NOTES
TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND PRINCIPAL ACTIVITIES
Ritter
Pharmaceuticals, Inc. (“Ritter” or the “Company”) is a Delaware corporation headquartered in Los Angeles,
California. The Company was formed as a Nevada limited liability company in March 2004, under the name Ritter Natural Sciences,
LLC, and converted into a Delaware corporation in September 2008.
Since
its inception, Ritter 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.
On
October 7, 2019, after previously announcing that its Phase 3 clinical trial of RP-G28 for LI failed to demonstrate statistical
significance in its pre-specified primary and secondary endpoints, the Company announced publicly that it had engaged Alliance
Global Partners/A.G.P (“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.
The Company is continuing to explore monetization opportunities for RP-G28 for the treatment of lactose intolerance, including
exploring a variety of commercial routes.
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 subsidiary of the Company 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), the Company 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 stock split to be effected in connection with the merger) will receive one CVR for each share of common 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 the Company’s RP-G28 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 the Company 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 the Company.
From and after the CVR Termination Date, any further proceeds received by the Company 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 interim period unaudited condensed financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the SEC regarding
interim financial reporting. Accordingly, they do not include all of the information and footnotes required by GAAP for complete
financial statements. However, in the opinion of management, all adjustments consisting of normal recurring adjustments considered
necessary for a fair presentation of the financial position and results of operations have been included and management believes
the disclosures that are made are adequate to make the information presented not misleading.
The
condensed balance sheet at December 31, 2019 has been derived from the audited financial statements included in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 31, 2020 and amended on April
24, 2020 (as amended, the “2019 Annual Report”), but does not include all of the information and footnotes required
by GAAP for complete financial statements.
The
results for the three months ended March 31, 2020 are not necessarily indicative of the results expected for the full fiscal year
or any other period. The accompanying interim period unaudited condensed financial statements and related financial information
included in this Quarterly Report on Form 10-Q (“Quarterly Report”) should be read in conjunction with the audited
financial statements and notes thereto included in the Company’s 2019 Annual Report.
All
common share amounts and per share amounts have been adjusted to reflect a 1-for-10 reverse stock split of the Company’s
common stock effected on March 23, 2018.
Going
Concern and Liquidity
The
accompanying condensed interim period unaudited financial statements have been prepared assuming the Company will continue as
a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal
course of business.
The
Company has not generated any product revenue and has not achieved profitable operations. For the three months ended March 31,
2020, the Company had a net loss of approximately $1.7 million and had net cash used in operating activities of approximately
$1.2 million. At March 31, 2020, the Company had net working capital of approximately $4.5 million, an accumulated deficit
of approximately $82.0 million, and cash and cash equivalents of approximately $6.0 million. There is no assurance that profitable
operations will ever be achieved, and, if achieved, could be sustained on a continuing basis. In addition, potential future development
activities, clinical and pre-clinical testing, and commercialization of the Company’s products will require significant
financing. If the merger is not consummated, the Company may be forced to cease operations 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, warrant
exercise proceeds 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 need 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.
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.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There
have been no material changes in the Company’s significant accounting policies as of and for the three months ended March
31, 2020, as compared with the significant accounting policies described in the Company’s 2019 Annual Report.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
Cash
consists of amounts held in financial institutions that are immediately available to the Company. The funds are maintained at
stable financial institutions, generally at amounts in excess of federally insured limits. Cash equivalents include money market
funds and held-to-maturity securities with a maturity date of 90 days or less. As of March 31, 2020, cash and cash equivalents
consisted of bank deposits, cash and investments in money market funds.
Investments
in Marketable Securities
Investments
in marketable securities are held in a custodial account at a financial institution and managed by the Company’s capital
advisors based on the Company’s investment guidelines. All of the Company’s investments in marketable securities are
classified as available-for-sale debt securities and are carried at fair value. Interest on these securities, as well as the amortization
of discounts and premiums, is included in interest income in the statements of operations and comprehensive loss. The unrealized
gains and losses on these securities are excluded from earnings and reported in other comprehensive income 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.
Operating
Leases
The
Company determines if a contract contains a lease at inception. The Company’s material operating lease relates to a single
office space. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities
represent the present value of lease payments not yet paid. Operating lease assets represent the Company’s right to use
an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial
direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not
yet paid, the Company estimates incremental secured borrowing rates corresponding to the maturities of the leases. As the Company
has no outstanding debt or committed credit facilities, secured or otherwise, the Company estimates this rate based on prevailing
financial market conditions, comparable company and credit analysis, and management judgment.
The
Company’s leases typically contain rent escalations over the lease term. The Company recognize expense for these leases
on a straight-line basis over the lease term. Additionally, tenant incentives used to fund leasehold improvements are recognized
when earned and reduce the Company’s right-of-use (“ROU”) asset related to the lease. These are amortized through
the ROU asset as reductions of expense over the lease term. The Company’s lease agreement does not contain any material
residual value guarantees or material restrictive covenants. The Company has no lease agreements with lease and non-lease components.
Related
to the adoption of Topic 842, the Company’s policy elections were as follows:
Separation
of lease and non-lease components
|
|
While
the Company does not currently have any lease agreement with lease and non-lease components, the Company elected this expedient
to account for lease and non-lease components as separate components.
|
|
|
|
Short-term
policy
|
|
The
Company has elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term
disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized
on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option
to purchase the underlying asset that the Company is reasonably certain to exercise, are not recorded on the balance sheets.
|
Equity-linked
Financial Instruments
The
Company classifies outstanding common stock warrants with down-round features as equity, if the instrument would otherwise be
classified in equity absent the down-round feature. The Company will recognize the value of a down-round feature when it is triggered
and the warrant’s strike price has been adjusted downward, as a deemed dividend and reduction of income available to common
stockholders in computing basic earnings per share.
Net
Loss Per Share
The
Company determines basic loss per share and diluted loss per share in accordance with the provisions of Accounting Standards Codification
(“ASC”) 260, “Earnings per Share.” Basic net loss per share was calculated by dividing net loss by the
weighted-average common shares outstanding during the period. Diluted net loss per share was calculated by dividing net loss by
the weighted-average common shares outstanding during the period using the treasury stock method or the two-class method, whichever
is more dilutive. The potentially dilutive stock options issued under the 2015 Plan (described in Note 8), Series A, B and C Convertible
Preferred Stock (described in Note 6) and warrants to purchase the Company’s common stock (described in Notes 6 and 7) were
not considered in the computation of diluted net loss per share because they would be anti-dilutive.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is defined as the change in equity during a period from transactions and other events and circumstances from non-owner
sources. The Company is required to record all components of comprehensive income (loss) in the financial statements in the period
in which they are recognized. Net income (loss) and other comprehensive income (loss), including foreign currency translation
adjustments and unrealized gains and losses on investments are reported, net of their related tax effect, to arrive at comprehensive
income (loss). There were no investments in available-for-sale debt securities and held-to-maturity debt securities for the three
months ended March 31, 2020. For the three months ended March 31, 2019, comprehensive income consisted of unrealized gains on
investments in available-for-sale debt securities.
Recent
Accounting Pronouncements
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 March 31, 2020 are not expected to have a material impact on the Company’s financial
statements.
Recently
Adopted 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 adopted ASU 2016-13 on January 1, 2020 and the adoption of this guidance did not 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 adopted ASU 2016-13 on January 1, 2020 and the adoption of this guidance did not have a material
impact on its financial statements.
NOTE
4 - PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
Estimated
Life
|
|
March
31, 2020
|
|
|
December
31,2019
|
|
Computers
and equipment
|
|
5
years
|
|
$
|
17,178
|
|
|
$
|
17,178
|
|
Furniture
and fixtures
|
|
7
years
|
|
|
19,158
|
|
|
|
19,158
|
|
Total
property and equipment
|
|
|
|
|
36,336
|
|
|
|
36,336
|
|
Accumulated
depreciation
|
|
|
|
|
(22,144
|
)
|
|
|
(20,680
|
)
|
Total
property and equipment, net
|
|
|
|
$
|
14,192
|
|
|
$
|
15,656
|
|
Depreciation
expense of approximately $1,500 and $1,400 was recognized for the three months ended March 31, 2020 and 2019, respectively, and
classified in general and administrative expense in the accompanying unaudited condensed 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. As of March
31, 2020, there were no in process task orders with the CRO under the Service 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 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.
Other
information related to leases was as follows:
|
|
Three
Months Ended
March 31, 2020
|
|
Supplemental
Cash Flows Information
|
|
|
|
|
Cash
paid for amounts included in the measurement of lease liability:
|
|
|
|
|
Operating
cash flows from operating lease
|
|
$
|
143,723
|
|
Operating
lease asset obtained in exchange for lease obligation:
|
|
|
|
|
Operating
lease
|
|
$
|
198,319
|
|
Remaining
lease term
|
|
|
|
|
Operating
lease
|
|
|
0.6
years
|
|
Discount
rate
|
|
|
|
|
Operating
lease
|
|
|
6.00
|
%
|
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
(remaining)
|
|
$
|
72,278
|
|
Total
future minimum lease payments, undiscounted
|
|
|
72,278
|
|
Less
imputed interest
|
|
|
(1,424
|
)
|
Present
value of lease liabilities
|
|
$
|
70,854
|
|
|
|
|
|
|
Operating
lease liabilities reported as of March 31, 2020:
|
|
|
|
|
Operating
lease liabilities-current
|
|
$
|
70,854
|
|
Total
|
|
$
|
70,854
|
|
Rent
expense, which is recognized on a straight-line basis over the lease term, was approximately $29,000 for the three months ended
March 31, 2020 and 2019 and is recorded in general and administrative expenses in the accompanying unaudited condensed statements
of operations and comprehensive loss.
Legal
From
time to time, the Company may be party to legal claims and proceedings that arise in the ordinary course of business, which may
relate to our operations or assets. These may include disputes and lawsuits related to intellectual property, licensing, contract
law and employee relations matters. Periodically, the Company reviews the status of significant matters, if any exist, and assesses
its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can
be estimated, the Company accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the
outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the
time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and
litigation. We do not believe that any individual legal claim or proceeding that is currently pending is material to the Company
or that these claims and proceedings in the aggregate are material to the Company.
NOTE
6 - STOCKHOLDERS’ EQUITY
Authorized
Shares
In September 2017, the Company amended its
Amended and Restated Certificate of Incorporation (as amended, the “Certificate of Incorporation”) to authorize the
issuance of up to 225,000,000 shares of common stock, $0.001 par value per share, and 15,000,000 shares of preferred stock,
$0.001 par value per share, 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 March 31, 2020, the Company had 45,713,862 shares of common
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 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 C preferred stock,
on an as-if-converted-to-common-stock basis, equal to and in the same form as dividends actually paid on outstanding common shares
when, as and if such dividends are paid on outstanding common shares. Upon any liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary, the holders of Series 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 C preferred stock
were fully converted to common stock, which amounts shall be paid pari passu with all common stockholders. Holders of Series C
preferred stock have no voting rights. However, as long as any shares of 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 C preferred stock,
(a) alter or change adversely the powers, preferences or rights given to the 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 C preferred stock, (c) increase the number of authorized shares of 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 Capital 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 was entered into to provide
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 has the right, in its sole discretion, to present Aspire Capital with a purchase
notice (each, a “Purchase Notice”), directing Aspire Capital (as principal) to purchase up to 100,000 shares of its
common stock per trading day (which may 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 10 consecutive trading days ending on
the trading day immediately preceding the sale date. The aggregate purchase price payable by Aspire Capital on any one purchase
date may not exceed $500,000, unless otherwise mutually agreed. In addition, on any date on which the Company submits
a Purchase Notice to Aspire Capital in an amount of at least 100,000 shares and its stock price is not less than $0.25
per share, the Company may 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 may be sold pursuant to the Aspire Purchase Agreement is limited to 1,807,562 (the “Exchange
Cap”), which represented 19.99% of the Company’s outstanding shares of common stock as of March 29, 2019, the date
the agreement was first amended and restated, unless stockholder approval or an exception pursuant to the rules of the Nasdaq
Capital Market is obtained to issue more than 19.99%. This limitation will not apply if, at any time the Exchange
Cap is reached and at all times thereafter, the average price paid for all shares issued under the Aspire Purchase Agreement
is 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. For the three-month period ending March 31, 2020, the Company
sold approximately 1.8 million shares of common stock under this agreement resulting in proceeds to the Company of approximately
$0.5 million.
At-the-Market
Offering Agreement
On
November 6, 2019, the Company entered into an at the market sales agreement (“ATM Agreement”) with A.G.P./Alliance
Global Partners (“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. For the three-month period ending March 31, 2020, the Company sold
approximately 16.8 million shares of common stock under the ATM Agreement resulting net proceeds to the Company of approximately
$4.3 million after commissions and expenses of approximately $157,000.
NOTE
7 - WARRANTS
Warrants
to purchase an aggregate of 2,363,304 shares of the Company’s common stock were outstanding at March 31, 2020. 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 $2.04, and expire at various dates through November 2023. For the three-month period ending March 31, 2020, the Company
received proceeds of approximately $614,000 from warrant exercises resulting in the issuance of 6.0 million common shares
of Company common stock.
NOTE
8 - STOCK-BASED COMPENSATION
Equity
Incentive Plans
The
Company has issued equity awards pursuant to its 2015 Equity Incentive Plan (the “2015 Plan”), 2009 Stock Plan and
2008 Stock Plan (collectively the “Plans”). The Plans permit the Company to grant non-statutory stock options, incentive
stock options and other equity awards to the Company’s employees, outside directors and consultants; however, incentive
stock options may only be granted to the Company’s employees. Beginning June 29, 2015, no further awards may be granted
under the 2009 Stock Plan or 2008 Stock Plan. However, to the extent awards under the 2008 Plan or 2009 Plan are forfeited or
lapse unexercised or are settled in cash, the common stock subject to such awards will be available for future issuance under
the 2015 Plan.
On
June 2, 2017, the stockholders of the Company approved an amendment to the 2015 Plan at the 2017 annual meeting of stockholders,
which among other things, increased the number of shares that may be issued pursuant to awards under the 2015 Plan by 83,800 shares
of common stock.
On
September 15, 2017, the stockholders of the Company approved an amendment to the 2015 Plan at a special meeting of stockholders,
which among other things, increased the number of shares that may be issued pursuant to awards under the 2015 Plan by 2,585,871
shares of common stock. As of March 31, 2020, the aggregate number of shares of common stock authorized for issuance under the
2015 Plan, as amended, was 2,750,000 and 1,121,544 shares were available for issuance.
The
following represents a summary of the options granted to employees and non-employees that are outstanding at March 31, 2020 and
changes during the period then ended:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
|
Weighted
Average Remaining Contractual Life
(in years)
|
|
Outstanding at December 31,
2019
|
|
|
1,164,644
|
|
|
$
|
6.93
|
|
|
$
|
―
|
|
|
|
8.4
|
|
Granted
|
|
|
48,000
|
|
|
$
|
0.23
|
|
|
$
|
1,776
|
|
|
|
9.8
|
|
Expired/ Forfeited
|
|
|
(4,900
|
)
|
|
$
|
―
|
|
|
$
|
―
|
|
|
|
-
|
|
Outstanding at
March 31, 2020
|
|
|
1,207,744
|
|
|
$
|
9.15
|
|
|
$
|
1,776
|
|
|
|
8.2
|
|
Exercisable at
March 31, 2020
|
|
|
560,839
|
|
|
$
|
17.86
|
|
|
$
|
296
|
|
|
|
7.7
|
|
The
exercise price for an option issued under the 2015 Plan is determined by the Board of Directors, but will be (i) in the case of
an incentive stock option (A) granted to an employee who, at the time of grant of such option, is a 10% stockholder, no less than
110% of the fair market value per share on the date of grant; or (B) granted to any other employee, no less than 100% of the fair
market value per share on the date of grant; and (ii) in the case of a non-statutory stock option, no less than 100% of the fair
market value per share on the date of grant. The options awarded under the Plans will vest as determined by the Board of Directors
but will not exceed a ten-year period. The weighted average grant date fair value per share of options granted during the three
months ended March 31, 2020 was $0.23.
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. The Company’s expected volatility is derived from a blend of the historical volatility of
the Company’s own common stock and of 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:
|
|
For
the three months ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected stock-price volatility
|
|
|
80.33
|
%
|
|
|
13.52%
- 23.39
|
%
|
Risk-free interest rate
|
|
|
1.60
|
%
|
|
|
2.41%
- 2.60
|
%
|
Expected average term of options
|
|
|
5
|
|
|
|
7.5
|
|
Stock price
|
|
$
|
0.23
|
|
|
|
$0.60
- $0.87
|
|
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 $56,000 and $146,000 for the three months ended March 31, 2020 and 2019, respectively.
As of March 31, 2020, there was approximately $183,000 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 1.25 years.
No
stock options were exercised during the three months ended March 31, 2020.
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 as described above, 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 for the three months ended March 31, 2020.