ITEM
1. FINANCIAL STATEMENTS
RITTER
PHARMACEUTICALS, INC.
CONDENSED
BALANCE SHEETS
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,558,874
|
|
|
$
|
7,046,282
|
|
Prepaid
expenses
|
|
|
260,597
|
|
|
|
156,752
|
|
Total
current assets
|
|
|
3,819,471
|
|
|
|
7,203,034
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
10,326
|
|
|
|
10,326
|
|
Deferred
offering costs
|
|
|
310,786
|
|
|
|
—
|
|
Property
and equipment, net
|
|
|
19,606
|
|
|
|
23,542
|
|
Total
Assets
|
|
$
|
4,160,189
|
|
|
$
|
7,236,902
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,745,370
|
|
|
$
|
1,896,368
|
|
Accrued
expenses
|
|
|
196,578
|
|
|
|
1,222,735
|
|
Other
liabilities
|
|
|
15,927
|
|
|
|
14,736
|
|
Total
current liabilities
|
|
|
2,957,875
|
|
|
|
3,133,839
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value; 15,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2017 and December
31, 2016
|
|
|
—
|
|
|
|
—
|
|
Common stock,
$0.001 par value; 225,000,000 shares authorized; 14,756,521 and 11,619,197 shares issued and outstanding as of September 30,
2017 and December 31, 2016, respectively
|
|
|
14,757
|
|
|
|
11,619
|
|
Additional
paid-in capital
|
|
|
52,302,244
|
|
|
|
49,559,020
|
|
Accumulated
deficit
|
|
|
(51,114,687
|
)
|
|
|
(45,467,576
|
)
|
Total
stockholders’ equity
|
|
|
1,202,314
|
|
|
|
4,103,063
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
4,160,189
|
|
|
$
|
7,236,902
|
|
The
accompanying notes are an integral part of these financial statements.
RITTER
PHARMACEUTICALS, INC.
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Operating
costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$
|
915,268
|
|
|
$
|
2,348,755
|
|
|
$
|
2,121,898
|
|
|
$
|
7,112,177
|
|
Patent
costs
|
|
|
47,431
|
|
|
|
98,908
|
|
|
|
175,794
|
|
|
|
199,888
|
|
General
and administrative
|
|
|
1,052,236
|
|
|
|
1,091,647
|
|
|
|
3,367,781
|
|
|
|
3,533,608
|
|
Total
operating costs and expenses
|
|
|
2,014,935
|
|
|
|
3,539,310
|
|
|
|
5,665,473
|
|
|
|
10,845,673
|
|
Operating
loss
|
|
|
(2,014,935
|
)
|
|
|
(3,539,310
|
)
|
|
|
(5,665,473
|
)
|
|
|
(10,845,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
4,083
|
|
|
|
13,239
|
|
|
|
18,362
|
|
|
|
50,466
|
|
Other
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,214
|
|
Total
other income
|
|
|
4,083
|
|
|
|
13,239
|
|
|
|
18,362
|
|
|
|
51,680
|
|
Net
loss
|
|
$
|
(2,010,852
|
)
|
|
$
|
(3,526,071
|
)
|
|
$
|
(5,647,111
|
)
|
|
$
|
(10,793,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share ― basic and diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(1.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding — basic and diluted
|
|
|
14,756,521
|
|
|
|
8,585,406
|
|
|
|
13,443,007
|
|
|
|
8,584,442
|
|
The
accompanying notes are an integral part of these financial statements.
RITTER
PHARMACEUTICALS, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For
the Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,647,111
|
)
|
|
$
|
(10,793,993
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
3,936
|
|
|
|
3,894
|
|
Stock-based
compensation
|
|
|
746,362
|
|
|
|
1,041,656
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
(103,845
|
)
|
|
|
(57,092
|
)
|
Accounts
payable
|
|
|
849,002
|
|
|
|
2,131,022
|
|
Accrued
expenses
|
|
|
(1,026,157
|
)
|
|
|
293,793
|
|
Other
liabilities
|
|
|
1,191
|
|
|
|
12,841
|
|
Net
cash used in operating activities
|
|
|
(5,176,622
|
)
|
|
|
(7,367,879
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
—
|
|
|
|
(8,063
|
)
|
Net
cash used in investing activities
|
|
|
—
|
|
|
|
(8,063
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds
from the issuance of shares from common stock purchase agreement
|
|
|
2,000,000
|
|
|
|
—
|
|
Proceeds
from exercise of options on common stock
|
|
|
—
|
|
|
|
8,504
|
|
Deferred
offering costs
|
|
|
(310,786
|
)
|
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
1,689,214
|
|
|
|
8,504
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(3,487,408
|
)
|
|
|
(7,367,438
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
7,046,282
|
|
|
|
15,819,566
|
|
Cash
and cash equivalents at end of period
|
|
$
|
3,558,874
|
|
|
$
|
8,452,128
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash
paid for taxes
|
|
$
|
800
|
|
|
$
|
72,112
|
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activities
|
|
|
|
|
|
|
|
|
Shares
issued as a commitment fee
|
|
$
|
93,380
|
|
|
|
—
|
|
The
accompanying notes are an integral part of these financial statements.
RITTER
PHARMACEUTICALS, INC.
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE
1 — ORGANIZATION AND PRINCIPAL ACTIVITIES
Ritter
Pharmaceuticals, Inc. (“Ritter” or the “Company”) is a Delaware corporation headquartered in Los Angeles,
California. The Company was formed as a Nevada limited liability company on March 29, 2004 under the name Ritter Natural Sciences,
LLC, and converted into a Delaware corporation on September 16, 2008.
Ritter
develops therapeutic products that modulate the human gut microbiome to treat gastrointestinal diseases. The Company conducts
human gut health research by exploring metabolic capacity of the gut microbiota and translating the functionality of prebiotic-based
therapeutics. The Company’s lead compound, RP-G28, is currently under development for the treatment of lactose intolerance.
There currently is no drug approved by the Food and Drug Administration (“FDA”) for the treatment of lactose intolerance,
a debilitating disease that affects over one billion people worldwide.
The
Company currently operates in one business segment focusing on the development and commercialization of RP-G28. The Company is
not organized by market and is managed and operated as one business. A single management team reports to the chief operating decision
maker, the Chief Executive Officer. The Company does not currently operate any separate lines of business or separate business
entities.
NOTE
2 — BASIS OF PRESENTATION
The
accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) and applicable rules and regulations of the SEC regarding interim financial
reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.
However, in the opinion of management, all adjustments consisting of normal recurring adjustments considered necessary for a fair
presentation of the financial position and results of operations have been included and management believes the disclosures that
are made are adequate to make the information presented not misleading.
The
condensed balance sheet at December 31, 2016 has been derived from the audited financial statements included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the SEC on February 27, 2017 (the “2016
Annual Report”), but does not include all of the information and footnotes required by GAAP for complete financial statements.
The
results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results expected for the
full fiscal year or any other period. The accompanying interim period unaudited condensed financial statements and related financial
information included in this Quarterly Report on Form 10-Q (“Quarterly Report”) should be read in conjunction with
the audited financial statements and notes thereto included in the Company’s 2016 Annual Report.
Going
Concern and Liquidity
The
accompanying condensed financial statements have been prepared assuming the Company will continue as a going concern, which contemplates,
among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has
not generated any product revenue and has not achieved profitable operations. For the nine months ended September 30, 2017, the
Company had a net loss of approximately $5.6 million and had net cash used in operating activities of approximately $5.2 million.
At September 30, 2017, the Company had working capital of approximately $0.9 million, an accumulated deficit of approximately
$51.1 million, and cash and cash equivalents of approximately $3.6 million. There is no assurance that profitable operations will
ever be achieved, and, if achieved, could be sustained on a continuing basis. In addition, development activities, clinical and
pre-clinical testing, and commercialization of the Company’s products will require significant financing. These matters,
among others, raise substantial doubt about the Company’s ability to continue as a going concern.
RITTER
PHARMACEUTICALS, INC.
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Since
inception, the operations of the Company have been funded through the sale of common shares, preferred shares and convertible
debt. Management cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that
the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant
dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct
business. If the Company is not able to raise additional capital when required or on acceptable terms, the Company may have to
(i) significantly delay, scale back or discontinue the development and/or commercialization of RP-G28; (ii) seek collaborators
at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available;
and/or (iii) relinquish or otherwise dispose of its rights to RP-G28.
The
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE
3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There
have been no material changes in the Company’s significant accounting policies as of and for the nine months ended September
30, 2017, as compared with the significant accounting policies described in the Company’s 2016 Annual Report.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
Cash
consists of amounts held in a financial institution and consists of immediately available fund balances. The funds are maintained
at a stable financial institution, generally at amounts in excess of federally insured limits. As of September 30, 2017 and December
31, 2016, approximately $3.6 million and approximately $6.8 million, respectively, in cash and cash equivalents were uninsured.
The Company has not experienced any loss on deposits of cash and cash equivalents to date.
Clinical
Trial and Pre-Clinical Study Accruals
The
Company makes estimates of accrued expenses as of each balance sheet date in its financial statements based on the facts and circumstances
known to it at that time. Accrued expenses for pre-clinical studies and clinical trials are based on estimates of costs incurred
and fees that may be associated with services provided by contract research organizations, clinical trial investigational sites,
and other related vendors. Payments under certain contracts with such parties depend on factors such as successful enrollment
of patients, site initiation and the completion of milestones. In accruing service fees, management estimates the time period
over which services will be performed and the level of effort to be expended in each period. If possible, the Company obtains
information regarding unbilled services directly from these service providers. However, the Company may be required to estimate
these services based on other information available to it. If the Company underestimates or overestimates the activity or fees
associated with a study or service at a given point in time, adjustments to research and development expenses may be necessary
in future periods. Historically, estimated accrued liabilities have approximated actual expense incurred. Subsequent changes in
estimates may result in a material change in the Company’s accruals.
RITTER
PHARMACEUTICALS, INC.
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Recent
Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-02,
Leases
(Topic 842)
(“ASU 2016-02”). The provisions of ASU 2016-02 set out the principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract (
i.e.,
lessees and lessors). The new standard requires
lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or
not the lease is effectively a financed purchase by the lessee. This classification will determine whether the lease expense is
recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required
to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their
classification. Leases with a term of 12 months or less will be accounted for under the existing guidance for operating leases
today. Topic 842 supersedes the previous lease standard, Topic 840
Leases
. The guidance is effective for annual periods
and interim periods within those annual periods beginning after December 15, 2018, and is effective for the Company for the year
ending December 31, 2019. The Company is currently evaluating the impact that the implementation of this standard will have on
the Company’s financial statements.
On
March 30, 2016, the FASB issued Accounting Standards Update No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting
(“ASU 2016-09”). Among other things, ASU 2016-09 requires that entities
recognize excess tax benefits and deficiencies related to employee share-based payment transactions as income tax expense or benefit.
ASU 2016-09 also eliminates the requirement to reclassify excess tax benefits and deficiencies from operating activities to financing
activities in the statement of cash flows. The guidance is effective for the annual periods and interim periods within those annual
periods beginning after December 15, 2016. The adoption of this standard did not have a material impact on the Company’s
financial statements.
On
August 26, 2016, the FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows (Topic 230),
a consensus
of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). The new guidance amends Accounting Standards Codification
No. 230 (“ASC 230”) to add or clarify guidance on the classification of certain cash receipts and payments in the
statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in
the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements.
Therefore, the FASB issued the ASU 2016-15 with the intent of reducing diversity in practice with respect to eight types of cash
flows. ASU 2016-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and is effective
for the Company for the year ending December 31, 2018. The Company is currently evaluating the impact that the implementation
of this standard will have on the Company’s financial statements.
In
May 2017, the FASB issued Accounting Standards Update No. 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of
Modification Accounting
(“ASU 2017-09”)
.
ASU 2017-09 provides guidance on the types of changes to the terms
or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would
not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately
before and after the modification. The amendments are effective for the Company’s interim and annual reporting periods beginning
January 1, 2018. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its financial statements.
Other
accounting standards updates effective after September 30, 2017 are not expected to have a material effect on the Company’s
financial statements.
RITTER
PHARMACEUTICALS, INC.
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE
4 — PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
Estimated
Life
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Computer
equipment
|
|
5
years
|
|
$
|
10,274
|
|
|
$
|
10,274
|
|
Furniture
and fixtures
|
|
7
years
|
|
|
23,325
|
|
|
|
23,325
|
|
Total
property and equipment
|
|
|
|
|
33,599
|
|
|
|
33,599
|
|
Accumulated
depreciation
|
|
|
|
|
(13,993
|
)
|
|
|
(10,057
|
)
|
Property
and equipment, net
|
|
|
|
$
|
19,606
|
|
|
$
|
23,542
|
|
Depreciation
expense of approximately $1,300 was recognized for each of the three months ended September 30, 2017 and 2016 and approximately
$3,900 was recognized for the nine months ended September 30, 2017 and 2016, and classified in general and administrative expense
in the accompanying unaudited condensed statements of operations.
NOTE
5 — COMMITMENTS AND CONTINGENCIES
Master
Services Agreement
On
December 30, 2015, the Company entered into a Master Service Agreement with Covance, Inc. (“Covance”), with an effective
date of December 29, 2015. Pursuant to the terms of the Master Service Agreement, Covance (or one or more of its affiliates) will
provide Phase 1, 2, 3, and 4 clinical services for a clinical study or studies to the Company and, at the request of the Company,
assist with the design of such studies, in accordance with the terms of separate individual project agreements to be entered into
by the parties. The term of the agreement is for three years and will renew automatically for successive one year periods unless
Covance is no longer providing services under the agreement or either party has terminated the agreement upon written notice.
The Company may terminate the Master Service Agreement or any individual project agreement entered into under the Master Service
Agreement prior to the applicable study’s completion at any time for any reason upon 30 days written notice to Covance,
except when the reason for termination is the safety of subjects, in which case it may be terminated immediately. Covance may
not terminate any individual project agreement without cause, except when the reason for the termination is the safety of subjects,
in which case it may be terminated immediately. In the event of a termination of the Master Service Agreement, Covance will be
entitled to full payment for (i) work performed on the applicable project through the date work on such project is concluded and
(ii) reimbursement for all non-cancellable and non-refundable expenses and financial obligations which Covance (or an affiliate)
has incurred or undertaken on behalf of the Company.
Clinical
Supply and Cooperation Agreement with Ricerche Sperimentali Montale (“Ricerche”) and Inalco SpA (“Inalco”)
Effective
July 24, 2015, the Company entered into an amended Clinical Supply and Cooperation Agreement (the “Amended Supply Agreement”)
with Ricerche and Inalco (collectively, “RSM”). The Amended Supply Agreement amends certain terms of the Clinical
Supply and Cooperation Agreement, dated December 16, 2009, amended on September 25, 2010.
RITTER
PHARMACEUTICALS, INC.
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Pursuant
to the terms of the Amended Supply Agreement, the Company purchased the exclusive worldwide assignment of all right, title and
interest to a purified GOS product (“Improved GOS”), the composition of matter of the Improved GOS and any information
relating to the Improved GOS, including certain specified technical information and other intellectual property rights (the “Improved
GOS IP”) on July 30, 2015 for $800,000. The Company also issued 100,000 shares of its common stock to RSM pursuant to a
stock purchase agreement. The shares issued to RSM were subject to a lock-up agreement, pursuant to which RSM agreed that it would
not sell these shares for a period ending on the earlier of (i) the public release by the Company of the final results of its
Phase 2b/3 clinical trial of RP-G28 and (ii) the filing of a Form 10-Q with the SEC for the fiscal quarter in which the Company
receives the results of its Phase 2b/3 clinical trial of RP-G28, which condition was satisfied with the filing of the Company’s
quarterly report on Form 10-Q on August 7, 2017.
Under
the terms of the Amended Supply Agreement, if the Company fails to make any future option payment to RSM as required under the
terms of the Amended Supply Agreement, the Company may be required to return the Improved GOS IP to RSM. The Amended Supply Agreement
provides that the Company must pay RSM $400,000 within 10 days following FDA approval of a new drug application for the first
product owned or controlled by the Company using Improved GOS as its active pharmaceutical ingredient and to pay RSM the sum of
$250 per kilo for clinical supply of Improved GOS.
Lease
Agreement
The
Company leases office space for its headquarters in California. On July 9, 2015, the Company entered into a lease with Century
Park, a California limited partnership, pursuant to which the Company is leasing approximately 2,780 square feet of office space
in Los Angeles, California for its headquarters. The lease provides for a term of sixty-one (61) months, commencing on October
1, 2015. The Company paid no rent for the first month of the term, paid base rent of $9,174 per month for months 2 through 13
of the term, and will pay base rent of $9,449 per month for months 14 to 25 with increasing base rent for each twelve-month period
thereafter under the term of the lease to a maximum of $10,325 per month for months 50 through 61. The base rent payments do not
include the Company’s proportionate share of any operating expenses, including real estate taxes. The Company has the option
to extend the term of the lease for one five-year term, provided that the rent would be subject to market adjustment at the beginning
of the renewal term.
Rent
expense, which is recognized on a straight-line basis over the lease term, was approximately $29,000 and $28,000 for the three
months ended September 30, 2017 and 2016, respectively, and $86,000 for the nine months ended September 30, 2017 and 2016, and
is recorded in general and administrative expenses in the accompanying unaudited condensed statements of operations.
Legal
The
Company is not currently involved in any legal matters arising in the normal course of business. From time to time, the Company
could become involved in disputes and various litigation matters that arise in the normal course of business. These may include
disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters. Periodically,
the Company reviews the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential
loss from any claim or legal claim is considered probable and the amount can be estimated, the Company accrues a liability for
the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such
uncertainties, accruals are based on the best information available at the time. As additional information becomes available,
the Company reassesses the potential liability related to pending claims and litigation.
RITTER
PHARMACEUTICALS, INC.
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE
6 — STOCKHOLDERS’ EQUITY
Authorized
Shares
On
September 15, 2017, the Company amended its Amended and Restated Certificate of Incorporation to authorize the issuance of up
to 225,000,000 shares of common stock, $0.001 par value per share, and 15,000,000 shares of preferred stock, $0.001 par value
per share.
As
of September 30, 2017, the Company had 14,756,521 shares of common stock issued and outstanding. Each share of the Company’s
common stock is entitled to one vote, and all shares rank equally as to voting and other matters. There are currently no shares
of preferred stock issued and outstanding. Any preferred stock issued in the future will have the rights, preferences and privileges
that the Company’s Board of Directors may determine from time to time.
Aspire
Capital Financing Arrangement
On
December 18, 2015, the Company entered into a common stock purchase agreement (the “2015 Aspire Purchase Agreement”)
with Aspire Capital Fund, LLC (“Aspire Capital”), pursuant to which Aspire Capital was committed to purchase up to
an aggregate of $10.0 million of the Company’s shares of common stock over the approximate 30-month term of the 2015 Aspire
Purchase Agreement. As of September 30, 2017, the Company had issued an aggregate of 4,577,699 shares of its common stock to Aspire
Capital under the 2015 Aspire Purchase Agreement for approximate proceeds of $5.0 million.
On
May 4, 2017, the Company terminated the 2015 Aspire Purchase Agreement and entered into a new common stock purchase agreement
with Aspire Capital (the “2017 Aspire Purchase Agreement”), which provides that upon the terms and conditions set
forth therein, Aspire Capital is committed to purchase up to an aggregate of $6.5 million of shares of the Company’s common
stock over the 30-month term of the 2017 Aspire Purchase Agreement. On any trading day on which the closing sale price of the
Company’s common stock exceeds $0.25, the Company has the right, in its sole discretion, to present Aspire Capital with
a purchase notice, directing Aspire Capital (as principal) to purchase up to 100,000 shares of the Company’s common stock
per trading day, for up to $6.5 million of the Company’s common stock in the aggregate at a per share price, calculated
by reference to the prevailing market price of the Company’s common stock (as provided in the 2017 Aspire Purchase Agreement).
As
a condition to the 2017 Aspire Purchase Agreement, the Company issued 137,324 shares of its common stock to Aspire Capital as
a commitment fee. As of the date of this Quarterly Report, no shares of common stock have been sold to Aspire Capital under the
2017 Aspire Purchase Agreement.
October
2016 Public Offering
On
October 31, 2016, the Company closed a public offering, selling 2,127,660 shares of the Company’s common stock at a price
to the public of $2.35 per share, for aggregate gross proceeds to the Company of approximately $5.0 million. The Company paid
to the underwriters underwriting discounts and commissions of approximately $0.4 million in connection with the offering, and
approximately $0.2 million of other expenses in connection with the offering.
RITTER
PHARMACEUTICALS, INC.
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
This
offering was made pursuant to a shelf registration statement on Form S-3, which was declared effective by the SEC on August 23,
2016. The shelf registration statement allows the Company to issue, from time to time at prices and on terms to be determined
at or prior to the time of an offering, up to $150,000,000 of any combination of an indeterminate number of shares of common stock,
an indeterminate number of shares of preferred stock, an indeterminate principal amount of debt securities, an indeterminate number
of warrants, rights and purchase contracts to purchase common stock or debt securities, and an indeterminate number of units.
If any debt securities are issued at an original issue discount, then the offering price of such debt securities shall be in such
greater principal amount as shall result in an aggregate offering price not to exceed $150,000,000, less the aggregate dollar
amount of all securities previously issued hereunder. The securities registered also include such indeterminate number of shares
of common stock and preferred stock that may be issued upon conversion or exchange of convertible or exchangeable securities being
registered or pursuant to the anti-dilution provisions of any such securities.
October
2017 Public Offering
On
October 3, 2017, the Company closed a public offering, selling an aggregate of (i) 34,550,000 Class A Units consisting of 34,550,000
shares of the Company’s common stock and warrants to purchase 34,550,000 shares of the Company’s common stock at a
public offering price of $0.40 per unit, and (ii) 9,180 Class B Units consisting of 9,180 shares of Series A Convertible Preferred
Stock, with a stated value of $1,000 per unit, and convertible into an aggregate of 22,950,000 shares of the Company’s common
stock, and warrants to purchase an aggregate of 22,950,000 shares of the Company’s common stock. The warrants have an exercise
price of $0.44, are exercisable upon issuance and expire five years from the date of issuance.
The
Company granted the underwriters a 45-day option to purchase an additional 8,625,000 shares of the Company’s common stock
and/or warrants to purchase an additional 8,625,000 shares of the Company’s common stock. As of the closing of the offering,
the underwriters have exercised their over-allotment option for warrants to purchase 2,975,000 shares of the Company’s common
stock.
Aggregate gross proceeds to the Company from
the public offering were approximately $23.0 million. The Company paid to the underwriters underwriting discounts and commissions
of approximately $1.6 million in connection with the offering, and approximately $0.4 million of other expenses in connection
with the offering of which approximately $0.3 million are recorded as deferred offering costs in the Company’s financial
statements as of, and for the nine months ended September 30, 2017.
The
securities described above were offered by the Company pursuant to a registration statement filed with the SEC that was declared
effective on September 28, 2017. The final prospectus relating to the offering was filed with the SEC on October 2, 2017.
NOTE
7 — WARRANTS
The
following represents a summary of the warrants outstanding at September 30, 2017 and changes during the period then ended:
|
|
Warrants
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding
at December 31, 2016
|
|
|
578,323
|
|
|
$
|
8.45
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
Exercised/Expired/Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
Outstanding
at September 30, 2017
|
|
|
578,323
|
|
|
$
|
8.45
|
|
Exercisable
at September 30, 2017
|
|
|
578,323
|
|
|
$
|
8.45
|
|
RITTER
PHARMACEUTICALS, INC.
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE
8 — STOCK-BASED COMPENSATION
Equity
Incentive Plans
The
Company has issued equity awards pursuant to its 2015 Equity Incentive Plan (the “2015 Plan”), 2009 Stock Plan and
2008 Stock Plan (collectively the “Plans”). The Plans permit the Company to grant non-statutory stock options, incentive
stock options and other equity awards to the Company’s employees, outside directors and consultants; however, incentive
stock options may only be granted to the Company’s employees. Beginning June 29, 2015, no further awards may be granted
under the 2009 Stock Plan or 2008 Stock Plan. However, to the extent awards under the 2008 Plan or 2009 Plan are forfeited or
lapse unexercised or are settled in cash, the common stock subject to such awards will be available for future issuance under
the 2015 Equity Incentive Plan.
On
June 2, 2017, the stockholders of the Company approved an amendment to the 2015 Plan at the 2017 annual meeting of stockholders,
which among other things, increased the number of shares that may be issued pursuant to awards under the 2015 Plan by 838,000
shares of common stock.
On
September 15, 2017, the stockholders of the Company approved an amendment to the 2015 Plan at a special meeting of stockholders,
which among other things, increased the number of shares that may be issued pursuant to awards under the 2015 Plan by 25,858,711
shares of common stock. As of September 30, 2017, the aggregate number of shares of common stock authorized for issuance under
the 2015 Plan, as amended, was 27,500,000.
The
following represents a summary of the options granted to employees and non-employees that are outstanding at September 30, 2017
and changes during the period then ended:
|
|
Number
of Shares
|
|
|
Weighted-
Average Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
Weighted-
Average Remaining Contractual Life (in years)
|
|
Outstanding
at December 31, 2016
|
|
|
2,476,924
|
|
|
$
|
6.01
|
|
|
$
|
497,351
|
|
|
|
8.3
|
|
Options
granted
|
|
|
88,000
|
|
|
|
2.89
|
|
|
|
―
|
|
|
|
8.8
|
|
Options
forfeited
|
|
|
(5,000
|
)
|
|
|
2.89
|
|
|
|
―
|
|
|
|
―
|
|
Outstanding
at September 30, 2017
|
|
|
2,559,924
|
|
|
|
5.91
|
|
|
|
―
|
|
|
|
7.6
|
|
Exercisable
at September 30, 2017
|
|
|
1,808,972
|
|
|
$
|
5.88
|
|
|
$
|
―
|
|
|
|
7.2
|
|
The
exercise price for an option issued under the Plans is determined by the Board of Directors, but will be (i) in the case of an
incentive stock option (A) granted to an employee who, at the time of grant of such option, is a 10% stockholder, no less than
110% of the fair market value per share on the date of grant; or (B) granted to any other employee, no less than 100% of the fair
market value per share on the date of grant; and (ii) in the case of a non-statutory stock option, no less than 100% of the fair
market value per share on the date of grant. The options awarded under the Plans will vest as determined by the Board of Directors
but will not exceed a ten-year period.
Fair
Value of Equity Awards
The
Company utilizes the Black-Scholes option pricing model to value awards under its Plans. Key valuation assumptions include:
RITTER
PHARMACEUTICALS, INC.
NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
|
●
|
Expected
dividend yield.
The expected dividend is assumed to be zero as the Company has never paid dividends and has no current
plans to pay any dividends on the Company’s common stock.
|
|
|
|
|
●
|
Expected
stock-price volatility.
As the Company’s common stock only recently became publicly traded, the expected volatility
is derived from the average historical volatilities of publicly traded companies within the Company’s industry that
the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term.
|
|
|
|
|
●
|
Risk-free
interest rate.
The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero
coupon U.S. Treasury notes with maturities approximately equal to the expected term.
|
|
|
|
|
●
|
Expected
term.
The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s
historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because
of a lack of sufficient data. Therefore, the Company estimates the expected term by using the simplified method provided by
the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life
of the options.
|
The
Company elected to adopt the amendments of ASU 2016-09 (described in Note 3) related to the presentation of excess tax benefits
on the statement of cash flows using a prospective transition method but does not expect any impact on its financial statements.
The
material factors incorporated in the Black-Scholes model in estimating the fair value of the options granted for the periods presented
were as follows:
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Expected
dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected
stock price volatility
|
|
|
53.08%
- 53.68
|
%
|
|
|
53.60%
- 54.73
|
%
|
|
|
53.08%
– 53.90
|
%
|
|
|
53.60%
- 59.03
|
%
|
Risk-free
interest rate
|
|
|
1.89%
- 2.29
|
%
|
|
|
1.29%
- 1.71
|
%
|
|
|
1.98%
- 2.37
|
%
|
|
|
1.29%
- 1.78
|
%
|
Term of options
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
Stock price
|
|
|
$0.35
- $0.65
|
|
|
|
$1.27
- $1.68
|
|
|
|
$0.35
- $1.08
|
|
|
|
$1.13
- $1.68
|
|
Stock-Based
Compensation
The
Company recognized stock-based compensation expense for services within general and administrative expense in the accompanying
statements of operations of approximately $203,000 and $333,000 for the three months ended September 30, 2017 and 2016, respectively,
and $746,000 and $1,042,000 for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there
was approximately $263,000 of total unrecognized compensation cost related to unvested stock-based compensation arrangements.
This cost is expected to be recognized over a weighted average period of 1.1 years.
No
stock options were exercised during the three and nine months ended September 30, 2017. Approximately 8,000 options were exercised
during the three months ended September 30, 2016, and approximately 11,000 options were exercised during the nine months ended
September 30, 2016 with approximate proceeds to the Company of $9,000. The aggregate intrinsic value of stock options exercised
during the nine months ended September 30, 2016 was approximately $18,000.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis should be read in conjunction with our interim unaudited condensed financial statements and
related notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the audited financial statements
and notes thereto as of and for the year ended December 31, 2016 and the related Management’s Discussion and Analysis of
Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC”) on February 27, 2017 (the “2016
Annual Report”). As used in this report, unless the context suggests otherwise, “we,” “us,” “our,”
or “Ritter” refer to Ritter Pharmaceuticals, Inc.
Special
Note Regarding Forward-Looking Statements and Industry Data
This
Quarterly Report contains forward-looking statements that involve substantial risks and uncertainties. All statements other than
statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations,
future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth
are forward-looking statements. The words “anticipate,” “believe,” “could,” “estimate,”
“expect,” “intend,” “may,” “plan,” “potential,” “predict,”
“project,” “should,” “target,” “will,” “would” and similar expressions
are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.
These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results,
performance or achievements to be materially different from any future results, performance or achievements expressed or implied
by the forward-looking statements.
Some
of the factors that we believe could cause actual results to differ from those anticipated or predicted include:
|
●
|
our
ability to obtain additional financing;
|
|
|
|
|
●
|
the
accuracy of our estimates regarding expenses, future revenues and capital requirements;
|
|
|
|
|
●
|
the
success and timing of our preclinical studies and clinical trials;
|
|
|
|
|
●
|
our
ability to obtain and maintain regulatory approval of RP-G28 and any other product candidates we may develop, and the labeling
under any approval we may obtain;
|
|
|
|
|
●
|
regulatory
developments in the United States and other countries;
|
|
|
|
|
●
|
the
performance of third-party manufacturers;
|
|
|
|
|
●
|
our
ability to develop and commercialize RP-G28 and any other product candidates that we may develop in the future;
|
|
|
|
|
●
|
our
ability to obtain and maintain intellectual property protection for RP-G28 and any other product candidates we may develop
in the future;
|
|
|
|
|
●
|
the
successful development of our sales and marketing capabilities;
|
|
|
|
|
●
|
the
potential markets for RP-G28 and any other product candidates we may develop in the future and our ability to serve those
markets;
|
|
|
|
|
●
|
the
rate and degree of market acceptance of our products, if approved;
|
|
|
|
|
●
|
the
success of competing drugs that are or become available; and
|
|
|
|
|
●
|
the
loss of key scientific or management personnel.
|
By
their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics,
and healthcare, regulatory and scientific developments and depend on the economic circumstances that may or may not occur in the
future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each
forward-looking statement contained in this Quarterly Report, we caution you that forward-looking statements are not guarantees
of future performance and that our actual results of operations, financial condition and liquidity, and the development of the
industry in which we operate may differ materially from the forward-looking statements contained in this Quarterly Report. In
addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we
operate are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of results
or developments in future periods.
Any
forward-looking statement that we make in this Quarterly Report speaks only as of the date of such statement, and we undertake
no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report. You should
also read carefully the factors described in the “Risk Factors” section of our 2016 Annual Report and this Quarterly
Report to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.
Overview
Ritter
Pharmaceuticals, Inc. develops novel therapeutic products that modulate the human gut microbiome to treat gastrointestinal diseases.
We are advancing human gut health research by exploring the metabolic capacity of the gut microbiota and translating the functionality
of prebiotic-based therapeutics into applications intended to have a meaningful impact on a patient’s health. We completed
a Phase 2a clinical trial of our leading product candidate, RP-G28, an orally administered, high purity oligosaccharide in November
2011.
We
completed a Phase 2b/3 multi-center, randomized, double-blind, placebo-controlled, parallel group trial of RP-G28 in October 2016.
The purpose of the trial was to evaluate the safety, efficacy and tolerability of two dosing regimens of RP-G28 in patients with
moderate to severe lactose intolerance symptoms. Enrollment was initiated in March 2016 and completed in August 2016, achieving
our projected enrollment time period. The trial aimed to evaluate a patient’s ability to consume dairy foods post-treatment
with improved tolerance and reduced digestive symptoms. A total of 377 subjects were enrolled in the trial with 18 clinical sites
participating throughout the United States. Patients underwent a 30-day treatment, followed by a 30-day post-treatment evaluation
of dairy tolerance. On October 17, 2016, the last patient completed dosing and all monitoring visits.
We
held a Type C meeting with the FDA in March 2017, prior to the unblinding of our Phase 2b/3 data, to discuss our development plans
and Phase 2b/3 clinical trial. The focus of the meeting was to obtain the FDA’s feedback on our Phase 2b/3 clinical trial,
including our statistical analysis plan (“SAP”) prior to unblinding any data.
The
meeting with the FDA was constructive and productively focused on best defining clinically meaningful benefits to patients suffering
from lactose intolerance and how to reflect these benefits in endpoints. We modified aspects of our SAP to address certain FDA
recommendations, including a change to our primary endpoint, which was changed to combine abdominal pain with relevant secondary
endpoints to establish a composite score (abdominal pain, abdominal cramping, abdominal bloating and abdominal gas). The protocol
design and the assessment utilized to collect lactose intolerance symptoms remained unchanged.
Topline
results of the trial were announced in March 2017. Due to inconsistent data results from one study site, the data from this site
was excluded from the primary analysis population (Efficacy Subset mITT). After excluding the data from the one anomalous study
site, results showed a clinically meaningful benefit to subjects in the reduction of lactose intolerance symptoms across a variety
of outcome measures. The majority of analyses showed positive outcome measures and the robustness of the data point to a clear
drug effect. Treatment patients not only reported meaningful reduced symptoms, but also 30 days after taking the treatment, patients
reported adequate relief from lactose intolerance symptoms and satisfaction with the results of the treatment, with RP-G28 preventing
or treating their lactose intolerance symptoms. Greater milk and dairy product consumption was also reported by patients.
A
subset of subjects from our Phase 2b/3 clinical trial has been rolled into a 12-month extension study to evaluate long-term durability
of treatment. The study is also evaluating each participant’s microbiome, expanding our knowledge of the effects that RP-G28
may have on adapting the gut microbiota in a beneficial manner. The subjects are expected to complete the 12-month evaluation
during the fourth quarter of 2017.
We
held an End-of-Phase 2 meeting with the FDA’s Division of Gastroenterology and Inborn Errors Products in August 2017. The
purpose of the meeting was to obtain the FDA’s feedback on our Phase 3 program. We reached general consensus with the FDA
on certain elements of our current Phase 3 program and have received clear guidance and recommendations on many necessary components
of our Phase 3 program; including the clinical, non-clinical, and chemistry, manufacturing and controls (CMC) requirements needed
to support an NDA submission.
We
have incorporated much of this guidance into our Phase 3 program. Our current Phase 3 clinical program will consist of two confirmatory
clinical trials of similar trial design and size as our Phase 2b/3 clinical trial and will include additional components that
may allow for claims for durability of effect. These additional trials may be run in parallel.
Financial
Overview
We
have incurred net losses in each year since our inception, including net losses of approximately $5.6 million for the nine months
ended September 30, 2017. We had an accumulated deficit of approximately $51.1 million as of September 30, 2017. Substantially
all of our net losses resulted from costs incurred in connection with our research and development programs, patent costs, stock-based
compensation, and from general and administrative costs associated with our operations.
Revenue
We
have not generated any revenue since our inception. Our ability to generate revenue in the future will depend almost entirely
on our ability to successfully develop, obtain regulatory approval for and then successfully commercialize RP-G28 in the United
States. In the event we choose to pursue a partnering arrangement to commercialize RP-G28 or other products outside the United
States, we would expect to initiate additional research and development and clinical trial activities in the future.
Research
and Development Expenses
Since
our inception, we have focused our resources on our research and development activities, including conducting nonclinical studies
and clinical trials, manufacturing development efforts and activities related to regulatory filings for RP-G28. Our research and
development expenses consist primarily of:
|
●
|
fees
paid to consultants and clinical research organizations (“CROs”), including in connection with our nonclinical
and clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory
work, clinical trial database management, clinical trial material management and statistical compilation and analysis;
|
|
|
|
|
●
|
costs
related to acquiring and manufacturing clinical trial materials;
|
|
|
|
|
●
|
depreciation
of equipment, computers and furniture and fixtures;
|
|
|
|
|
●
|
costs
related to compliance with regulatory requirements; and
|
|
|
|
|
●
|
overhead
expenses for personnel in research and development functions.
|
From
inception through September 30, 2017, we have incurred approximately $21.9 million in research and development expenses. We plan
to increase our research and development expenses for the foreseeable future as we continue the development of RP-G28 for the
reduction of symptoms associated with lactose intolerance in patients and other indications, subject to the availability of additional
funding.
The
successful development of RP-G28 is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs
of the efforts that will be necessary to complete the remainder of the development of RP-G28 or the period, if any, in which material
net cash inflows from RP-G28 may commence. This is due to the numerous risks and uncertainties associated with developing drugs,
including the uncertainty of:
|
●
|
the
scope, rate of progress and expense of our ongoing, as well as any additional, clinical trials and other research and development
activities;
|
|
|
|
|
●
|
future
clinical trial results; and
|
|
|
|
|
●
|
the
timing and receipt of any regulatory approvals.
|
For
example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently
anticipate will be required for the completion of clinical development of RP-G28 or if we experience significant delays in enrollment
in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion
of clinical development.
Patent
Costs
Patent
costs consist primarily of professional fees for legal services to prosecute patents and maintain patent rights.
General
and Administrative Expenses
General
and administrative expenses include allocation of facilities costs, salaries, benefits, and stock-based compensation for employees,
professional fees for directors, fees for independent contractors and accounting and legal services.
We
expect that our general and administrative expenses will increase as we continue to operate as a public company and will increase
further if RP-G28 is approved for commercialization. We believe that these increases will likely include increased costs for director
and officer liability insurance, and increased fees for outside consultants, lawyers and accountants, among other expenses.
Interest
Income
Interest
income consists of interest earned on our cash.
Critical
Accounting Policies and Estimates
This
discussion and analysis is based on our financial statements, which have been prepared in accordance with GAAP. The preparation
of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis,
we evaluate our estimates and judgments, including those related to fair value of financial instruments, research and development
costs, accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events
and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. There have been no material changes in our significant
accounting policies as of and for the nine months ended September 30, 2017, as compared with the significant accounting policies
described in our 2016 Annual Report.
While
our significant accounting policies are more fully described in Note 3 to the financial statements included in this Quarterly
Report, we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating
our financial condition and results of operations.
Fair
Value of Financial Instruments
Fair
value measurement guidelines are prescribed by accounting principles generally accepted in the United States of America (“GAAP”)
to value financial instruments. The guidance includes a definition of fair value, prescribes methods for measuring fair value,
establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair
value measurements.
The
valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained
from independent sources, while unobservable inputs reflect internal market assumptions. Assets are classified in their entirety
based on the lowest level of input that is significant to the fair value measurement.
These
two types of inputs create the following fair value hierarchy:
Level
1 — Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access
at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such
as exchange-traded instruments and listed equities.
Level
2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly. Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models
consider various assumptions, including volatility factors, current market prices and contractual prices for the underlying financial
instruments. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or
are supported by observable levels at which transactions are executed in the marketplace.
Level
3 — Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values
are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption
or input is unobservable
The
carrying amounts reported in the balance sheet for cash and cash equivalents, prepaid expenses, accounts payable and accrued expenses,
approximate the fair values due to the short-term nature of the instruments.
Research
and Development Costs
We
expense the cost of research and development as incurred. Research and development expenses comprise costs incurred in performing
research and development activities, including clinical study costs, contracted services, and other external costs. Nonrefundable
advance payments for goods and services that will be used in future research and development activities are expensed when the
activity is performed or when the goods have been received, rather than when payment is made, in accordance with ASC 730,
Research
and Development
.
Accrued
Expenses
As
part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves
reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service
performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual
cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones
are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and
circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make
adjustments if necessary. The significant estimates in our accrued research and development expenses include fees due to service
providers.
We
base our expenses on our estimates of the services received and efforts expended pursuant to quotes and contracts with our service
providers that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation,
vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors
will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service
fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period.
If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly.
Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status
and timing of services performed relative to the actual status and timing of services performed may vary and could result in us
reporting amounts that are too high or too low in any particular period.
Stock-based
Compensation
Stock-based
compensation cost for equity awards granted to employees and nonemployees is measured at the grant date based on the calculated
fair value of the award using the Black-Scholes option-pricing model, and is recognized as an expense, under the straight-line
method, over the requisite service period (generally the vesting period of the equity grant). If we determine that other methods
are more reasonable, or other methods for calculating these assumptions are prescribed by regulators, the fair value calculated
for our stock options could change significantly. Higher volatility and longer expected lives would result in an increase to stock-based
compensation expense to non-employees determined at the date of grant.
In
addition to the assumptions used in the Black-Scholes option-pricing model, we also estimate a forfeiture rate to calculate the
stock-based compensation for our equity awards. We will continue to use judgment in evaluating the expected volatility, expected
terms and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis.
Emerging
Growth Company Status
On
April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) was enacted. Section 107 of the JOBS Act
provides that an “emerging growth company” can take advantage of the extended transition period provided in Section
7(a)(2)(B) of the Securities Act of 1933, as amended, for complying with new or revised accounting standards. In other words,
an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise
apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting
standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting
standards that have different effective dates for public and private companies until those standards apply to private companies.
As a result of this election, our financial statements may not be comparable to companies that comply with public company effective
dates.
We
are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the
JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely
on certain of these exemptions, including without limitation, (i) providing an auditor’s attestation report on our system
of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any
requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report
providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We
will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (a) following the fifth anniversary
of the date we completed our initial public offering, which was June 29, 2015, (b) in which we have total annual gross revenue
of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our
common stock that is held by non-affiliates exceeded $700.0 million as of the prior June 30th, and (ii) the date on which we have
issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Results
of Operations
Comparison
of the Three Months Ended September 30, 2017 and 2016
The
following table summarizes our results of operations for the three months ended September 30, 2017 and 2016, together with the
changes in those items in dollars and as a percentage:
|
|
For the Three Months Ended
September 30,
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
915,268
|
|
|
$
|
2,348,755
|
|
|
$
|
(1,433,487
|
)
|
|
|
(61
|
)%
|
Patent costs
|
|
|
47,431
|
|
|
|
98,908
|
|
|
|
(51,477
|
)
|
|
|
(52
|
)%
|
General and administrative
|
|
|
1,052,236
|
|
|
|
1,091,647
|
|
|
|
(39,411
|
)
|
|
|
(4
|
)%
|
Total operating costs and expenses
|
|
|
2,014,935
|
|
|
|
3,539,310
|
|
|
|
(1,524,375
|
)
|
|
|
(43
|
)%
|
Loss from operations
|
|
|
(2,014,935
|
)
|
|
|
(3,539,310
|
)
|
|
|
1,524,375
|
|
|
|
43
|
%
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4,083
|
|
|
|
13,239
|
|
|
|
(9,156
|
)
|
|
|
(69
|
)%
|
Total other income
|
|
|
4,083
|
|
|
|
13,239
|
|
|
|
(9,156
|
)
|
|
|
(69
|
)%
|
Net loss
|
|
$
|
(2,010,852
|
)
|
|
$
|
(3,526,071
|
)
|
|
$
|
1,515,219
|
|
|
|
43
|
%
|
Research
and Development Expenses
Research
and development expenses decreased by approximately $1.4 million, or 61%, during the three months ended September 30, 2017 as
compared to the three months ended September 30, 2016. The primary reason for this decrease is that our Phase 2b/3 clinical trial,
which was initiated in March 2016, was completed during the fourth quarter of 2016. Research and development expenses during the
three months ended September 30, 2017 primarily reflect the Phase 2b/3 extension study fees and Phase 3 program planning expenses.
Patent
Costs
Patent
costs decreased by approximately $51,000, or 52%, during the three months ended September 30, 2017 as compared to the three months
ended September 30, 2016. The decrease was attributable to the overall timing of certain costs related to our maintenance of patent
rights and the prosecution of patents.
General
and Administrative Expenses
General
and administrative expenses decreased slightly by approximately $39,000, or 4%, during the three months ended September 30, 2017
as compared to the three months ended September 30, 2016, mainly due to lower stock-based compensation expense in the current
fiscal quarter.
Other
Income
Other
income decreased by approximately $9,000, or 69%, during the three months ended September 30, 2017 as compared to the three months
ended September 30, 2016, due to lower interest income for the current fiscal quarter.
Comparison
of the Nine Months Ended September 30, 2017 and 2016
The
following table summarizes our results of operations for the nine months ended September 30, 2017 and 2016, together with the
changes in those items in dollars and as a percentage:
|
|
For the Nine Months Ended
September 30,
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
2,121,898
|
|
|
$
|
7,112,177
|
|
|
$
|
(4,990,279
|
)
|
|
|
(70
|
)%
|
Patent costs
|
|
|
175,794
|
|
|
|
199,888
|
|
|
|
(24,094
|
)
|
|
|
(12
|
)%
|
General and administrative
|
|
|
3,367,781
|
|
|
|
3,533,608
|
|
|
|
(165,827
|
)
|
|
|
(5
|
)%
|
Total operating costs and expenses
|
|
|
5,665,473
|
|
|
|
10,845,673
|
|
|
|
(5,180,200
|
)
|
|
|
(48
|
)%
|
Loss from operations
|
|
|
(5,665,473
|
)
|
|
|
(10,845,673
|
)
|
|
|
(5,180,200
|
)
|
|
|
48
|
%
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
18,362
|
|
|
|
50,466
|
|
|
|
(32,104
|
)
|
|
|
(64
|
)%
|
Other income
|
|
|
—
|
|
|
|
1,214
|
|
|
|
(1,214
|
)
|
|
|
(100
|
)%
|
Total other income
|
|
|
18,362
|
|
|
|
51,680
|
|
|
|
(33,318
|
)
|
|
|
(64
|
)%
|
Net loss
|
|
$
|
(5,647,111
|
)
|
|
$
|
(10,793,993
|
)
|
|
$
|
5,146,882
|
|
|
|
48
|
%
|
Research
and Development Expenses
Research
and development expenses decreased by approximately $5.0 million, or 70%, during the nine months ended September 30, 2017 as compared
to the same prior year period. The primary reason for the decrease is that our Phase 2b/3 clinical trial, which was initiated
in March 2016, was completed during the fourth quarter of 2016. Research and development expenses during the nine months ended
September 30, 2017 primarily reflect the Phase 2b/3 extension study fees and Phase 3 program planning expenses.
Patent
Costs
The approximate $24,000, or 12%, decrease
in patent costs during the nine months ended September30, 2017 as compared to the nine months ended September 30, 2016 was mainly
attributable to the overall timing of certain costs related to our maintenance of patent rights and the prosecution of patents.
As of September 30, 2017, we had 14 issued patents and 27 pending patent applications.
General
and Administrative Expenses
General
and administrative expenses decreased by approximately $166,000, or 5%, during the nine months ended September 30, 2017 as compared
to the nine months ended September 30, 2016. The decrease was primarily due to lower stock compensation expense that was slightly
offset by higher legal fees.
Other
Income
Interest
income was approximately $18,000 and $50,000 for the nine months ended September 30, 2017 and 2016, respectively. The decrease
of approximately $32,000, or 64%, during the nine months ended September 30, 2017 reflects a decrease in interest on our average
cash balances as a result of funding our Phase 2b/3 trial and extension study.
There was no other income during the nine
months ended September 30, 2017 as compared to other income of approximately $1,000 for the nine months ended September 30, 2016.
Liquidity
and Capital Resources
Since
our inception, we have incurred net losses and negative cash flows from operations, and, as of September 30, 2017, we had an accumulated
deficit of approximately $51.1 million. Substantially all of our net losses resulted from costs incurred in connection with our
research and development programs, stock-based compensation, and from general and administrative costs associated with our operations.
At
September 30, 2017, we had working capital of approximately $0.9 million, and cash of approximately $3.6 million. We have not
generated any product revenues and have not achieved profitable operations.
Cash
Flows
The
following table sets forth the significant sources and uses of cash for the periods set forth below:
|
|
For
the Nine Months Ended
September 30,
|
|
|
2017
|
|
2016
|
Net
cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(5,176,622
|
)
|
|
$
|
(7,367,879
|
)
|
Investing
activities
|
|
|
—
|
|
|
|
(8,063
|
)
|
Financing
activities
|
|
|
1,689,214
|
|
|
|
8,504
|
|
Net
decrease in cash
|
|
$
|
(3,487,408
|
)
|
|
$
|
(7,367,438
|
)
|
Operating
Activities
During
the nine months ended September 30, 2017, net cash used in operating activities of approximately $5.2 million primarily reflects
our net loss for the period of approximately $5.6 million, offset by non-cash charges of approximately $746,000 for stock-based
compensation expense and changes in our working capital accounts, mainly consisting of an approximate $849,000 increase in accounts
payable and an approximate $1.0 million decrease in accrued expenses.
Net
cash used in operating activities of approximately $7.4 million during the nine months ended September 30, 2016 reflects our net
loss of approximately $10.8 million, partially offset by stock-based compensation of approximately $1.0 million, an increase in
prepaid expenses of approximately $57,000, and an increase in accounts payable, accrued expenses and other liabilities of approximately
$2.1 million, $294,000 and $13,000, respectively.
Investing
Activities
No
cash was used in investing activities for the nine months ended September 30, 2017. Net cash used in investing activities of approximately
$8,000 during the nine months ended September 30, 2016 related to the purchase of office furniture and equipment.
Financing
Activities
Net
cash provided by financing activities of approximately $1.7 million during the nine months ended September 30, 2017 resulted from
proceeds received from the sale of common shares to Aspire Capital, LLC (“Aspire Capital”) pursuant to the Common
Stock Purchase Agreement with Aspire Capital (the “2015 Aspire Purchase Agreement”). Deferred offering costs of approximately
$311,000, related to our October 2017 public offering that was closed on October 3, 2017, slightly offset the proceeds from the
sale of common shares to Aspire Capital.
Sources
of Liquidity
2015
Aspire Capital Financing Arrangement
On
December 18, 2015, we entered into the 2015 Aspire Purchase Agreement with Aspire Capital, pursuant to which Aspire Capital was
committed to purchase up to an aggregate of $10.0 million of our shares of common stock over the approximate 30-month term of
the 2015 Aspire Purchase Agreement.
On
May 4, 2017, we terminated the 2015 Aspire Purchase Agreement and entered into a new common stock purchase agreement with Aspire
Capital (the “2017 Aspire Purchase Agreement”), which provides that upon the terms and conditions set forth therein,
Aspire Capital is committed to purchase up to an aggregate of $6.5 million of shares of our common stock over the 30-month term
of the 2017 Aspire Purchase Agreement. On any trading day on which the closing sale price of our common stock exceeds $0.25, we
have the right, in our sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital to purchase
up to 100,000 shares of our common stock per trading day, for up to $6.5 million of our common stock in the aggregate at a per
share price, calculated by reference to the prevailing market price of our common stock (as provided in the 2017 Aspire Purchase
Agreement).
As
a condition to the 2017 Aspire Purchase Agreement, we issued 137,324 shares of our common stock to Aspire Capital as a commitment
fee. As of the date of this Quarterly Report, no shares of common stock have been sold to Aspire Capital under the 2017 Aspire
Purchase Agreement. We expect to use the Aspire facility to complement, rather than replace, other financing that may be required
during the next twelve months to continue our operations and support our capital needs.
October
2016 Public Offering
On
October 31, 2016, we closed a public offering of 2,127,660 shares of our common stock at a price to the public of $2.35 per share,
for net proceeds of approximately $4.4 million, after deducting underwriting discounts and commissions and offering expenses payable
by us in the offering. The offering was made pursuant to a shelf registration statement on Form S-3.
October
2017 Public Offering
On
October 3, 2017, the Company closed a public offering, selling an aggregate of (i) 34,550,000 Class A Units consisting of 34,550,000
shares of the Company’s common stock and warrants to purchase 34,550,000 shares of the Company’s common stock at a
public offering price of $0.40 per unit, and (ii) 9,180 Class B Units consisting of 9,180 shares of Series A Convertible Preferred
Stock, with a stated value of $1,000, and convertible into an aggregate of 22,950,000 shares of the Company’s common stock,
and warrants to purchase an aggregate of 22,950,000 shares of the Company’s common stock. The warrants have an exercise
price of $0.44, are exercisable upon issuance and expire five years from the date of issuance.
The
Company granted the underwriters a 45-day option to purchase an additional 8,625,000 shares of the Company’s common stock
and/or warrants to purchase an additional 8,625,000 shares of the Company’s common stock. As of the closing of the offering,
the underwriters have exercised their over-allotment option for warrants to purchase 2,975,000 shares of the Company’s common
stock.
Aggregate
gross proceeds to the Company from the public offering were approximately $23.0 million. The Company paid to the underwriters
underwriting discounts and commissions of approximately $1.6 million in connection with the offering, and approximately $0.4 million
of other expenses in connection with the offering., of which approximately $0.3 are recorded as deferred offering costs in the
Company’s financial statements as of, and for the nine months ended September 30, 2017.
The
securities described above were offered by the Company pursuant to a registration statement filed with the SEC that was declared
effective on September 28, 2017. The final prospectus relating to the offering was filed with the SEC on October 2, 2017.
Future
Funding Requirements
To
date, we have not generated any revenue. We do not know when, or if, we will generate any revenue from product sales. We do not
expect to generate significant revenue from product sales unless and until we obtain regulatory approval for and commercialize
RP-G28. At the same time, we expect our expenses to increase in connection with our ongoing development activities, particularly
as we continue the research, development and clinical trials of, and seek regulatory approval for RP-G28. Additionally, we have
incurred and will continue to incur additional costs associated with operating as a public company. In addition, subject to obtaining
regulatory approval for RP-G28, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing
and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations.
Based
upon our current operating plan, we believe that our existing cash and cash equivalents (including the net proceeds from our October
2017 public offering), together with interest and any proceeds received from our sale of shares of common stock to Aspire Capital
pursuant to the 2017 Aspire Purchase Agreement will enable us to fund our operating expenses and capital expenditure requirements
through 2018. We will need to raise additional capital to fund operations and complete ongoing and planned clinical trials beyond
2018.
Our
future capital requirements will depend on many factors, including:
|
●
|
the
ability of RP-G28 and any other product candidates that we may develop in the future to progress through clinical development
successfully;
|
|
|
|
|
●
|
the
outcome, costs and timing of seeking and obtaining FDA approval;
|
|
|
|
|
●
|
the
willingness of the EMA or other regulatory agencies outside the United States to accept our Phase 2b/3 and any Phase 3 trials
of RP-G28, as well as our other completed and planned clinical and nonclinical studies and other work, as the basis for review
and approval of RP-G28 in the European Union for the reduction of symptoms associated with lactose intolerance in patients;
|
|
|
|
|
●
|
our
need to expand our research and development activities;
|
|
|
|
|
●
|
the
costs associated with securing and establishing commercialization and manufacturing capabilities;
|
|
|
|
|
●
|
market
acceptance of RP-G28 and any other product candidates that we may develop in the future;
|
|
|
|
|
●
|
the
costs of acquiring, licensing or investing in businesses, products, product candidates and technologies;
|
|
|
|
|
●
|
our
ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of
any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense
and enforcement of any patents or other intellectual property rights;
|
|
●
|
our
need and ability to hire additional management and scientific and medical personnel;
|
|
|
|
|
●
|
the
effect of competing technological and market developments;
|
|
|
|
|
●
|
our
need to implement additional internal systems and infrastructure, including financial and reporting systems;
|
|
|
|
|
●
|
the
economic and other terms, timing of and success of our existing licensing arrangements and any collaboration, licensing or
other arrangements into which we may enter in the future; and
|
|
|
|
|
●
|
the
costs of operating as a public company.
|
Until
such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our cash needs through a combination
of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements
and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through
the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the
terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders.
Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through
government or other third-party funding, commercialization, marketing and distribution arrangements or other collaborations, strategic
alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future
revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
Contractual
Obligations and Commitments
There
have been no material changes to our contractual obligations and commitments from those disclosed in our 2016 Annual Report.
Off-Balance
Sheet Arrangements
Through
September 30, 2017, we do not have any off-balance sheet arrangements, as defined by applicable SEC regulations.