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 in March 2004, under the name Ritter Natural Sciences,
LLC, and converted into a Delaware corporation in September 2008.
Ritter
Pharmaceuticals, Inc. develops innovative therapeutic products that modulate the gut microbiome to treat gastrointestinal
diseases. The Company’s lead product candidate, RP-G28, is an orally administered, high purity galacto-oligosaccharide,
currently in Phase 3 clinical development for the treatment of lactose intolerance (“LI”), a condition that affects
millions of people worldwide. 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. RP-G28 has the potential to become the first drug approved by the Food and Drug Administration (“FDA”)
for the treatment of LI. 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 diseases, cancer, metabolic,
and liver diseases. The Company intends to expand its product pipeline and create added value in the future by evaluating RP-G28
in other indications, including orphan indications, developing additional products based on its underlying, microbiome-modulating
technology, or in-licensing complementary products to treat these, or other, conditions.
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 sheets at December 31, 2018 have 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, 2018 filed with the SEC on April 1, 2019
(the “2018 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 six months ended June 30, 2019 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 2018 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 interim period unaudited 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 six
months ended June 30, 2019, the Company had a net loss of approximately $7.5 million and had net cash used in operating activities
of approximately $10.4 million. At June 30, 2019, the Company had working capital of approximately $2.0 million, an accumulated
deficit of approximately $77.7 million, and cash and cash equivalents of approximately $4.4 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 six months ended
June 30, 2019, as compared with the significant accounting policies described in the Company’s 2018 Annual Report, except
for the recent adoption of the new lease accounting pronouncement as disclosed below.
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 that are immediately available to the Company. The funds are maintained
at stable financial institutions, generally at amounts in excess of federally insured limits. Cash equivalents include money market
funds and held-to-maturity securities with a maturity date of 90 days or less. As of June 30, 2019, cash and cash equivalents
consisted of bank deposits, cash and investments in money market funds and held-to-maturity securities. The Company has not realized
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 at which those deposits are held.
Investments
in Marketable Securities
Investments
in marketable securities are held in a custodial account at a financial institution and managed by the Company’s capital
advisors based on the Company’s investment guidelines. All of the Company’s investments in marketable securities are
classified as available-for-sale debt securities and are carried at fair value. Interest on these securities, as well as the amortization
of discounts and premiums, is included in interest income in the statements of operations. The unrealized gains
and losses on these securities are excluded from earnings and reported in other comprehensive income until realized, except when
the declines in value are considered to be other than temporary. Other than temporary impairment losses related
to credit losses are considered to be realized losses. When available-for-sale debt securities are sold, the cost of the securities
is specifically identified and is used to determine the realized gain or loss. Securities classified as current assets have maturity
dates of less than or equal to one year from the balance sheet date.
Operating
Leases
The
Company determines if a contract contains a lease at inception. The Company’s material operating lease relates to
a single office space. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities
represent the present value of lease payments not yet paid. Operating lease assets represent the Company’s right to use
an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial
direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not
yet paid, the Company estimates incremental secured borrowing rates corresponding to the maturities of the leases. As the Company
has no outstanding debt or committed credit facilities, secured or otherwise, the Company estimates this rate based on prevailing
financial market conditions, comparable company and credit analysis, and management judgment.
The
Company’s leases typically contain rent escalations over the lease term. The Company recognize expense for these leases
on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized
when earned and reduce the Company’s right-of-use (“ROU”) asset related to the lease. These are amortized through
the ROU asset as reductions of expense over the lease term. The Company’s lease agreement does not contain any material
residual value guarantees or material restrictive covenants. The Company has no lease agreements with lease and non-lease components.
Related
to the adoption of Topic 842, the Company’s policy elections were as follows:
Separation
of lease and non-lease components
|
|
While
the Company does not currently have any lease agreement with lease and non-lease components, the Company elected this expedient
to account for lease and non-lease components as separate components.
|
|
|
|
Short-term
policy
|
|
The
Company has elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term
disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized
on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option
to purchase the underlying asset that the Company is reasonably certain to exercise, are not recorded on the balance sheet.
|
Other
information related to leases was as follows:
|
|
Six Months Ended
June 30, 2019
|
|
Supplemental Cash Flows Information
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liability:
|
|
|
|
|
Operating cash flows from operating lease
|
|
|
57,489
|
|
Operating lease asset obtained in exchange for lease obligation:
|
|
|
|
|
Operating lease
|
|
$
|
198,319
|
|
Remaining lease term
|
|
|
|
|
Operating lease
|
|
|
1.3 years
|
|
Discount rate
|
|
|
|
|
Operating lease
|
|
|
6.00
|
%
|
Future
payments under noncancelable extended operating leases having initial or remaining terms of one year or more are as follows for
the remaining fiscal year and thereafter:
Future minimum lease payments year ending December 31,
|
|
|
|
2019
|
|
$
|
60,750
|
|
2020
|
|
|
103,254
|
|
Total future minimum lease payments, undiscounted
|
|
|
164,004
|
|
Less imputed interest
|
|
|
(6,801
|
)
|
Present value of lease liabilities
|
|
$
|
157,203
|
|
|
|
|
|
|
Operating lease liabilities reported as of June 30, 2019:
|
|
|
|
|
Operating lease liabilities-current
|
|
$
|
116,413
|
|
Operating lease liabilities-non-current
|
|
|
40,790
|
|
Total
|
|
$
|
157,203
|
|
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 deemed dividend and reduction of income available to common
stockholders in computing basic earnings per share.
Net
Loss Per Share
The
Company determines basic loss per share and diluted loss per share in accordance with the provisions of Accounting Standards Codification
(“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 Plan (described in Note 8), Series A, B and
C Convertible Preferred Stock (described in Note 6) and warrants to purchase 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.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner
sources. The Company is required to record all components of comprehensive income (loss) in the financial statements in the period
in which they are recognized. Net income (loss) and other comprehensive income (loss), including foreign currency translation
adjustments and unrealized gains and losses on investments are reported, net of their related tax effect, to arrive at comprehensive
income (loss). For the six months ended June 30, 2019, comprehensive income consisted of unrealized gains on investments in available-for-sale
debt securities. There were no unrealized gains (losses) on investments in available-for-sale debt securities and held-to-maturity
debt securities for the six months ended June 30, 2018.
Recent
Accounting Pronouncements
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
,
an amendment that modifies the measurement recognition of credit losses for most financial assets and certain other instruments.
The amendment updates the guidance for measuring and recording credit losses on financial assets measured at amortized cost by
replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets
will be presented at the net amount expected to be collected. The amendment also requires that credit losses related to available-for-sale
debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment
model. The guidance is effective for public business entities that are SEC filers. The amendments in ASU No. 2016-13
are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For
all other public business entities, the amendments in this Update are effective for fiscal years beginning after December 15,
2020, including interim periods within those fiscal years. The Company does not expect the adoption of this guidance will have
a material impact on its financial statements.
In
August 2018, the FASB issued ASU No. 2018-13,
“Fair Value Measurement (Topic 820): Disclosure Framework — Changes
to the Disclosure Requirements for Fair Value Measurement”
, an amendment to the accounting guidance on fair value measurements.
The guidance modifies the disclosure requirements on fair value measurements, including the removal of disclosures of the amount
of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between
levels, and the valuation processes for Level 3 fair value measurements. The guidance also adds certain disclosure requirements
related to Level 3 fair value measurements. The guidance is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. The Company does not expect the adoption of this guidance will have a material impact
on its financial statements.
In
June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments
(ASU 2016-13) and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04,
and ASU 2019-05 (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit
losses for financial assets held. The effective date and transition methodology for the amendments in Topic 326 are
the same as in ASU 2016-13. The Company does not expect the adoption of this guidance will have a material impact on its
financial statements.
Other
accounting standard updates effective after June 30, 2019 are not expected to have a material effect on the Company’s financial
statements.
Recently
Adopted Accounting Pronouncements
In
January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
.
The amendments in ASU No. 2016-01 address certain aspects of recognition, measurement, presentation and disclosure of financial
instruments. The Company adopted ASU No. 2016-01 in the first quarter of 2018. The adoption of this new standard did not have
a material impact on the Company’s financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. Under this guidance, an entity is required to recognize
ROU assets and corresponding lease liabilities on its balance sheets and disclose key information about leasing arrangements.
In July 2018, the FASB issued ASU No. 2018-11,
Leases (Topic 842) Targeted Improvements
, which provides for an alternative
transition method by allowing companies to continue to use the legacy guidance in Topic 840, Leases, including its disclosure
requirements, in the comparative periods presented in the year of adoption of the new leases standard and recognize a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption rather than the earliest period presented.
The
Company elected the available package of practical expedients, but not the hindsight practical expedient, and implemented internal
controls to enable the preparation of financial information on adoption as of January 1, 2019.
The
standard had a material impact on the Company’s condensed balance sheets but did not have an impact on its statements
of operations and comprehensive loss. The most significant impact was the recognition of a ROU asset and lease liability
for the Company’s sole operating lease—the Company had no finance leases. Adoption of the standard did not require
the Company to restate previously reported results as it elected to apply a modified retrospective approach at the beginning of
the period of adoption rather than at the beginning of the earliest comparative period presented.
On
August 26, 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230),
a consensus of the FASB’s
Emerging Issues Task Force. The new guidance amends 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 No. 2016-15 with the intent of reducing diversity in practice with respect to eight
types of cash flows. ASU No. 2016-15 was effective for annual and interim periods in fiscal years beginning after December 15,
2017 and was effective for the Company for the year ending December 31, 2018. The Company adopted ASU No. 2016-15 on January 1,
2018 and it did not have a material impact on the Company’s financial statements.
In
July 2017, the FASB issued ASU No. 2017-11,
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.
The ASU allows companies to exclude a down round feature
when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own
stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required
to be classified as liabilities. A company will recognize the value of a down round feature only when it is triggered and the
strike price has been adjusted downward. For equity-classified freestanding financial instruments, such as warrants, an entity
will treat the value of the effect of the down round, when triggered, as a dividend and a reduction of income available to common
stockholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down
round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings.
The guidance in ASU No. 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those
fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach.
The Company early adopted this guidance on October 1, 2017. As a result, the warrants issued on October 3, 2017, in connection
with the Company’s October 2017 public offering and the warrants issued on November 3, 2018 in connection with the Company’s
November 2018 private placement offering, were equity-classified.
In
January 2017, the FASB issued ASU No. 2017-04 “
Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting
for Goodwill Impairment
,” or ASU No. 2017-04. ASU No. 2017-04 allows companies to apply a one-step quantitative test
and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not
to exceed the total amount of goodwill allocated to the reporting unit. The amendments implemented by the ASU are effective
for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted
for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted this guidance
as of October 1, 2018 and there was no impact on its financial statements.
In
May 2017, the FASB issued ASU No. 2017-09, “
Stock Compensation – Scope of Modification Accounting”
or
ASU No. 2017-09. ASU No. 2017-09 provides guidance on which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting. The new standard was effective for fiscal years beginning after December 15,
2017. The Company adopted the guidance effective January 1, 2018. There was no impact upon adoption.
In
March 2018, the FASB issued ASU No. 2018-05,
Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118 (“SAB 118”),
which amended various SEC paragraphs for applying Topic 740 as
it relates to the Tax Cuts and Jobs Act of 2017. SAB 118 was issued by the SEC in December 2017 to provide immediate guidance
concerning the accounting implications of U.S. tax reform under the Tax Cuts and Jobs Act of 2017, which became effective
for the Company on January 1, 2018. The Company has evaluated the potential impacts of SAB 118 and has applied this guidance to
its financial statements and related disclosures in 2018 and 2019.
In
June 2018, the FASB issued ASU No. 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting
, which expands the
scope of Topic 718
Compensation—Stock Compensation
, to include share-based payments issued to nonemployees for goods
or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned.
ASU No. 2018-07 supersedes Subtopic 505-50
Equity—Equity-Based Payments to Non-Employees
. The amendments implemented
by ASU No. 2018-07 are effective for fiscal years beginning after December 15, 2018, including interim periods within that
fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company adopted
ASU 2018-07 on January 1, 2019 and it did not have a material effect on its results of operations, financial position or cash
flows.
In
August 2018, the SEC adopted final rules under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain
disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded
the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments,
an analysis of changes in each caption of stockholders’ equity presented in the balance sheets must be provided in a note
or separate statement. The analysis must present a reconciliation of the beginning balance to the ending balance of each period
for which a statement of comprehensive income is required to be filed. These final rules became effective on November 5, 2018,
with issuers required to provide their analysis of stockholders’ equity in quarterly reports on Form 10-Q beginning with
reports for the quarter ended March 31, 2019. The Company included the analysis of changes in stockholders’ equity in the
interim period unaudited condensed financial statements for the quarter ended March 31, 2019 as well as this Quarterly
Report and will continue to do so in the Company’s quarterly reports on Form 10-Q in the future. The Company does not anticipate
that the adoption of these SEC amendments will have a material effect on the Company’s financial position, results of operations,
cash flows or stockholders’ equity.
NOTE
4 - PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
Estimated Life
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Computers and equipment
|
|
5 years
|
|
$
|
17,178
|
|
|
$
|
15,589
|
|
Furniture and fixtures
|
|
7 years
|
|
|
19,158
|
|
|
|
19,158
|
|
Total property and equipment
|
|
|
|
|
36,336
|
|
|
|
34,747
|
|
Accumulated depreciation
|
|
|
|
|
(17,594
|
)
|
|
|
(14,587
|
)
|
Total property and equipment, net
|
|
|
|
$
|
18,742
|
|
|
$
|
20,160
|
|
Depreciation
expense of approximately $1,500 was recognized for the three months ended June 30, 2019 and approximately $1,400 was recognized
for 2018. Depreciation expense of approximately $3,000 was recognized for the six months ended June 30, 2019 and approximately
$2,800 was recognized for 2018. Depreciation expense is classified in general and administrative expense in the accompanying
unaudited condensed statements of operations.
NOTE
5 - COMMITMENTS AND CONTINGENCIES
Master
Services Agreement
In
May 2018, the Company entered into an Amended and Restated Master Services Agreement (“Service Agreement”) with a
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.
Lease
Agreement
On
July 9, 2015, the Company entered into a lease with 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, which is recognized on a straight-line basis over the lease term, was approximately $29,000 for the three months ended
June 30, 2019 and 2018, approximately $59,000 for the six months ended June 30, 2019, and approximately $58,000 for the
six months ended June 30, 2018 and is recorded in general and administrative expenses in the accompanying unaudited condensed
statements of operations.
Legal
From
time to time, the Company may be 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
Authorized
Shares
The
Company’s
Amended and Restated Certificate of Incorporation
authorizes 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, of which 9,500, 6,000 and 1,880 shares are designated for Series A, B and C,
respectively.
All
common share amounts and per share amounts were retroactively restated to reflect a 1-for-10 reverse stock split that was effective
March 23, 2018.
As
of June 30, 2019, the Company had 9,042,330 shares of common stock, 4,080 shares of Series A convertible preferred stock, 3,000
shares of Series B convertible preferred stock and 240 shares of Series C 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 at $4.00 per share; subject to adjustment for stock splits,
stock dividends, subsequent rights offerings, pro rata distributions, and fundamental transactions. Each share of Series B preferred
stock is convertible by the holder at $1.30 per share; subject to customary adjustment in the event of future stock dividends
and stock splits. Each share of Series C preferred stock is convertible by the holder at $1.64 per share; subject to customary
adjustment in the event of future stock dividends and stock splits. Holders are entitled to receive, and the Company shall pay,
dividends on outstanding shares of Series A, Series B and Series C 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, Series B and Series C preferred stock shall be entitled to receive out of the assets of the Company,
whether capital or surplus, the same amount that a holder of common stock would receive if the Series A, Series B and Series C
preferred stock were fully converted to common stock, which amounts shall be paid pari passu with all common stockholders. Holders
of Series A, Series B and Series C preferred stock have no voting rights. However, as long as any shares of Series A, Series B
and Series C preferred stock are outstanding, the Company may not, without the affirmative vote of the holders of a majority of
the then outstanding shares of Series A, Series B and Series C preferred stock, (a) alter or change adversely the powers, preferences
or rights given to the Series A, Series B and Series C 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, Series B and Series C preferred stock, (c) increase the number of authorized shares of Series
A, Series B and Series C preferred stock, or (d) enter into any agreement with respect to any of the foregoing.
Aspire
Capital Common Stock Purchase Agreement
On
May 4, 2017, the Company entered into a common stock purchase agreement with Aspire Capital Fund, LLC (“Aspire Capital”),
which the Company and Aspire amended and restated on March 29, 2019 (as amended and restated, the “Aspire Purchase Agreement”).
The Aspire Purchase Agreement was amended and restated to adjust certain provisions of the agreement to improve the Company’s
access to funding under the agreement. The Aspire Purchase Agreement provides access to the Company of up to an aggregate of $6.5
million in proceeds through the sale of shares of its common stock through March 31, 2021.
Under
the Aspire Purchase Agreement, as amended, on any trading day the Company selects, it has the right, in its sole discretion, to
present Aspire Capital with a purchase notice (each, a “Purchase Notice”), directing Aspire Capital (as principal)
to purchase up to 100,000 shares of its common stock per trading day (which could be increased by as much as an additional 2,000,000
shares per trading day by mutual agreement), up to an aggregate of $6,500,000 of its common stock, at a per share price (the “Purchase
Price”) equal to the lesser of: (i) the lowest sale price of the Company’s common stock on the sale date, or (ii)
the arithmetic average of the three lowest closing sale prices for the Company’s 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 cannot exceed $500,000, unless otherwise mutually agreed. In addition, on any date on which the Company
submits a Purchase Notice to Aspire Capital in an amount of at least 100,000 shares and its stock price is not less than $0.25
per share, the Company can also, in its 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 its common stock equal to
up to 30% of the aggregate shares of the Company’s common stock traded on its principal market on the next trading day (the
“VWAP Purchase Date”), as determined by the Company. Under the terms of the Aspire Purchase Agreement, the number
of shares that can be sold pursuant to Aspire Capital is limited to 1,807,562 (the “Exchange Cap”), which represented
19.99% of the Company’s outstanding shares of common stock as of March 29, 2019, the date the agreement was amended and
restated, unless stockholder approval or an exception pursuant to the rules of the NASDAQ Capital Market was obtained to issue
more than 19.99%. This limitation would not apply if, at any time the Exchange Cap was reached and at all times thereafter, the
average price paid for all shares issued under the Aspire Purchase Agreement was equal to or greater than $0.86 (the “Minimum
Price”), which was the closing price of the Company’s common stock immediately preceding the signing of the agreement.
As of June 30, 2019, no shares of common stock have been sold or issued to Aspire Capital under the Aspire Purchase Agreement.
NOTE
7 - WARRANTS
Warrants
to purchase an aggregate of 8,413,017 shares of the Company’s common stock were outstanding at June 30, 2019. These warrants
are all vested and exercisable, have exercise prices ranging from $1.30 to $93.00 per share, with a weighted average exercise
price of $1.78, and expire at various dates through November 2023.
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 2008 Stock Plan or 2009 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 June 30, 2019, the aggregate number of shares of common stock authorized for issuance under the
2015 Plan, as amended, was 2,750,000 and 186,124 shares were available for issuance as of June 30, 2019.
The
following represents a summary of the options granted to employees and non-employees that are outstanding at June 30, 2019 and
changes during the period then ended:
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Aggregate Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Outstanding at December 31, 2018
|
|
|
673,885
|
|
|
$
|
19.82
|
|
|
$
|
―
|
|
|
|
8.2
|
|
Granted
|
|
|
668,750
|
|
|
$
|
0.60
|
|
|
$
|
314,000
|
|
|
|
9.6
|
|
Exercised/ Expired/ Forfeited
|
|
|
(1,500
|
)
|
|
$
|
3.40
|
|
|
$
|
―
|
|
|
|
-
|
|
Outstanding at June 30, 2019
|
|
|
1,341,135
|
|
|
$
|
10.25
|
|
|
$
|
314,000
|
|
|
|
8.6
|
|
Exercisable at June 30, 2019
|
|
|
443,350
|
|
|
$
|
33.90
|
|
|
$
|
37,000
|
|
|
|
7.3
|
|
The
exercise price for an option issued under the 2015 Plan 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:
●
|
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
and the Company.
|
|
|
●
|
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 (three months ended June 30, 2018 stock price adjusted for 1-for-10 reverse stock split):
|
|
For the three months ended
June 30,
|
|
|
For the six months ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
46.33% –
48.17
|
%
|
|
|
46.47%
– 50.34
|
%
|
|
|
46.33%
– 48.17
|
%
|
|
|
46.47
%
– 53.11
|
%
|
Risk-free interest rate
|
|
|
2.51% – 2.60
|
%
|
|
|
2.75% – 3.02
|
%
|
|
|
2.51% – 2.60
|
%
|
|
|
2.46
% – 3.02
|
%
|
Expected average term of options
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Stock price
|
|
$
|
0.60
|
|
|
|
$2.73 – $3.32
|
|
|
$
|
0.60
|
|
|
|
$2.73 – $3.40
|
|
Restricted
Stock Units
Certain
employees and consultants have been awarded restricted stock units. The restricted stock units include either milestone or
time-based vesting. The following table summarizes restricted stock unit activity for the six months ended June 30, 2019:
|
|
Number of Units
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Unvested at December 31, 2018
|
|
|
1,100,000
|
|
|
$
|
2.73
|
|
Granted
|
|
|
35,000
|
|
|
|
0.63
|
|
Forfeited
|
|
|
―
|
|
|
|
―
|
|
Vested
|
|
|
(23,334
|
)
|
|
|
0.63
|
|
Unvested at June 30, 2019
|
|
|
1,111,666
|
|
|
$
|
2.71
|
|
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 $123,000 and $178,000 for the three months ended June 30, 2019 and 2018, respectively,
and $269,000 and $391,000 for the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, there was approximately
$423,000 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 0.8 years.
No
stock options were exercised during the six months ended June 30, 2019.
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 for the six months ended June 30, 2019.
NOTE
10 – SUBSEQUENT EVENTS
On
May 4, 2017, the Company entered into a common stock purchase agreement with Aspire Capital, which the Company and Aspire amended
and restated on March 29, 2019 and on July 23, 2019 (as amended and restated, the “Aspire Purchase Agreement”,
see footnote 6).