ITEM
1. CONDENSED FINANCIAL STATEMENTS
RITTER
PHARMACEUTICALS, INC.
CONDENSED
BALANCE SHEETS
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September 30, 2018
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December 31, 2017
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(unaudited)
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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12,496,576
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$
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22,631,971
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Prepaid expenses
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465,784
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167,400
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Total current assets
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12,962,360
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22,799,371
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Other assets
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10,326
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10,326
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Property and equipment, net
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21,624
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23,873
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Total Assets
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$
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12,994,310
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$
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22,833,570
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities
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Accounts payable
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$
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2,130,479
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$
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2,237,579
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Accrued expenses
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408,560
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454,252
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Other liabilities
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14,396
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15,757
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Total current liabilities
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2,553,435
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2,707,588
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Stockholders’ equity
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Preferred stock, $0.001 par value; 15,000,000 shares authorized, 5,960 and 9,140 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively
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3,344,209
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5,128,536
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Common stock, $0.001 par value; 225,000,000 shares authorized, 5,734,639 and 4,940,652 shares issued and outstanding as of as of September 30, 2018 and December 31, 2017, respectively
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5,735
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4,941
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Additional paid-in capital
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70,665,970
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68,323,939
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Accumulated deficit
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(63,575,039
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)
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(53,331,434
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)
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Total stockholders’ equity
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10,440,875
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20,125,982
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Total Liabilities and Stockholders’ Equity
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$
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12,994,310
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$
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22,833,570
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The
accompanying notes are an integral part of these condensed financial statements.
RITTER
PHARMACEUTICALS, INC.
CONDENSED
STATEMENTS OF OPERATIONS
(Unaudited)
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For the Three Months Ended
September 30,
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For the Nine Months Ended
September 30,
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2018
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2017
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2018
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2017
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Operating costs and expenses:
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Research and development
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$
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3,459,681
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$
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915,268
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$
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6,180,607
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$
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2,121,898
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Patent costs
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59,068
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47,431
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170,418
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175,794
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General and administrative
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1,144,750
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1,052,236
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3,957,545
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3,367,781
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Total operating costs and expenses
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4,663,499
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2,014,935
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10,308,570
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5,665,473
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Operating loss
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(4,663,499
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)
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(2,014,935
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)
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(10,308,570
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)
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(5,665,473
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)
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Other income:
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Interest income
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17,237
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4,083
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64,965
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18,362
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Total other income
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17,237
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4,083
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64,965
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18,362
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Net loss
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$
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(4,646,262
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)
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$
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(2,010,852
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)
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$
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(10,243,605
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)
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$
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(5,647,111
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)
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Net loss per common share – basic and diluted
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$
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(0.86
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)
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$
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(0.14
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)
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$
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(2.00
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)
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$
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(0.42
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)
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Weighted average common shares outstanding – basic and diluted
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5,373,769
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14,756,521
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5,129,351
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13,443,007
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The
accompanying notes are an integral part of these condensed financial statements.
RITTER
PHARMACEUTICALS, INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
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For the Nine Months Ended
September 30,
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2018
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2017
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Cash flows from operating activities
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Net loss
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$
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(10,243,605
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)
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$
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(5,647,111
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)
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation
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4,257
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3,936
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Stock –based compensation
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561,755
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746,362
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Settlement of accounts payable
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(893,823
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)
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–
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Changes in operating assets and liabilities:
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Prepaid expenses
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(298,384
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)
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(103,845
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)
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Accounts payable
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786,723
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849,002
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Accrued expenses
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(45,692
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)
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(1,026,157
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)
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Other liabilities
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(1,362
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)
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1,191
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Net cash used in operating activities
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(10,130,131
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)
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(5,176,622
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)
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Cash flows from investing activities
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Purchase of property and equipment
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(2,008
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)
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–
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Net cash used in investing activities
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(2,008
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)
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–
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Cash flows from financing activities
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Proceeds from the issuance of shares from common stock purchase agreement
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–
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2,000,000
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Deferred offering costs
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–
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(310,786
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)
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Payout to shareholders for fractional shares
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(3,256
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)
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–
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Net cash provided by (used in) financing activities
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(3,256
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)
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1,689,214
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Net decrease in cash and cash equivalents
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(10,135,395
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)
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(3,487,408
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)
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Cash and cash equivalents at beginning of period
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22,631,971
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7,046,282
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Cash and cash equivalents at end of period
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$
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12,496,576
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$
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3,558,874
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Supplemental disclosure of non-cash financing activities:
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Conversion of preferred stock to common stock
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$
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1,784,327
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$
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–
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Shares issued as a commitment fee
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$
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–
|
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$
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93,380
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Cash paid for taxes
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$
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–
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$
|
800
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|
The
accompanying notes are an integral part of these condensed 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
Pharmaceuticals, Inc. develops novel therapeutic products that modulate the gut microbiome to treat gastrointestinal diseases.
Its lead product candidate, RP-G28, has the potential to become the first FDA-approved treatment for lactose intolerance, a condition
that affects millions worldwide. RP-G28 has been studied in Phase 2 trials and is now in Phase 3 clinical development with its
first Phase 3 study currently underway. The Company is further exploring the functionality and discovering the therapeutic potential
that gut microbiome changes may have on treating/preventing a variety of conditions including: gastrointestinal, cancer, metabolic,
and liver diseases.
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 interim period 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 U.S. Securities
and Exchange Commission (“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, 2017 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, 2017 filed with the SEC on March 19, 2018 (the “2017 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, 2018 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 2017 Annual Report.
All
common share amounts and per share amounts have been adjusted to reflect a 1-for-10 reverse stock split of the Company’s
common stock effected on March 23, 2018.
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, 2018, the
Company had a net loss of approximately $10.2 million and had net cash used in operating activities of approximately $10.1 million.
At September 30, 2018, the Company had working capital of approximately $10.4 million, an accumulated deficit of approximately
$63.6 million, and cash and cash equivalents of approximately $12.5 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.
Since
inception, the operations of the Company have been funded through the sale of common shares, preferred shares, warrants 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 could 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 one or more product candidates;
(ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less
favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates
or products that the Company would otherwise seek to develop or commercialize.
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, 2018, as compared with the significant accounting policies described in the Company’s 2017 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 financial institutions and consists of immediately available fund balances. The funds are maintained
at stable financial institutions, generally at amounts in excess of federally insured limits. The Company has not experienced
any losses in such accounts and management believes that the Company is not exposed to significant credit risk due to the financial
position of the depository institutions in which those deposits are held.
Equity-linked
Financial Instruments
The
Company classifies outstanding common stock warrants with down-round features as equity if the instrument would otherwise be classified
in equity absent the down-round feature. The Company will recognize the value of a down-round feature when it is triggered and
the warrant’s strike price has been adjusted downward, as a dividend and reduction of income available to common stockholders
in computing basic earnings per share.
Net
Loss Per Share
The
Company determines basic net loss per share and diluted net loss per share in accordance with the provisions of ASC 260, “Earnings
per Share.” Basic net loss per share was calculated by dividing net loss by the weighted-average common shares outstanding
during the period. Diluted net loss per share was calculated by dividing net loss by the weighted-average common shares outstanding
during the period using the treasury stock method or the two-class method, whichever is more dilutive. The potentially dilutive
stock options issued under the 2015 Stock Plan (described in Note 8), Series A Convertible Preferred Stock (described in Note
6) and warrants on the Company’s common stock (described in Notes 6 and 7) were not considered in the computation of diluted
net loss per share because they would be anti-dilutive.
Recent
Accounting Pronouncements
On
August 26, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
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 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 adopted
ASU 2016-15 on January 1, 2018 and it did not have a material impact 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 adopted ASU 2017-09 on January 1, 2018 and it did not have a material impact on its financial statements.
In
August 2018, the FASB issued Accounting Standards Update No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework
- Changes to the Disclosure
(“ASU 2018-13”)
.
ASU 2018-13 improves the disclosure requirements on fair value
measurements. It is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
Early adoption is permitted for any removed or modified disclosures. The Company is currently evaluating the impact that adopting
this guidance will have on its financial statements.
Other
accounting standard updates effective after September 30, 2018 are not expected to have a material effect on the Company’s
financial statements.
NOTE
4 - PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
Estimated Life
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Computers and equipment
|
|
5 years
|
|
$
|
15,589
|
|
|
$
|
13,582
|
|
Furniture and fixtures
|
|
7 years
|
|
|
19,158
|
|
|
|
19,158
|
|
Total property and equipment
|
|
|
|
|
34,747
|
|
|
|
32,740
|
|
Accumulated depreciation
|
|
|
|
|
(13,123
|
)
|
|
|
(8,867
|
)
|
Total property and equipment, net
|
|
|
|
$
|
21,624
|
|
|
$
|
23,873
|
|
Depreciation
expense of approximately $1,500 and $1,300 was recognized for each of the three months ended September 30, 2018 and 2017, respectively,
and approximately $4,300 and $3,900 was recognized for the nine months ended September 30, 2018 and 2017, respectively, 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 a clinical research organization, with an effective
date of December 29, 2015. During the nine months ended September 30, 2018, the Company settled a balance with this clinical research
organization resulting in a $894,000 decrease in accounts payable and a reduction in research and development expense under the
Master Service Agreement.
On
May 1, 2018, the Company entered into an Amended and Restated Master Services Agreement (“Service Agreement”) with
a different clinical research organization (“CRO”), pursuant to which the CRO will perform certain services related
to the management and execution of certain clinical trials involving the Company’s lead product candidate, RP-G28. The Services
Agreement supersedes the Master Service Agreement, dated August 30, 2016, by and between the Company and the CRO. The precise
services to be performed by the CRO under the Services Agreement will be mutually agreed upon by the parties in writing and set
forth in one or more task orders. The Company is not obligated to purchase any minimum or specific volume or dollar amount of
services under the Services Agreement.
The
term of the Services Agreement is four years from the effective date of the Service Agreement unless earlier terminated. The Company
may terminate the Services Agreement or any task without cause immediately upon giving the CRO notice of such termination. The
CRO may terminate a task order if the Company has materially defaulted on its obligations under the Services Agreement or any
task order and has not cured such material default with advance notice to the Company, as described in the Services Agreement.
Clinical
Supply and Cooperation Agreement
Effective
July 24, 2015, the Company entered into an amended Clinical Supply and Cooperation Agreement (the “Amended Supply Agreement”)
with a contract manufacturer (“Manufacturer”) of active pharmaceutical ingredients and one of its affiliates. The
Amended Supply Agreement amends certain terms of the Clinical Supply and Cooperation Agreement, dated December 16, 2009, amended
on September 25, 2010 (the “Existing Supply Agreement”).
Under
the Existing Supply Agreement, the Manufacturer granted the Company an exclusive worldwide option in a specified field and territory
to assignment of all right, title and interest to a purified galacto-oligosaccharides 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”). Pursuant to the amended terms, the Company
could exercise the option by paying the Manufacturer $800,000 within ten days after the effective date of the Amended Supply Agreement.
The Company exercised this option on July 30, 2015 and the Manufacturer transferred the Improved GOS IP to the Company. Under
the terms of the Amended Supply Agreement, if a further option payment of $1 million due in the future is not made, the Company
may be required to return the Improved GOS IP to the Manufacturer.
The
Amended Supply Agreement also provides that the Company must pay the Manufacturer $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.
Lease
Agreement
On
July 9, 2015, the Company entered into a lease with Century Park, a California limited partnership, pursuant to which the Company
leased 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 and paid
base rent of $9,174 per month for months 2 through 13 of the term, 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 is recognized on a straight-line basis over the lease term and is recorded in general and administrative expenses in the
accompanying unaudited condensed statements of operations. Approximately $29,000 of rent expense was recognized for the three
months ended September 30, 2018 and 2017, and $88,000 and $86,000 of rent expense was recognized for the nine months ended September
30, 2018 and 2017, respectively.
Legal
From
time to time, we are party to legal claims and proceedings that arise in the ordinary course of business, which may relate to
our operations or assets. 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.
We do not believe that any individual legal claim or proceeding that is currently pending is material to the Company or that these
claims and proceedings in the aggregate are material to the Company.
NOTE
6 - STOCKHOLDERS’ EQUITY
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.
Effective
March 23, 2018, all common share amounts and per share amounts have been adjusted to reflect a 1-for-10 reverse stock split.
As
of September 30, 2018, the Company had 5,734,639 shares of common stock and 5,960 shares of Series A convertible preferred 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. Each share of Series A preferred stock is convertible by the holder into 250 shares of common stock
at a conversion price of $4.00 per share; subject to adjustment for stock splits, stock dividends, subsequent rights offerings,
pro rata distributions, and fundamental transactions. Holders are entitled to receive, and the Company shall pay, dividends on
outstanding shares of Series A preferred stock, on an as-if-converted-to-common-stock basis, equal to and in the same form as
dividends actually paid on outstanding common shares when, as and if such dividends are paid on outstanding common shares. Upon
any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of Series A preferred
stock shall be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder
of common stock would receive if the Series A preferred stock were fully converted to common stock, which amounts shall be paid
pari passu with all common shareholders. Holders of Series A preferred stock have no voting rights. However, as long as any shares
of Series A preferred stock are outstanding, the Company shall not, without the affirmative vote of the holders of a majority
of the then outstanding shares of Series A preferred stock, (a) alter or change adversely the powers, preferences or rights given
to the Series A preferred stock or alter or amend the applicable Certificate of Designation, (b) amend the Company’s certificate
of incorporation or other charter documents in any manner that adversely affects any rights of the holders of Series A preferred
stock, (c) increase the number of authorized shares of Series A preferred stock, or (d) enter into any agreement with respect
to any of the foregoing.
Aspire
Capital Financing Arrangement
On
May 4, 2017, the Company entered into a common stock purchase agreement with Aspire Capital Fund, LLC (“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 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 $2.50 per share, 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 10,000 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); provided, however, that
(subject to limited exceptions) the total number of shares that may be sold pursuant to the 2017 Aspire Purchase Agreement will
be limited to 284,242 shares, which represents 19.99% of our outstanding shares of common stock as of May 2, 2017, unless stockholder
approval or an exception pursuant to the rules of Nasdaq is obtained to issue more than 19.99% of our outstanding shares as of
May 2, 2017.
As
a condition to the 2017 Aspire Purchase Agreement, the Company issued 13,732 shares of its common stock to Aspire Capital as a
commitment fee. As of September 30, 2018, no shares of common stock have been sold to Aspire Capital under the 2017 Aspire Purchase
Agreement.
October
2017 Public Offering
On
October 3, 2017, the Company closed a public offering, selling an aggregate of (i) 3,455,000 Class A Units consisting of 3,455,000
shares of the Company’s common stock and warrants to purchase 3,455,000 shares of the Company’s common stock at a
public offering price of $4.00 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 2,295,000 shares of the Company’s common
stock, and warrants to purchase an aggregate of 2,295,000 shares of the Company’s common stock. The securities 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.
The
warrants have an exercise price of $4.40, are exercisable upon issuance and expire five years from the date of issuance. The warrant
agreements provide for an adjustment to the number of common shares issuable under the warrants and/or adjustment to the exercise
price, including but not limited to, if: (a) the Company issues shares of common stock as a dividend or distribution to holders
of its common stock; (b) the Company subdivides or combines its common stock; or (c) the Company issues new securities at a price
less than the exercise price of the warrants.
The
Company granted the underwriters a 45-day option to purchase an additional 862,500 shares of the Company’s common stock
and/or warrants to purchase an additional 862,500 shares of the Company’s common stock. At the closing of the offering,
the underwriters exercised their over-allotment option for warrants to purchase 297,500 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 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.
The
Company early adopted the provisions of ASU 2017-11 in recognizing the warrants. As a result, the exercise price reset provisions
were excluded from the assessment of whether the warrants are considered indexed to the Company’s own stock. The warrants
otherwise meet the requirements for equity classification, and as such were initially classified in Stockholders’ Equity.
The Company will recognize the value of the exercise price reset provision if and when it becomes triggered, by recognizing the
value of the effect of the exercise price reset as a deemed dividend and a reduction of income available to common shareholders
in computing basic earnings per share.
The
proceeds received in the October 2017 Public Offering were allocated to each instrument on a relative fair value basis. Total
proceeds of $23.0 million were allocated as follows: $10.1 million to warrants issued, $7.8 million to Common Stock, and $5.1
million to Series A convertible preferred stock. The allocation resulted in an effective conversion price for the Series A preferred
stock that was below the quoted market price of the Company’s common stock on the closing date. As such, the Company recognized
a beneficial conversion feature equal to the intrinsic value of the conversion feature on the closing date, resulting in a deemed
dividend for the Series A convertible preferred stock of approximately $3.1 million recognized on the closing date.
In
the nine-month period ended September 30, 2018, holders of 3,180 shares of Series A convertible preferred stock converted their
shares of preferred stock into an aggregate of 795,000 shares of common stock at the stated conversion price of $4.00 per share.
NOTE
7 - WARRANTS
Warrants
to purchase an aggregate of 6,105,332 shares of the Company’s common stock were outstanding at September 30, 2018. These
warrants are all vested and exercisable, have exercise prices ranging from $4.40 to $93.00 per share, with a weighted average
exercise price of $5.20, and expire at various dates through October 2022.
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 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 83,800 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 2,585,871
shares of common stock. As of September 30, 2018, the aggregate number of shares of common stock authorized for issuance under
the 2015 Plan, as amended, was 2,750,000 and 2,697,950 shares were available for issuance as of September 30, 2018.
The
following represents a summary of the options granted to employees and non-employees that are outstanding at September 30, 2018
and changes during the nine-month period then ended:
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
Weighted Average
Remaining
Contractual
Life (in years)
|
|
Outstanding at December 31, 2017
|
|
|
254,171
|
|
|
$
|
47.43
|
|
|
$
|
–
|
|
|
|
7.3
|
|
Granted
|
|
|
456,718
|
|
|
$
|
3.16
|
|
|
$
|
–
|
|
|
|
9.3
|
|
Exercised/ Expired/ Forfeited
|
|
|
(14,504
|
)
|
|
$
|
4.69
|
|
|
$
|
–
|
|
|
|
–
|
|
Outstanding at September 30, 2018
|
|
|
696,385
|
|
|
$
|
19.29
|
|
|
$
|
–
|
|
|
|
8.5
|
|
Exercisable at September 30, 2018
|
|
|
258,523
|
|
|
$
|
53.07
|
|
|
$
|
–
|
|
|
|
6.9
|
|
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. The weighted average grant date fair value per share of options granted during the nine
months ended September 30, 2018 was $0.90.
Fair
Value of Equity Awards
The
Company utilizes the Black-Scholes option pricing model to value awards under its Plans. Key valuation assumptions include:
|
●
|
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
material factors incorporated in the Black-Scholes model in estimating the fair value of the options granted for the periods presented
were as follows (adjusted for 1-for-10 reverse stock split):
|
|
For the three months ended
September 30,
|
|
|
For the nine months ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
48.89% – 50.22
|
%
|
|
|
53.08% – 53.68
|
%
|
|
|
46.47% – 53.11
|
%
|
|
|
53.08% – 53.90
|
%
|
Risk-free interest rate
|
|
|
2.78% – 3.07
|
%
|
|
|
1.89% – 2.29
|
%
|
|
|
2.46% – 3.07
|
%
|
|
|
1.98% – 2.37
|
%
|
Expected average term of options
|
|
|
7 – 10
|
|
|
|
10
|
|
|
|
5 – 10
|
|
|
|
10
|
|
Stock price
|
|
$
|
1.85
– $2.22
|
|
|
$
|
3.50
– $6.50
|
|
|
$
|
1.85
– $3.40
|
|
|
$
|
3.50 – $10.80
|
|
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 $171,000 and $203,000 for the three months ended September 30, 2018 and 2017, respectively,
and $562,000 and $746,000 for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, there
was approximately $613,000 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 1.7 years.
No
stock options were exercised during the three and nine months ended September 30, 2018 and 2017.
NOTE
9 - RELATED PARTY TRANSACTIONS
A
director of the Company is a managing director of Javelin Venture Partners GP, LLC, the general partner of Javelin Venture Partners
GP, L.P., which holds a significant investment in the Company’s common stock and warrants. Two directors of the Company
have acted as a managing director of Stonehenge Partners, LLC, which holds an investment in the Company’s common stock.
The
Company has not entered into or been a participant in any other transaction in which a related party had or will have a direct
or indirect material interest.
NOTE
10 – SUBSEQUENT EVENTS
On
November 5, 2018, the Company closed a private placement (“PIPE financing”) with certain institutional investors,
a key vendor and a member of its board of directors. Gross proceeds from the PIPE financing were approximately $6.0 million, before
deducting placement agent fees and other offering expenses. The securities sold by the Company consisted of 6,000 shares of a
newly designated class of Series B convertible preferred stock of the Company, with a stated value of $1,000 per share and an
initial conversion price per share of $1.30 (
subject to customary adjustment for stock dividends
and stock splits
). In addition, each investor received a warrant to purchase a number of shares of common stock equal to
one half the number of shares of common stock into which their Series B convertible preferred stock is initially convertible.
The warrants are exercisable immediately for a five-year period and have an exercise price of $1.30 per share (
subject
to customary adjustment for stock dividends and stock splits
). Certain investors in the PIPE financing who at the time
of closing of the PIPE financing owned shares of the Company’s Series A convertible preferred stock, exchanged, on a 1 for
1 share basis, their shares of Series A convertible preferred stock for shares of a newly designated class of Series C convertible
preferred stock of the Company, with a stated value of $1,000 per share and convertible into shares of the Company’s common
stock at an initial conversion price per share of $1.64 (
subject to customary adjustment
for stock dividends and stock splits
).
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, 2017 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, 2017 filed with the Securities and Exchange Commission (“SEC”) on March 19, 2018 (the “2017
Annual Report”). As used in this report, unless the context suggests otherwise, “we,” “us,” “our,”
or “Ritter” refer to Ritter Pharmaceuticals, Inc. All common share amounts and per share amounts have been adjusted
to reflect a 1-for-10 reverse stock split of our common stock on March 23, 2018. In addition to historical information, this discussion
and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.
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 2017 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 gut microbiome to treat gastrointestinal diseases.
Our lead product candidate, RP-G28, has the potential to become the first drug approved by the Food and Drug Administration (“FDA”)
for the treatment of lactose intolerance, a condition that affects millions worldwide. RP-G28 has been studied in Phase 2 clinical
trials and is now in Phase 3 clinical development with its first Phase 3 study currently underway. We are further exploring the
functionality and discovering the therapeutic potential that gut microbiome changes may have on treating/preventing a variety
of conditions including: gastrointestinal cancer, metabolic, and liver diseases.
Our
first novel microbiome modulator, RP-G28, an orally administered, high purity galacto-oligosaccharide, is currently under development
for the treatment of lactose intolerance. RP-G28 is designed to selectively stimulate the growth of lactose-metabolizing bacteria
in the colon, thereby effectively adapting the gut microbiome to assist in digesting lactose (the sugar found in milk) that reaches
the large intestine.
Our
current Phase 3 clinical program includes two confirmatory clinical trials of similar trial design as our Phase 2b clinical trial.
The first Phase 3 clinical trial was initiated in the second quarter of 2018.
We
have devoted substantially all of our resources to development efforts relating to RP-G28, including conducting clinical trials
of RP-G28, providing general and administrative support for these operations and protecting our intellectual property. We currently
do not have any products approved for sale and we have not generated any revenue from product sales since our inception.
Financial
Operations Overview
We
have incurred net losses in each year since our inception, including net losses of approximately $10.2 million for the nine months
ended September 30, 2018. We had an accumulated deficit of approximately $63.6 million as of September 30, 2018. 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.
We
expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate
that our expenses will increase substantially as we:
|
●
|
complete
the development of our lead product candidate, RP-G28;
|
|
|
|
|
●
|
seek
to obtain regulatory approvals for RP-G28;
|
|
|
|
|
●
|
outsource
the commercial manufacturing of RP-G28 for any indications for which we receive regulatory approval;
|
|
|
|
|
●
|
contract
with third parties to develop our commercial strategies and for the sales, marketing and distribution of RP-G28 for any indications
for which we receive regulatory approval;
|
|
|
|
|
●
|
maintain,
expand and protect our intellectual property portfolio;
|
|
|
|
|
●
|
continue
our research and development efforts; and
|
|
|
|
|
●
|
add
operational, financial and management information systems and personnel, including personnel to support our business and product
development and commercialization efforts.
|
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, 2018, we have incurred approximately $28.3 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 lactose
intolerance 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 development of RP-G28 or when, if ever, 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 the 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 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 and Interest Expense
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 accounting principles
generally accepted in the United States of America (“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.
A
critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation
and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. Our critical accounting estimates are disclosed in the Management’s
Discussion and Analysis of Financial Condition and Results of Operations section of our 2017 Annual Report on Form 10-K. There
have not been any material changes to such critical accounting estimates since December 31, 2017.
Fair
Value of Financial Instruments
Fair
value measurement guidelines are prescribed by 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, accrued expenses,
and the notes payable 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
accrued expense adjustments, if necessary. The significant estimates in our accrued research and development expenses include
fees due to service providers.
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 (the “Securities Act”), 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, 2018 and 2017
The
following table summarizes our results of operations for the three months ended September 30, 2018 and 2017, together with the
changes in those items in dollars and as a percentage:
|
|
For the Three Months Ended
September 30,
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Change
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
3,459,681
|
|
|
$
|
915,268
|
|
|
$
|
2,544,413
|
|
|
|
278
|
%
|
Patent costs
|
|
|
59,068
|
|
|
|
47,431
|
|
|
|
11,637
|
|
|
|
25
|
%
|
General and administrative
|
|
|
1,144,750
|
|
|
|
1,052,236
|
|
|
|
92,514
|
|
|
|
9
|
%
|
Total operating costs and expenses
|
|
|
4,663,499
|
|
|
|
2,014,935
|
|
|
|
2,648,564
|
|
|
|
131
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(4,663,499
|
)
|
|
|
(2,014,935
|
)
|
|
|
(2,648,564
|
)
|
|
|
131
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
17,237
|
|
|
|
4,083
|
|
|
|
13,154
|
|
|
|
322
|
%
|
Total other income
|
|
|
17,237
|
|
|
|
4,083
|
|
|
|
13,154
|
|
|
|
322
|
%
|
Net Loss
|
|
$
|
(4,646,262
|
)
|
|
$
|
(2,010,852
|
)
|
|
$
|
(2,635,411
|
)
|
|
|
131
|
%
|
Research
and Development Expenses
Research
and development expenses increased by approximately $2.5 million, or 278%, during the three months ended September 30, 2018 as
compared to the three months ended September 30, 2017. The primary reason for this increase is due to the costs associated with
the launch and conduct of our Phase 3 clinical trial of RP-G28 in the current period, including manufacturing costs. Research
and development expenses during the three months ended September 30, 2017 primarily reflect extension study costs and continued
Phase 3 program analysis costs.
Patent
Costs
Patent
costs during the three months ended September 30, 2018 were relatively consistent as compared to the same period in 2017. Patent
costs relate to our maintenance of patent rights and the prosecution of patents, new patent applications and our preparation to
file national phase applications in certain foreign countries. During the three months ended September 30, 2018, there were no
patents issued.
General
and Administrative Expenses
General
and administrative expenses increased approximately $93,000, or 9%, during the three months ended September 30, 2018 as compared
to the three months ended September 30, 2017, primarily due to increased insurance expenses, public and investor relations fees
and professional fees, offset by a decrease in stock-based compensation. Approximately $171,000 in stock-based compensation expense
was recognized during the three months ended September 30, 2018, as compared to approximately $203,000 during the same period
in 2017.
Other
Income
Other
income increased by approximately $13,000, or 322%, during the three months ended September 30, 2018 as compared to the three
months ended September 30, 2017, due to interest income on higher average cash balance in the three months ended September 30,
2018 as compared to the comparative period ended September 30, 2017.
Comparison
of the Nine Months Ended September 30, 2018 and 2017
The
following table summarizes our results of operations for the nine months ended September 30, 2018 and 2017, together with the
changes in those items in dollars and as a percentage:
|
|
For the Nine Months Ended September 30,
|
|
|
Dollar
|
|
|
Percentage
|
|
|
|
2018
|
|
|
2017
|
|
|
Change
|
|
|
Change
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
6,180,607
|
|
|
$
|
2,121,898
|
|
|
$
|
4,058,709
|
|
|
|
191
|
%
|
Patent costs
|
|
|
170,418
|
|
|
|
175,794
|
|
|
|
(5,376
|
)
|
|
|
(3
|
%)
|
General and administrative
|
|
|
3,957,545
|
|
|
|
3,367,781
|
|
|
|
589,764
|
|
|
|
18
|
%
|
Total operating costs and expenses
|
|
|
10,308,570
|
|
|
|
5,665,473
|
|
|
|
4,643,097
|
|
|
|
82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,308,570
|
)
|
|
|
(5,665,473
|
)
|
|
|
(4,643,097
|
)
|
|
|
82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
64,965
|
|
|
|
18,362
|
|
|
|
46,603
|
|
|
|
254
|
%
|
Total other income
|
|
|
64,965
|
|
|
|
18,362
|
|
|
|
46,603
|
|
|
|
254
|
%
|
Net Loss
|
|
$
|
(10,243,605
|
)
|
|
$
|
(5,647,111
|
)
|
|
$
|
(4,596,494
|
)
|
|
|
81
|
%
|
Research
and Development Expenses
Research
and development expenses increased by approximately $4.1 million, or 191%, during the nine months ended September 30, 2018 as
compared to the nine months ended September 30, 2017. The primary reason for this increase is due to costs associated with the
preparation, launch and conduct of our Phase 3 clinical trial of RP-G28 in the current period, including manufacturing costs.
Research and development expenses during the nine months ended September 30, 2017 primarily reflect extension study costs and
continued Phase 3 program analysis costs.
Patent
Costs
Patent
costs during the nine months ended September 30, 2018 were relatively consistent as compared to the same period in 2017. Patent
costs relate to our maintenance of patent rights and the prosecution of patents, new patent applications and our preparation to
file national phase applications in certain foreign countries. During the nine months ended September 30, 2018, there were no
patents issued.
General
and Administrative Expenses
General
and administrative expenses increased by approximately $590,000, or 18%, during the nine months ended September 30, 2018 as compared
to the nine months ended September 30, 2017, primarily due to increased personnel costs due to hiring and one-time employee separation
payments and an increase in professional fees, offset by a decrease in stock-based compensation. Approximately $562,000 in stock-based
compensation expense was recognized during the nine months ended September 30, 2018, as compared to approximately $746,000 during
the same period in 2017.
Other
Income
Other
income increased by approximately $47,000, or 254%, during the nine months ended September 30, 2018 as compared to the nine months
ended September 30, 2017, due to increased interest income on higher average cash balance in the nine months ended September 30,
2018 as compared to the nine months ended September 30, 2017.
Liquidity
and Capital Resources
Since
our inception, we have incurred net losses and negative cash flows from operations, and, as of September 30, 2018, we had an accumulated
deficit of approximately $63.6 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, 2018, we had working capital of approximately $10.4 million, and cash of approximately $12.5 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,
|
|
|
|
2018
|
|
|
2017
|
|
Net cash (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(10,130,131
|
)
|
|
$
|
(5,176,622
|
)
|
Investing activities
|
|
|
(2,008
|
)
|
|
|
–
|
|
Financing activities
|
|
|
(3,256
|
)
|
|
|
1,689,214
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(10,135,395
|
)
|
|
$
|
(3,487,408
|
)
|
Operating
Activities
During
the nine months ended September 30, 2018, net cash used in operating activities of approximately $10.1 million primarily reflects
our net loss for the period of approximately $10.2 million and a non-cash adjustment of approximately $894,000 relating to an
accounts payable settlement, offset by non-cash charges of approximately $562,000 for stock-based compensation expense and changes
in our working capital accounts, mainly consisting of an increase in accounts payable of $787,000 and a decrease in accrued expenses
of $46,000.
Net
cash used in operating activities of approximately $5.2 million during the nine months ended September 30, 2017 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 increase in accounts payable of $849,000
and a decrease in accrued expenses of approximately $1.0 million.
Investing
Activities
Net
cash used in investing activities of approximately $2,000 during the nine months ended September 30, 2018 related to the purchase
of office furniture and equipment.
No
cash was used in investing activities for the nine months ended September 30, 2017.
Financing
Activities
Net
cash used in financing activities of approximately $3,000 during the nine months ended September 30, 2018 related to the payout
of fractional shares to stockholders relating to the reverse stock split.
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 Fund, LLC (“Aspire Capital”) pursuant to a previous
stock purchase agreement with Aspire Capital which was terminated on May 4, 2017, offset by $0.3 million of deferred offering
costs.
Sources
of Liquidity
Aspire
Capital Financing Arrangement
On
May 4, 2017, we entered into a common stock purchase agreement (the “2017 Aspire Purchase Agreement”) with Aspire
Capital. The 2017 Aspire Purchase Agreement provides us with access of up to an aggregate of $6.5 million through the sale of
shares of our common stock, over a 30-month period (subject to limitations described below). In consideration for entering into
the 2017 Aspire Purchase Agreement, we issued to Aspire Capital 13,732 shares of our common stock with an aggregate dollar value
equal to $97,500 (the “Commitment Shares”).
Under
the 2017 Aspire Purchase Agreement, on any trading day on which the closing price of our common stock exceeds $2.50 per share,
we have the right, in our sole discretion, to present Aspire Capital with a purchase notice (each, a “Purchase Notice”),
directing Aspire Capital (as principal) to purchase up to 10,000 shares of our common stock per trading day (which may be increased
by as much as an additional 200,000 shares per trading day by mutual agreement), up to an aggregate of $6.5 million of our common
stock (subject to limitations described below), at a per share price (the “Purchase Price”) equal to the lesser of:
|
●
|
the
lowest sale price of our common stock on the sale date; or
|
|
|
|
|
●
|
the arithmetic average
of the three lowest closing sale prices for our common stock during the ten (10) consecutive trading days ending on the trading
day immediately preceding the sale date.
|
The
aggregate purchase price payable by Aspire Capital on any one purchase date may not exceed $50,000, unless otherwise mutually
agreed.
In
addition, on any date on which we submit a Purchase Notice to Aspire Capital in an amount equal to 10,000 shares and our stock
price is not less than $2.50 per share, we may also, in our sole discretion, present Aspire Capital with a volume-weighted average
price purchase notice (each, a “VWAP Purchase Notice”) directing Aspire Capital to purchase an amount of our common
stock equal to up to 30% of the aggregate shares of our common stock traded on its principal market on the next trading day (the
“VWAP Purchase Date”), as determined by us. The purchase price per share pursuant to such VWAP Purchase Notice is
generally 97% of the volume-weighted average price for our common stock traded on its principal market on the VWAP Purchase Date.
We
may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the 2017
Aspire Purchase Agreement, so long as the most recent purchase has been completed.
The
2017 Aspire Purchase Agreement provides that the number of shares that may be sold to Aspire Capital (including the Commitment
Shares) will be limited to 284,242 shares (the “Exchange Cap”), which represents 19.99% of our outstanding shares
of common stock as of May 2, 2017, unless stockholder approval or an exception pursuant to the rules of Nasdaq is obtained to
issue more than 19.99% of our outstanding shares as of May 2, 2017. This limitation will not apply if, at any time the Exchange
Cap is reached and at all times thereafter, the average price paid for all shares issued under the 2017 Aspire Purchase Agreement
is equal to or greater than $6.80, which was the consolidated closing bid price of our common stock on May 4, 2017. We are not
required or permitted to issue any shares of common stock under the 2017 Aspire Purchase Agreement if such issuance would breach
our obligations under the rules or regulations of Nasdaq.
As
of September 30, 2018, no shares of common stock have been sold to Aspire Capital under the 2017 Aspire Purchase Agreement.
October
2017 Public Offering
On
October 3, 2017, we closed a public offering of (i) 3,455,000 Class A Units consisting of 3,455,000 shares of our common stock
and warrants to purchase 3,455,000 shares of our common stock, at a public offering price of $4.00 per unit, and (ii) 9,180 Class
B Units consisting of 9,180 shares of our Series A Convertible Preferred stock, with a stated value of $1,000, and convertible
into an aggregate of 2,295,000 shares of our common stock, and warrants to purchase 2,295,000 shares of our common stock, at a
public offering price of $1,000 per unit. We received approximately $21.0 million in net proceeds from this offering, after deducting
the underwriting discounts and commissions and estimated offering expenses payable by us. The offering was made pursuant to a
shelf registration statement on Form S-1 (Registration Number 333-219147).
November
2018 Private Placement Financing
On
November 5, 2018, we closed a private placement (“PIPE financing”) with certain institutional investors, a key vendor
and a member of our board of directors. Gross proceeds from the PIPE financing were approximately $6.0 million, before deducting
placement agent fees and other offering expenses. The securities that we sold consisted of 6,000 shares of our newly designated
class of Series B convertible preferred stock, with a stated value of $1,000 per share and an initial conversion price per share
of $1.30
(subject to customary adjustment for stock dividends and stock splits
).
In addition, each investor received a warrant to purchase a number of shares of common stock equal to one half the number of shares
of common stock into which their Series B convertible preferred stock is initially convertible. The warrants are exercisable immediately
for a five-year period and have an exercise price of $1.30 per share (
subject to customary
adjustment for stock dividends and stock splits
). Certain investors in the PIPE financing who at the time of closing of
the PIPE financing owned shares of our Series A convertible preferred stock, exchanged, on a 1 for 1 share basis, their shares
of Series A convertible preferred stock for shares of our newly designated class of Series C convertible preferred stock, with
a stated value of $1,000 per share and convertible into shares of the our common stock at an initial conversion price per share
of $1.64 (
subject to customary adjustment for stock dividends and stock splits
).
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 of and commercialize
RP-G28 or any of our other product candidates. 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. In addition, subject to obtaining regulatory approval of 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.
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 European Medicines Agency or other regulatory agencies outside the United States to accept our Phase 2b
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.
|
We
expect that significant ongoing operating expenditures will be necessary to successfully implement our business plan and develop,
manufacture, and market our products. Based on our current operating plan, our existing cash and cash equivalents, together with
interest, may not be sufficient to fund our operations for the next twelve months from the date of this filing. Our operations
have been and will continue to be dependent upon management’s ability to raise operating capital through a combination of
equity offerings (including sales pursuant to the 2017 Aspire Purchase Agreement), debt financings, government or other third-party
funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing
agreements. 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
Other
than as disclosed in Note 5 Commitment and Contingencies of our unaudited financial statements included in the Quarterly Report,
there have been no material changes to our contractual obligations and commitments from those disclosed in our 2017 Annual Report.
Off-Balance
Sheet Arrangements
Through
September 30, 2018, we do not have any off-balance sheet arrangements, as defined by applicable SEC regulations.