock-based compensation					396,809			396,809
Foreign currency translation adjustment					-		55,007	55,007
Net loss						(15,271,074)		(15,271,074)
Balance, September 30, 2020	2,878	$-	28,881,984	$2,888	$93,239,704	$(77,965,806)	$(1,211,548)	$14,065,238

See accompanying notes to consolidated financial statements

Consolidated Statements of Cash Flows (unaudited)

	Nine Months	Nine Months
	Ended	Ended
	09/30/20	09/30/19
Cash flows from operating activities:
Net loss	$(15,271,074)	$(13,896,063)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	26,556	51,261
Amortization	395,661	825,063
Non-cash lease expense	(4,855)	(3,218)
Common stock issued to settle accounts payable for board fees	131,137	-
Stock-based compensation	369,517	541,725
Restricted stock granted to employees/directors	27,292	556,888
Common stock granted to consultants	109,605	112,500
Accreted interest on convertible debt	234,334	124,932
Accretion of debt discount	4,580,167	147,461
Loss on debt extinguishment	609,998	-
Gain on settlement	(211,430)	-
Beneficial conversion feature related to promissory note exchange	798,413	-
Changes in assets and liabilities:
Accounts receivables	(220,094)	-
Other receivables	2,121,336	(261,981)
Prepaid expenses	446,766	420,218
Deposits	(4,180)	(4,125)
Accounts payable and accrued expenses	90,147	601,096
Accrued dividends payable	408,043	-
Other liabilities	31,104	(23,274)
Net cash used in operating activities	(5,331,557)	(10,807,517)

Cash flows from investing activities:
Purchase of property and equipment	(2,808)	(17,243)
Net cash used in investing activities	(2,808)	(17,243)

Cash flows from financing activities:
Proceeds from issuance of notes payable, net	179,408	-
Proceeds from issuance of common stock, net	988,348	9,492,016
Proceeds from issuance of convertible debt, net	3,227,002	2,000,000
Proceeds from issuance of preferred stock, net	13,197,740	-
Received from stockholder in relation to warrant modification	-	61,590
Repayments of convertible debt	(475,000)	-
Repayments of note payable	(623,772)	(255,032)
Net cash provided by financing activities	16,493,726	11,298,574

Increase in cash	11,159,361	473,814

Effect of exchange rate changes on cash	33,523	(38,332)

Cash, beginning balance	175,796	1,114,343

Cash, ending balance	$11,368,680	$1,549,825


Supplemental disclosures of cash flow information:
Cash paid for interest	$105,460	$5,762

Non-cash investing and financing activities:

Common stock issued for patents purchased from Mayoly	$-	$1,740,959
Warrant modification related to convertible debt issuance	$-	$325,320
Deemed dividend on preferred stock	$8,155,212	$-
Accrued dividends on preferred stock	$408,043	$-
Exchange of promissory notes into preferred stock and warrants	$609,998	$-

See accompanying notes to consolidated financial statements

~~Note~~Note 1 - The ~~Company~~Company and Basis of Presentation

~~The Company~~Description of Business

The Company is engaged in the research and development of non-systemic biologics for the treatment of patients with gastrointestinal disorders. Non-systemic biologics are non-absorbable drugs that act locally, i.e. the intestinal lumen, skin or mucosa, without reaching an individual’s systemic circulation. ~~The Company’s current product pipeline consists of two therapeutic proteins under development:~~

~~In October 2018, the U.S. Food and Drug Administration (“FDA”) cleared the Company’s Investigational New Drug (“IND~~”) application for MS1819-SD in patients with EPI due to CF. In connection with the FDA’s clearance of the IND, the Company initiated a multi-center Phase 2 OPTION study in the fourth quarter of 2018 in the United States and Europe (the “~~OPTION Study”). The Company targeted enrollment of 30 to 35 patients for the OPTION Study and dosed the first patients in February 2019. In June 2019, the Company reached its enrollment target for the study.~~

On September 25, 2019, the Company announced positive results from the OPTION Study. Results showed that the primary efficacy endpoint of CFA was comparable to the CFA in a prior phase two study in patients with CP, while using the same dosage of MS1819-SD. The dosage used in both studies was 2.2 grams per day, which was determined in agreement with the FDA as a bridging dose. Although the study was not powered for statistical significance, the data demonstrated meaningful efficacy results, with approximately 50% of the patients showing CFAs high enough to reach non-inferiority with standard porcine enzyme replacement therapy (“~~PERT”). Additionally, coefficient of nitrogen absorption (“CNA~~”) was comparable between the MS1819-SD and PERT arms, 93% vs. 97%, respectively, in the Option Study. This important finding confirms that protease supplementation is not likely to be required with MS1819-SD treatment. A total of 32 patients, ages 18 or older, completed the OPTION Study. The Company now plans to meet with the FDA before year-end based on prior communications, to discuss a Phase 2b or Phase 3 trial design exploring the use of higher doses and/or enteric-coated capsules to ensure higher levels of MS1819-SD in the duodenum.

~~In addition to the OPTION Study, in July 2019 the Company launched a Phase 2 multi-center clinical trial (the “Combination Trial~~”) in Hungary to investigate MS1819-SD in combination with PERT, for CF patients who suffer from severe EPI, but continue to experience clinical symptoms of fat malabsorption despite taking the maximum daily dose of PERTs. The Combination 2 study is designed to investigate the safety, tolerability and efficacy of escalating doses of MS1819-SD, in conjunction with a stable dose of PERTs, in order to increase CFA and relieve abdominal symptoms.

~~-6-~~

~~Table of Contents~~

~~DRAFT~~

On October 15, 2019, the Company announced that it dosed the first patients in its Combination Trial. This study is designed to investigate the safety, tolerability and efficacy of escalating doses of MS1819-SD (700 mg, 1120 mg and 2240 mg per day, respectively), in conjunction with a stable dose of porcine PERTs, in order to increase the CFA and relieve abdominal symptoms. A combination therapy of PERT and MS1819-SD has the potential to: (i) correct macronutrient and micronutrient maldigestion; (ii) eliminate abdominal symptoms attributable to maldigestion; and (iii) sustain optimal nutritional status on a normal diet in CF patients with severe EPI. Planned enrollment is expected to include approximately 24 CF patients with severe EPI, with study completion anticipated in 2020.

On October 17, 2019, the Company announced that the Cystic Fibrosis Foundation Data Safety Monitoring Board has completed its review of the Company’s final results of the OPTION Study and has found no safety concerns for MS1819-SD, and that the group supports the Company’s plan to proceed to a higher four-gram dose of MS1819-SD in its next planned Phase 2 clinical trial.

~~b-Lactamase Program~~

~~Recent Developments~~

~~Asset Purchase Agreement with Mayoly~~

~~On March 27, 2019, the Company~~ ~~entered into an Asset Purchase Agreement with Mayoly (the “Mayoly APA”),~~ ~~pursuant to which the Company purchased all rights, title~~U.S. and ~~interest in and to MS1819-SD. Upon execution of the Mayoly APA, the Joint Development and License Agreement (the “JDLA~~”) previously executed by AzurRx SAS and Mayoly was terminated. In addition, the Company granted to Mayoly an exclusive, royalty-bearing right to revenue received from commercialization of MS1819-SD within certain territories.

~~In accordance with the Mayoly APA, the Company provided to Mayoly the following consideration for the purchase of MS1819-SD:~~

~~(i)~~

~~the Company assumed certain of Mayoly’s liabilities with respect to MS1819-SD;~~

~~(ii)~~

~~the Company forgave all amounts currently owed to AzurRx SAS by Mayoly under the JDLA;~~

~~(iii)~~

the Company agreed to pay, within 30 days after the execution of the Mayoly APA, all amounts incurred by Mayoly for the maintenance of patents related to MS1819-SD from January 1, 2019 through the date of the Mayoly APA;

~~(iv)~~

~~the Company made an initial payment to Mayoly of €800,000, which amount was paid by the issuance of 400,481 shares of the Company’s common stock at a price of $2.29 per share (the “Closing Payment Shares~~”)Europe, and the ~~Company recognized $917,101 as part~~Combination therapy trial in Europe, consisting of ~~stockholders’ equity; and~~

~~(v)~~

MS1819 in conjunction with porcine-derived pancreatic enzyme replacement therapy, the ~~Company agreed to pay to Mayoly an additional €1,500,000, payable in a mix~~current standard of ~~cash and shares of the Company’s common stock as follows (the “~~care.~~Milestone Payments”): (y) on December 31, 2019, a cash payment of €400,000 and 200,240 shares of common stock (the “2019 Escrow Shares”) and (z) on December 31, 2020, a cash payment of €350,000 and 175,210 shares of common stock (the “2020 Escrow Shares” and, together with the 2019 Escrow Shares, the “Escrow Shares”) and the Company recognized $823,858 as part of stockholders’ equity.~~

~~-7-~~

~~Table of Contents~~

~~DRAFT~~

~~The Closing Payment Shares and the Escrow Shares were all issued upon execution of the Mayoly APA;provided~~,~~however~~, per the terms 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. See Note 6.

~~April 2019 Registered Direct Public Offering~~

In April 2019, the Company completed a public offering of 1,294,930 shares of its common stock at a public offering price of $2.13 per share, resulting in net proceeds of approximately $2,500,000, after deducting the selling agent fee paid to Alexander Capital, L.P. and other offering expenses payable by the Company (the “~~April 2019 Public Offering~~”). The April 2019 Public Offering was completed pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-226065) and the prospectus supplement filed on April 2, 2019.

In connection with the April 2019 Public Offering, the Company entered into a Selling Agent Agreement with Alexander Capital, L.P., pursuant to which we paid to Alexander Capital, L.P. (i) a cash fee equal to 7% of the aggregate gross proceeds of the April 2019 Public Offering, and (ii) issued to Alexander Capital, L.P. warrants to purchase 38,848 shares of the Company’s common stock (the “~~April 2019 Selling Agent Warrants~~”), an amount equal to 3% of the aggregate number of shares of common stock sold in the April 2019 Public Offering. The April 2019 Selling Agent Warrants will become exercisable one year from the date of issuance, expire on April 2, 2024 and have an exercise price of $2.55 per share. Also see Note 12. The Company also reimbursed Alexander Capital, L.P. for its expenses on a non-accountable basis in an amount equal to 1% of the gross proceeds of the April 2019 Public Offering and $50,000 for other accountable expenses.

~~May 2019 Registered Direct Public Offering~~

On May 9, 2019, the Company completed a second public offering with Alexander Capital of 1,227,167 shares of the Company’s common stock at a public offering price of $2.35 per share, resulting in net proceeds of approximately $2,550,000, after deducting the selling agent fee paid to Alexander Capital and other offering expenses payable by the Company (the “~~May 2019 Public Offering~~”). The May 2019 Public Offering was completed pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-226065) and the prospectus supplement filed on May 9, 2019.

In connection with the May 2019 Public Offering, the Company entered into a Selling Agent Agreement with Alexander Capital, pursuant to which the Company (i) paid Alexander Capital a cash fee equal to 7.0% of the aggregate gross proceeds of the May 2019 Public Offering, and (ii) issued Alexander Capital warrants to purchase up to 36,815 shares of common stock, an amount equal to 3.0% of the aggregate number of shares of common stock sold in the Offering. The May 2019 Selling Agent Warrants will become exercisable one year from the date of issuance, expire on May 9, 2024 and have an exercise price of $2.82 per share. Also see Note 12. The Company also agreed to reimburse Alexander Capital for its expenses in connection with the Offering on a non-accountable basis in an amount equal to 1.0% of the gross proceeds of the Offering and up to $50,000 for other accountable expenses.

~~July 2019 Underwritten Public Offering~~

~~On July 17, 2019, we entered into an underwriting agreement (the “Underwriting Agreement”) with H.C. Wainwright & Co., LLC. (“Wainwright”) as representatives of the several underwriters named therein (the “Underwriters~~”), relating to the issuance and sale of 5 million shares of our common stock. Each share of common stock was sold at a public offering price of $1.00 per share, resulting in gross proceeds to us of $5,000,000, or net proceeds of approximately $4,500,000, after deducting the underwriting discount, estimated legal fees and other offering expenses payable by the Company (the “~~July 2019 Public Offering~~”). In addition, pursuant to the terms of the Underwriting Agreement, the Company granted to the Underwriters a 30-day option to purchase up to an additional 750,000 shares of common stock at the same public offering price per share.

~~-8-~~

~~Table of Contents~~

~~DRAFT~~

~~The July 2019 Public Offering was conducted pursuant to our effective shelf registration statement on Form S-3 (File No. 333-231954), filed with the Securities and Exchange Commission (the “SEC”) on June 5, 2019, and declared effective on June 25, 2019, including the base prospectus dated June 4, 2019 included therein and the related prospectus supplement filed on July 19, 2019.~~

In addition to the underwriting discount received by the Underwriters, we also issued unregistered common stock purchase warrants to Wainwright to purchase up to 200,000 shares of common stock (the “~~Wainwright Warrants”). The Wainwright Warrants are exercisable immediately upon issuance, expire on July 17, 2024 and have an exercise price of $1.25 per share.~~

~~Cyber-Related Fraud~~

On August 8, 2019, management was advised that it was a victim of a cyber-related fraud whereby a hacker impersonated one of the Company’s key vendors to redirect payments, totaling $418,765. The Company, including the Audit Committee, completed its investigation and is reviewing all available avenues of recovery, including from the Company’s financial institution to recover the payments. As of September 30, 2019, the Company had recovered $50,858 from its financial institution but management is unable to determine the probability of recovering anything further from the cyber-related fraud. Therefore, as of September 30, 2019, the Company recorded a loss of $367,908 which is included in General and Administrative (“~~G&A”) expenses. As a result of the cyber-related fraud, the Company has instituted additional controls and procedures and all employees have now undergone cybersecurity training.~~

Basis of Presentation and Principles of Consolidation

The unaudited interim consolidated financial statements include the accounts of AzurRx and its wholly-owned subsidiary, AzurRx SAS. Intercompany transactions and balances have been eliminated upon consolidation.

Going Concern Uncertainty

~~-9-~~

~~Table~~Our primary sources of ~~Contents~~

~~DRAFT~~

liquidity come from capital raises through additional equity and/or debt financings. This may be impacted by the novel coronavirus ("COVID-19") pandemic, which is evolving and could negatively impact our ability to raise additional capital in the future.

Note 2 - Significant Accounting Policies and Recent Accounting Pronouncements

The accompanying unaudited consolidated financial statements are prepared in conformity with U.S. GAAP and include certain estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements (including goodwill, intangible assets and contingent consideration), and the reported amounts of revenues and expenses during the reporting period, including contingencies. Accordingly, actual results may differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of three months or less from date of purchase to be cash equivalents. All cash balances were highly liquid at September 30, 2020 and December 31, 2019, respectively.

Concentrations of Credit Risk

Financial instruments that potentially expose the Company to concentrations of credit risk consist of cash. The Company primarily maintains its cash balances with financial institutions in federally insured accounts in the U.S. The Company may from time to time have cash in banks in excess of FDIC insurance limits. At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had ~~$1,172,862~~approximately $11.1 million and ~~$754,261,~~$0, respectively, in one account in the U.S. in excess of these limits. The Company has not experienced any losses to date resulting from this practice. The Company mitigates its risk by maintaining the majority of its cash and cash equivalents with high quality financial institutions.

The Company also has exposure to foreign currency risk as its subsidiary in France has a functional currency in Euros.

~~Leases~~Debt Instruments

~~Effective January 1, 2019,~~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 ~~Company adopted Accounting Standards Update (“ASU”) No. 2016-02, "Leases." This ASU requires substantially all leases be~~money at the commitment date constitute a beneficial conversion feature that is measured at its intrinsic value and recognized as debt discount. Debt discount is amortized as interest expense over the maturity period of the debt using the effective interest method. Contingent beneficial conversion features are recognized when the contingency has been resolved.

Debt issuance costs are recorded onas a direct reduction of the ~~balance sheet as right~~carrying amount of ~~use assets and lease obligations. The Company adopted~~ the ~~ASU~~related debt. Debt issuance costs are amortized over the maturity period of the related debt instrument using ~~a modified retrospective adoption method at January 1, 2019, as outlined in ASU No. 2018-11, "Leases - Targeted Improvements." Under this method of adoption, there is no impact to~~ the comparative condensed consolidated statement of operations and condensed consolidated balance sheet. The Company determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carryforward of historical lease classifications. Adoption of this standard did not materially impact the Company’s results of operations and had no impact on the consolidated statement of cash flows.effective interest method.

Equity-Based Payments to Non-Employees

Equity-based payments to non-employees are measured at fair value on the grant date per ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting.

~~Research and Development~~Fair Value Measurements

As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions, which reflect those that a market participant would use.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the overall fair value measurement. The Company’s ~~licenses,~~assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the ~~payments to third parties for clinical trial and additional product development and testing.~~financial instrument.

The Company recognizes transfers between levels as if the transfers occurred on the last day of the reporting period.

Foreign Currency Translation

For foreign subsidiaries with operations denominated in a foreign currency, assets and liabilities are translated to U.S. dollars, which is the functional currency, at period end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the periods presented. Gains and losses from translation adjustments are accumulated in a separate component of stockholders’ equity.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price of the acquired business over the fair value of amounts assigned to assets acquired and liabilities assumed. Goodwill and other intangible assets with indefinite useful lives are reviewed for impairment annually or more frequently if events or circumstances indicate impairment may be present. Any excess in carrying value over the estimated fair value is charged to results of operations. The Company has not recognized any impairment charges through September 30, 2020.

Intangible assets subject to amortization consist of in process research and development, license agreements, and patents reported at the fair value at date of the acquisition less accumulated amortization. Amortization expense is provided using the straight-line method over the estimated useful lives of the assets as follows:

In Process Research & Development 12 years

License Agreements 5 years

Impairment of Long-Lived Assets

The Company accounts for uncertain tax positions in accordance with the provisions of ASC 740. When uncertain tax positions exist, the Company recognizes the tax benefit of tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position as well as consideration of the available facts and circumstances. At September 30, 2020 and December 31, 2019, the Company does not have any significant uncertain tax positions. All tax years are still open for audit.

~~-10-~~-8-

Table of Contents

~~DRAFT~~

Research and Development

Research and development (“R&D”) costs are charged to operations when incurred and are included in operating expense. R&D costs consist principally of compensation of employees and consultants that perform the Company’s research and development and clinical activities, the fees paid to maintain the Company’s licenses, and the payments to third parties for manufacturing drug supply and clinical trials, laboratory and other supply expenses and amortization of intangible assets.

Stock-Based Compensation

The Company’s board of directors (the “Board”) and stockholders have adopted and approved the Amended and Restated 2014 Omnibus Equity Incentive Plan (the “2014 Plan”) which took effect on May 12, 2014, and the 2020 Omnibus Equity Incentive Plan, which took effect on September 11, 2020 (the “2020 Plan”). From the effective date of the 2020 Plan, no new awards have been or will be made under the 2014 Plan. The Company accounts for its stock-based compensation awards to employees and Board members in accordance with ASC Topic 718, Compensation—Stock Compensation (“ASC 718”). ASC 718 requires all stock-based payments to employees and Board members, including grants of employee stock options, to be recognized in the statements of operations by measuring the fair value of the award on the date of grant and recognizing this fair value as stock-based compensation using a straight-line method over the requisite service period, generally the vesting period.

For awards with performance conditions that affect their vesting, such as the occurrence of certain transactions or the achievement of certain operating or financial milestones, recognition of fair value of the award occurs when vesting becomes probable.

The Company estimates the grant date fair value of stock option awards using the Black-Scholes option-pricing model. The use of the Black-Scholes option-pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the Common Stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the Common Stock.

Sublicense Agreement

As more fully discussed in Note 14, the Company entered into a sublicense agreement with TransChem, Inc. (“TransChem”), pursuant to which TransChem granted the Company an exclusive license to certain patents and patent applications. Any payments made to TransChem in connection with this sublicense agreement are recorded as R&D expense.

Subsequent Events

The Company considered events or transactions occurring after the balance sheet date but prior to the date the consolidated financial statements are available to be issued for potential recognition or disclosure in its consolidated financial statements.

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other, Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to ~~simplify~~have the ~~subsequent measurement of goodwill impairment. The~~option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. This new guidance ~~eliminates the two-step process that required identification of potential impairment~~will be applied prospectively and a separate measure of the actual impairment. Goodwill impairment charges, if any, would be determined by reducing the goodwill balance by the difference between the carrying value and the reporting unit’s fair value (impairment loss is limited to the carrying value). This standard is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. This ASU, which the Company adopted as of January 1, 2020, did not have a material effect on the Company’s consolidated financial statements.

In August 2020, the Financial Accounting Standards Board (“FASB”) issued an accounting pronouncement (ASU 2020-06) related to the measurement and disclosure requirements for convertible instruments and contracts in an entity's own equity. The pronouncement simplifies and adds disclosure requirements for the accounting and measurement of convertible instruments and the settlement assessment for contracts in an entity's own equity. As a smaller reporting company, as defined by the SEC, this pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2023. The Company is currently evaluating the impact of this ASU on the financial statements.

-9-

Table of Contents

Note 3 - Fair Value Disclosures

Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework that prioritizes and ranks the level of observability of inputs used in measuring fair value.

The fair value of the Company's financial instruments are as follows:

		Fair Value Measured at Reporting Date Using					Fair Value Measured a Reporting Date Using
	Carrying Amount	Level 1	Level 2	Level 3	Fair Value	Carrying Amount	Level 1	Level 2	Level 3	Fair Value
At September 30, 2019:
At September 30, 2020:
Cash	$1,549,825	$-	$1,549,825	$-	$1,549,825	$11,368,680	$	$11,368,680	$	$11,368,680
Other receivables	$2,090,233	$-		$2,090,233		$20,688		$	$20,688
Convertible debt	$1,947,073	$-		$1,947,073

At December 31, 2018:
At December 31, 2019:
Cash	$1,114,343	$-	$1,114,343	$-	$1,114,343	$175,796	$-	$175,796	$-	$175,796
Other receivables	$3,172,676	$-		$3,172,676		$2,637,303	$-		$2,637,303
Note payable	$255,032	$-		$255,032		$444,364	$-		$444,364
Convertible debt						$1,076,938	$-		$1,076,938

~~The~~At September 30, 2020, the fair value of other receivables approximates carrying value as these consist primarily of refundable tax credits.

At December 31, 2019, the fair value of other receivables approximates carrying value as these consist primarily of French R&D tax credits that are normally received the following ~~year and amounts due from our collaboration partner Mayoly, see Note 14.~~year.

The fair value of the note payable in connection with the financing of directors and officer’s liability insurance approximates carrying value due to the terms of such instruments and applicable interest rates.

The ~~fair value of~~ convertible debt is based on ~~the par~~its fair value less unamortized debt discount plus accrued interest through the date of reporting ~~due to the terms of such instruments and interest rates, or the current interest rates of similar instruments.~~(see Note 9).

Note 4 - Other Receivables

Other receivables consisted of the following:

	September 30,	December 31,	September 30,	December 31,
	2019	2018	2020	2019
R&D tax credits	$2,019,211	$2,162,373	$-	$2,566,281
Other	71,022	1,010,303	20,688	71,022
Total other receivables	$2,090,233	$3,172,676	$20,688	$2,637,303

~~-11-~~-10-

Table of Contents

~~DRAFT~~

Note 5 - Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements consisted of the following:

For the three months ended September 30, 2020, $4,881 of depreciation is included in R&D expense and $3,307 of depreciation is included in G&A expense. For the nine months ended September 30, 2020, $14,372 of depreciation is included in R&D expense and $12,184 of depreciation is included in G&A expense.

For the three months ended September 30, 2019, $11,842 of depreciation has been reclassified to R&D expense and ~~2018 was $51,261 and $46,073, respectively. Depreciation expense~~$5,149 of depreciation remains in G&A expense. For the nine months ended September 30, 2019, $35,442 of depreciation is included in ~~general~~R&D expense and ~~administrative (“~~$15,343 of depreciation is included in G&A~~”) expenses.~~ expense.

Note 6 - Intangible Assets and Goodwill

Pursuant to the Mayoly APA entered into on March 27, 2019, in which the Company purchased all rights, title and interest in and to ~~MS1819-SD~~MS1819 (see Note 14), the Company recorded Patents in the amount of $3,802,745 as follows:

Common stock issued at signing to Mayoly	$1,740,959
Due to Mayoly at 12/31/19 - €400,000	449,280
Due to Mayoly at 12/31/20 - €350,000	393,120
Assumed Mayoly liabilities and forgiveness of Mayoly debt	1,219,386

	$3,802,745

Intangible assets are as follows:

Amortization expense for the three months ended September 30, ~~2019~~2020 and ~~2018~~2019 was $131,887 and ~~$181,217,~~$131,887, respectively. Amortization expense for the nine months ended September 30, 2020 and 2019 was $395,661 and ~~2018 was~~ $825,063, ~~and $558,716,~~ respectively.

~~-12-~~-11-

Table of Contents

~~DRAFT~~

As of September 30, ~~2019,~~2020, amortization expense related to patents is expected to be as follows for the next five ~~years:~~years (2020 through 2025):

Goodwill is as follows:

	Goodwill
Balance at January 1, ~~2018~~2019	$~~2,016,240~~
~~Foreign currency translation~~	~~(91,410~~)
~~Balance at December 31, 2018~~	1,924,830
Foreign currency translation	(~~91,915~~38,144)
Balance at December 31, 2019	1,886,686
Foreign currency translation	81,833
Balance at September 30, ~~2019~~2020	$~~1,832,915~~1,968,519

Note 7 - Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:

At September 30, 2020, and December 31, 2019, trade payables included $0, and $1,683,505, respectively, due to related parties.

Note 8 - ~~Note~~Notes Payable

Directors and Officer’s Liability Insurance

On December ~~14, 2018,~~5, 2019, the Company entered into a 9-month financing agreement for its directors and officer’s liability insurance in the amount of ~~$286,203~~$498,783 that bears interest at an annual rate of ~~5.99%~~5.461%. Monthly payments, including principal and interest, are ~~$32,599~~$56,689 per month. The balance due under this financing agreement at September 30, ~~2019~~2020 was $0.

Note 9 – Convertible Notes ~~and Original Issue Discounted Convertible Notes with Warrants~~

~~-13-~~

~~Table of Contents~~

~~DRAFT~~

~~Prior to their respective Maturity Dates, each~~Each of the ADEC Notes iswas convertible, at ADEC’s option, into shares of ~~the Company’s common stock,~~Common Stock, at a conversion price equal to ~~the principal and accrued interest due under the terms of the Notes divided by~~ $2.50 (~~“Conversion Shares”~~);per share; provided, however, that pursuant to the term of the ADEC Notes, ADEC ~~may~~could not convert all or a portion of the ADEC Notes if such conversion would result in the significant stockholder and/or entities affiliated with him beneficially owning in excess of 19.99% of the ~~Company’s~~ shares of ~~common stock~~Common Stock issued and outstanding immediately after giving effect to the issuance of the shares issuable upon conversion of the ADEC Notes (the “ADEC Note Conversion ~~Shares.~~Shares”).

In ~~connection with the above transaction,~~December 2019, the Company ~~also~~repaid $1,550,000 principal amount of the ADEC Notes and on January 2, 2020 repaid the remaining principal balance of $450,000 plus outstanding accrued interest of $104,153. As of September 30, 2020, no ADEC Notes were outstanding.

Senior Convertible Promissory Note Offering

On January 2, 2020, January 3, 2020, and January 9, 2020, the Company issued Promissory Notes to the Note Investors in the aggregate principal amount of $3,517,700.

The Company determined the Prepayment Option feature represents a contingent call option. The Company evaluated the Prepayment Option in accordance with ASC 815-15-25. The Company determined that the Prepayment Option feature is clearly and closely related to the debt host instrument and is not an embedded derivative requiring bifurcation. Additionally, the Company determined the Conversion Option represents an embedded call option. The Company evaluated the Conversion Option in accordance with ASC 815-15-25. The Company determined that the Conversion Option feature meets the scope exception from ASC 815 and is not an embedded derivative requiring bifurcation.

The Company evaluated the Promissory Notes for a beneficial conversion feature in accordance with ASC 470-20. The Company determined that at each commitment date the effective conversion price was below the closing stock price (market value), and the Convertible Notes contained a beneficial conversion feature.

Pursuant to the December 2019 closings of the Promissory Note Offering, the principal amount of $3,386,300 was first allocated based on the relative fair value of the Promissory Notes and the Note Warrants. The fair value of the Note Warrants amounted to $912,648. Then the beneficial conversion feature was calculated, which amounted to $1,359,284. The Company incurred debt issuance costs of $588,017 related to the offering. The initial carrying value of the Promissory Notes issued amounted to $526,351.

Pursuant to the January 2020 closings of the Promissory Note Offering, the principal amount of $3,517,700 was first allocated based on the relative fair value of the Promissory Notes and the Note Warrants. The fair value of the Note Warrants amounted to $2,439,272. Then the beneficial conversion feature was calculated, which amounted to $1,838,422. The Company incurred debt issuance costs of $472,326 related to the offering. The initial carrying value of the Promissory Notes issued amounted to $128,524.

During the three months ended September 30, ~~2019,~~2020, the Company ~~accrued $50,411~~recognized $404,222 of interest expense ~~in connection with~~related to these ~~convertible notes. During the three months ended September 30, 2019, the Company recorded $59,502 of interest expense in the form of~~Promissory Notes, including amortization of debt discount related to the ~~repriced warrants.~~ value of the Note Warrants of $120,165, amortization of the beneficial conversion feature of $193,555, amortization of debt discount related to debt issuance costs of $63,264, and accrued interest expense of $27,238.

During the nine months ended September 30, ~~2019,~~2020, the Company ~~accrued $124,932~~recognized $4,912,396 of interest expense ~~in connection with~~related to these ~~convertible notes. During the nine months ended September 30, 2019, the Company recorded $147,461 of interest expense in the form of~~Promissory Notes, including amortization of debt discount related to the ~~repriced warrants.~~

~~Convertible Debt consisted of:~~

September 30,

December 31,

2019

2018

Convertible debt
$2,000,000
$-
Unamortized debt discount - revalued warrants
  (177,859)
  -
Accrued interest
  124,932
  -
Total convertible debt
$1,947,073
$-

~~LPC OID Debenture~~

~~On April 11, 2017,~~value of the ~~Company entered into a~~ Note ~~Purchase Agreement with Lincoln Park Capital Fund, LLC (“LPC”), pursuant to which the Company issued a 12% Senior Secured Original Issue Discount Convertible Debenture (the~~ ~~“Debenture”) to LPC.~~

~~On July 11, 2018, the Company paid off the remaining amount due under the terms~~Warrants of ~~this Debenture in the amount of $286,529.~~

~~For the three months ended September 30, 2018, the Company recorded $5,505 of interest expense related to the~~$1,461,728, amortization of the ~~debt discount and~~ beneficial conversion feature of $2,347,763, amortization of debt discount related to ~~the warrant features~~debt issuance costs of ~~the Debenture. For the nine months ended September 30, 2018, the Company recorded $97,837 of~~$771,675, and accrued interest expense ~~related to the amortization~~ of ~~the debt discount and beneficial conversion feature related to the warrant features of the Debenture.~~$332,230.

-14-

Table of Contents

~~DRAFT~~

Exchange of Promissory Notes into Series B Convertible Preferred Stock

As more fully discussed in Note 11, on July 16, 2020, in connection with the Series B Private Placement, 937.004177 shares of Series B Preferred Stock, Series B Warrants to purchase 4,684,991 shares of Common Stock, and Exchange Warrants to purchase 1,772,937 shares of Common Stock were issued to certain holders of the Promissory Notes in exchange for such Promissory Notes for aggregate consideration of approximately $7.2 million consisting of approximately $6.9 million aggregate outstanding principal amount, together with accrued and unpaid interest thereon through the date of the Series B Private Placement of approximately $0.3 million.

The Company prepaid the remaining outstanding balance of $25,000 aggregate principal amount of Promissory Notes, together with accrued and unpaid interest thereon through the prepayment date of $1,307, held by those holders who did not participate in the Exchange. Following these transactions, no Promissory Notes remain outstanding.

Accounting for the Exchange of Promissory Notes into Series B Private Placement

Convertible Debt consisted of:

	Total	Promissory Notes	ADEC Notes	Total
	September 30,	September 30,	September 30,	December 31,
	2020	2020	2020	2019
Convertible debt	$-	$-	$-	$3,836,300
Unamortized debt discount - revalued warrants	-	-	-	(118,356)
Unamortized debt discount - warrants	-	-	-	(878,979)
Unamortized debt discount - BCF	-	-	-	(1,307,755)
Unamortized debt discount - debt issuance costs	-	-	-	(566,815)
Accrued interest	-	-	-	112,543
Total convertible debt	$-	$-	$-	$1,076,938

Note 10 – Other Liabilities

Other liabilities consisted of the following:

The Company had 28,881,984 and 26,800,519 shares of its Common Stock issued and outstanding at September 30, 2020 and December 31, 2019, respectively.

In addition, the holders of our Common Stock will be entitled to receive ratably such dividends, if any, as may be declared by the Board out of legally available funds; however, the current policy of our Board is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of our Common Stock will be entitled to share ratably in all assets that are legally available for distribution.

Holders of our Common Stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to the Common Stock. The rights, preferences and privileges of the holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our preferred stock that we may designate and issue in the future.

We have 10,000,000 shares of preferred stock, par value $0.0001 per share, authorized and available for issuance in one or more series. The Board is authorized to divide the preferred stock into any number of series, fix the designation and number of each such series, and determine or change the designation, relative rights, preferences, and limitations of any series of preferred stock. The Board of may increase or decrease the number of shares initially fixed for any series, but no decrease may reduce the number below the shares then outstanding and duly reserved for issuance.

On July ~~13, 2016, the Company amended its Certificate of Incorporation to increase the~~16, 2020, we authorized 5,194.805195 shares as Series B Preferred Stock and issued 2,912.583005 shares of ~~its common stock, $0.0001 par value, to 100,000,000 shares from 9,000,000 shares and increase the authorized~~Series B Preferred Stock, with 2,282.222190 shares of ~~its~~Series B Preferred Stock remaining authorized but unissued. Following such transactions, we currently have 2,912.583005 shares of preferred stock ~~$0.0001 par value, to 10,000,000~~issued and outstanding with 9,997,087.416995 shares ~~from 1,000,000 shares.~~of preferred stock remaining authorized but unissued.

~~Common~~Series B Convertible Preferred Stock

The Series B Preferred Stock will rank senior to the Common Stock with respect to distributions of assets upon the liquidation, dissolution or winding up of the Company.

Each holder of shares of Series B Preferred Stock, in preference and priority to the holders of all other classes or series of stock of the Company, is entitled to receive dividends, commencing from the date of issuance. Such dividends may be paid by the Company only when, as and if declared by the Board, out of assets legally available therefor, semiannually in arrears on the last day of June and December in each year, commencing December 31, 2020, at the dividend rate of 9.0% per year, which is cumulative and continues to accrue on a daily basis whether or not declared and whether or not the Company has assets legally available therefor. The Company may pay such dividends at its option either in cash or in kind in additional shares of Series B Preferred Stock (rounded down to the nearest whole share), provided the Company must pay in cash the fair value of any such fractional shares in excess of $100.00. At September 30, ~~2019~~2020 the dividend payable to the holders of the Series B Preferred Stock aggregated to approximately $408,043.

Liquidation Preference; Liquidation Rights

If the Company ~~had 26,155,111~~voluntarily or involuntarily liquidates, dissolves or winds up its affairs, each holder of the Series B Preferred Stock will be entitled to receive out of the Company’s assets available for distribution to stockholders, after satisfaction of liabilities to creditors, if any, but before any distribution of assets is made on the Common Stock or any of the Company’s shares of stock ranking junior as to such a distribution to the Series B Preferred Stock, a liquidating distribution in the amount of the Stated Value of all such holder’s Series B Preferred Stock plus all accrued and ~~17,704,925, respectively,~~unpaid dividends thereon. At September 30, 2020, the value of the liquidation preference of the Series B Preferred stocks aggregated to approximately $22.6 million.

Most Favored Nations Exchange Right

~~Each holder~~The holders of ~~common~~the Series B Preferred Stock, voting as a separate class, will have customary consent rights with respect to certain corporate actions of the Company. The Company may not take the following actions without the prior consent of the holders of at least a majority of the Series B Preferred Stock then outstanding: (a) authorize, create, designate, establish, issue or sell an increased number of shares of Series B Preferred Stock or any other class or series of capital stock ~~has one vote~~ranking senior to or on parity with the Series B Preferred Stock as to dividends or upon liquidation; (b) reclassify any shares of Common Stock or any other class or series of capital stock into shares having any preference or priority as to dividends or upon liquidation superior to or on parity with any such preference or priority of Series B Preferred Stock; (c) amend, alter or repeal the Certificate of Incorporation or Bylaws of the Company and the powers, preferences, privileges, relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof, which would adversely affect any right, preference, privilege or voting power of the Series B Preferred Stock; (d) issue any indebtedness or debt security, other than trade accounts payable, insurance premium financings and/or letters of credit, performance bonds or other similar credit support incurred in the ordinary course of business, or amend, renew, increase, or otherwise alter in any material respect the terms of any such indebtedness existing as of the date of first issuance of shares of Series B Preferred Stock; (e) redeem, purchase, or otherwise acquire or pay or declare any dividend or other distribution on (or pay into or set aside for ~~each share held.~~a sinking fund for any such purpose) any capital stock of the Company; (f) declare bankruptcy, dissolve, liquidate, or wind up the affairs of the Company; (g) effect, or enter into any agreement to effect, a Change of Control (as defined in the Certificate of Designations); or (h) materially modify or change the nature of the Company’s business.

2014 Equity Incentive Plan

On July 16, 2020, the Board approved an amendment to the 2014 Plan. The amendment eliminates individual grant limits under the 2014 Plan that were intended to comply with the exemption for “performance-based compensation” under Section 162(m) of the Internal Revenue Code, which section has been repealed.

The Company issued an aggregate of 795,006 and 0 stock options, during the nine months ended September 30, 2020 and 2019, respectively, under the 2014 Plan (see Note 13). Upon adoption of the 2020 Omnibus Equity Incentive Plan on September 11, 2020, the Company will no longer make grants under the 2014 Plan.

2020 Equity Incentive Plan

As of September 30, 2020, no grants were issued under the 2020 Plan and an aggregate of 10,000,000 total shares are available under the 2020 Plan.

Equity Line with Lincoln Park

●	the lowest sale price of Common Stock on the purchase date; and;

●	the average of the three lowest closing sale prices for the Common Stock during the ten consecutive business days ending on the business day immediately preceding the purchase date of such shares;

●	97% of the volume weighted average price of the Company’s common stock during the applicable Accelerated Purchase Measurement Period on the applicable Accelerated Purchase date; and

●	the closing sale price of Common Stock on the applicable Accelerated Purchase Date.

●	97% of the volume weighted average price of the Company’s common stock during the applicable Additional Accelerated Purchase Measurement Period on the applicable Additional Accelerated Purchase date; and

●	the closing sale price of Common Stock on the applicable Additional Accelerated Purchase.

Pursuant to the terms of the Equity Line Agreement, without first obtaining stockholder approval, the aggregate number of shares that the Company is permitted to sell to Lincoln Park thereunder, when aggregated with certain other private offerings of Common Stock, as applicable, may not exceed 19.99% of the Common Stock outstanding immediately prior to the execution of the Equity Line Agreement on November 13, 2019, unless the average price of all applicable sales thereunder exceeds $0.70 per share calculated by reference to the “Minimum Price” under Nasdaq Listing Rule 5635(d). On September 11, 2020, the Company received stockholder approval for the issuances of the full $15 million available under the Equity Line Agreement. Generally, there is approximately $14 million of availability left for issuance pursuant to the Equity Line Agreement.

Common Stock Issuances

~~Series A Convertible Preferred~~During the period from April 6, 2020 through May 22, 2020, the Company sold an aggregate of 1,345,199 shares of Common Stock

~~At September 30, 2019 and December 31, 2018, there~~ pursuant to the Equity Line, from which the Company derived approximately $869,000 in net proceeds. The sales of these shares were ~~no Series A Convertible Preferred Stock (“Series A Preferred”) outstanding. However, all terms~~exempt from registration under the Securities Act of ~~the Series A Preferred are still~~1933, as amended, in ~~effect.~~reliance upon Section 4(a)(2) (or Regulation D promulgated thereunder).

Restricted Stock and Restricted Stock Units

During the three months ended September 30, 2019, ~~43,750~~the Company issued 21,677 restricted shares of ~~common stock~~Common Stock to a consultant as payment of $22,500 of accounts payable for investor relations services. During the nine months ended September 30, 2019, the Company issued 62,518 shares of Common Stock to a consultant as payment of $112,500 of accounts payable for investor relations services.

~~During the nine months ended September 30, 2019, 223,417~~these restricted shares ~~of common stock vested~~ with a total grant date fair value of ~~$556,888. 58,833 of these 223,417 shares having a fair value of $178,852~~approximately $134,501 vested during the nine months ended September 30, 2019 due to the ~~Company dosing the first patients in the Company's Phase II study to investigate MS1819-SD in CF patients. 33,334~~satisfaction of service conditions 30,000 of these ~~223,417~~restricted shares having a fair value of $101,335 vested during the nine months ended September 30, 2019 due to the Company reaching enrollment of 30 patients in the Company's Phase II study to investigate MS1819-SD in CF patients. 90,000 of these 223,417 shares having a fair value of $142,200 were issued during the ~~nine~~three months ended September 30, 2019 to our directors as a part of Board ~~compensation. 41,250 of these 223,417 shares having~~compensation with a total grant date fair value of ~~$134,501 vested during the nine months ended September 30, 2019 due to the terms of such grants.~~approximately $142,200.

~~-15-~~

~~Table of Contents~~

~~DRAFT~~

During the three months ended September 30, 2019, the Company issued 21,677 shares of its common stock to a consultant as payment of $22,500 of accounts payable. During the nine months ended September 30, 2019, the Company issued 62,518 shares of its common stock to a consultant as payment of $112,500 of accounts payable.

As of September 30, ~~2019,~~2020, the Company had unrecognized restricted common stock expense of ~~$247,526 that will be recognized over~~approximately $393,250. Approximately $196,625 of this unrecognized expense vests upon the ~~average remaining vesting term~~first commercial sale in the United States of ~~1.57 years.~~

~~During~~MS1819 and approximately $196,625 of this unrecognized expense vests upon the ~~three months ended~~total market capitalization of the Company exceeding $1.0 billion for 20 consecutive trading days. These milestones were not considered probable at September 30, 2018, 43,750 restricted shares of common stock vested with a fair value of $121,935. 30,000 of these 43,750 shares having a fair value of $77,100 were issued during the three months ended September 30, 2018 to our directors as a part of Board compensation. 13,750 of these 43,750 shares having a fair value of $44,835 vested during the three months ended September 30, 2018 due to the terms of such grants. 5,000 shares of restricted common stock were canceled to employees and consultants with a total value of $15,200.

During the nine months ended September 30, 2018, 139,584 restricted shares of common stock vested with a fair value of $457,685. 90,000 of these 139,584 shares having a fair value of $267,600 were issued during the nine months ended September 30, 2018 to our directors as a part of Board compensation. 49,584 of these 139,584 shares having a fair value of $190,085 vested during the nine months ended September 30, 2018 due to the terms of such grants. 5,000 shares of restricted common stock were canceled during the nine months ended September 30, 2018 with a total value of $15,200.

During the three months ended September 30, 2018, the Company issued 55,067 shares of its common stock to consultants as payment of $140,541 of accounts payable. During the nine months ended September 30, 2018, the Company issued 118,067 shares of its common stock to consultants as payment of $360,771 of accounts payable.

~~Note 12 - Warrants~~

In February 2019, as additional consideration for issuing convertible notes with ADEC and pursuant to a Warrant Amendment Agreement, the Company agreed to reduce the exercise price of certain outstanding warrants previously issued by the Company to ADEC and its affiliates, see Note 9.

~~Stock warrant transactions for the periods January 1 through September 30, 2019 and 2018 are as follows:~~

Exercise

Weighted

Price Per

Average

Warrants

Share

Exercise Price

Warrants outstanding and exercisable at January 1, 2018
  3,371,385
$3.17 - $7.37
$5.28




Granted during the period
  244,400
$2.55 - $2.75
$2.58
Expired during the period
  -
  -
  -
Exercised during the period
  (503,070)
$2.50
$2.50
Warrants outstanding and exercisable at September 30, 2018
  3,112,715
$2.55 - $7.37
$4.83








Warrants outstanding and exercisable at January 1, 2019
  3,112,715
$2.55 - $7.37
$4.83




Granted during the period
  275,663
$1.25 - $2.82
$1.64
Expired during the period
  -
  -
  -
Exercised during the period
  -
  -
  -
Warrants outstanding and exercisable at September 30, 2019
  3,388,378
$1.25 - $7.37
$3.37

~~-16-~~-20-

Table of Contents

~~DRAFT~~

Series B Private Placement

The Series B Private Placement and the Exchange

On July 16, 2020 (the “Series B Closing Date”), the Company consummated a private placement offering (the “Series B Private Placement”) whereby the Company entered into a Convertible Preferred Stock and Warrant Securities Purchase Agreement (the “Series B Purchase Agreement”) with certain accredited and institutional investors (the “Series B Investors”). Pursuant to the Series B Purchase Agreement, the Company issued an aggregate of 2,912.583005 shares of Series B Convertible Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”), at a price of $7,700.00 per share, initially convertible into an aggregate of 29,125,756 shares of Common Stock at $0.77 per share, together with warrants (the “Series B Warrants”) to purchase an aggregate of 14,562,826 shares of Common Stock at an exercise price of $0.85 per share. The amount of the Series B Warrants is equal to 50% of the shares of Common Stock into which the Series B Preferred Stock is initially convertible.

In connection with the Series B Private Placement, an aggregate of 1,975.578828 shares of Series B Preferred Stock initially convertible into 19,755,748 shares of Common Stock and related 9,877,835 Series B Warrants were issued for cash consideration, resulting in aggregate gross proceeds of approximately $15.2 million and aggregate net proceeds to the Company of approximately $13.2 million after deducting placement agent compensation and offering expenses.

An aggregate of 937.004177 shares of Series B Preferred Stock initially convertible into 9,370,008 shares of Common Stock and related Series B Warrants to purchase 4,684,991 shares of Common Stock were issued to certain Series B Investors (the “Exchange Investors”) in exchange for consideration consisting of approximately $6.9 million aggregate outstanding principal amount, together with accrued and unpaid interest thereon through the Series B Closing Date of approximately $0.3 million, of certain Senior Convertible Promissory Notes (the “Promissory Notes”) issued between December 20, 2019 and January 9, 2020 (the “Exchange”), pursuant to an Exchange Addendum (the “Exchange Addendum”) executed by the Company and the Exchange Investors. As additional consideration to the Exchange Investors, the Company also issued certain additional warrants (the “Exchange Warrants”) to purchase an aggregate of 1,772,937 shares of Common Stock at an exercise price of $0.85 per share. The amount of the Exchange Warrants is equal to 25% of the shares of Common Stock into which such Promissory Notes were originally convertible upon the initial issuance thereof.

Pursuant to the Series B Private Placement and the Series B Purchase Agreement, for purposes of complying with Nasdaq Listing Rule 5635(c) and 5635(d), the Company was required to hold a meeting of its stockholders not later than 60 days following the Series B Closing Date to seek approval (the “Stockholder Approval”) for, among other things, the issuance of shares of Common Stock upon (i) full conversion of the Series B Preferred Stock; and (ii) full exercise of the Series B Warrants and the Exchange Warrants. In the event the Stockholder Approval was not received on or prior to the 90th day following the Series B Closing Date, subject to extension upon the prior written approval of the holders of at least a majority of the Series B Preferred Stock then outstanding, the Company would have been required to repurchase all of the then outstanding shares of Series B Preferred Stock at a price equal to 150% of the stated value thereof plus accrued and unpaid dividends thereon, in cash. On September 11, 2020, the Company received Stockholder Approval.

In connection with the Series B Private Placement, the Company paid the placement agent 9.0% of the gross cash proceeds received by the Company from investors introduced by the placement agent and 4.0% of the gross cash proceeds received by the Company for all other investors, or approximately $1.3 million. The Company also paid the placement agent a non-accountable cash fee equal to 1.0% of the gross cash proceeds and a cash financial advisory fee equal to 3.0% of the outstanding principal balance of the Promissory Notes that were submitted in the Exchange, or approximately $0.3 million in additional cash fees in the aggregate. In addition, the Company issued to the placement agent warrants to purchase up to 1,377,458 shares of Common Stock (the “July Placement Agent Warrants”). The July Placement Agent Warrants have substantially the same terms as the Series B Warrants, except the July Placement Agent Warrants have an exercise price of $0.96 per share, are not callable, provide for cashless exercise and are not exercisable until the earlier of stockholder approval of the Series B Private Placement and the date that is six months following the issuance thereof.

-21-

Accounting for the Series B Private Placement

Upon receiving Shareholder Approval on September 11, 2020, the Company classified the Series B Preferred Stock as permanent equity because no features provide for redemption by the holders of the Series B Preferred Stock or conditional redemption, which is not solely within the Company’s control, and there are no unconditional obligations in that (1) the Company must or may settle in a variable number of its equity shares and (2) the monetary value is predominantly fixed, varying with something other than the fair value of the Company’s equity shares or varying inversely in relation to the Company’s equity shares.

Because the Series B Preferred Stock contain certain embedded features that could affect the ultimate settlement of the Series B Preferred Stock, the Company analyzed the instrument for embedded derivatives that require bifurcation. The Company’s analysis began with determining whether the Series B Preferred Stock is more akin to equity or debt. The Company evaluated the following criteria/features in this determination: redemption, voting rights, collateral requirements, covenant provisions, creditor and liquidation rights, dividends, conversion rights and exchange rights. The Company determined that the Series B Preferred Stock was more akin to equity than to debt when evaluating the economic characteristics and risks of the entire Series B Preferred Stock, including the embedded features. The Company then evaluated the embedded features to determine whether their economic characteristics and risks were clearly and closely related to the economic characteristics and risks of the Series B Preferred Stock. Since the Series B Preferred Stock was determined to be more akin to equity than debt, and the underlying that causes the value of the embedded features to fluctuate would be the value of the Company’s common stock, the embedded features were considered clearly and closely related to the Series B Preferred Stock. As a result, the embedded features would not need to be bifurcated from the Series B Preferred Stock.

Any beneficial conversion features related to the exercise of the Most Favored Nation exchange right or the application of the Mandatory Conversion provision will be recognized upon the occurrence of the contingent events based on its intrinsic value at the commitment date.

The Company concluded the freestanding Series B Warrants did not contain any provision that would require liability classification and therefore should be classified in stockholder’s equity, based on their relative fair value.

The proceeds from the Series B Private Placement were allocated to the Series B Preferred Stock and Series B Warrants based on their relative fair values. Thetotal proceeds of approximately $22,426,890 were allocated as follows: $16,474,374 to the Series B Preferred Stock, and $5,952,515 to the Series B Warrants.After allocation of the proceeds, the effective conversion price of the Series B Preferred Stock was determined to be beneficial and, as a result, the Company recorded a deemed dividend of $8,155,212 equal to the intrinsic value of the beneficial conversion feature and recognized on the closing date and recorded as a reduction of income available to common stockholders in computing basic and diluted loss per share.

The total offering costs of approximately $2,014,218 were recognized in equity.

-22-

Table of Contents

Number of Weighted Average Weighted
Shares Under Remaining Contract Average
Exercise Price Warrants Life in Years Exercise Price
$1.25 - $2.99          1,529,628 2.80
$3.00 - $3.99             636,972 2.56
$4.00 - $4.99             196,632 2.26
$5.00 - $5.99             805,476 2.38
$6.00 - $6.99             187,750 2.01
$7.00 - $7.37               31,920 1.21
Total          3,388,378 2.57 $3.37
Note 12 – Warrants

InFor the nine months ended September 30, 2020, in connection with the January ~~2018,~~2020 closings of the Promissory Note Offering, the Company ~~offered certain warrant holders~~issued Note Warrants to investors to purchase an aggregate of 1,813,257 shares of Common Stock with the ~~opportunity~~issuance of the Promissory Notes as referenced in Note 9. These Note Warrants were issued between January 2, 2020 and January 9, 2020, are exercisable commencing six (6) months following the issuance date at $1.07 per share and expire five years from issuance. The total grant date fair value of these warrants was determined to ~~exercise~~be approximately $1,574,886, as calculated using the Black-Scholes model, and were recorded as a debt discount based on their ~~warrants~~relative fair value.

For the nine months ended September 30, 2020, in connection with the January 2020 closings of the Promissory Note Offering, the Company issued the January Placement Agent Warrants to purchase an aggregate of 199,732 shares of Common Stock to the placement agent and/or their designees. The January Placement Agent Warrants were issued between January 2, 2020 and January 9, 2020, vested immediately, and expire five years from issuance. 41,495 of these January Placement Agent Warrants are exercisable at ~~a reduced strike price~~$1.21 per share and 158,237 are exercisable at $1.42 per share. The total grant date fair value of ~~$2.50,~~the January Placement Agent Warrants was determined to be approximately $174,130, as calculated using the Black-Scholes model, and ~~if so elected, would also have the opportunity~~was charged to ~~reprice other warrants~~debt discount that ~~they continued to hold unexercised to $3.25. The offer, which was effective January 12, 2018, was for the repricing only and did not modify~~will be amortized over the life of the warrants. Warrant holders of approximately 503,000 shares exercised their warrants and had other warrants modified on approximately 197,000 shares, which resulted in a charge of approximately $429,000 in January 2018.debt.

~~During~~For the three and nine months ended September 30, ~~2019, 200,000~~2020, in connection with the closing of the Series B Private Placement, the Company issued Series B Warrants to investors to purchase an aggregate of 14,562,826 shares of Common Stock with the issuance of the Series B Preferred Stock as referenced in Note 11. These Series B Warrants were issued on July 16, 2020, are exercisable commencing six (6) months following the issuance date at $0.85 per share and expire five years from issuance. The total grant date fair value of the Series B Warrants was determined to be approximately $8,103,277, as calculated using the Black-Scholes model, and were recorded as equity based on their relative fair value (See Note 11).

For the three and nine months ended September 30, 2020, in connection with the closing of the Exchange (See Note 11), the Company issued Exchange Warrants to certain investors to purchase an aggregate of 1,772,937 shares of Common Stock with the issuance of the Series B Preferred Stock as referenced in Note 11. These Exchange Warrants were issued on July 16, 2020, are exercisable commencing six (6) months following the issuance date at $0.85 per share and expire five years from issuance. The total grant date fair value of the Exchange warrants was determined to be approximately $986,526, as calculated using the Black-Scholes model, and were recorded as part of the loss on extinguishment (See Note 9).

For the three and nine months ended September 30, 2020, in connection with the closing of the Series B Private Placement, the Company issued the July Placement Agent Warrants to purchase an aggregate of 1,377,458 shares of Common Stock to the placement agent and/or their designees as referenced in Note 11. The July Placement Agent Warrants were issued on July 16, 2020, are exercisable commencing six (6) months following the issuance date at $0.96 per share and expire five years from issuance. The total grant date fair value of the July Placement Agent Warrants was determined to be approximately $744,378, as calculated using the Black-Scholes model, and were recorded as equity (See Note 11).

For the three and nine months ended September 30, 2020, in connection with the Spoor Settlement and Release (See Note 18), on July 14, 2020 the Company granted Mr. Spoor warrants to purchase an aggregate of 150,000 shares of Common Stock. The warrants were ~~issued~~immediately exercisable, have an exercise price equal to ~~investment bankers in association with~~$1.00 per share, a five-year term and may be exercised pursuant to a cashless exercise provision commencing six months from the ~~July 2019 Public Offerings with a~~issuance date. The total grant date fair value of ~~$116,600.~~ these warrants was determined to be approximately $85,770, as calculated using the Black-Scholes model, and were included in the gain on settlement (See Note 18).

During the nine months ended September 30, 2020, warrants to purchase an aggregate of 59,774 shares of Common Stock expired with exercise prices ranging between $3.25 and $7.37 per share.

-23-

Table of Contents

Warrant transactions for the nine months ended September 30, 2020 and 2019 ~~275,663 warrants~~ were ~~issued to investment bankers in association with the April, May, and July 2019 Public Offerings with a value of $233,182.~~as follows:

During the three months ended September 30, 2018, no warrants were issued to investment bankers. During the nine months ended September 30, 2018, 244,400 warrants were issued to investment bankers in association with the May 2018 Public Offering with a value of $416,426.

		Exercise	Weighted
		Price Per	Average
	Warrants	Share	Exercise Price

Warrants outstanding and exercisable at January 1, 2019	3,112,715	$2.55 - 7.37	$4.83

Granted during the period	275,663	$2.55 – 2.82	$2.68
Expired during the period	-	-	-
Exercised during the period	-	-	-
Warrants outstanding and exercisable at September 30, 2019	3,388,378	$1.50 - 7.37	$3.51


Warrants outstanding and exercisable at January 1, 2020	5,378,288	$1.07 - 7.37	$2.53

Granted during the period	19,881,654	$0.85 - 1.42	$0.88
Expired during the period	(59,774)	$3.25 - 7.37	$5.15
Exercised during the period	-	-	-
Warrants outstanding and exercisable at September 30, 2020	25,200,168	$0.85 - 7.37	$1.22

		Number of	Weighted Average	Weighted
		Shares Under	Remaining Contract	Average
	Exercise Price	Warrants	Life in Years	Exercise Price
	$0.00 - 0.99	17,718,665	4.79
	$1.00 - 1.99	5,362,464	3.65
	$2.00 - 2.99	320,063	2.82
	$3.00 - 3.99	635,019	1.57
	$4.00 - 4.99	164,256	1.53
	$5.00 - 5.99	783,132	1.42
	$6.00 - 6.99	187,750	1.01
	$7.00 - 7.37	28,819	0.28
Totals		25,200,168	4.28	$1.22

The weighted average fair value of warrants granted ~~to non-employees during the three months ended September 30, 2019 was $0.58. The weighted average fair value of warrants granted to non-employees~~ during the nine months ended September 30, ~~2019 and 2018~~2020 was ~~$0.84 and $1.70, respectively.~~$0.88 per share. The fair value was estimated on the grant dates using the Black-Scholes option-pricing model with the following weighted average

assumptions:

September 30,

September 30,

2019

2018

Expected life (in years)
  5
  5
Volatility
  71 - 73%
  84%
Risk-free interest rate
  1.83 - 2.37%
  2.70%
Dividend yield
  -%
  -%

	September 30,
	2020
Expected life (in years)	5
Volatility	84.7%
Risk-free interest rate	0.28-1.67%
Dividend yield	-%

-24-

Table of Contents

Note 13 - ~~Stock-Based Compensation Plan~~Stock Options

Under the 2014 Plan and the 2020 Plan, the fair value of options granted is estimated on the grant date using the Black-Scholes option valuation model. This valuation model for stock-based compensation expense requires the Company to make assumptions and judgments about the variables used in the calculation, including the expected term (weighted-average period of time that the options granted are expected to be outstanding), the volatility of the common stock price and the assumed risk-free interest rate. The Company recognizes stock-based compensation expense for only those shares expected to vest over the requisite service period of the award. No compensation cost is recorded for options that do not vest and the compensation cost from vested options, whether forfeited or not, is not reversed.

During the three months ended September 30, ~~2019, no~~2020, the Company issued stock options ~~were granted.~~ to purchase an aggregate of 2,040,000 shares of Common Stock with a strike price of $0.85 per share and a term of ten years to its employees. These options had a total grant date fair value of approximately $1,449,130, as calculated using the Black-Scholes model.

During the three months ended September 30, ~~2019, 30,000~~2020, the Board approved an amended and restated option grant to its chief financial officer, amending and restating a grant previously made on January 2, 2020, to reduce the amount of shares issuable upon exercise of such option to be the maximum number of shares Mr. Schneiderman was eligible to receive under the 2014 Incentive Plan on the original grant date, or 300,000 shares, due to the 2014 Incentive Plan provisions relating to the Section 162(m) limitations described above. The Board also approved the issuance of a replacement option covering the balance of shares intended to be issued at that time, or 35,006 shares. The original stock option has an exercise price of $1.03, the closing sale price of Common Stock on January 2, 2020, which was the date of its original grant, and the replacement stock option has an exercise price of $0.85, the closing sale price of the Common Stock on its date of grant. Both the original stock option and the replacement stock option vest over a term of three years, in 36 equal monthly installments on each monthly anniversary of January 2, 2020. On the issuance date, 6,336 shares had vested, and 28,670 shares were unvested with $24,102 of unrecognized expense. The Company determined the cancellation and reissue of these stock options ~~vested having a~~resulted in an effective repricing of the stock options and modification accounting should be applied under ASC 718. The fair value of ~~$30,390~~the original stock options immediately prior to the modification was $23,454 and ~~an intrinsic~~the grant date fair value of ~~$0.~~the replacement stock options was $24,154. The Company will recognize a total of $24,802 over the remaining requisite service period through January 1, 2023.

During the nine months ended September 30, 2020, the Company issued stock options to purchase an aggregate of 335,006 shares of Common Stock with a strike price of $1.03 per share and a term of ten years to its chief financial officer that vest quarterly over three years. These options had a total grant date fair value of approximately $281,405, as calculated using the Black-Scholes model.

During the nine months ended September 30, ~~2019 893,500~~2020, the Company issued stock options ~~were granted~~to purchase an aggregate of 460,000 shares of Common Stock with ~~an exercise~~a strike price of ~~$1.70~~$0.97 per share and a term of ~~five years. During the nine months ended September 30, 2019, 274,500~~ten years to its non-executive directors. These options ~~vested having~~had a total grant date fair value of ~~$541,725 and an intrinsic value of $0. 242,000 of these options valued at $501,666 vested due to~~approximately $210,284, as calculated using the ~~Company having its first CF patient dosed with MS1819-SD anywhere in the world, which was achieved by the dosing of the first patient in the OPTION Study.~~

During the three months ended September 30, 2018, no stock options were granted. 7,500 options vested in the three months ended September 30, 2018 having a fair value of $29,018. 90,000 stock options were canceled with exercise prices ranging from of $3.04 to $3.60.

~~-17-~~

~~Table of Contents~~

~~DRAFT~~

Black-Scholes model.

During the nine months ended September 30, ~~2018, 539,000~~2020, stock options to purchase an aggregate of 235,006 shares of Common Stock were cancelled with strike prices ranging between $0.97 and $3.60 per share.

During the three months ended September 30, 2020, stock options to purchase an aggregate of 234,252 shares of Common Stock, subject to service conditions, vested with a total grant date fair value of approximately $139,392 and recorded as stock-based compensation, of which $119,514 was included as part of general and administrative expense and $19,878 was included as part of research and development expense.

During the nine months ended September 30, 2020, stock options to purchase an aggregate of 600,086 shares of Common Stock, subject to service conditions, vested with a total grant date fair value of approximately $360,519 and recorded as stock-based compensation, of which $340,640 was included as part of general and administrative expense and $19,878 was included as part of research and development expense.

During the nine months ended September 30, 2020, stock options to purchase an aggregate of 50,000 shares of Common Stock, subject to performance conditions vesting, vested with a total grant date fair value of approximately $20,150 and were recorded as stock-based compensation, and included as part of general and administrative expense due to the Company initiating the Option 2 Clinical Trial.

-25-

Table of Contents

During the three and nine months ended September 30, 2020, stock options to purchase an aggregate of 35,006, and 235,006 shares of Common Stock were cancelled, respectively, with strike prices ranging between $0.97 and $3.60 per share.

During the three and nine months ended September 30, 2019, stock options to purchase an aggregate of 893,500 shares of Common Stock were granted with an exercise price of ~~$3.04~~$1.75 and a term of five years. ~~111,250~~During the three months ended September 30, 2019, no options ~~vested in~~vested. During the nine months ended September 30, ~~2018 having~~2019, stock options to purchase an aggregate 244,500 shares of Common Stock vested with a total grant date fair value of ~~$306,966. 90,000~~approximately $511,335. stock options ~~were canceled~~to purchase an aggregate 242,000 shares of Common Stock with ~~exercise prices ranging from~~a total grant date fair value of ~~$3.04~~approximately $501,666 vested due to ~~$3.60.~~the Company achieving certain clinical milestones.

The fair values were estimated on the grant dates using the Black-Scholes option-pricing model with the following weighted-average assumptions:

September 30,

September 30,

2019

2018

Contractual term (in years)
  5
  5
Volatility
  71%
  85%
Risk-free interest rate
  2.19%
  2.82%
Dividend yield
  -%
  -%

	September 30,
	2020
Expected life (in years)	10
Volatility	84.0%
Risk-free interest rate	0.62- 1.88%
Dividend yield	-%

The expected term of the options is based on expected future employee exercise behavior. Volatility is based on the historical volatility of the Company’s ~~common stock~~Common Stock if available or of several public entities that are similar to the Company. The Company bases volatility this way because it may not have sufficient historical transactions in its own shares on which to solely base expected volatility. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at the grant date. The Company has not historically declared any dividends and does not expect to in the future.

~~The Company realized no income tax benefit from stock option exercises in each of the periods presented due to recurring losses and valuation allowances.~~

~~Stock option activity under the 2014 Plan is as follows:~~

Number

Average

Remaining Contract

Intrinsic

of Shares

Exercise Price

Life in Years

Value

Stock options outstanding at January 1, 2018
  545,000
$4.05
  7.13
$-





Granted during the period
  539,000
$3.04
  5.00
$-
Expired during the period
  -
  -


Canceled during the period
  (90,000)
$3.26
  4.41
$-
Exercised during the period
  -
  -


Stock options outstanding at September 30, 2018
  994,000
$3.58
  5.67
$-





Exercisable at September 30, 2018
  260,000
$4.29
  7.47
$-

Non-vested stock options outstanding at January 1, 2018
  387,500
$3.89
  6.39
$-





Granted during the period
  539,000
$3.04
  5.00
$-
Vested during the period
  (111,250)
$3.67
  5.64
$-
Expired during the period
  -
  -
  -

Canceled during the period
  (81,250)
$3.26
  4.41
$-
Exercised during the period
  -
  -
  -

Non-vested stock options outstanding at September 30, 2018
  734,000
$3.32
  5.04
$-

~~-18-~~-26-

Table of Contents

~~DRAFT~~

Stock options outstanding at January 1, 2019
  994,000
$3.58
  5.42
$-





Granted during the period
  893,500
$1.70
  4.96
  -
Expired during the period
  -
  -
  -
  -
Canceled during the period
  -
  -
  -
  -
Exercised during the period
  -
  -
  -
  -
Stock options outstanding at September 30, 2019
  1,887,500
$2.58
  4.69
$-





Exercisable at September 30, 2019
  1,024,000
$3.52
  4.54
$-





Non-vested stock options outstanding at January 1, 2019
  244,500
$3.05
  4.53
$-





Granted during the period
  893,500
$1.70
  4.96
  -
Vested during the period
  (274,500)
$2.91
  3.88
  -
Expired during the period
  -
  -
  -
  -
Canceled during the period
  -
  -
  -
  -
Exercised during the period
  -
  -
  -
  -
Non-vested stock options outstanding at September 30, 2019
  863,500
$1.70
  4.77
$-

~~530,849 shares~~Since the adoption of ~~common~~the 2020 Plan on September 11, 2020, no awards have yet been made thereunder. During the nine months ended September 30, 2020 and 2019, stock ~~were available for future issuance~~option activity under the 2014 Plan was as ~~of September 30, 2019.~~follows:

	Number	Average	Remaining Contract	Intrinsic
	of Shares	Exercise Price	Life in Years	Value

Stock options outstanding at January 1, 2019	994,000	$3.58	5.42	$-

Granted during the period	893,500	$1.70	4.96	-
Expired during the period	-	-	-	-
Canceled during the period	-	-	-	-
Exercised during the period	-	-	-	-
Stock options outstanding at September 30, 2019	1,887,500	$2.58	4.69	$-

Exercisable at September 30, 2019	994,000	$3.58	5.17	$-

Non-vested stock options outstanding at January 1, 2019	244,500	$3.05	4.53	$-

Granted during the period	893,500	$1.70	4.96	-
Vested during the period	(274,500)	$2.91	3.88	-
Expired during the period	-	-	-	-
Canceled during the period	-	-	-	-
Exercised during the period	-	-	-	-
Non-vested stock options outstanding at September 30, 2019	863,500	$1.70	4.77	$-

Stock options outstanding at January 1, 2020	1,677,5000	$2.17	5.37	$-

Granted during the period	2,870,012	$0.89	9.79	$-
Expired during the period	-	-
Canceled during the period	(235,006)	$1.94	3.28	$-
Exercised during the period	-	-
Stock options outstanding at September 30, 2020	4,312,506	$1.38	7.94	$-

Exercisable at September 30, 2020	1,084,834	$2.59	5.60	$-

Non-vested stock options outstanding at January 1, 2020	883,500	$1.33	6.26	$-

Granted during the period	2,870,012	$0.98	10.00	$-
Vested during the period	(593,750)	$2.59	6.88	$-
Expired during the period	-	-	-
Canceled during the period	(160,006)	$1.30	7.10	$-
Exercised during the period	-	-	-
Non-vested stock options outstanding at September 30, 2020	2,999,756	$0.98	8.75	$-

As of September 30, ~~2019,~~2020, the Company had unrecognized stock-based compensation expense of ~~$874,726. $91,170~~approximately $2,190,131. Approximately $1,189,036 of this unrecognized expense will be recognized over the average remaining vesting term of the options of.8.75 years. Approximately $440,213 of ~~0.75 years. $713,405~~this unrecognized expense will vest upon enrollment completion of the next MS1819 Phase II clinical trial in the U.S. for CF (the OPTION 2 Trial). Approximately $41,213 of this unrecognized expense will vest upon enrollment completion of the ongoing Combination Trial in Europe. Approximately $20,150 of this unrecognized expense will vest upon trial completion of the next MS1819 Phase II clinical trial in the U.S. for CF (the OPTION 2 Trial). Approximately $40,300 of this unrecognized expense vests upon the ~~completion of enrollment of the next~~Company initiating a Phase III clinical trial ~~of MS 1819-SD~~ in the U.S. ~~$70,151~~for MS1819. Approximately $40,300 of this unrecognized expense vests upon initiating a U.S. Phase I clinical trial for any product other than MS1819. Approximately, $139,640 of this unrecognized expense vests upon the ~~completion~~public release of ~~enrollment~~topline data of the ~~ongoing clinical trial assessing MS1819-SD in cystic fibrosis patients as~~complete Combination Trial results. Approximately, $139,640 of this unrecognized expense vests upon the public release of topline data of the complete OPTION 2 Trial results. Approximately, $139,640 of this unrecognized expense vests upon signing of a ~~combination therapy~~definitive term sheet with Board approval for either (i) a strategic licensing, distribution or commercialization agreement for MS1819 with a bona fide partner, or (ii) the ~~standard~~substantial sale of ~~care.~~the Company or the MS1819 asset, on or before December 31, 2021. The Company will recognize the expense related to these milestones ~~will be recognized~~ when the milestones become probable.

-27-

Table of Contents

Note 14 - Agreements

Mayoly Agreement

On March 27, 2019, the Company and Laboratories Mayoly Spinder (“Mayoly”) entered into an Asset Purchase Agreement (the “Mayoly APA”), pursuant to which the Company purchased all rights, title and interest in and to MS1819. Upon execution of the Mayoly APA, the Joint Development and License Agreement (the “JDLA”) previously executed by AzurRx SAS and Mayoly was terminated. In addition, the Company granted to Mayoly an exclusive, royalty-bearing right to revenue received from commercialization of MS1819 within certain territories.

During the three ~~months ended September 30, 2019~~ and ~~2018, the Company charged $0 and $96,119, respectively, to Mayoly under the JDLA that was in effect during both periods. During the~~ nine months ended September 30, 2019, ~~and 2018,~~ the Company charged ~~$403,020~~$0 and ~~$621,724,~~$403,020, respectively, to Mayoly under the JDLA that was in effect during both periods.

~~On March 27, 2019, the Company~~ ~~entered into the Mayoly APA~~ ~~pursuant to which the Company purchased substantially all rights, title and interest in and to MS1819-SD, see Recent Developments above.~~

~~INRA Agreement~~

In February 2006, Mayoly and INRA TRANSFERT, on behalf of INRA and CNRS (French government research centers), entered into a Usage and Cross-Licensing Agreement granting Mayoly exclusive worldwide rights to exploit Yarrowia lipolytica and other lipase proteins based on their patents for use in humans. The INRA Agreement provides for the payment by Mayoly of royalties on net sales, subject to Mayoly’s right to terminate such obligation upon the payment of a lump sum specified in the agreement. Upon execution of the Mayoly APA, all rights, obligations and interests under the INRA Agreement were transferred to the Company.

~~-19-~~

~~Table of Contents~~

~~DRAFT~~

TransChem Sublicense

On August 7, 2017, the Company and TransChem entered into athe TransChem Sublicense Agreement ~~with TransChem, Inc.~~ ~~(“TransChem”~~), pursuant to which TransChem granted ~~the Company~~to us an exclusive license to certain patents ~~and patent applications~~(the“TransChem Licensed Patents”) relating to ~~Helicobacter~~H. pylori 5’methylthioadenosine nucleosidase ~~inhibitors (the~~ ~~“Licensed Patents”) currently held by TransChem (the~~ ~~“Sublicense Agreement”). The Company~~inhibitors. We may terminate the Sublicense Agreement and the licenses granted therein for any reason and without further liability on 60 days’ notice. Unless terminated earlier, the Sublicense Agreement will expire upon the expiration of the last Licensed Patents. Upon execution, ~~the Company~~we paid an upfront fee to TransChem and agreed to reimburse TransChem for certain expenses previously incurred in connection with the preparation, filing, and maintenance of the Licensed Patents. ~~The Company~~We also agreed to pay TransChem certain future periodic sublicense maintenance fees, which fees may be credited against future royalties. ~~The Company~~We may also be required to pay TransChem additional payments and royalties in the event certain performance-based milestones and commercial sales involving the Licensed Patents are achieved. The TransChem Licensed Patents will allow ~~the Company~~us to develop compounds for treating gastrointestinal, lung and other infections ~~which~~that are specific to individual bacterial species. ~~H.pylori~~H. pylori bacterial infections are a major cause of chronic gastritis, peptic ulcer disease, gastric cancer and other diseases. ~~Amounts paid~~

On March 11, 2020, the Company provided TransChem with sixty (60) days prior written notice of its intent to terminate the TransChem Sublicense Agreement.

No payments were made under this Sublicense Agreement duringin the three and nine months ended September 30, 2020 and 2019, ~~and 2018 are $50,000 and $136,880, respectively, and are included in R&D expense.~~respectively.

Employment Agreements

James Sapirstein

Effective October 8, 2019, the Company entered into an employment agreement with Mr. Sapirstein to serve as its President and Chief Executive Officer for a term of three years, subject to further renewal upon agreement of the parties. The employment agreement with Mr. Sapirstein provides for a base salary of $450,000 per year. In addition to the base salary, Mr. Sapirstein is eligible to receive (i) a cash bonus of up to 40% of his base salary on an annual basis, based on certain milestones that are yet to be determined; (ii) 1% of net fees received by the Company upon entering into license agreements with any third-party with respect to any product current in development or upon the sale of all or substantially all assets of the Company; (iii) aan award grant of 200,000 restricted ~~shares of the Company’s common~~ stock units (“RSUs”) which are ~~subject~~scheduled to vest as follows (a) 100,000 shares upon the first commercial sale of MS1819 in the ~~United States,~~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 ~~the Company’s~~ common stock with an exercise price equal to $0.56 per share, which are ~~subject~~scheduled to vest as follows (a) 50,000 shares upon the Company initiating its next Phase II clinical trial in the ~~United States~~U.S. for MS1819, (b) 50,000 shares upon the Company completing its next or subsequent Phase II clinical trial in the ~~United States~~U.S. for MS1819, (c) 100,000 shares upon the Company initiating a Phase III clinical trial in the ~~United States~~U.S. for MS1819, and (d) 100,000 shares upon the Company initiating a Phase I clinical trial in the ~~United States~~U.S. for any product other than MS1819. Mr. Sapirstein is entitled to receive 20 days of paid vacation, participate in full employee health benefits and receive reimbursement for all reasonable expenses incurred in connection with his services to the Company.

In the event that Mr. Sapirstein’s employment is terminated by the Company for Cause, as defined in his employment agreement, or by Mr. Sapirstein voluntarily, then he will not be entitled to receive any payments beyond amounts already earned, and any unvested equity awards will terminate. In the event that Mr. Sapirstein’s employment is terminated as a result of an Involuntary Termination Other than for Cause, as defined in ~~the Agreement,~~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~~base salary rate in effect at the time of termination, but prior to any reduction triggering Good ~~Reason)~~Reason (as such term is defined in Mr. Sapirstein’s employment agreement) for a period of 12twelve months following the termination date; (ii) payment of ~~Executive’s~~Mr. Sapirstein’s premiums to cover COBRA for a period of 12twelve months following the termination date; and (iii) a prorated annual bonus.

~~-20-~~-28-

Table of Contents

~~DRAFT~~

~~Johan (Thijs) Spoor~~Daniel Schneiderman

OnEffective January ~~3, 2016,~~2, 2020, 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 has expired, he remained employed as the Company’s President and Chief Executive Officer under the terms of his prior employment agreement until his resignation on October 8, 2019. As previously reported on the Company’s Current Report on Form 8-K filed October 11, 2019, Mr. Spoor resigned from his position as the Company’s President and Chief Executive Officer effective October 8, 2019. Mr. Spoor continuesSchneiderman to serve ~~as a director on the Board of the Company.~~

Mr. Spoor was paid 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 receive an additional cash bonus based on his attainment of certain financial, clinical development, and/or business milestones to be established annually by the Board or the Compensation Committee.

Mr. Spoor was originally entitled to 380,000 10-year stock options pursuant to the 2014 Plan. In the first quarter of 2017, 100,000 options having a value of $386,900 were granted and expensed. On September 29, 2017, Mr. Spoor was granted 100,000 shares of restricted common stock subject to vesting conditions as follows: (i) 75% upon FDA acceptance of a U.S. IND application for MS1819-SD, and (ii) 25% upon the Company completing a Phase IIa clinical trial for MS1819-SD, in satisfaction of the Company’s obligation to issue the additional 280,000 options to Mr. Spoor described above, with an estimated fair value at the grant date of $425,000. All of these shares vested during 2018. $106,250 was expensed in the second quarter of 2018 and $318,750 was expensed in the fourth quarter of 2018 due to the Company completing both milestones.

On June 28, 2018, Mr. Spoor was granted 200,000 shares of restricted common stock subject to vesting conditions as follows: (i) 50% shall vest in three equal installments beginning one year from the date of issuance, and (ii) the remaining 50% shall vest as follows: one-third shall vest upon U.S. acceptance of IND for MS1819-SD, one-third upon the first dosing of a CF patient with MS1819-SD anywhere in the world, and the remaining one-third upon enrollment of the first 30 patients in a CF trial. These restricted shares had an estimated fair value at the grant date of $608,000 to be expensed when the above milestones are probable. 8,333 shares with a fair value of $25,332 vested and was expensed in the three months ended September 30, 2019 due to being earned over that time. 25,000 shares with a fair value of $76,000 vested and was expensed in the nine months ended September 30, 2019 due to being earned over that time. 33,333 shares with a fair value of $101,332 vested and was expensed in the nine months ended September 30, 2019 due to the first dosing of CF patients with MS1819-SD anywhere in the world.

~~On June 28, 2018, the Board approved a 2017 annual incentive bonus pursuant to his employment agreement in the amount of $212,500.~~

On June 13, 2019, Mr. Spoor was granted stock options to purchase 150,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan, that vest upon the completion of enrollment of the next trial of MS 1819-SD in the U.S. These options had an estimated fair value at the grant date of $151,950 to be expensed when the above milestone is probable.

~~On June 29, 2019, the Board approved a 2018 annual incentive bonus pursuant to his employment agreement in the amount of $255,000 that is included in accrued expenses at September 30, 2019.~~

~~Mr. Spoor received no additional or severance compensation and all unvested options and restricted shares of common stock were cancelled as a result of Mr. Spoor’s resignation.~~

~~-21-~~

~~Table of Contents~~

~~DRAFT~~

~~Maged Shenouda~~

On September 26, 2017, the Company entered into an employment agreement with Maged Shenouda, pursuant to which Mr. Shenouda served as the Company’s Chief Financial Officer. Mr. Shenouda’s employment agreement provided for the issuance of stock options to purchase 100,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan. These options vested as follows so long as Mr. Shenouda served as either Executive Vice-President of Corporate Development or as Chief Financial Officer (i) 75% upon FDA acceptance of a U.S. IND application for MS1819-SD, and (ii) 25% upon the Company completing a Phase IIa clinical trial for MS1819-SD. The option is exercisable for $4.39 per share and will expire on September 25, 2027. All of these shares vested in 2018. Due to the Company completing both milestones, $84,125 was expensed in the second quarter of 2018 and $252,375 was expensed in the fourth quarter of 2018.

On June 28, 2018, Mr. Shenouda was granted stock options to purchase 100,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan, subject to vesting conditions as follows: (i) 50% upon U.S. acceptance of an IND for MS1819-SD, and (ii) 50% upon the first CF patient doses with MS1819-SD anywhere in the world. These options had an estimated fair value at the grant date of $207,300 to be expensed when the above milestones are probable. 50,000 of these options having a fair value of $103,650 vested and was expensed in 2018 due to the FDA acceptance of the Company’s IND application for MS1819-SD. The remaining 50,000 options having a fair value of $103,650 vested and was expensed in the nine months ended September 30, 2019 due to the first dosing of CF patients with MS1819-SD anywhere in the world.

~~On June 28, 2018, the Board approved a 2017 annual incentive bonus pursuant to his employment agreement in the amount of $82,500.~~

On June 13, 2019, Mr. Shenouda was granted stock options to purchase 100,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan, that vest upon the completion of enrollment of the next trial of MS 1819-SD in the U.S. These options had an estimated fair value at the grant date of $101,300 to be expensed when the above milestone is probable.

~~On June 28, 2019, the Board approved a 2018 annual incentive bonus pursuant to his employment agreement in the amount of $100,000 that is included in accrued expenses at September 30, 2019.~~

~~As previously reported on the Company’s Current Report on Form 8-K filed November 1, 2019, Mr. Shenouda resigned from his position~~ as the Company’s Chief Financial Officer ~~effective November 30, 2019.~~for a term of three years, subject to further renewal upon agreement of the parties. The employment agreement with Mr. ~~Shenouda’s resignation was not due to any disagreements with respect~~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 ~~operations, policies~~Board or ~~plans~~the Compensation Committee, and ~~he received no additional or severance compensation~~(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 ~~resignation. All options~~service to the Company. The Company may terminate Mr. Schneiderman’s employment agreement at any time, with or without Cause, as such term is defined in his employment agreement.

In the event that Mr. Schneiderman’s employment is terminated by the Company for Cause, as defined in Mr. Schneiderman’s employment agreement, or by Mr. Schneiderman voluntarily, then he will not be entitled to receive any payments beyond amounts already earned, and ~~restricted shares~~any unvested equity awards will terminate. If the Company terminates his employment agreement without Cause, not in connection with a Change of ~~common stock not otherwise exercised or vested~~Control, as such term is defined in Mr. Schneiderman’s employment agreement, he will be ~~cancelled effective upon~~entitled to (i) all salary owed through the ~~effective~~ date of termination; (ii) any unpaid annual milestone bonus; (iii) severance in the form of continuation of his salary for the greater of a period of six months following the termination date or the remaining term of the employment agreement; (iv) payment of premiums to cover COBRA for a period of six months following the termination date; (v) a prorated annual bonus equal to the target annual milestone bonus, if any, for the year of termination multiplied by the formula set forth in the agreement. If the Company terminates Mr. ~~Shenouda’s resignation.~~Schneiderman’s employment agreement without Cause, in connection with a Change of Control, he will be entitled to the above and immediate accelerated vesting of any unvested options or other unvested awards.

Dr. James E. Pennington

OnEffective May 28, 2018, the Company entered into an employment agreement with Dr. Pennington to serve as ~~the Company’s~~its Chief Medical Officer. The employment agreement with Dr. Pennington provides for a base annual salary of $250,000. In addition to his salary, Dr. Pennington is eligible to receive an annual milestone bonus, awarded at the sole discretion of the Board based on his attainment of certain financial, clinical development, and/or business milestones established annually by the Board or Compensation Committee. The Company may terminate Dr. Pennington’s employment agreement ~~is terminable by either party~~ at any ~~time.~~time, with or without Cause, as such term is defined in Dr. Pennington’s employment agreement. In the event of termination by the Company other than for ~~cause,~~Cause, Dr. Pennington is entitled to three months’ severance payable over such period. In the event of termination by the Company other than for ~~cause~~Cause in connection with a Change of Control as such term is defined in Dr. Pennington’s employment agreement, Dr. Pennington will receive six months’ severance payable over such period.

~~-22-~~

~~Table of Contents~~

~~DRAFT~~

On June 28, 2018, Mr. Pennington was granted stock options to purchase 75,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan, subject to vesting conditions as follows: (i) 50% upon U.S. acceptance of an IND for MS1819-SD, and (ii) 50% upon the first CF patient doses with MS1819-SD anywhere in the world. These options had an estimated fair value at the grant date of $155,475 to be expensed when the above milestones are probable. 37,500 of these options vested and $77,738 was expensed in 2018 due to the FDA acceptance of the Company’s IND application for MS1819-SD in 2018. 37,500 of these options having a fair value of $77,738 vested and was expensed in the nine months ended September 30, 2019 due to the first dosing of CF patients with MS1819-SD anywhere in the world.

On June 13, 2019, Mr. Pennington was granted stock options to purchase 110,000 shares of the Company’s common stock, issuable pursuant to the 2014 Plan, that vest upon the completion of enrollment of the next trial of MS 1819-SD in the U.S. These options had an estimated fair value at the grant date of $111,430 to be expensed when the above milestone is probable.

~~On June 13, 2019, the Board approved a 2018 annual incentive bonus pursuant to his employment agreement in the amount of $75,000 that was paid in the third quarter of 2019.~~

Note 15 - Leases

The Company adopted ASU 2016-02, Leases, as of January 1, 2019, using the modified retrospective approach. Prior year financial statements were not recast under the new standard.

The Company leases its office and research facilities under operating leases which are subject to various rent provisions and escalation ~~clauses expiring~~clauses.

During the three months ended September 30, 2020, the Company entered into a month-to-month lease for office space in Delray Beach, FL and one-year residential lease in Delray Beach, FL.

During the nine months ended September 30, 2020, the Company entered into a two-year lease extension (amendment) to is Hayward, CA office. The Company determined that the lease modification did not grant an additional right of use and concluded that the modification was not a separate new lease, but rather that it should reassess and remeasure the entire modified lease on the effective date of the modification. The Company accounted for the lease amendment prospectively.

The Company’s leases expire at various dates through ~~2020.~~2022. The escalation clauses are indeterminable and considered not material and have been excluded from minimum future annual rental payments.

-29-

Table of Contents

Lease expense amounted to ~~$52,057~~$55,418 and ~~$40,224,~~$52,057, respectively, in the three months ended September 30, ~~2019~~2020 and ~~2018.~~ 2019.

Lease expense amounted to ~~$153,723~~$128,663 and ~~$108,217,~~$153,723, respectively, in the nine months ended September 30, ~~2019~~2020 and ~~2018.~~2019.

The weighted-average remaining lease term and weighted-average discount rate under operating leases at September 30, ~~2019~~2020 are:

	September 30,
	~~2019~~2020
Lease term and discount rate
Weighted-average remaining lease term	~~1.00~~1.16 years
Weighted-average discount rate	6.0%

Maturities of operating lease liabilities at September 30, ~~2019~~2020 are as follows:

2019	$49,983
2020	151,282	$30,565
2021		55,420
2022		23,375
Total lease payments	201,265	109,360
Less imputed interest	(12,226)	(3,736)
Present value of lease liabilities	$189,039	$105,624

Note 16 - Income Taxes

The Company is subject to taxation at the federal level in both the United States and France and at the state level in the United States. At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had no tax provision for either jurisdiction.

At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had gross deferred tax assets of approximately ~~$16,156,000~~$20,059,000 and ~~$12,490,000,~~$16,372,000, respectively. As the Company cannot determine that it is more likely than not that the Company will realize the benefit of the deferred tax asset, a valuation allowance of approximately ~~$16,156,000~~$20,059,000 and ~~$12,490,000,~~$16,372,000, respectively, has been established at September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. The change in the valuation allowance in the nine months ended September 30, 2020 and 2019 ~~and 2018~~ was ~~$3,666,000~~$3,687,000 and $2,108,000, respectively.

~~-23-~~

~~Table of Contents~~

~~DRAFT~~

At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company had taken no uncertain tax positions that would require disclosure under ASC 740, Accounting for Income Taxes.

			Page

PART I.	FINANCIAL INFORMATION

	Item 1.	Consolidated Financial Statements	1

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25 32

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2938

	Item 4.	Controls and Procedures	29 38

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	3039

	Item 1A.	Risk Factors	30 39

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3039

	Item 3.	Defaults Upon Senior Securities	3039

	Item 4.	Mine Safety Disclosures	3039

	Item 5.	Other Information	3039

	Item 6.	Exhibits	30 40

	September 30,	December 31,	September 30,	December 31,
	2019	2018	2020	2019
Laboratory equipment	$193,661	$190,406	$193,661
Computer equipment	78,986	75,417	77,850	74,836
Office equipment	41,188	37,262	36,703
Leasehold improvements	35,711	29,163	29,162	35,711
Total property, plant and equipment	349,546	332,248	337,376	340,911
Less accumulated depreciation	(254,179)	(203,394)	(283,306)	(263,520)
Property, plant and equipment, net	$95,367	$128,854	$54,070	$77,391

2019 (balance of year)	$131,887
2020	527,548
2020 (balance of year)		$395,661
2021	527,548	527,548
2022	527,548	527,548
2023	527,548	527,548
2024		527,548
2025		527,548

Exhibit No.		Description
3.1		Certificate of the Designations, Powers, Preferences and Rights of Series B Convertible Preferred Stock (incorporated by reference as Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2020.)
3.2		Amended and Restated Bylaws (incorporated by reference as Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 5, 2020.)
4.1		Form of Warrant (incorporated by reference as Exhibit 4.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2020.)
4.2		Form of Warrant for Convertible Notes Offering (incorporated by reference as Exhibit 4.2 of the Company’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on July 27, 2020.)
10.1		Form of Purchase Agreement, by and among the Company and the investors set forth on the signature pages thereto, including the form of Exchange Addendum (incorporated by reference as Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2020.)
10.2		Form of Registration Rights Agreement, by and among the Company and the investors set forth on the signature page thereto (incorporated by reference as Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2020.)
10.3		First Amendment to 2014 Omnibus Equity Incentive Plan (incorporated by reference as Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 20, 2020.)
10.4		2020 Omnibus Equity Incentive Plan.
31.1		Certification of the Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase


		By	/s/ ~~Maged Shenouda~~Daniel Schneiderman
Date: November ~~14, 2019~~	16, 2020		~~Maged Shenouda~~Daniel Schneiderman Chief Financial Officer (Principal Financial and Accounting Officer)

AZURRX BIOPHARMA, INC.
Consolidated Balance Sheets (unaudited)

	September 30,	December 31,
	2019	2018
ASSETS

Current Assets:
Cash	$1,549,825	$1,114,343
Other receivables	2,090,233	3,172,676
Prepaid expenses	89,756	512,982
Total Current Assets	3,729,814	4,800,001

Property, equipment, and leasehold improvements, net	95,367	128,854

Other Assets:
In process research and development, net	-	258,929
License agreements, net	-	311,548
Patents, net	3,538,971	-
Goodwill	1,832,915	1,924,830
Operating lease right-of-use assets	189,987	-
Deposits	48,669	45,233
Total Other Assets	5,610,542	2,540,540
Total Assets	$9,435,723	$7,469,395

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable and accrued expenses	$2,754,217	$2,070,396
Accounts payable and accrued expenses - related party	525,520	670,095
Note payable	-	255,032
Convertible debt	1,947,073	-
Other current liabilities	592,676	-
Total Current Liabilities	5,819,486	2,995,523

Other liabilities	414,463	-
Total Liabilities	6,233,949	2,995,523

Stockholders' Equity:
Convertible preferred stock - Par value $0.0001 per share; 10,000,000 shares authorized and 0 shares issued and outstanding at September 30, 2019 and December 31, 2018; liquidation preference approximates par value	-	-
Common stock - Par value $0.0001 per share; 100,000,000 shares authorized; 26,155,111 and 17,704,925 shares issued and outstanding, respectively, at September 30, 2019 and December 31, 2018	2,615	1,771
Additional paid-in capital	65,969,414	53,139,259
Accumulated deficit	(61,413,109)	(47,517,046)
Accumulated other comprehensive loss	(1,357,146)	(1,150,112)
Total Stockholders' Equity	3,201,774	4,473,872
Total Liabilities and Stockholders' Equity	$9,435,723	$7,469,395

Non-vested stock options outstanding at January 1, 2018	387,500	$3.89	6.39	$-

Granted during the period	539,000	$3.04	5.00	$-
Vested during the period	(111,250)	$3.67	5.64	$-
Expired during the period	-	-	-
Canceled during the period	(81,250)	$3.26	4.41	$-
Exercised during the period	-	-	-
Non-vested stock options outstanding at September 30, 2018	734,000	$3.32	5.04	$-

			AZURRX BIOPHARMA, INC.

		By	/s/ James Sapirstein
			James Sapirstein President, Chief Executive Officer and Director (Principal Executive Officer)