As of June 28, 2019 (the
last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the
registrant’s common stock held by non-affiliates was approximately $7.1 million based upon the closing price for shares
of the registrant’s common stock of $1.07 as reported by the Nasdaq Capital Market on that date.
As of March 25,
2020, there were 45,713,862 shares outstanding of the registrant’s common stock, par value $0.001 per share.
PART
III
Item
10. Directors, Executive Officers, and Corporate Governance
The
Board of Directors in General
Our
board of directors currently consists of six members. Biographical information with respect to our directors is provided below.
Our
directors hold office for one year or until their successors have been duly elected and qualified or until the earlier of their
death, resignation or removal. Our amended and restated bylaws provide that the authorized number of directors comprising our
board of directors will be fixed, from time to time, by a majority of the total number of directors.
There
are no family relationships among any of our directors or executive officers, other than Ira and Andrew Ritter, who are father
and son, respectively.
|
Name
|
|
Position
with the Company
|
|
Age
as
of the
Annual
Meeting
|
|
Director
Since
|
|
Andrew
J. Ritter
|
|
President,
Chief Executive Officer and Director
|
|
37
|
|
2008
|
|
Ira
E. Ritter
|
|
Executive
Chairman, Chief Strategic Officer and Director
|
|
71
|
|
2008
|
|
Noah
J. Doyle
|
|
Director
|
|
52
|
|
2008
|
|
Matthew
W. Foehr
|
|
Director
|
|
47
|
|
2015
|
|
Paul
V. Maier
|
|
Director
|
|
72
|
|
2015
|
|
Dr.
William M. Merino
|
|
Director
|
|
77
|
|
2017
|
Andrew
J. Ritter served as Co-Founder, President and Chief Executive Officer of the Company’s predecessor in interest from
its inception in 2004 until relinquishing the role of Chief Executive Officer to Mr. Step in October 2014. Mr. Ritter assumed
the role of Chief Executive Officer, relinquishing the role of President in June 2018 when Mr. Step resigned as Chief Executive
Officer. Mr. Ritter was a member of the board of directors of the Company’s predecessor since its inception in 2004 and
has been a member of our board of directors since 2008 when the Company was formed. Mr. Ritter has been actively studying the
field of lactose intolerance for over 15 years and currently holds over a dozen patents and over twenty pending international
patent applications. In addition, he has co-published articles, has given presentations at major healthcare and medical conferences,
and has been a guest lecturer of entrepreneurship at various graduate and undergraduate schools throughout Los Angeles including:
University of Southern California Marshall School of Business, University of California at Los Angeles Anderson School of Business
and Pepperdine University Graziadio School of Business and Management. Mr. Ritter served as a Los Angeles City Commissioner on
the Commission for Children, Youth and Their Families from 2000 to 2002. He holds a B.A. in Political Science and a minor in Business
from the University of Southern California. Mr. Ritter received a Master of Business Administration from the Wharton School of
Business.
Qualifications:
We believe that Mr. Ritter is well qualified to serve on our board of directors due to his over 15 years of research experience
working in lactose intolerance and digestive diseases. Having founded the Company and invented Lactagen™, Mr. Ritter has
an in depth knowledge of the Company, and provides senior leadership on the clinical and product development matters facing the
Company. Mr. Ritter also brings to the board of directors an extensive scientific and operational background gained previously
at Ritter Natural Sciences and over the years at Ritter.
Ira
E. Ritter served as Co-Founder, Chief Strategic Officer and Executive Chairman of
our predecessor from its inception in 2004 through the formation of Ritter Pharmaceuticals, Inc. in 2008 and has served in those
positions with us since 2008. Mr. Ritter has extensive experience creating and building diverse business enterprises and has provided
corporate management, strategic planning and financial consulting for a wide range of market segments including; health product
related national distribution and private label production, television and publishing. He assisted taking us public on Nasdaq
and Martin Lawrence Art Galleries public on The New York Stock Exchange. Since 2010, Mr Ritter has also acted as a
managing partner of Stonehenge Partners. Mr. Ritter has a long history of public service that includes appointments by three
Governors to several State of California Commissions including eight years as Commissioner on the California Prison Industry Authority.
He has guest lectured at University of Southern California Marshall School of Business and Pepperdine University Graziadio School
of Business, where he also serves as an advisory board member to Pepperdine’s Graduate School of Education and Psychology,
Social Entrepreneurship and Change Program. He previously served on the boards of directors for Vitavis
Laboratories and SCWorx.
Qualifications:
We believe that Mr. Ritter is well suited to serve on our board of directors due to his over 40 years’ experience overseeing
daily operations of diverse business enterprises, and his managing public as well as private companies. Mr. Ritter provides our
board of directors with extensive background in operational and strategic planning, as well as general executive and leadership
expertise. Mr. Ritter has served on the boards of several companies during his career.
Noah
J. Doyle has served as a director of the Company since September 2008. He has been an entrepreneur and investor for over
20 years. Mr. Doyle is the managing director of Javelin GP, LLC, the general partner of Javelin GP, LP, which is the general partner
of Javelin and the manager of Javelin SPV. Prior to forming the first Javelin entities in 2008, Mr. Doyle supported over a dozen
start-ups as an angel investor, including Keyhole, Inc. (“Keyhole”) (acquired by Google Inc. in 2004), Cantametrix,
Inc. (acquired by Gracenote, Inc. in 2002), Amae Software (acquired by Verint Systems, Inc. in 2006), Nuvon, Inc., Aquea Scientific
Corporation, Emdigo Inc., Magnacash Inc. (acquired by Yaga, Inc. in 2001), and i-mint India. Mr. Doyle most recently directed
the enterprise product line for Google’s geospatial products, Google Earth and Google Maps, from 2004 to 2007. From 2002
to 2004 he managed the Sales and Corporate Development functions at Keyhole, which created the first Web hosted digital earth
model. Prior to Keyhole, Mr. Doyle helped establish the Internet loyalty rewards marketplace as a co-founder of MyPoints.com (“MyPoints”),
the largest Internet loyalty program with over 6 million active members, where he led product management and business development
functions from the company’s inception in 1996 through its initial public offering and subsequent acquisition by United
Airlines in 2002. Prior to joining MyPoints, Mr. Doyle was based in Tokyo where he managed overseas sales and marketing for the
OEM channel of Matsushita’s (Panasonic) communications equipment subsidiary in Japan, from 1990 to 1994. Mr. Doyle served
on the board of directors of MOL Global, Inc. from July 2014 to February 2016. He was also chairman of the management board of
the University of California, Berkeley’s campus bookstore, a $17 million retail operation, and also held product management
and operations management roles at IBM/Rational (Pure Atria) and Oracle, from 1989 to 1990. Mr. Doyle holds M.B.A. and B.A. Economics
degrees, as well as certificates in Management of Technology and Global Management from University of California, Berkeley.
Qualifications:
We believe that Mr. Doyle is well suited to serve on our board of directors due to his over 20 years of experience as an entrepreneur
and investor. Mr. Doyle has experience as a venture capitalist building and serving on the boards of many public and private emerging
companies in leadership roles providing guidance on finance, development and operational growth.
Matthew
W. Foehr has served as a director of the Company since February 2015. He currently serves as President and Chief Operating
Officer at Ligand Pharmaceuticals Incorporated (“Ligand”), a biopharmaceutical company. Prior to joining Ligand in
2011, Mr. Foehr was Vice President and Head of Consumer Dermatology R&D, as well as Acting Chief Scientific Officer of Dermatology,
in the Stiefel division of GlaxoSmithKline (“GSK”). Following GSK’s acquisition of Stiefel Laboratories, Inc.
(“Stiefel”) in 2009, Mr. Foehr led the R&D integration of Stiefel into GSK. At Stiefel Laboratories, Inc., Mr.
Foehr served as Senior Vice President of Global R&D Operations, Senior Vice President of Product Development& Support,
and Vice President of Global Supply Chain Technical Services. Prior to joining Stiefel, Mr. Foehr held various executive roles
at Connetics Corporation including Senior Vice President of Technical Operations and Vice President of Manufacturing. Currently,
he is a member of the board of directors of Viking Therapeutics Inc. Mr. Foehr is the author of multiple scientific publications
and is a named inventor on numerous U.S. patents. He received his Bachelor of Science degree in Biology from Santa Clara University.
Qualifications:
We believe that Mr. Foehr is well suited to serve on our board of directors due to his more than 20 years of experience in the
pharmaceutical industry and his experience managing global operations and research and development programs.
Paul
V. Maier has served as a director of the Company since April 2015. From November 2009 through June 2014, Mr. Maier served
as the Chief Financial Officer of Sequenom Inc., a publicly held company serving the discovery, clinical research, and diagnostics
market. From February 2007 until November 2009, he served as an independent financial consultant. Previously, Mr. Maier was Senior
Vice President and Chief Financial Officer of Ligand from 1992 through 2007. From 1990 to 1992, Mr. Maier served as Vice President,
Finance of DFS West, a division of DFS Group LP, a private multinational retailer. From 1984 to 1990, Mr. Maier was employed by
ICN Pharmaceuticals, a pharmaceutical and biotechnology research products company, where he held various executive positions in
finance and general management in ICN as well as SPI Pharmaceuticals, a publicly held subsidiary. Mr. Maier currently serves on
the board of directors of International Stem Cell Corporation, Biological Dynamics Inc. and Eton Pharmaceuticals, Inc. Mr. Maier
served on the board of directors of Apricus Biosciences from 2012 to January 2019 and on the board of directors of MabVax Therapeutics
from 2014 to July 2018. Mr. Maier received an MBA from Harvard Business School and a BS from Pennsylvania State University.
Qualifications:
We believe that Mr. Maier is well suited to serve on our board of directors due to his over 25 years of experience as a senior
executive in biotechnology and pharmaceutical companies and his extensive experience in finance.
Dr.
William M. Merino has served as a director of the Company since January 2017. Dr. Merino served as the Senior Vice President
of Worldwide Regulatory Affairs for Warner Lambert Pharmaceuticals from 1987 to 2000, where he was a member of the Office of the
Chairman and responsible for the registration and approval of pharmaceuticals products with regulatory agencies around the world.
He was also responsible for quality assurance, quality control and drug safety for the company, and led efforts to gain expedited
registration of Lipitor in the United States and abroad in 20 other countries. He also has previous experience leading international
regulatory affairs at Alcon Pharmaceuticals, G.D. Searle & Co., and Riker Laboratories. Dr. Merino has served as a senior
clinical and regulatory advisory to the Company. Dr. Merino received his PhD in Pharmacology from Purdue University.
Qualifications:
We believe that Dr. Merino’s deep global experience in drug and device registration and his extensive work with senior members
of the FDA as well as several international regulatory authorities will bring important insight and acumen to our board of directors,
as the Company continues its interactions with the FDA in an effort to bring RP-G28 to market.
Code
of Business Conduct and Ethics
We
have adopted a code of business conduct and ethics that applies to all of our employees, officers and directors, including those
officers responsible for financial reporting. The code of business conduct and ethics is reviewed periodically and amended as
necessary and is available on our website at www.ritterpharmaceuticals.com. Any amendments to the code of business conduct
and ethics, or any waivers of its requirements that apply to our principal executive officer, principal financial officer or principal
accounting officer, will be disclosed on our website.
Audit
Committee
The
current members of our Audit Committee are Matthew W. Foehr, Paul V. Maier (Chairman) and Dr. William M. Merino, each of whom
was determined by our board of directors to be independent under Rule 10A-3 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), and the continued listing requirements of Nasdaq, and to satisfy the other continued listing
requirements of Nasdaq for audit committee membership. Our board of directors has determined that Mr. Maier qualifies as an “audit
committee financial expert,” as such term is defined by the Securities and Exchange Commission (the “SEC”),
and that he has the requisite level of financial sophistication required by the continued listing requirements of Nasdaq.
Executive
Officers
Our
Executive Officers as of the date of this proxy statement are as follows:
|
Name
|
|
Age
|
|
Position
with the Company
|
|
Andrew
J. Ritter
|
|
37
|
|
Chief
Executive Officer and Director
|
|
Ira
E. Ritter
|
|
71
|
|
Executive
Chairman and Chief Strategic Officer
|
|
John
W. Beck
|
|
60
|
|
Chief
Financial Officer
|
Officers
serve at the discretion of the board of directors. There are no family relationships among any of our directors or executive officers,
other than Ira and Andrew Ritter, who are father and son, respectively. There is no arrangement or understanding between any executive
officer and any other person pursuant to which the executive officer was selected.
For
the biographies of Andrew J. Ritter and Ira E. Ritter, please see “Board of Directors - The Board of Directors in General”.
John
W. Beck has served as our Chief Financial Officer since May 2018. From 2008 until its acquisition by AstraZeneca in 2012,
John W. Beck, served first as a board member and later as Chief Financial Officer and Senior Vice President of finance & operations
of Ardea Biosciences Inc. (“Ardea”). Before joining Ardea, Mr. Beck spent 10 years with Metabasis Thereapeutics Inc.,
as a Co-Founder and its Chief Financial Officer. Mr. Beck has served on the advisory board of Pinnacle Medical Holdings, LLC,
a Denver Colorado-based physician-led network of health-care providers, which was acquired by OnPoint Medical Group, LLC in 2017,
since 2014. He has also served on the board of advisors of August Therapeutics, Inc., a San Diego California-based company developing
non-systemic therapeutics to treat disordered eating and obesity, since 2017, and the board of directors of Artelo Biosciences
Inc., a San Diego-based company focused on developing and commercializing a diverse portfolio of novel therapeutic candidates
targeting the endocannabinoid system, since December 2019. Mr. Beck has also served as a scientific advisor and mentor to the
University of California, San Diego’s student-run TRITON FUNDS since August 2019.
Delinquent
Section 16(a) Reports
Section
16(a) of the Exchange Act, and the rules issued thereunder, requires our directors and executive officers and beneficial owners
of more than 10% of the outstanding shares of our equity securities to file reports of ownership and changes in beneficial ownership
of our equity securities with the SEC. Copies of these reports are furnished to the Company. The Company is required to identify
any of those individuals who failed to file such reports on a timely basis. Based solely on our review of the copies of such reports
furnished to us, and representations from the persons subject to Section 16(a) with respect to the Company, we believe that during
2019 all of our executive officers, directors and 10% stockholders complied with the Section 16(a) requirements.
Item
11. Executive Compensation
Summary
Compensation Table (2019 and 2018)
The
following table sets forth the compensation paid or earned for the fiscal years ended December 31, 2019 and 2018 to our named
executive officers for each of those years.
|
Name
and Principal Position
|
|
Year
|
|
|
Salary(1)
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards(2)
($)
|
|
|
All
Other Compensation(3)
($)
|
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew
J. Ritter
|
|
|
2019
|
|
|
|
450,651
|
|
|
|
—
|
|
|
|
—
|
|
|
|
73,238
|
|
|
|
38,381
|
|
|
|
562,270
|
|
|
Chief
Executive Officer and Director
|
|
|
2018
|
|
|
|
410,939
|
|
|
|
168,750
|
|
|
|
1,774,500
|
|
|
|
292,668
|
|
|
|
—
|
|
|
|
2,646,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ira
E. Ritter
|
|
|
2019
|
|
|
|
345,499
|
|
|
|
—
|
|
|
|
—
|
|
|
|
58,125
|
|
|
|
24,814
|
|
|
|
428,438
|
|
|
Executive
Chairman and Chief Strategic Officer
|
|
|
2018
|
|
|
|
342,559
|
|
|
|
103,500
|
|
|
|
819,000
|
|
|
|
87,668
|
|
|
|
—
|
|
|
|
1,352,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
W. Beck
|
|
|
2019
|
|
|
|
321,608
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30,516
|
|
|
|
57,563
|
|
|
|
409,687
|
|
|
Chief
Financial Officer
|
|
|
2018
|
|
|
|
180,923
|
|
|
|
56,000
|
|
|
|
409,500
|
|
|
|
170,439
|
|
|
|
—
|
|
|
|
816,862
|
|
|
(1)
|
A
portion of the amounts reported in this column were deferred by the named executive officers as follows: (i) for Andrew Ritter,
$70,200 of this amount was deferred; (ii) for Ira Ritter, $53,820 of this amount was deferred; and (iii) for John Beck, $33,000
of this amount was deferred. See “Narrative Summary Compensation Table—Offer Letter Amendments”
below.
|
|
|
|
|
(2)
|
Represent
the grant date fair value of the option awards granted during the years presented, determined in accordance with FASB ASC
Topic 718. We utilize the Black-Scholes option-pricing model to value awards. Key valuation assumptions include:
|
|
|
|
|
|
|
●
|
Expected
dividend yield. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans
to pay any dividends on our common stock.
|
|
|
|
|
|
|
●
|
Expected
stock-price volatility. As our common stock only recently became publicly traded, the expected volatility is derived from
the average historical volatilities of publicly traded companies within our industry that we consider to be comparable to
our 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. Our 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, we estimate 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.
|
|
|
|
|
|
|
In
addition to the assumptions used in the Black-Scholes option-pricing model, we also estimate a forfeiture rate to calculate
the stock-based compensation for our equity awards. We will continue to use judgment in evaluating the expected volatility,
expected terms and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis.
|
|
|
|
|
(3)
|
For
Andrew Ritter, the amount reported in 2019 includes $8,910 for insurance premiums, $17,221 for social security and medicare
employer contributions, and $12,250 for Young Presidents Organizations’ dues. For Ira Ritter, the amount
reported in 2019 includes $10,069 for insurance premiums and $14,745 for social security and medicare employer contributions. For
John Beck, the amount reported in 2019 includes $15,167 for insurance premiums, $13,596 for social security and medicare employer
contributions, and $28,800 for housing expenses paid on Mr. Beck’s behalf.
|
Narrative
to Summary Compensation Table
All
share amounts referenced below have been adjusted to account for the reverse stock split that was effected March 23, 2018 (the
“Reverse Stock Split”).
Offer
Letters with Andrew Ritter
Under
the terms of his offer letter that became effective June 29, 2015, Andrew Ritter was entitled to receive an annual base salary
of $310,000 and was entitled to receive up to $180,000 payable over a three-year period for tuition reimbursement. He was also
eligible to receive an annual bonus based on a percentage of his base salary, as then in effect, and subject to the achievement
of certain performance measures, as determined by the board of directors. The initial target bonus opportunity was 40% of base
salary.
On
June 26, 2018, in connection with his appointment as Chief Executive Officer of the Company, the Company entered into an amended
and restated offer letter with Mr. Ritter, which provides for an annual base salary of $450,000. He is also eligible to receive
an annual bonus based on a percentage of his base salary, as then in effect, and subject to the achievement of certain performance
measures, as determined by the board of directors. The initial target bonus opportunity is 50% of base salary. Mr. Ritter is eligible
to participate in all employee benefit programs generally available to other executive level employees of the Company.
Offer
Letter with Ira Ritter
Under
the terms of his offer letter, which became effective June 29, 2015, Ira Ritter is entitled to receive an annual base salary of
$295,000. He is also eligible to receive an annual bonus based upon a percentage of his base salary, as then in effect, and subject
to the achievement of specific performance measures, as determined by the board of directors. The initial target bonus opportunity
was 35% of his base salary, which was raised to 40% of his base salary in 2018. Mr. Ritter is eligible to participate in all employee
benefit programs generally available to other executive level employees of the Company.
Offer
Letter with John W. Beck
Under
the terms of his offer letter, which became effective May 23, 2018, Mr. Beck is entitled to receive an annual base salary of $320,000.
He is eligible to receive an annual bonus equal to 40% of his base salary, as then in effect, as determined by the board of directors.
He is also entitled to receive reimbursement in an amount up to $2,000 per month for reasonable travel and housing expenses. Mr.
Beck is eligible to participate in all employee benefit programs generally available to other executive level employees of the
Company.
Offer
Letter Amendments
In
connection with the Company’s previously announced plan to reduce operating expenses, on October 15, 2019, the Company and
each of Andrew Ritter, John Beck and Ira Ritter entered into an amendment to their respective offer letters (the
“Offer Letter Amendments”).
Pursuant
to the terms of the Offer Letter Amendments, each of the executive officers agreed to defer a portion of his annual base salary
(the “Deferred Amounts”), as set forth below, until such time as the board of directors, in its sole discretion, decides
to pay the Deferred Amounts (or any portion of the Deferred Amounts) to the executive officers, if ever.
|
Name of Executive Officer
|
|
Deferred Amount
|
|
|
Andrew J. Ritter
|
|
$
|
70,200
|
|
|
John W. Beck
|
|
$
|
33,000
|
|
|
Ira E. Ritter
|
|
$
|
53,820
|
|
The
board of directors has since determined that the Deferred Amounts will be paid to the executive officers upon the closing of the
proposed merger between the Company and Qualigen, Inc.
2015
Equity Incentive Plan
On
June 15, 2015, our board of directors approved the 2015 Equity Incentive Plan (the “2015 Plan”), and on June 17, 2015,
the 2015 Plan was approved by our stockholders. The 2015 Equity Incentive Plan was subsequently amended by the stockholders of
the Company on June 3, 2016, June 2, 2017 and August 24, 2017.
The
purposes of the 2015 Plan are to optimize the profitability and growth of the Company through long-term incentives that are consistent
with the Company’s objectives and that link the interests of award recipients (“Grantees”), to those of the
Company’s stockholders; to give award recipients an incentive for excellence in individual performance; to promote teamwork
among Grantees; and to give the Company flexibility in attracting and retaining key employees, directors and consultants.
Selected
employees, officers and directors of the Company or any subsidiary, and consultants, advisors and independent service providers
to the Company and any subsidiary who qualify as a “consultant” under the applicable rules of the SEC for registration
of shares on a Form S-8 registration statement, are eligible to receive awards under the 2015 Plan. The plan administrator may
also grant awards to individuals in connection with hiring, retention or otherwise before the date the individual first performs
services for the Company or any subsidiary; provided, however, that those awards will not become vested or exercisable before
the date the individual first performs services for the Company or any subsidiary.
The
number of shares of common stock that we may issue pursuant to awards under the 2015 Plan is (i) 2,750,000 plus (ii) any shares
which were available for grant under the 2008 Stock Plan or the 2009 Stock Plan (collectively, the “Prior Plans”),
on the effective date of the 2015 Plan or are subject to awards under the Prior Plans which, after the effective date of the 2015
Plan, are forfeited or lapse unexercised or are settled in cash and are not issued under the Prior Plans. No more than 2,750,000
shares of common stock may be issued pursuant to incentive stock options intended to qualify under Section 422 of the Internal
Revenue Code (the “Code”). No awards may be granted under any Prior Plan; however, any awards granted under any Prior
Plan that were outstanding as of the effective date of the 2015 Plan continue to be subject to the terms and conditions of such
Prior Plan.
The
2015 Plan provides for grants of stock options (including incentive stock options qualifying under Section 422 of the Code and
nonstatutory stock options), restricted stock awards, stock appreciation rights, restricted stock units, performance awards, other
stock-based awards or any combination of the foregoing.
Performance-Based
Restricted Stock Units Granted in 2018
On
June 26, 2018, our Compensation Committee granted performance-based restricted stock unit awards to each of Andrew J. Ritter (650,000
performance-based restricted stock units), Ira E. Ritter (300,000 performance-based restricted stock units) and John W. Beck (150,000
performance-based restricted stock units). The awards were subject to vesting criteria relating to the achievement of three specific
performance goals established by the Compensation Committee. Each performance restricted stock unit represented a contingent right
to receive one share of common stock, subject to the vesting conditions being satisfied. The terms of these awards provided as
follows:
|
|
●
|
If
the first performance goal was achieved by the target date established by the Compensation Committee, then 100% of the target
restricted stock units allocated to the first goal (i.e., 40% of the total target restricted stock units granted to
the executive officer) would vest and the underlying shares of common stock would be issued, and if the first goal was achieved
by an earlier date established by the Compensation Committee, then 125% of the target restricted stock units allocated to
the first goal would vest and the underlying shares of common stock would be issued;
|
|
|
|
|
|
|
●
|
If
the second performance goal was achieved by the target date established by the Compensation Committee with respect to this
goal, then 100% of the target restricted stock units allocated to the second goal (i.e., 40% of the total target restricted
stock units granted to the executive officer) would vest and the underlying shares of common stock would be issued, and if
the second goal was achieved by an earlier date established by the Compensation Committee, then 125% of the target restricted
stock units allocated to the second goal would vest and the underlying shares of common stock would be issued; and
|
|
|
|
|
|
|
●
|
If
the third performance goal was achieved by the target date established by the Compensation Committee with respect to this
goal, then 100% of the target restricted stock units allocated to the third goal (i.e., 20% of the total target restricted
stock units granted to the executive officer) would vest and the underlying shares of common stock would be issued, and if
the third goal was achieved by an earlier date established by the Compensation Committee, then 125% of the target restricted
stock units allocated to the third goal would vest and the underlying shares of common stock would be issued.
|
On
January 15, 2020, our board of directors cancelled these awards.
Outstanding
Equity Awards at 2019 Fiscal Year-End
The
following table presents the outstanding equity awards held by each of the named executive officers as of December 31, 2019. The
information included in the table and footnotes below has been adjusted to account for the Reverse Stock Split.
|
|
|
Option
Awards
|
|
Stock
Awards
|
|
Name
|
|
Grant
Date
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
Grant
Date
|
|
Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
(#)
|
|
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
|
|
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
(#)
|
|
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)
|
|
|
Andrew
J. Ritter
|
|
9/25/2013
|
|
|
2,797
|
|
|
|
—
|
|
|
|
12.74
|
|
|
9/25/2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/2/2014
|
|
|
2,097
|
|
|
|
—
|
|
|
|
58.63
|
|
|
12/2/2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/2/2014
|
|
|
43,243
|
|
|
|
—
|
|
|
|
93.59
|
|
|
12/2/2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/5/2016
|
|
|
7,005
|
(1)
|
|
|
1,195
|
(1)
|
|
|
15.40
|
|
|
7/5/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/25/2016
|
|
|
11,087
|
(2)
|
|
|
2,917
|
(2)
|
|
|
26.00
|
|
|
10/25/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/23/2018
|
|
|
23,722
|
(3)
|
|
|
25,784
|
(3)
|
|
|
3.40
|
|
|
1/23/2028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/26/2018
|
|
|
56,250
|
(4)
|
|
|
93,750
|
(4)
|
|
|
2.73
|
|
|
6/26/2028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/26/2018
|
|
|
|
|
|
|
|
|
|
|
650,000
|
(6)
|
|
|
110,500
|
(6)
|
|
|
|
2/6/2019
|
|
|
52,500
|
(5)
|
|
|
199,500
|
(5)
|
|
|
0.60
|
|
|
2/6/2029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(650,000
|
)(6)
|
|
|
(110,500
|
)(6)
|
|
Totals
|
|
|
|
|
198,7019
|
|
|
|
323,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
Ira
E. Ritter
|
|
9/25/2013
|
|
|
2,797
|
|
|
|
—
|
|
|
|
12,74
|
|
|
9/25/2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/2/2014
|
|
|
2,097
|
|
|
|
—
|
|
|
|
58.63
|
|
|
12/2/2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/2/2014
|
|
|
43,243
|
|
|
|
—
|
|
|
|
93.59
|
|
|
12/2/2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/5/2016
|
|
|
7,005
|
(7)
|
|
|
1,195
|
(7)
|
|
|
15.40
|
|
|
7/5/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/25/2016
|
|
|
11,087
|
(8)
|
|
|
2,917
|
(8)
|
|
|
26.00
|
|
|
10/25/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/23/2018
|
|
|
23,722
|
(9)
|
|
|
25,784
|
(9)
|
|
|
3.40
|
|
|
1/23/2028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/26/2018
|
|
|
|
|
|
|
|
|
|
|
300,000
|
(6)
|
|
|
180,000
|
(6)
|
|
|
|
2/6/2019
|
|
|
41,667
|
(10)
|
|
|
158,333
|
(10)
|
|
|
0.60
|
|
|
2/6/2029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(300,000)
|
(6)
|
|
|
(180,000)
|
(6)
|
|
Totals
|
|
|
|
|
131,618
|
|
|
|
188,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
John
W. Beck
|
|
5/23/2018
|
|
|
39,584
|
(11)
|
|
|
60,416
|
(11)
|
|
|
3.32
|
|
|
5/23/2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/26/2028
|
|
|
|
|
|
|
|
|
|
|
150,000
|
(6)
|
|
|
90,000
|
(6)
|
|
|
|
2/6/2019
|
|
|
21,875
|
(12)
|
|
|
83,125
|
(12)
|
|
|
0.60
|
|
|
2/6/2028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150,000
|
)(6)
|
|
|
(90,000
|
)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
|
|
61,459
|
|
|
|
143,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
This
option was granted to Andrew Ritter on July 5, 2016 for an aggregate of 8,200 shares. The option vests in 48 equal monthly
installments, the first of which vested on July 20, 2016 with the balance vesting on the 20th day of each calendar
month thereafter until vested in full.
|
|
|
|
|
(2)
|
This
option was granted to Andrew Ritter on October 25, 2016 for an aggregate of 14,004 shares. The option vests ratably in 48
equal monthly installments following the public disclosure of top-line data results from the Company’s Phase 2b clinical
trial.
|
|
|
|
|
(3)
|
This
option was granted to Andrew Ritter on January 23, 2018 for an aggregate of 49,506 shares. The option vests in 48 equal monthly
installments, the first of which vested on February 23, 2018 with the balance vesting on the 23rd day of each calendar
month thereafter until vested in full.
|
|
|
|
|
(4)
|
This
option was granted to Andrew Ritter on June 26, 2018 for an aggregate of 150,000 shares. The option vests in 48 equal monthly
installments, the first of which vested on July 26, 2018 with the balance vesting on the 23rd day of each calendar
month thereafter until vested in full.
|
|
|
|
|
(5)
|
This
option was granted to Andrew Ritter on February 6, 2019 for an aggregate of 252,000 shares. The option vests in 48 equal monthly
installments beginning on March 6, 2019 with the balance vesting on the 6th day of each calendar month thereafter until vested
in full.
|
|
|
|
|
(6)
|
Represent
performance-based restricted stock unit awards granted on June 26, 2018. Market value was calculated using the closing price
of our common stock on December 31, 2019 ($0.17). These awards were subsequently cancelled by the board of directors of the
Company in January 2020. For more information with respect to these awards, please see the “Narrative to Summary Compensation
Table 2015 Equity Incentive Plan - Performance - Based Restricted Stock Units Granted in 2018” section above.
|
|
|
|
|
(7)
|
This
option was granted to Ira Ritter on July 5, 2016 for an aggregate of 8,200 shares. The option vests in 48 equal monthly installments,
the first of which vested on July 20, 2016 with the balance vesting on the 20th day of each calendar month thereafter until
vested in full.
|
|
|
|
|
(8)
|
This
option was granted to Ira Ritter on October 25, 2016 for an aggregate of 14,004 shares. The option vests ratably in 48 equal
monthly installments following the public disclosure of top-line data results from the Company’s Phase 2b clinical trial.
|
|
|
|
|
(9)
|
This
option was granted to Ira Ritter on January 23, 2018 for an aggregate of 49,506 shares. The option vests in 48 equal monthly
installments, the first of which vested on February 23, 2018 with the balance vesting on the 23rd day of each calendar
month thereafter until vested in full.
|
|
|
|
|
(10)
|
This
option was granted to Ira Ritter on February 6, 2019 for an aggregate of 200,000 shares. The option vests in 48 equal monthly
installments beginning on March 6, 2019 with the balance vesting on the 6th day of each calendar month thereafter until vested
in full.
|
|
|
|
|
(11)
|
This
option was granted to John Beck on May 23, 2018 for an aggregate of 100,000 shares. 25% of the shares underlying this option
vest on May 24, 2019. The remaining 75% of the shares underlying the option will vest in 36 equal installments beginning on
the 24th day of each calendar month thereafter.
|
|
|
|
|
(12)
|
This
option was granted to John Beck on February 6, 2019 for an aggregate of 105,000 shares. The option vests in 48 equal monthly
installments beginning on March 6, 2019 with the balance vesting on the 6th day of each calendar month thereafter until vested
in full.
|
Payments
Due Upon Termination of Employment or a Change in Control
Executive
Severance & Change in Control Agreements
We
have entered into Executive Severance & Change in Control Agreements (the “Severance Agreements”), with each of
our named executive officers. The Severance Agreements provide that if we terminate the executive’s employment without Cause,
or the executive terminates his employment for Good Reason, the executive will be entitled to: (i) the Accrued Obligations; (ii)
an amount equal to the sum of twelve (12) months of base salary for Andrew and Ira Ritter and six (6) months of base salary for
John Beck, as in effect immediately prior to the termination date; (iii) medical, dental benefits provided by the Company to the
executive and his spouse and dependents at least equal to the levels of benefits provided to other similarly situated active employees
of the Company and its subsidiaries until the earlier of (a) the twelve (12) month anniversary of the date of termination or (b)
the date that the executive becomes covered under a subsequent employer’s medical and dental plans; and (iv) acceleration
of vesting of all equity and equity-based awards.
Pursuant
to the terms of the Severance Agreements, in the event that within one (1) month prior to or the twelve (12) months following
a Change in Control, the Company terminates the executive’s employment without Cause, or the executive terminates his employment
for Good Reason, then, in lieu of the payments and benefits otherwise due to the executive in the preceding paragraph, the executive
will be entitled to: (i) the Accrued Obligations; (ii) an amount equal to the sum of twelve (12) months of base salary for Andrew
and Ira Ritter and six (6) months of base salary for John Beck, as in effect on the date of termination or the date of the Change
in Control, whichever is greater; (iii) medical, dental benefits provided by the Company to the executive and his spouse and dependents
at least equal to the level of benefits provided to other similarly situated active employees of the Company and its subsidiaries
until the earlier of (a) the twelve (12) month anniversary of the date of termination or (b) the date that the executive becomes
covered under a subsequent employer’s medical and dental plans; and (iv) acceleration of vesting of all equity and equity-based
awards.
In
the event the executive’s employment is terminated by him without Good Reason, by the Company for Cause or due to the executive’s
death or disability, the executive and/or his estate or beneficiaries will be solely entitled to the Accrued Obligations.
The
executive’s entitlement to the payments (other than the Accrued Obligations) and benefits described above is expressly contingent
upon him providing the Company with a signed release satisfactory to the Company.
For
purposes of the Severance Agreements:
“Accrued
Obligations” means (i) earned but unpaid base salary through the date of termination; (ii) payment of any annual, long-term,
or other incentive award which relates to a completed fiscal year or performance period, as applicable, and is payable (but not
yet paid) on or before the date of termination; (iii) a lump-sum payment in respect of accrued but unused vacation days at the
executive’s per-business-day base salary rate in effect as of the date of termination; and (iv) any unpaid expense or reimbursements
due pursuant to Company expense reimbursement policy.
“Cause”
means a finding by the Company that the executive has (i) been convicted of a felony or crime involving moral turpitude; (ii)
disclosed trade secrets or confidential information of the Company (or any parent or subsidiary) to persons not entitled to receive
such information; (iii) engaged in conduct in connection with the executive’s employment or service to the Company (or any
parent or subsidiary), that has, or could reasonably be expected to result in, material injury to the business or reputation of
the Company (or any parent or subsidiary), including, without limitation, act(s) of fraud, embezzlement, misappropriation and
breach of fiduciary duty; (iv) violated the operating and ethics policies of the Company (or any parent or subsidiary) in any
material way, including, but not limited to those relating to sexual harassment and the disclosure or misuse of confidential information;
(v) engaged in willful and continued negligence in the performance of the duties assigned to the executive by the Company, after
the executive has received notice of and failed to cure such negligence; or (vi) breached any material provision of any agreement
between the executive and the Company (or any parent or subsidiary), including, without limitation, any confidentiality agreement.
“Change
in Control” means the occurrence of any of the following events:
|
|
(i)
|
Any
“person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes a “beneficial owner”
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more
than 50% of the voting power of the then outstanding securities of the Company; provided that a Change of Control will not
be deemed to occur as a result of a change of ownership resulting from the death of a shareholder, and a Change of Control
will not be deemed to occur as a result of a transaction in which the Company becomes a subsidiary of another corporation
and in which the shareholders of the Company, immediately prior to the transaction, will beneficially own, immediately after
the transaction, shares entitling such shareholders to more than 50% of all votes to which all shareholders of the parent
corporation would be entitled in the election of directors (without consideration of the rights of any class of stock to elect
directors by a separate class vote);
|
|
|
|
|
|
|
(ii)
|
A
change in the effective control of the Company which occurs on the date that a majority of members of the board of directors
is replaced during any twelve (12) month period by Directors whose appointment or election is not endorsed by a majority of
the members of the board of directors prior to the date of the appointment or election; or
|
|
|
|
|
|
|
(iii)
|
The
consummation of (A) a merger or consolidation of the Company with another corporation where the shareholders of the
Company, immediately prior to the merger or consolidation, will not beneficially own, immediately after the merger or consolidation,
shares entitling such shareholders to more than 50% of all votes to which all shareholders of the surviving corporation would
be entitled in the election of directors (without consideration of the rights of any class of stock to elect directors by
a separate class vote); (B) a sale or other disposition of all or substantially all of the assets of the Company; or (C) a
liquidation or dissolution of the Company.
|
“Good
Reason” means, without the executive’s express written consent, the occurrence of any one or more of the following:
(i) a substantial and material diminution in the executive’s duties or responsibilities; (ii) a material reduction in the
executive’s Base Salary; or (iii) the relocation of the executive’s principal place of employment to a location that
is more than 50 miles from the prior location.
A
termination of employment by the executive for Good Reason will be effectuated by giving the Company written notice, or Notice
of Termination for Good Reason, not later than 90 days following the occurrence of the circumstance that constitutes Good Reason,
setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s)
of this Agreement on which the executive relied. The Company will be entitled, during the 30-day period following receipt of a
Notice of Termination for Good Reason, to cure the circumstances that gave rise to Good Reason, provided that the Company shall
be entitled to waive its right to cure or reduce the cure period by delivery of written notice to that effect to the executive
(such 30-day or shorter period, the “Cure Period”). If, during the Cure Period, such circumstance is remedied, the
executive will not be permitted to terminate his employment for Good Reason as a result of such circumstance. If, at the end of
the Cure Period, the circumstance that constitutes Good Reason has not been remedied, the executive will terminate employment
for Good Reason on the date of expiration of the Cure Period.
2008
Stock Plan
The
2008 Stock Plan provides that in the event of a merger or a Change in Control (as defined below), each outstanding award will
be treated as the administrator determines, including, without limitation, that each award be assumed or an equivalent award be
substituted by the successor corporation or a parent or subsidiary of the successor corporation. In the event of a Change in Control
in which the successor corporation does not assume or substitute for the award, awards outstanding under the 2008 Stock Plan will
become fully vested and exercisable, including shares as to which such award would not otherwise be vested or exercisable, and
all restrictions on outstanding restricted stock awards will lapse.
For
purposes of the 2008 Stock Plan, “Change in Control” means the occurrence of any of the following events:
|
|
(i)
|
A
change in the ownership of the Company which occurs on the date that any one person, or more than one person acting as a group
(“Person”), acquires ownership of the stock of the Company that, together with the stock held by such Person,
constitutes more than 50% of the total voting power of the stock of the Company, except that any change in the ownership of
the stock of the Company as a result of a private financing of the Company that is approved by the board of directors will
not be considered a Change in Control; or
|
|
|
|
|
|
|
(ii)
|
If
the Company has a class of securities registered pursuant to Section 12 of the Exchange Act, a change in the effective control
of the Company which occurs on the date that a majority of members of the board of directors is replaced during any twelve
(12) month period by directors whose appointment or election is not endorsed by a majority of the members of the board of
directors prior to the date of the appointment or election; or
|
|
|
|
|
|
|
(iii)
|
A
change in the ownership of a substantial portion of the Company’s assets which occurs on the date that any person acquires
(or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons)
assets from the Company that have a total gross fair market value equal to or more than 50% of the total gross fair market
value of all of the assets of the Company immediately prior to such acquisition or acquisitions.
|
2015
Equity Incentive Plan
The
2015 Plan provides that notwithstanding any other provision of the 2015 Plan, in the event of a Change in Control (as defined
below), unless otherwise determined by the plan administrator, each outstanding award under the plan will be assumed or an equivalent
award substituted by the successor corporation or a parent or subsidiary of the successor corporation. In the event that, or to
the extent that, the successor corporation in a Change in Control refuses to assume or substitute for the award, or if the plan
administrator determines that such assumption or substitution is not desirable or is only desirable for a portion of any outstanding
award, then the plan administrator may take any or all of the following actions: (i) determine that an outstanding award will
accelerate and become exercisable, or determine that the restrictions and conditions on an outstanding award will lapse, in whole
or in part, as applicable, upon the Change of Control or upon such other event as the plan administrator determines; (ii) require
that a Grantee surrender his or her outstanding award, or any portion of such outstanding award, in exchange for a payment by
the Company, in cash or stock, as determined by the plan administrator, in an amount equal to the fair market value of the vested
portion of the award (with respect to options or stock appreciation rights, or other similar appreciation value awards, such value
shall be determined by the amount by which the then fair market value of the shares subject to the Grantee’s unexercised
award exceeds the any applicable exercise price or other grant price or base value or the award); or (iii) after giving the Grantee
an opportunity to exercise the vested portion of his or her outstanding award, terminate any or all unexercised portion of the
award at such time as the plan administrator deems appropriate. Such surrender or termination will take place as of the date of
the Change of Control or such other date as the plan administrator may specify.
For
purposes of the 2015 Plan, “Change in Control” means the occurrence of any of the following events:
|
|
(i)
|
A
change in our ownership which occurs on the date that any one person, or more than one person acting as a group, or Person,
acquires ownership of our stock that, together with the stock held by such Person, constitutes more than 50% of the total
voting power of our stock, except that any change in the ownership of our stock as a result of a private financing that is
approved by our board of directors will not be considered a Change in Control; or
|
|
|
|
|
|
|
(ii)
|
If
we have a class of securities registered pursuant to Section 12 of the Exchange Act, a change in our effective control which
occurs on the date that a majority of members of our board of directors is replaced during any twelve (12) month period by
directors whose appointment or election is not endorsed by a majority of the members of our board of directors prior to the
date of the appointment or election. For purposes of this paragraph (ii), if any Person is considered to be in effective control
of our company, the acquisition of additional control of our company by the same Person will not be considered a Change in
Control; or
|
|
|
(iii)
|
A
change in the ownership of a substantial portion of our assets which occurs on the date that any Person acquires (or has acquired
during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from
us that have a total gross fair market value equal to or more than 50% of the total gross fair market value of all of our
assets immediately prior to such acquisition or acquisitions. For purposes of this paragraph (iii), gross fair market value
means the value of our assets, or the value of the assets being disposed of, determined without regard to any liabilities
associated with such assets.
|
Persons
will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase
or acquisition of stock, or similar business transaction with us.
Compensation
of Directors
Non-Employee
Director Compensation Program
Our
non-employee directors are entitled to receive the following compensation for their services:
|
|
●
|
Annual
Cash Retainer — $35,000
|
|
|
|
|
|
|
●
|
Chairman
of the Board Cash Retainer — $25,000
|
|
|
|
|
|
|
●
|
Audit
Committee Chair Retainer — $15,000
|
|
|
|
|
|
|
●
|
Compensation
Committee Chair Retainer — $10,000
|
|
|
|
|
|
|
●
|
Nominating
and Corporate Governance Committee Chair Retainer — $7,500
|
|
|
|
|
|
|
●
|
Initial
Equity Grant — 40,000 shares
|
|
|
|
|
|
|
●
|
Annual
Equity Grant — 30,000 shares
|
2019
Director Compensation
The
following table sets forth the compensation paid or earned for the fiscal year ended December 31, 2019 to our non-employee directors.
Compensation paid to Andrew Ritter, and Ira Ritter is presented as part of the “Summary Compensation Table (2019 and 2018)”
above. Our employee directors do not receive compensation for their service as directors.
|
Name of Director
|
|
Fees Earned and
Paid in Cash
($)
|
|
|
Option
Awards(1)
($)
|
|
|
All other compensation
($)
|
|
|
Total
($)
|
|
|
Noah Doyle
|
|
|
38,625
|
(2)
|
|
|
4,013
|
|
|
|
—
|
|
|
|
42,638
|
|
|
Matthew W. Foehr
|
|
|
52,500
|
(3)
|
|
|
4,013
|
|
|
|
—
|
|
|
|
56,513
|
|
|
Paul V. Maier
|
|
|
58,625
|
(4)
|
|
|
4,013
|
|
|
|
—
|
|
|
|
62,638
|
|
|
Dr. William M. Merino
|
|
|
55,000
|
(5)
|
|
|
4,013
|
|
|
|
—
|
|
|
|
59,013
|
|
|
(1)
|
Represents
the aggregate grant date fair value of the options granted to the non-employee directors on February 6, 2019 determined in
accordance with FASB ASC 718.
|
We
utilize the Black-Scholes option-pricing model to value awards. Key valuation assumptions include:
|
|
●
|
Expected
dividend yield. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans
to pay any dividends on our common stock.
|
|
|
|
|
|
|
●
|
Expected
stock-price volatility. As our common stock only recently became publicly traded, the expected volatility is derived from
the average historical volatilities of publicly traded companies within our industry that we consider to be comparable to
our 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. Our 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, we estimate 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.
|
In
addition to the assumptions used in the Black-Scholes option-pricing model, we also estimate a forfeiture rate to calculate the
stock-based compensation for our equity awards. We will continue to use judgment in evaluating the expected volatility, expected
terms and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis.
As
of December 31, 2019, Mr. Foehr and Mr. Maier held options to purchase an aggregate of 39,400 shares of our common stock. Mr.
Doyle held options to purchase an aggregate of 18,000 shares of our common stock and Dr. Merino held options to purchase an aggregate
of 19,200 shares of our common stock.
|
|
(2)
|
Amount
includes $15,450 of director fees that have been deferred and are expected to be paid
upon the closing of the proposed merger between the Company and Qualigen, Inc.
|
|
|
(3)
|
Amount
includes $21,000 of director fees that have been deferred and are expected to be paid
upon the closing of the proposed merger between the Company and Qualigen, Inc.
|
|
|
(4)
|
Amount
includes $23,450 of director fees that have been deferred and are expected to be paid
upon the closing of the proposed merger between the Company and Qualigen, Inc.
|
|
|
(5)
|
Amount
includes $11,000 of director fees that have been deferred and are expected to be paid
upon the closing of the proposed merger between the Company and Qualigen, Inc.
|
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Security
Ownership Of Certain Beneficial Owners And Management
The
following table sets forth certain information with respect to the beneficial ownership of Ritter common stock as of April 10,
2020 (except where otherwise indicated) for:
|
|
●
|
each
person, or group of affiliated persons, known by Ritter to beneficially own more than 5% of the outstanding shares of Ritter
common stock;
|
|
|
|
|
|
|
●
|
each
of Ritter’s named executive officers;
|
|
|
|
|
|
|
●
|
each
of Ritter’s directors; and
|
|
|
|
|
|
|
●
|
all
of Ritter’s current executive officers and directors as a group.
|
The
number of shares beneficially owned by each entity, person, director or executive officer is determined under the rules of the
SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which the individual has the sole or shared voting power or investment power and any shares
that the individual has the right to acquire within 60 days of April 10, 2020, through the exercise of any stock option, warrant
or other right (including shares of common stock issuable upon the conversion of convertible preferred stock). Shares of Ritter’s
common stock that may be acquired by an individual or group within 60 days of April 10, 2020, pursuant to the exercise of options,
warrants or other rights, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual
or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of Ritter’s common
stock of any other person shown in the table.
The
percentage of beneficial ownership is based on 46,152,960 shares of Ritter common stock outstanding on April 10, 2020.
Subject
to applicable community property laws, each person has sole investment and voting power with respect to the shares set forth in
the following table. Except as otherwise noted below, the address for each person or entity listed in the table is c/o Ritter
Pharmaceuticals, Inc., 1880 Century Park East, Suite 1000, Los Angeles, California 90067.
Except
as contemplated by the merger, Ritter does not know of any arrangements the operation of which may at a subsequent date result
in a change in control of Ritter.
|
Beneficial Owner
|
|
Number of Shares
Beneficially Owned
|
|
|
Percentage of
Common stock
Beneficially Owned
|
|
|
Executive Officers, Directors and Director Nominees
|
|
|
|
|
|
|
|
|
|
Andrew J. Ritter(1)
|
|
|
356,637
|
|
|
|
*
|
|
|
Ira E. Ritter(2)
|
|
|
255,052
|
|
|
|
*
|
|
|
John W. Beck(3)
|
|
|
85,000
|
|
|
|
*
|
|
|
Noah J. Doyle(4)
|
|
|
798,924
|
|
|
|
1.7
|
%
|
|
Matthew W. Foehr(5)
|
|
|
162,335
|
|
|
|
*
|
|
|
Paul V. Maier(6)
|
|
|
23,700
|
|
|
|
*
|
|
|
Dr. William M. Merino(7)
|
|
|
26,252
|
|
|
|
*
|
|
All current executive officers and directors as a group
(7 persons)(8)
|
|
|
1,607,453
|
|
|
|
3.4
|
%
|
*
Represents beneficial ownership of less than 1% of the shares of common stock.
(1)
Includes 625 shares owned directly, 255,565 shares underlying stock option awards that are currently exercisable or exercisable
within 60 days of April 10, 2020 and 81,697 shares beneficially owned by Stonehenge Partners LLC (“Stonehenge”), including
18,750 shares that are issuable upon the exercise of warrants to purchase common stock that are currently exercisable. As a managing
partner of Stonehenge, Andrew Ritter may be deemed the beneficial owner of these shares. Andrew Ritter expressly disclaims beneficial
ownership of the shares held by Stonehenge.
(2)
Includes as of April 10, 2020, 625 shares held in a retirement plan trust of which the reporting person and his spouse are trustees,
153,980 stock option awards that are currently exercisable or exercisable within 60 days of April 10, 2020, and 81,697 shares
beneficially owned by Stonehenge, including 18,750 shares that are issuable upon the exercise of warrants to purchase common stock
that are currently exercisable. As a managing partner of Stonehenge, Ira Ritter may be deemed the beneficial owner of these shares.
Ira Ritter expressly disclaims beneficial ownership of the shares held by Stonehenge.
(3)
Represents shares underlying stock option awards held by Mr. Beck that are currently exercisable or exercisable within 60 days
of April 10, 2020.
(4)
Includes 2,272 shares owned directly by Mr. Doyle, 19,000 shares underlying stock options held by Mr. Doyle that are currently
exercisable or exercisable within 60 days of April 10, 2020. This number also includes (i) 737,055 shares of common stock held
directly by Javelin Venture Partners, L.P. and Javelin Partners I SPVI, LLC (“Javelin”) and 40,597 shares of common
stock that Javelin has the right to acquire upon exercise of warrants to purchase common stock that are currently exercisable
Javelin Venture Partners GP, L.P. (“Javelin GP, LP”) serves as the general partner for the Javelin entities. Javelin
Venture Partners GP, LLC (“Javelin GP, LLC”) serves as the general partner of Javelin GP, LP, and Noah Doyle and Jed
Katz serve as the managers of Javelin GP, LLC.
(5)
Includes 138,635 shares owned directly by Mr. Foehr and 23,700 shares underlying stock options held by Mr. Foehr that are currently
exercisable or exercisable within 60 days of April 10, 2020.
(6)
Represents shares underlying stock options held by Mr. Maier that are currently exercisable or exercisable within 60 days of April
10, 2020.
(7)
Includes 1,398 shares owned directly by Dr. Merino and 24,854 shares underlying stock options held by Dr. Merino that are currently
exercisable or exercisable within 60 days of April 10, 2020.
(8)
Includes 645,146 shares underlying stock options and warrants that are currently exercisable or exercisable within 60 days of
April 10, 2020.
Equity
Compensation Plan Information
The
following table sets forth aggregate information for the fiscal year ended December 31, 2019, regarding the Company’s compensation
plans, including individual compensation agreements, under which equity securities of the Company are authorized for issuance:
|
|
|
Number of securities
to
be issued
upon exercise of
outstanding options,
warrants and rights
(#)
|
|
|
Weighted average
exercise price of
outstanding options,
warrants and rights
($)
|
|
|
Number of securities
remaining available for future
issuance under
equity compensation
plans (excluding
securities reflected in column (a))
(#)
|
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by security holders
|
|
|
1,159,744
|
(1)
|
|
$
|
6.93
|
|
|
|
1,742,515
|
(2)
|
|
Equity compensation plans not approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
|
1,159,744
|
(1)
|
|
$
|
6.93
|
|
|
|
1,742,515
|
(2)
|
|
(1)
|
Represents
the number of underlying shares of common stock associated with outstanding options that were granted under the 2008 Stock
Plan and the 2015 Equity Incentive Plan.
|
|
|
|
|
(2)
|
Represents
the number of shares of common stock available for future issuance under the 2015 Equity Incentive Plan. As of June 29, 2015,
no further awards were permitted to be issued under the 2008 Stock Plan.
|
Item
13. Certain Relationships and Related Transactions, and Director Independence.
Certain
Relationships and Related Party Transactions
Our
Audit Committee is responsible for reviewing, approving and overseeing any transaction between the Company and its directors,
director nominees, executive officers, greater than 5% beneficial owners, and each of their respective immediate family members,
where the amount involved exceeds the lesser of (i) $120,000 and (ii) one percent (1%) of the average of our total assets at year-end
for the prior two fiscal years. Since January 1, 2018, there have been no such transactions.
Director
Independence
Under
Nasdaq’s continued listing requirements, a majority of a listed company’s board of directors must be comprised of
independent directors, subject to certain exceptions. In addition, Nasdaq’s continued listing requirements require that,
subject to certain exceptions, each member of a listed company’s audit, compensation and governance and nominating committees
must be independent. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Exchange
Act. Under Nasdaq’s continued listing requirements, a director will only qualify as an “independent director”
if, in the opinion of that company’s board of directors, such person does not have a relationship that would interfere with
the exercise of independent judgment in carrying out the responsibilities of a director.
Based
upon information requested from and provided by each director concerning their background, employment and affiliations, including
family relationships, our board of directors determined that each of Messrs. Doyle, Foehr and Maier and Dr. Merino are independent
under the applicable rules and regulations of Nasdaq. In making such determinations, the board of directors considered the relationships
that each such non-employee director has with our company and all other facts and circumstances the board of directors deemed
relevant in determining their independence.
Item
14. Principal Accountant Fees and Services
Fees
and Services of Mayer Hoffman McCann P.C.
The
following table sets forth the aggregate fees billed to the Company by MHM for the fiscal years ended December 31, 2019 and 2018:
|
|
|
2019
|
|
|
2018
|
|
|
Audit Fees(1)
|
|
$
|
132,000
|
|
|
$
|
130,000
|
|
|
Audit-Related Fees
|
|
|
─
|
|
|
|
─
|
|
|
Tax Fees
|
|
|
─
|
|
|
|
─
|
|
|
All Other Fees(2)
|
|
|
31,110
|
|
|
|
11,000
|
|
|
Total
|
|
$
|
163,110
|
|
|
$
|
141,000
|
|
|
(1)
|
Audit
fees consisted of fees for audit work performed in the audit of financial statements, as well as fees for quarterly reviews
and registration statements.
|
|
|
|
|
(2)
|
All
Other Fees for 2019 consists of fees paid in connection with registrations statements we filed with the SEC in 2019. All
Other Fees for 2018 consists of fees paid in connection with our November 2018 private placement financing.
|
The
Audit Committee has adopted a formal policy on auditor independence requiring the advance approval by the Audit Committee of all
audit and non-audit services provided by our independent registered public accounting firm. In determining whether to approve
any services by our independent registered public accounting firm, the Audit Committee reviews the services and the estimated
fees, and considers whether approval of the proposed services will have a detrimental impact on the auditor’s independence.
On an annual basis, our management reports to the Audit Committee all audit services performed during the previous 12 months and
all fees billed by our independent registered public accounting firm for such services.
In
fiscal 2019 and 2018, all audit services and the corresponding fees were approved by our board of directors.
NOTES
TO FINANCIAL STATEMENTS
NOTE
1 — ORGANIZATION AND PRINCIPAL ACTIVITIES
Since
its inception, Ritter Pharmaceuticals, Inc. (“Ritter”
or the “Company”) has focused on the development of therapeutic products that modulate the gut microbiome
to treat gastrointestinal diseases. The Company’s only product candidate, RP-G28, is an orally administered, high
purity galacto-oligosaccharide (“GOS”), 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.
Ritter
was formed as a Nevada limited liability company on March 29, 2004 under the name Ritter Natural Sciences, LLC. Its first prototype
LI product, Lactagen™, was an alternative LI treatment method with a mechanism of action similar to RP-G28. In 2004, clinical
testing was conducted with Lactagen, which included a 61-subject double-blind placebo controlled clinical trial. The results were
published in the Federation of American Societies for Experimental Biology in May 2005.
In
early 2008, the Company initiated a prescription drug development program by developing RP-G28, an improved, second-generation
version of Lactagen, based on the belief that if it was successful in gaining approval from the U.S. Food and Drug Administration
(“FDA”), it would be able to make stronger claims of both efficacy and safety, garner more medical community support
and reach a wider market in the effort to treat LI.
In
November 2010, Ritter was awarded a grant from the United States government’s Health Care Bill program, the Qualifying Therapeutic
Discovery Project, to help fund the development of RP-G28. This grant program provides support for innovative projects that are
determined by the U.S. Department of Health and Human Services to have reasonable potential to result in new therapies that treat
areas of unmet medical need and/or prevent, detect or treat chronic or acute diseases and conditions.
In
November 2011, the Company completed a Phase 2a clinical trial of RP-G28. Positive trends were seen when the entire per protocol
study population was analyzed, including some statistically significant subgroup. The combined data demonstrated proof of concept
and suggested that RP-G28 administration produced a positive therapeutic effect. RP-G28 was also well tolerated with no significant
study-drug related adverse effects.
In
October 2016, the Company completed a Phase 2b multi-center, randomized, double-blind, placebo-controlled, parallel group trial
of RP-G28. Topline results of the trial were announced in March 2017. Results showed a clinically meaningful benefit to subjects
in the reduction of LI symptoms across a variety of outcome measures. The majority of analyses showed positive outcome measures
and the robustness of the data point to a clear drug effect. Treatment patients not only reported meaningful reduced symptoms,
but also 30 days after taking the treatment, patients reported adequate relief from LI symptoms and satisfaction with the results
of the treatment, with RP-G28 preventing or treating their LI symptoms. Greater milk and dairy product consumption was also reported
by patients.
In August
2017, the Company held an End-of-Phase 2 meeting with the FDA’s Division of Gastroenterology and Inborn Errors Products.
The purpose of the meeting was to obtain the FDA’s feedback on its Phase 3 program. The Company reached general consensus
with the FDA on certain elements of its Phase 3 program and clear guidance and recommendations on many necessary components of
its Phase 3 program; including the clinical, non-clinical, and chemistry, manufacturing and controls (“CMC”) requirements
needed to support a new drug application (“NDA”) submission.
In
June 2018, the Company initiated the first pivotal Phase 3 clinical trial of RP-G28. Called “Liberatus”, this study
was to determine the efficacy, safety and tolerability of RP-G28 to treat LI when compared to placebo. The study was a multicenter,
randomized, double-blind, placebo-controlled, parallel-group study conducted in the United States. Trial enrollment exceeded expectations,
concluding with approximately 557 subjects randomized. More than 30 U.S. sites participated in the study. The protocol design
included a 2-week screening period that included one week of study drug administration, a randomized 30-day study drug treatment
period and a 90-day “real world experience” period to assess study drug response and durability of effect after treatment
as patients consumed their normal diets including dairy products. The primary endpoint of the study was the mean change in LI
symptom composite score 30-days post-treatment compared to baseline. Secondary endpoints were to examine the safety, tolerability
and meaningfulness of treatment benefit with RP-G28 and the durability of effect of treatment with RP-G28 on reduction of LI symptoms
after real-world lactose exposure. The study utilized the prior validated symptom assessment measure and patient questionnaires
to capture relevant outcomes. In addition, risk-based data review was used to monitor and assess potential protocol deviations
and site quality indicators.
The
Company completed enrollment of the Liberatus Phase 3 clinical trial of RP-G28 in March 2019 and last patient visit in July 2019.
In September 2019, the Company announced that its Phase 3 clinical trial of RP-G28 for LI failed to demonstrate statistical significance
in its pre-specified primary and secondary endpoints.
On October
7, 2019, the Company announced publicly that it had engaged AGP as a financial advisor to explore and evaluate potential strategic
alternatives, as it continued to analyze the results of the trial to better understand the data and clinical outcome to assess
a path forward for RP-G28. All further development efforts for RP-G28 have been suspended, until such time as the Company determines
a path forward.
On
January 15, 2020, Ritter entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Qualigen Inc.
(“Qualigen”), pursuant to which a wholly owned Company Merger Sub will merge with and into Qualigen, with Qualigen
surviving as a wholly owned subsidiary of Ritter Pharmaceuticals, Inc.
If
the merger is consummated, the combined company does not intend to continue the clinical development of RP-G28. Pursuant to the
terms of the Merger Agreement, at the Effective Time (as defined in the Merger Agreement), Ritter and John Beck, the Company’s
Chief Financial Officer, acting as the initial contingent value right (“CVR”) holders’ representative and in
his capacity as a consultant to Ritter, will enter into a Contingent Value Rights Agreement (the “CVR Agreement”),
pursuant to which, each stockholder of record as of immediately prior to the Effective Time (after giving effect to the exercise
of any outstanding stock options or warrants and the conversion of any outstanding preferred stock, but not to be adjusted for
any reverse split to be effected in connection with the merger) will receive one CVR for each share of capital stock held by such
stockholder, entitling the holder to receive the net proceeds, if any, from any sale, license, transfer, spin-off or other monetizing
event of all or any part of our current business or all or any part of our intellectual property or technology (a “Legacy
Monetization”) that is entered into during the period beginning on the date the Merger Agreement was signed and ending on
the third anniversary of the closing date of the merger. Under the CVR Agreement, the combined company agreed to commit up to
$350,000 (subject to reduction pursuant to the terms of the Merger Agreement) for certain expenses to be incurred by us in pursuing
and closing any Legacy Monetization. The CVRs will not be transferable by the holders of CVRs (“CVR Holders”), except
in certain limited circumstances, will not be certificated or evidenced by any instrument, will not accrue interest and will not
be registered with the Securities and Exchange Commission (the “SEC”) or listed for trading on any exchange. The CVRs
will terminate on the tenth anniversary of the Effective Time (the “CVR Termination Date”). No payments with respect
to the CVRs will be payable in respect of any Legacy Monetization proceeds actually received after the CVR Termination Date by
us. From and after the CVR Termination Date, any further proceeds received by us arising from any Legacy Monetization will be
retained by Ritter and will not be distributed to the CVR Holders.
The
Company may not be successful in completing the merger. If the merger is not completed, Ritter may seek to pursue the development
and commercialization of RP-G28 as either a prescription drug, OTC product or dietary supplement for the consumer healthcare industry,
which would, in any case, require significant additional funding. If Ritter is unable to obtain funding for the development of
RP-G28, whether through potential collaborative, partnering or other strategic arrangements or otherwise, it will likely be required
to cease operations
The
Company currently operates in one business segment focusing on the potential future 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
financial statements have been prepared in accordance with GAAP and include all adjustments necessary for the fair presentation
of the Company’s financial position for the periods presented.
Going
Concern and Liquidity
The accompanying 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. The Company had net losses of approximately $10.1 million and $16.9 million for the
years ended December 31, 2019 and 2018, respectively, and had net cash used in operating activities of approximately $14.5 million
and $13.3 million, for the years ended December 31, 2019 and 2018, respectively. At December 31, 2019, the Company had working
capital of approximately $0.5 million, an accumulated deficit of approximately $80.3 million, cash and cash equivalents of approximately
$1.7 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. If the Plan of Merger is not successful, the Company may close down operations and
operate as a shell company if the Company cannot raise the cash to continue operations. 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
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 and such differences may be material to the financial statements. The more significant estimates and assumptions by
management include among others; the valuation allowance of deferred tax assets resulting from net operating losses and the valuation
of options on the Company’s common stock.
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. Cash equivalents include money market
funds and held-to-maturity securities with a maturity date of 90 days or less. As of December 31, 2019, cash and cash equivalents
consisted of bank deposits, cash and investments in money market funds.
Investment
in Marketable Securities
Investment in marketable securities is 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 and comprehensive loss. The unrealized gains and losses on these
securities are excluded from earnings and reported in other comprehensive loss until realized, except when it considers declines
in value 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.
Property
and Equipment
Property
and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method (see Note
4). Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts
and any resulting gain or loss is credited or charged to income. Maintenance and repairs are charged to expense as incurred while
expenditures for refurbishments and improvements that significantly add to the productive capacity or extend the useful life of
an asset are capitalized.
Impairment
of Long-Lived Assets
The
Company periodically assesses the impairment of long-lived assets in accordance with Accounting Standards Codification (“ASC”)
Topic 360, Property Plant and Equipment. When indicators of impairment are present, the Company evaluates the carrying
value of these assets in relation to the operating performance of the business and future undiscounted cash flows expected to
result from the use of these assets. No such impairments have been recognized during the years ended December 31, 2019 or 2018.
Clinical
Trial and Pre-Clinical Study Accruals
The
Company makes estimates of accrued expenses as of each balance sheet date in its financial statements based on the facts and circumstances
known to it at that time. Accrued expenses for pre-clinical studies and clinical trials are based on estimates of costs incurred
and fees that may be associated with services provided by contract research organizations, clinical trial investigational sites,
and other related vendors. Payments under certain contracts with such parties depend on factors such as successful enrollment
of patients, site initiation and the completion of milestones. In accruing service fees, management estimates the time period
over which services will be performed and the level of effort to be expended in each period. If possible, the Company obtains
information regarding unbilled services directly from these service providers. However, the Company may be required to estimate
these services based on other information available to it. If the Company underestimates or overestimates the activity or fees
associated with a study or service at a given point in time, adjustments to research and development expenses may be necessary
in future periods. Historically, estimated accrued liabilities have approximated actual expense incurred. Subsequent changes in
estimates may result in a material change in the Company’s accruals.
Research
and Development
The
Company expenses the cost of research and development as incurred. Research and development expenses comprise costs incurred in
performing research and development activities, including clinical trial costs, manufacturing costs for both clinical and pre-clinical
materials as well as other contracted services, license fees, 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 Topic 730, Research and Development.
Patent
Costs
The
Company has no historical data to support a probable future economic benefit for the arising patent applications, filing and prosecution
costs. Therefore, patent costs are expensed as incurred. Should the Company experience a legal cost to defend a patent in the
future, that cost would be capitalized only when it is part of the cost of retaining and obtaining the future economic benefit
of the patent. Costs related to an unsuccessful outcome would be expensed.
Stock-based
Compensation
Stock-based
compensation cost for stock awards issued to employees, members of the Company’s board of directors and non-employees, is
measured at the grant date based on the fair value of the award and is recognized as expense over the required service period,
which is generally equal to the vesting period. Stock-based compensation is recognized only for those awards that are ultimately
expected to vest. Common stock, stock options or warrants issued to non-employees, including consultants and members of the Company’s
Scientific Advisory Board as consideration for goods or services received by the Company, are accounted for based on the fair
value of the equity instruments issued unless the fair value consideration received can be more reliably measured. The fair value
of stock options is determined using the Black-Scholes option-pricing model. The fair value of any options issued to non-employees
is recorded as expense over the vesting period. See Note 8 for further information.
Fair
Value Measurements
The
fair value of the Company’s financial instruments reflects the amounts that it estimates it would receive in connection
with the sale of an asset or pay in connection with the transfer of a liability in an orderly transaction between market participants
at the measurement date (exit price). The Company discloses and recognizes the fair value of its assets and liabilities using
a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority
to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements).
The guidance establishes three levels of the fair value hierarchy as follows:
Level
1 - Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability
to access at the measurement date;
Level
2 - Inputs other than quoted prices that are observable for the assets or liability either directly or indirectly, including inputs
in markets that are not considered to be active;
Level
3 - Inputs that are unobservable.
Assets
and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant
to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement
in its entirety requires management to make judgments and consider factors specific to the asset or liability.
The
Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers
within the hierarchy during the year ended December 31, 2019.
A
summary of the assets and liabilities carried at fair value in accordance with the hierarchy defined above is as follows:
|
|
|
Fair
Value Measurements Using
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market fund
|
|
$
|
1,552,115
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
1,552,115
|
|
|
Total
assets
|
|
$
|
1,552,115
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
1,552,115
|
|
|
|
|
Fair
Value Measurements Using
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and money market fund
|
|
$
|
2,353,825
|
|
|
$
|
―
|
|
|
$
|
―
|
|
|
$
|
2,353,825
|
|
|
Corporate
debt securities
|
|
|
―
|
|
|
|
6,908,710
|
|
|
|
―
|
|
|
|
6,908,710
|
|
|
Commercial
paper
|
|
|
―
|
|
|
|
2,979,213
|
|
|
|
―
|
|
|
|
2,979,213
|
|
|
Total
assets
|
|
$
|
2,353,825
|
|
|
$
|
9,887,923
|
|
|
$
|
―
|
|
|
$
|
12,241,748
|
|
The Company
uses a market approach for determining the fair value of all its Level 1 money market funds and marketable securities. To value
its money market funds, the Company values the funds at $1 stable net asset value, which is the market pricing convention for
identical assets that the Company has the ability to access.
The
investments were classified as available-for-sale debt securities. At December 31, 2019, the balance in the Company’s
accumulated other comprehensive loss was comprised primarily of activity related to the Company’s available-for-sale
debt securities and some activity related to held-to-maturity debt securities. Realized gains and losses are included in
earnings The Company had no available-for-sale or held-to-maturity debt securities as of December 31,
2019.
Convertible
Preferred Stock
The
Company follows authoritative accounting guidance to distinguish liabilities from equity when assessing the classification and
measurement of preferred stock. Preferred shares subject to mandatory redemptions are considered liabilities and measured at fair
value. Conditionally redeemable preferred shares are considered temporary equity. All other preferred shares are considered as
stockholders’ equity.
Accounting
for Income Taxes
Deferred
tax assets and liabilities are recognized for the expected future consequences of events that have been reflected in the financial
statements. Deferred tax assets and liabilities are determined based on the differences between the book and tax basis of assets
and liabilities and operating loss carryforwards, using tax rates expected to be in effect for the years in which the differences
are expected to reverse. Such differences arise primarily from stock-based compensation and net operating loss carryforwards.
The Company records a valuation allowance to reduce deferred income tax assets when it is more likely than not that some portion
or all of the deferred tax asset will not be realized. Prior to September 15, 2008, the Company was a limited liability company
and the Company’s tax losses and credits generally flowed directly to the members.
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, Series B and Series C 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.
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 loss in the financial statements in the period in which
they are recognized. Net income (loss) and other comprehensive loss, including foreign currency translation adjustments and unrealized
gains and losses on investments are reported, net of their related tax effect, to arrive at a comprehensive loss. For the years
ended December 31, 2019 and 2018, comprehensive loss comprised of unrealized losses on investments in available-for-sale debt
securities and held-to-maturity debt securities.
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 FASB 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 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 ASU 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 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
December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,”
which is intended to simplify various aspects related to accounting for income taxes. The ASU 2019-12 removes certain exceptions
to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The
ASU 2019-12 is effective for the Company beginning after December 15, 2021. The Company is evaluating the impact of the adoption
of ASU 2019-12 on its financial statements, but does not expect such adoption to have a material impact.
Other
accounting standard updates effective after December 31, 2019 are not expected to have a material impact on the Company’s
financial statements.
Recently
Adopted Accounting Pronouncements
In February
2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under this guidance, an entity is required to recognize right-of-use
(“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 adopted this guidance as of January 1, 2019.
The standard had a material impact on the
Company’s 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.
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. 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.
NOTE
4 — PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
|
Estimated
Life
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
|
Computer
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
|
|
|
|
|
(20,680
|
)
|
|
|
(14,587
|
)
|
|
Property
and equipment, net
|
|
|
|
$
|
15,656
|
|
|
$
|
20,160
|
|
Depreciation
expense of approximately $6,100 and $5,700 was recognized for each of the years ended December 31, 2019 and 2018, respectively,
and is classified in general and administrative expense in the accompanying Statements of Operations and Comprehensive Loss.
NOTE
5 — COMMITMENTS AND CONTINGENCIES
Master
Services Agreement
In May 2018,
Ritter entered into an Amended and Restated Master Services Agreement (“Service Agreement”) with a clinical research
organization (“CRO”), pursuant to which the CRO agreed to perform certain services related to the management and execution
of certain clinical trials involving RP-G28. The Services Agreement supersedes the Master Service Agreement, dated August 30,
2016, that Ritter entered into with 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. Ritter 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. Ritter
may terminate the Services Agreement or any task without cause immediately upon giving the CRO notice of such termination. The
CRO may, with advance notice to Ritter, terminate a task order if Ritter has materially defaulted on its obligations under the
Services Agreement or any task order and has not cured such material default, as described in the Services Agreement.
Clinical
Supply and Cooperation Agreement with Ricerche Sperimentali Montale SpA (“RSM”)
Under the
terms of the Supply Agreement with RSM on July 22, 2015, Ritter is required to pay RSM $400,000 within 10 days following FDA approval
of an NDA for the first product owned or controlled by Ritter using Improved GOS as its active pharmaceutical ingredient.
Offer
Letter Amendments
On
October 15, 2019, Ritter entered into amendments to the respective employment offer letters of Andrew J. Ritter, its Chief Executive
Officer, John W. Beck, its Chief Financial Officer, and Ira E. Ritter, its Chief Strategic Officer (the “Offer Letter Amendments”).
Pursuant to the terms of the Offer Letter Amendments, each of Ritter’s executive officers agreed to defer a portion of his
annual base salary (the “Deferred Amounts”), as set forth below, until such time as the board of directors, in its
sole discretion, decides to pay the Deferred Amounts (or any portion of the Deferred Amounts) to the executive officers, if ever.
|
Name
of Executive Officer
|
|
Annual
Deferred Amount
|
|
|
Andrew
J. Ritter
|
|
$
|
70,200
|
|
|
John
W. Beck
|
|
$
|
33,000
|
|
|
Ira
E. Ritter
|
|
$
|
53,820
|
|
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, recognized on a straight-line basis, was approximately
$117,000 and $118,000 for the years ended December 31, 2019 and 2018, respectively, and is recorded in general and
administrative expenses in the accompanying statements of operations and comprehensive loss.
Other information
related to our leases is provided below.
|
|
|
Year
Ended
December 31, 2019
|
|
|
Supplemental
Cash Flows Information
|
|
|
|
|
|
Cash paid for amounts
included in the measurement of lease liability:
|
|
|
|
|
|
Operating
cash flows from operating lease
|
|
$
|
114,978
|
|
|
Operating lease asset
obtained in exchange for lease obligation:
|
|
|
|
|
|
Operating
lease
|
|
$
|
198,319
|
|
|
Remaining lease
term
|
|
|
|
|
|
Operating
lease
|
|
|
0.8
years
|
|
|
Discount rate
|
|
|
|
|
|
Operating
lease
|
|
|
6.0
|
%
|
Future
payments under non-cancelable 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,
|
|
|
|
|
2020
(10 months)
|
|
$
|
103,254
|
|
|
Total
future minimum lease payments, undiscounted
|
|
|
103,254
|
|
|
Less
imputed interest
|
|
|
(2,783
|
)
|
|
Present
value of lease liabilities
|
|
$
|
100,471
|
|
|
|
|
|
|
|
|
Operating lease liabilities reported
as of December 31, 2019:
|
|
|
|
|
|
Operating
lease liabilities-current
|
|
$
|
100,471
|
|
|
Operating
lease liabilities-non-current
|
|
|
—
|
|
|
Total
|
|
$
|
100,471
|
|
The
following table summarizes our lease obligations at December 31, 2019:
|
|
|
LEASE
COMMITMENTS
|
|
|
Years
ended December 31,
|
|
Operating
Lease
|
|
|
2020
|
|
$
|
103,254
|
|
|
Total
minimum lease payments
|
|
$
|
103,254
|
|
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
Authorized
Shares
In September
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 of which are designated as preferred stock, consisting of
(i) 9,500 shares that have been designated Series A convertible preferred stock, (ii) 6,000 shares that have been designated as
Series B convertible preferred stock, and (iii) 1,880 shares that have been designated as Series C convertible preferred stock.
Pursuant to the terms of the Certificate of Incorporation, the board of directors has the authority to issue preferred stock in
one or more classes or series and to fix the designations, powers, preferences and rights, and the qualifications, limitations
or restrictions thereof, including dividend rights, conversion right, voting rights, terms of redemption, liquidation preferences
and the number of shares constituting any class or series, without further vote or action by the stockholders.
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 December 31, 2019, the Company had 19,108,331 shares of common stock, 0 shares of Series A convertible preferred stock, 1,850
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 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, whether capital or surplus, of the Company
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 shall 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 and on July 23, 2019 (as amended and restated, the
“Aspire Purchase Agreement”). The Aspire Purchase Agreement was amended and restated to adjust certain provisions
to improve the Company’s access to funding under the agreement. The Company was not required to pay a commitment fee to
Aspire Capital to affect the amendment to the Aspire Purchase 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 selected, it had 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 could not exceed $500,000, unless otherwise mutually agreed. In addition, on any date on which the Company submitted a Purchase
Notice to Aspire Capital in an amount of at least 100,000 shares and its stock price was not less than $0.25 per share, the Company
could 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 could be sold pursuant
to Aspire Capital was 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 first 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 December 31, 2019, the Company
has not sold any shares of common stock under this agreement. Subsequent to December 31, 2019 the Company sold approximately 1.8
million shares of common stock under this agreement resulting in proceeds of approximately $0.5 million.
November
2018 Private Placement Financing
On
November 5, 2018, the Company closed a PIPE financing with certain institutional investors, a key vendor and a member of its board
of directors. Net proceeds from the PIPE financing were approximately $5.5 million, after 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) and warrants to purchase an aggregate of 2,307,685 shares of the
Company’s common stock. 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 but without the down-round protective provisions of previously issued warrants). The proceeds
received in the PIPE financing were allocated to each instrument on a relative fair value basis. Total proceeds of $6.0 million
were allocated as follows: $1.4 million to warrants issued and $4.6 million to Series B convertible preferred stock. The allocation
resulted in an effective conversion price for the Series B preferred stock that was below the quoted market price of the Company’s
common stock on the closing date. As such, the issuance was considered 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 B convertible preferred stock
of approximately $0.7 million, recognized on the closing date and recorded as a reduction of income available to common stockholders
in computing basic and diluted loss per share.
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), (“the Exchange”). As the Series A convertible preferred stock contained
a beneficial conversion feature, the Exchange was considered an extinguishment equal to the excess of (a) the fair value of the
consideration transferred to the holders of the Series A convertible preferred stock over (b) the carrying amount of the Series
A convertible preferred stock on the Company’s balance sheet plus (c) the amount previously recognized for the beneficial
conversion feature, or approximately $0.2 million, which was recognized on the closing date and recorded as a reduction of income
available to common stockholders in computing basic and diluted loss per share.
At-the-Market
Offering Agreement
On
November 6, 2019, the Company entered into an at the market sales agreement (“ATM Agreement”) with AGP, pursuant to
which it may offer and sell, from time to time through AGP, shares of its common stock (the “Placement Shares”) having
an aggregate offering price of up to $3,673,159 (which was subsequently increased to $8,030,917), subject to the terms and conditions
of the ATM Agreement. Unless earlier terminated pursuant to the terms of the ATM Agreement, the ATM Agreement will automatically
terminate upon the earlier to occur of (i) issuance and sale of all of the Placement Shares to or through AGP and (ii) August
1, 2022. As of December 31, 2019, the Company sold approximately 8.1 million shares of common stock under the ATM Agreement resulting
net proceeds to of approximately $1.4 million after commissions and expenses of approximately $50,000. Subsequent to December
31, 2019 the Company sold approximately 16.8 million shares of common stock under this agreement resulting in net proceeds of
approximately $4.4 million after commissions and expenses of approximately $0.2 million.
NOTE
7 — WARRANTS
Warrants
to purchase an aggregate of 8,413,017 shares of the Company’s common stock were outstanding at December 31, 2019.
These warrants are all vested and exercisable, have exercise prices ranging from $0.15 to $93.00 per share, with a weighted
average exercise price of $0.95, 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 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.
In
June 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.
In
September 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 December 31, 2019, the aggregate number of shares of common stock authorized for issuance under the 2015
Plan, as amended, was 2,750,000, and 1,737,615 shares were available for issuance as of December 31, 2019.
The
following represents a summary of the options granted to employees and non-employees that are outstanding at December 31, 2019
and changes during the period then ended:
|
|
|
Number
of Shares
|
|
|
Weighted-
Average Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
Weighted-
Average Remaining Contractual Life (in years)
|
|
|
Outstanding
at December 31, 2018
|
|
|
673,885
|
|
|
$
|
19.82
|
|
|
$
|
―
|
|
|
|
8.2
|
|
|
Options
granted
|
|
|
698,750
|
|
|
|
0.62
|
|
|
|
―
|
|
|
|
8.6
|
|
|
Options
forfeited
|
|
|
(207,991
|
)
|
|
|
27.50
|
|
|
|
―
|
|
|
|
―
|
|
|
Outstanding
at December 31, 2019
|
|
|
1,164,644
|
|
|
|
6.93
|
|
|
|
―
|
|
|
|
8.4
|
|
|
Exercisable
at December 31, 2019
|
|
|
481,883
|
|
|
$
|
20.54
|
|
|
$
|
―
|
|
|
|
7.8
|
|
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 year
ended December 31, 2019 was $0.62.
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 year ended December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Expected
dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
Expected
stock-price volatility
|
|
|
46.33%
- 69.38
|
%
|
|
|
46.47%
- 53.11
|
%
|
|
Risk-free
interest rate
|
|
|
1.47%
- 2.60
|
%
|
|
|
2.46%
- 3.07
|
%
|
|
Term
of options
|
|
|
5
- 7
|
|
|
|
5
- 10
|
|
|
Stock
price
|
|
$
|
0.60
- $1.04
|
|
|
$
|
1.85
- $3.40
|
|
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 $438,000 and $646,000 for the years ended December 31, 2019 and 2018, respectively.
As of December 31, 2019, there was approximately $254,000 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 1.4 years.
No
stock options were exercised during the year ended December 31, 2019 and 2018.
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.
Other
than disclosed, the Company has not entered into or been a participant in any transaction in which a related party had or will
have a direct or indirect material interest.
NOTE
10 — INCOME TAXES
As
of December 31, 2019, the Company has net operating loss carryforwards of approximately $63.5 million available to reduce
future taxable income, if any, for Federal and state income tax purposes. The U.S. federal and state net operating loss carryforwards
will begin to expire in 2028.
As
of December 31, 2019, the Company has Federal and state research and development credit carryforwards of approximately $3.2 million
and $3.1 million, respectively, available to reduce future taxable income, if any, for Federal and state income tax purposes.
The Federal credit carryforwards begin to expire in 2029. California credits have no expiration date.
Under
the Internal Revenue Code (“IRC”) Sections 382 and 383, annual use of the Company’s net operating loss and research
tax credit carryforwards to offset taxable income may be limited based on cumulative changes in ownership. The Company has not
completed an analysis to determine whether any such limitations have been triggered as of December 31, 2019. The Company has no
income tax affect due to the recognition of a full valuation allowance on the expected tax benefits of future loss carry forwards
based on uncertainty surrounding realization of such assets.
A
reconciliation of the statutory income tax rates and the Company’s effective tax rate is as follows:
|
|
|
December
31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Statutory
U.S. federal rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
State
income tax, net of federal benefit
|
|
|
7.0
|
%
|
|
|
7.0
|
%
|
|
Meals
& entertainment
|
|
|
(0.1
|
)%
|
|
|
(0.1
|
)%
|
|
Valuation
allowance
|
|
|
(27.9
|
)%
|
|
|
(27.9
|
)%
|
|
Provision
for income taxes
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The
tax effects of the temporary differences and carry forwards that give rise to deferred tax assets consist of the following:
|
|
|
As
of December 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
17,773,202
|
|
|
$
|
15,108,073
|
|
|
Patent
costs
|
|
|
423,747
|
|
|
|
382,812
|
|
|
Accrued
Vacation
|
|
|
12,832
|
|
|
|
11,516
|
|
|
Research
and development credit
|
|
|
5,241,066
|
|
|
|
4,314,813
|
|
|
Stock-based
compensation
|
|
|
2,025,742
|
|
|
|
1,903,104
|
|
|
Other
|
|
|
10,200
|
|
|
|
8,495
|
|
|
Gross
deferred tax assets
|
|
|
25,486,789
|
|
|
|
21,728,813
|
|
|
Valuation
allowance
|
|
|
(25,486,789
|
)
|
|
|
(21,728,813
|
)
|
|
Net
deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company did not record any accruals for income tax accounting uncertainties for the years ended December 31, 2019 and 2018.
Authoritative
guidance requires companies to accrue interest and related penalties, if applicable, on all tax positions for which reserves have
been established consistent with jurisdictional tax laws. The Company’s policy is to recognize interest and penalties that
would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense. The Company
did not accrue either interest or penalties from inception through December 31, 2019.
The
Company does not have any unrecognized tax benefits that will significantly decrease or increase within 12 months of December
31, 2019.
The
Company’s major tax jurisdictions are the United States and California. All of the Company’s tax years will remain
open three and four years for examination by the Federal and state tax authorities, respectively, from the date of utilization
of the net operating loss. The Company does not have any tax audits pending.
NOTE
11 — SUBSEQUENT EVENTS
On January 15, 2020,
Ritter entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Qualigen Inc. (“Qualigen”),
pursuant to which the Merger Sub will merge with and into Qualigen, with Qualigen surviving as a wholly owned subsidiary of Ritter.
Upon closing, on a pro forma basis and based upon the number of shares of Ritter common stock expected to be issued in the merger,
the pre-merger Ritter securityholders are expected to own approximately 7.5% of the combined company, on a fully diluted basis,
and the pre-merger Qualigen securityholders are expected to own approximately 92.5% of the combined company, on a fully diluted
basis. To consummate the merger, Ritter and Qualigen stockholders must adopt and approve the Merger Agreement and a series of
Merger-related proposals. In addition to obtaining such stockholder approvals and appropriate regulatory approvals, each of the
other closing conditions set forth in the Merger Agreement must be satisfied or waived.
Risks Related to COVID-19 Pandemic
The recent outbreak of COVID-19 originated
in Wuhan, China, in December 2019 and has since spread to multiple countries, including the United States and several European
countries. On March 11, 2020, the World Health Organization declared the outbreak a pandemic. The COVID-19 pandemic is affecting
the United States and global economies and may affect the Company’s operations and those of third parties on which the Company
relies. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict,
the impact of the COVID-19 pandemic on the global financial markets may reduce the Company’s ability to access capital,
which could negatively impact the Company’s short-term and long-term liquidity and the Company’s and Qualigen’s
ability to complete the Plan of Merger on a timely basis or at all. The ultimate impact of the COVID-19 pandemic is highly uncertain
and subject to change. The Company does not yet know the full extent of potential delays or impacts on its business, financing
or other activities or on healthcare systems or the global economy as a whole. However, these effects could have a material impact
on the Company’s liquidity, capital resources, operations and business and those of the third parties on which we rely.