UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016

 

or

 

[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 001-37428

 

RITTER PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		26-3474527
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1880 Century Park East, Suite 1000 Los Angeles, California		90067
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (310) 203-1000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share		NASDAQ Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer	[  ]	Accelerated filer	[  ]
Non-accelerated filer	[  ] (Do not check if a smaller reporting company)	Smaller reporting company	[X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of June 30, 2016 (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 $8.1 million based upon the closing price for shares of the registrant’s common stock of $1.53 as reported by the NASDAQ Capital Market on that date. For purposes of this calculation, the registrant has assumed that its directors, executive officers and holders of 5% or more of the outstanding common stock are affiliates.

 

As of February 22, there were 11,619,197 shares outstanding of the registrant’s common stock, par value $0.001 per share.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of Ritter Pharmaceuticals, Inc.’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A for the 2017 Annual Meeting of Stockholders are incorporated by reference in Part III of this Annual Report on Form 10-K

 

 

 

RITTER PHARMACEUTICALS, INC.

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31, 2016

Table of Contents

 

	PART I
Item 1.	Business		4
Item 1A.	Risk Factors		23
Item 1B.	Unresolved Staff Comments		46
Item 2.	Properties		46
Item 3.	Legal Proceedings		46
Item 4.	Mine Safety Disclosures		46
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		47
Item 6.	Selected Financial Data		48
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		48
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		56
Item 8.	Financial Statements and Supplementary Data		56
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		56
Item 9A.	Controls and Procedures		57
Item 9B.	Other Information		57
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance		57
Item 11.	Executive Compensation		58
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		72
Item 13.	Certain Relationships and Related Transactions, and Director Independence		72
Item 14.	Principal Accountant Fees and Services		72
	PART IV
Item 15.	Exhibits and Financial Statement Schedules		72
Signatures			73

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This Annual Report on Form 10-K (“Annual Report”) contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

 

Some of the factors that we believe could cause actual results to differ from those anticipated or predicted include:

 

	●	our ability to obtain additional financing;
	●	the accuracy of our estimates regarding expenses, future revenues and capital requirements;
	●	the success and timing of our preclinical studies and clinical trials;
	●	our ability to obtain and maintain regulatory approval of RP-G28 and any other product candidates we may develop, and the labeling under any approval we may obtain;
	●	regulatory developments in the United States and other countries;
	●	the performance of third-party manufacturers;
	●	our ability to develop and commercialize our product candidates;
	●	our ability to obtain and maintain intellectual property protection for our product candidates;
	●	the successful development of our sales and marketing capabilities;
	●	the potential markets for our product candidates and our ability to serve those markets;
	●	the rate and degree of market acceptance of our products, if approved;
	●	the success of competing drugs that are or become available; and
	●	the loss of key scientific or management personnel.

 

By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics, and healthcare, regulatory and scientific developments and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Annual Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from the forward-looking statements contained in this Annual Report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Annual Report, they may not be predictive of results or developments in future periods.

 

Any forward-looking statement that we make in this Annual Report speaks only as of the date of such statement, and we undertake no obligation to update such statements to reflect events or circumstances after the date of this Annual Report. You should also read carefully the factors described in the “Risk Factors” section of this Annual Report to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

 

This Annual Report includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third-parties. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe these industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data.

 

 

PART I

 

Item 1. Business

 

Overview

 

Ritter Pharmaceuticals, Inc. develops novel therapeutic products that modulate the human gut microbiome to treat gastrointestinal diseases. We are advancing human gut health research by exploring the metabolic capacity of the gut microbiota and translating the functionality of prebiotic-based therapeutics into applications intended to have a meaningful impact on a patient’s health.

 

Our first novel microbiome modulator, RP-G28, an orally administered, high purity galactooligosaccharide (“GOS”), is currently under development for the reduction of symptoms associated with lactose intolerance. RP-G28 is designed to stimulate the growth of lactose-metabolizing bacteria in the colon, thereby effectively adapting the gut microbiome to assist in digesting the lactose that reaches the large intestine. RP-G28 has the potential to become the first drug approved by the Food and Drug Administration (“FDA”) for the reduction of symptoms associated with lactose intolerance. RP-G28 has been studied in a Phase 2a clinical trial and an adaptive design Phase 2b/3 clinical trial and is a first-in-class compound.

 

On October 17, 2016, we announced that the last patient had completed dosing and all monitoring visits in our Phase 2b/3 clinical trial of RP-G28 for the treatment of lactose intolerance. Topline results of the trial are expected to be announced in the first quarter of 2017. The Phase 2b/3 trial is a double-blind, placebo-controlled, three arm, multicenter study evaluating safety, efficacy and tolerability of two dosing regimens of RP-G28 in patients with moderate to severe lactose intolerance symptoms. Enrollment was initiated in March 2016 and completed in August 2016, achieving our projected enrollment time period. The study aims to evaluate a patient’s ability to consume dairy foods post-treatment with improved tolerance and reduced digestive symptoms. A total of 377 subjects were enrolled in the trial with 18 clinical sites participating throughout the United States. Patients underwent a 30-day treatment, followed by a 30-day post-treatment evaluation of dairy tolerance. A subset of subjects have been rolled into a 12-month extension study to evaluate long-term durability of treatment. The study will also evaluate each participant’s microbiome, expanding knowledge of the effects that RP-G28 may have on adapting the gut microbiota in a beneficial manner. The subjects are expected to complete the 12-month evaluation during the fourth quarter 2017.

 

We have had communications with the FDA regarding our clinical program and regulatory path towards getting RP-G28 adequately studied and eventually approved. We intend to hold two meetings with the FDA in the near future about our Phase 2b/3 study, including a Type C meeting as well as an End of Phase 2 meeting, both of which the FDA has encouraged us to schedule. These meetings and communications are typical for development stage companies and include the clinical pathway, regulatory requirements, statistical plan and endpoints and similar matters.

 

The Gut Microbiome

 

The human gut is a relatively under-explored ecosystem but provides a great opportunity for using dietary intervention strategies to reduce the impact of gastrointestinal disease. The human body carries about 100 trillion microorganisms in the intestines, which is 10 times greater than the number of cells in the human body. This microbial population is responsible for a number of beneficial activities such as fermentation, strengthening the immune system, preventing growth of pathogenic bacteria, providing nutrients, and providing hormones. The increasing knowledge of how these microbial populations impact human health provides opportunities for novel therapies to treat an assortment of diseases such as neurological disease, cardiovascular disease, obesity, irritable bowel syndrome, inflammatory bowel disease, colon cancer, allergies, autism and depression.

 

Platform Approach

 

Our platform is based on selectively colonizing microbiota (increasing beneficial bacteria) in the colon, and thus changing the colon’s composition of microbiota. This process has been shown to stimulate the growth of endogenous bifidobacteria, which after a short feeding period become predominant in the colon. The result is believed to reduce inflammation and improve digestion, thereby potentially reducing digestive symptoms.

 

RP-G28 selectively increases colonization of lactose-metabolizing bacteria in the colon, such as bifidobacteria and lactobacilli, without increasing the growth of harmful bacteria, such as Escherichia coli (“E. coli”). Increased colonization of lactose-metabolizing colonic microbiota is associated with increased lactase activity, thereby increasing the fermentation of lactose into galactose, glucose and short chain fatty acids. We believe this process could reduce lactose-derived gas production and thereby mitigate the symptoms of lactose intolerance.

 

 

Lactose Intolerance

 

Studies have suggested that lactose intolerance is a widespread condition affecting over one billion people worldwide and over 40 million people in the United States (or 15% of the U.S. population), with an estimated nine million of those individuals demonstrating moderate to severe symptoms.

 

Current annual spending on over-the-counter lactose intolerance aids in the United States has been estimated at approximately $2.45 billion. However, these options are limited and there is no long-term treatment available.

 

Lactose intolerance develops in lactose maldigesters when consuming too much lactose or when lactose is added to a previously low-lactose diet. People with lactose maldigestion have a low activity level of lactase, the enzyme responsible for breaking down human lactose, located in the brush border membrane of the small intestine. Lactose intolerance is characterized by one or more of the cardinal symptoms; including abdominal pain/cramps, bloating, gas, and diarrhea following the ingestion of lactose or lactose-containing foods.

 

In lactose maldigesters, unhydrolyzed lactose passes into the large intestine, where it is fermented by the indigenous microflora into gases and short chain fatty acids. The excessive gas production and the osmotic effects of excessive undigested lactose cause the symptoms of lactose intolerance. Symptoms begin about 30 minutes to two hours after eating or drinking foods containing lactose. The severity of symptoms depends on many factors, including the amount of lactose a person can tolerate and a person’s age, ethnicity, and digestion rate. The symptoms of lactose intolerance are caused by gases and toxins produced by anaerobic bacteria in the large intestine. The problem of lactose intolerance has been exacerbated because many foods and drinks contain traces of lactose without lactose being clearly stated on the product’s label.

 

Diagnosis

 

Lactose intolerance is often diagnosed by evaluating an individual’s clinical history, which reveals a relationship between lactose ingestion and onset of symptoms. Hydrogen breath tests may also be utilized to diagnose lactose malabsorption and a milk challenge may be used to differentiate between lactose malabsorption and lactose intolerance. Further tests can be conducted to rule out other digestive diseases or conditions, including: stool examination to document the presence of a parasite, blood tests to determine the presence of celiac disease, and intestinal biopsies to determine mucosal problems leading to malabsorption, such as inflammatory bowel disease or ulcerative colitis.

 

Our History

 

We were formed as a Nevada limited liability company on March 29, 2004 under the name Ritter Natural Sciences, LLC. Our first prototype, Lactagen^™, was an alternative lactose intolerance treatment method. In 2004, clinical testing was conducted, which included a 60 subject double-blind placebo controlled clinical trial. The results were published in the Federation of American Societies for Experimental Biology in May 2005 and demonstrated Lactagen^™ to be an effective and safe product for reducing symptoms for nearly 80% of the clinical participants who were on Lactagen^™.

 

In 2008, we expanded our focus by developing a prescription drug development program. We initiated the program by developing RP-G28, a second generation edition of Lactagen^™. We believe that RP-G28 enables us to state stronger claims, garner more medical community support and reach a wider market in the effort to treat lactose intolerance.

 

To help fund the development of RP-G28, we were awarded a grant from the United States government’s Health Care Bill program, the Qualifying Therapeutic Discovery Project, in 2008. The 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.

 

On September 16, 2008, we converted into a Delaware corporation under the name Ritter Pharmaceuticals, Inc.

 

Our Leading Product Candidate — RP-G28

 

Overview

 

RP-G28 is a novel highly purified GOS, which is synthesized enzymatically. The product is being developed to reduce the symptoms and frequency of episodes of abdominal pain associated with lactose intolerance. The therapeutic is taken orally (a powder solution mixed in water) for 30 consecutive days. The proposed mechanism of action of RP-G28 is to increase the intestinal growth and colonization of bacteria that can metabolize lactose to compensate for a patient’s intrinsic inability to digest lactose. Once colonization of bacteria has occurred, it is hypothesized that patients will continue to tolerate lactose as long as they maintain their microflora balance. RP-G28 has the potential to become the first FDA-approved drug for the reduction of symptoms associated with lactose intolerance.

 

 

Galactooligosaccharides (GOS)

 

RP-G28 is a >95% purified GOS product. GOS refers to a group of compounds containing β-linkages of 1 to 6 galactose units with a single glucose on the terminal end and are found at low levels in human milk. GOS products resist hydrolysis by salivary and intestinal enzymes because of the configuration of their glycosidic bonds and reach the colon virtually intact. The undigested GOS enhances the growth of beneficial, lactose metabolizing, colonic bacteria that already exist in the subject’s digestive track, including multiple species and strains of bifidobacteria and lactobacilli. Once colonies of these bacteria have increased, continued lactose exposure should maintain tolerability of lactose without further exposure to RP-G28.

 

The significance of a higher purity GOS, namely RP-G28, was highlighted in a 2010 study by Klaenhammer. The in vitro study concluded that RP-G28 promoted growth of lactobacilli and bifidobacteria, but did not promote multiple strains of E. coli. In contrast, lower purity GOS stimulated both bifidobacteria as well as the strains of E. coli evaluated. (As seen below in Figure 1, NCK 430 (e. coli) grew in the presence of low purity GOS (GOS 2). Alternatively, the higher purity GOS (RP-G28/GOS 1) did not promote the growth of E. coli.).

 

Figure 1

 

 

 

Mechanism of Action

 

RP-G28 selectively increases colonization of lactose-metabolizing bacteria in the colon, such as bifidobacteria and lactobacilli, without increasing the growth of harmful bacteria, such as E. coli. Increased colonization of lactose-metabolizing colonic bacteria is associated with increased lactase activity and GOS utilization, thereby increasing the fermentation of lactose into galactose, glucose and short chain fatty acids. Digestion of lactose reduces lactose-derived gas production and thereby mitigates the symptoms of lactose intolerance.

 

 

 

Safety & Toxicology of GOS

 

Clinical studies of GOS products were reviewed as part of the safety evaluation to support our Investigational New Drug (“IND”) Application for RP-G28. The safety of GOS products in humans has been evaluated in 486 adults at doses of 2.5 to 15 gm/day for up to 14 weeks, 342 children at doses of 2.0 – 2.4 gm/day for up to 1 year, and in 2415 newborns and infants for up to 6 months. Overall, no reports of severe adverse events attributable to the consumption of GOS were reported in the literature.

 

Among the studies that included tolerance endpoints, side effects were limited to reports of flatulence, fullness, gastronintestinal symptoms, and changes in stool consistency and frequency when GOS was consumed on a repeat basis at quantities of between 5.5 to 15 g/day (Ito 1990; Deguchi 1997; Teuri 1998); however, this effect was not consistently reported in all studies (Teuri and Korpela 1998; Depeint 2008; Drakoularako 2010; van de Heuval 1998; van Dokkum 1999; Bouhnik 2004; Sairanen and Piirainen 2007; Shadid 2007). Similar observations of increased flatulence have been reported following the consumption of fructooligosaccharides (15 gm/day) over a 7-day period (Alles 1996), and this symptom represents a localized effect that is expected in association with the consumption of indigestible fiber in large quantities. There were no reports of events in other System Organ Class (“SOC”) suggestive of systemic toxicity.

 

RP-G28 Clinical Safety

 

In addition to the nonclinical studies evaluating GOS products, the safety of RP-G28 for clinical investigation is supported by clinical safety results from our Phase 2a study, G28-001. In this study, RP-G28 was escalated from 1.5 grams per day to 15 grams per day over a 35-day dosing period.

 

RP-G28 was well-tolerated. There were no serious adverse effects. The most common adverse effects were headache, dizziness, nausea, upper respiratory tract infection, nasal congestion and pain. All adverse effects were mild or moderate in severity, and event occurrence was distributed over the treatment and post-treatment follow-up phase. No clinically significant changes or findings were noted from clinical lab evaluations, vital sign measurements, physical exams, or 12-lead electrocardiograms.

 

 

Our Market Opportunity

 

Unmet Medical Needs

 

Lactose intolerance is a challenging condition to manage. According to a market research study conducted by Objective Insights in April 2012, approximately 60% of lactose intolerant sufferers reported experiencing symptoms daily, or bi-weekly. Not only can symptoms be painful and embarrassing, they can also dramatically affect one’s quality of life, social activities, and health. Currently there are few reliable, or effective, treatments available that provide consistent or satisfactory relief.

 

Currently, there is no approved prescription treatment for lactose intolerance. Most persons with lactose intolerance avoid ingestion of milk and dairy products while others substitute non-lactose-containing foods in their diet. However, complete avoidance of lactose-containing foods is difficult to achieve (especially for those with moderate to severe symptoms) and can lead to significant long-term morbidity (i.e., dietary deficiencies of calcium and vitamin D).

 

At the 2010 National Institute of Health (“NIH”) Consensus Development Conference: Lactose Intolerance and Health, the NIH highlighted numerous health risks tied to lactose intolerance such as: osteoporosis; hypertension; and low bone density. There is substantial evidence indicating that lactose intolerance is a major factor in limiting calcium and nutrient intake in the diet of people who are lactose intolerant. Adequate calcium intake is essential to reducing the risks of osteoporosis and hypertension. In addition, chronic calcium depletion has been linked to increased arterial blood pressure in over 30 published reports, thereby establishing a relationship between hypertension and low calcium intake. Moreover, there is evidence of a correlation between calcium intake and both colon and breast cancer.

 

Treatment Options

 

Doctors generally recommend the following treatments for the management of lactose intolerance: (1) dairy avoidance; (2) lactase supplements; (3) probiotics/dietary supplements; and (4) dairy substitutes/lactose free products. Despite educating their patients on all viable treatment options, physicians tend to advise their patients to refrain from consuming any dairy products whatsoever. However, in a 2008 survey conducted by Engage Health, 47% of lactose intolerance sufferers reported that this method was not effective (largely due to hidden dairy products in ingredients), and only 30% of lactose intolerance sufferers reported lactase supplements as being effective in managing their lactose intolerance. Further, while probiotics/dietary supplements have been demonstrated to aid and support one’s digestive system, helping break down general foods consumed, they don’t directly help with lactose intolerance. The 2008 survey by Engage Health suggests that the majority of lactose intolerance patients are dissatisfied with current treatment options.

 

Patients Unsatisfied with Current Management Options

 

 

 

Growing Awareness

 

Lactose intolerance is a condition that continues to expand as society advances and evolves. It has been estimated that gastroenterologists see approximately 15 new patients with lactose intolerance each month. Education and awareness have increased, and the American diet has greatly changed over the past decade to include more dairy-based goods. As the populace is growing older, the prevalence of lactose intolerance is increasing because more people tend to develop lactose intolerance later in life. Increased education and diagnosis is making more people aware of their allergies and digestive conditions. Physicians may compound the growth of lactose intolerance prevalence and its associated disorders by recommending individuals to avoid dairy products, a practice which in and of itself may increase severity of the intolerance.

 

Doctors tend to diagnose lactose intolerance in a patient before the patient is able to self-diagnose it. However, patients tend to initiate discussion about lactose intolerance with their doctors. This is indicative of broad public awareness of lactose intolerance. Doctors often administer two tests for diagnosing lactose intolerance: (i) a symptom history test and (ii) a hydrogen breath test.

 

Our Competitive Strengths

 

Market Opportunity

 

RP-G28 has the potential to become the first approved drug in the United States and Europe for the reduction of symptoms associated with lactose intolerance.

 

Renowned Scientific Team and Management Team

 

Our leadership team has extensive biotechnology/pharmaceutical expertise in discovering, developing, licensing and commercializing therapeutic products. We have attracted a scientific team comprised of innovative researchers who are renowned in their knowledge and understanding of the host-microbiome in the field of lactose intolerance and gastroenterology.

 

 

Substantial Patent Portfolio and Product Exclusivity

 

We have an issued patent in the United Kingdom directed to the composition of non-digestible carbohydrates, and we have issued patents in the United States directed to methods of using such compositions for the treatment of lactose intolerance and symptoms. Additional worldwide patent applications are pending. The patent applications include claims covering compositions, methods, formulations and packaging.

 

In addition, in July 2015 we acquired the rights, title and interest to certain patents and related patent applications with claims covering a process for producing ultra high purity GOS active pharmaceutical ingredients, including RP-G28 from our supplier. See “Business—Clinical Supply and Cooperation Agreement with Ricerche Sperimentali Montale and Inalco SpA” for additional details regarding the second amendment to the exclusive supply agreement and our exercise of the exclusive option.

 

See “Business—Intellectual Property” for additional information regarding our patent portfolio.

 

Our Growth Strategy

 

In order to achieve our objective of developing safe and effective applications to treat conditions associated with microbiome dysfunctions, our near-term and long-term strategies include the following:

 

	●	Complete our adaptive design Phase 2b/3 clinical trial and any additional pivotal studies of RP-G28 for the reduction of symptoms associated with lactose intolerance;
	●	seek regulatory approval of RP-G28 for the reduction of symptoms associated with lactose intolerance if the clinical trials are successful, initially in the United States and subsequently in the rest of the world;
	●	develop and commercialize RP-G28 either by ourselves or in collaboration with others throughout the world;
	●	explore the use of RP-G28 for additional potential therapeutic indications and orphan indications;
	●	establish ourselves as a leader in developing therapeutics that modulates the human gut microbiome;
	●	continue to develop a robust and defensible patent portfolio, including those we own and those we plan to in-license in the future; and
	●	continue to optimize our product development and manufacturing capabilities both internally and externally through outside manufacturers.

 

Clinical and Regulatory

 

IND Application/Phase 1

 

We submitted an IND application for RP-G28 to the FDA in June 2010. Because the safety and tolerability profile, pharmacokinetics and dose response curve of GOS products is generally well understood, as part of our IND submission, we proposed that the data supporting the IND was sufficient to support a Phase 2 proof-of-concept study in a small number of lactose-intolerant patients. The FDA agreed with this proposal and the typical Phase 1 clinical program in healthy volunteers was replaced with a Phase 2a program in subjects with lactose intolerance.

 

On June 28, 2010, we received an advice letter from the FDA regarding our IND submission. The FDA suggested that we (1) consider expanding our inclusion criteria to include females of childbearing potential who are willing to use appropriate contraception throughout the duration of the protocol; (2) follow the FDA’s guidance regarding Patient-Reported Outcome Measures; and (3) include a pharmacokinetic study in our proposed Phase 2a trial to determine the extent of systemic exposure of RP-G28.

 

Phase 2a Study

 

In June 2011, we began a Phase 2a clinical trial on RP-G28 to validate the efficacy, safety, and tolerance of RP-G28 compared to placebo when administered to subjects with symptoms of lactose intolerance. The clinical results from the study, which concluded at the end of 2011, showed that RP-G28 improved lactose digestion versus placebo as measured by the improvement in digestive symptoms associated with lactose intolerance and decline in hydrogen production present in a hydrogen breath test.

 

 

On June 12, 2013, we announced positive data from our Phase 2a first-in-human, proof of concept clinical study of RP-G28. The purpose of the study was to assess the effectiveness, safety and tolerability of RP-G28 compared to a placebo when administered to subjects with symptoms associated with lactose intolerance. The results were presented at Digestive Diseases Week and the New York Academy of Sciences Conference on Probiotics, Prebiotics and the Host Microbiome: The Science of Translation, and co-sponsored by the Sackler Institute for Nutrition Science and the International Scientific Association of Probiotics and Prebiotics.

 

The clinical microbiome data from this Phase 2a clinical trial of RP-G28 in patients with lactose intolerance was published in the Proceedings of the National Academy of Science (“PNAS-Plus”) PNAS 2017; Early Edition, published ahead of print January 3, 2017. The paper titled, “Impact of short-chain galactooligosaccharides on the gut microbiome of lactose-intolerant individuals,” reports findings on our lead therapeutic candidate, RP-G28, a short-chain GOS. The data validates RP-G28’s mechanism of action and supports the product as a potential treatment for lactose intolerance. The newly published microbiome data provides further insight into RP-G28’s Phase 2a 2013 clinical trial.

 

The double-blinded, randomized, multi-center, placebo-controlled Phase 2a study evaluated RP-G28 in 62 patients with lactose intolerance over a treatment period of 35 consecutive days. Post-treatment, subjects reintroduced dairy into their diets and were followed for an additional 30 days to evaluate lactose digestion, as measured by hydrogen production and symptom improvements. In order to confirm lactose intolerance and study participation, subjects underwent a 25-gram lactose challenge in the clinic. Lactose intolerance symptoms and hydrogen production via hydrogen breath test were assessed for six hours post-lactose dose. Eligible subjects were required to demonstrate a minimum symptom score and a “positive” hydrogen breath test in order to be eligible for randomization. A “positive” breath test was defined as a hydrogen gas elevation of 20 parts per million (ppm) at two time-points within the six hours following a lactose-loading dose. The primary endpoints included tracking patients’ gastrointestinal symptoms via a patient-reported symptom assessment instrument (a Likert Scale, measuring individual symptoms of flatulence, bloating, cramping, abdominal pain and diarrhea, on a scale of 0 (none) to 10 (worst)) at baseline, day 36 and day 66; as well as the measurement of hydrogen gas levels in their breath following a 25-gram lactose challenge.

 

RP-G28 was well tolerated, with no significant adverse events reported. The Phase 2a study demonstrated clinically meaningful benefits to patients on treatment, whereas treated subjects reported increased tolerance to lactose and dairy foods: reduced lactose intolerance symptoms (gas, bloating, cramping and abdominal pain) were reported in subjects on RP-G28, a durable reduction in abdominal pain (p=0.019) was reported, and treated patients were six times more likely to describe themselves as lactose tolerant (p=0.039). In sum, positive trends were seen when the entire per protocol study population was analyzed, including some statistically significant subgroup analysis, suggesting that a therapeutically positive effect is seen. Although there were few primary and secondary efficacy endpoints with statistically significant results, the combined data suggest that RP-G28 is exerting a positive therapeutic effect. We believe these positive drug effect trends combined with the benign safety profile support continued drug development of RP-G28.

 

Key findings of the Phase 2a study include:

 

	●	RP-G28 was well tolerated with no significant study-drug related adverse effects. The benign adverse event safety profile of RP-G28 with dose levels up to 15 gm/day observed in this study is consistent with the known safety of GOS products administered up to 20 gm/day reported in literature.
	●	Subjects in the RP-G28 group reported a reduction in total symptoms after treatment. Reported symptom improvement continued 30 days post-treatment. Improvement in symptoms was assessed in the study using several different measures, including a pain Likert scale and a patient global assessment. Subjects receiving RP-G28 had greater improvement in most of their symptoms (cramps, bloating and gas) following lactose challenge compared to placebo, but the differences were not statistically significant given the small cohort size. However, a clinically meaningful reduction in abdominal pain was seen in subjects receiving RP-G28 compared to placebo.
	●	An analysis of “responders” for abdominal pain (defined as subjects who reported a score of zero in abdominal pain severity following a lactose challenge at Day 36/Hour 6 and Day 66/Hour 6) was performed. In the 55 subjects who noted abdominal pain following the baseline (Day 0) lactose challenge, 50% of RP-G28-treated subjects reported no abdominal pain compared to 17% of the placebo-treated subjects. This difference was statistically significant (p = 0.0190). See Figure 2 below.
	●	An analysis of “responders” for abdominal pain (defined as subjects who reported a greater than 50% decrease in abdominal pain severity following lactose challenge between Day 0/Hour 6 and Day 36/Hour 6) was performed. In the 55 subjects who noted abdominal pain following the baseline (Day 0) lactose challenge, 72.2% of RP-G28-treated subjects reported a >50% reduction in abdominal pain severity compared to 42.1% of the placebo-treated subjects. This difference was also statistically significant (p=0.0288).
	●	To better explore a meaningful benefit to patients, a global assessment was explored. Six times as many patients in the treatment group versus the placebo group described themselves as lactose tolerant and did not report symptoms associated with lactose intolerance on Day 66. After completion of study treatment at Day 36, subjects were encouraged to re-introduce dairy foods into their diet. Thirty days later (Day 66), subjects were asked to provide an assessment of their symptom status, i.e., whether they considered themselves still lactose intolerant compared with subjects receiving placebo (Yes/No). As seen below in Figure 2 below, in the 58 subjects providing responses, a significantly larger percentage of subjects receiving RP-G28 (30%) considered themselves no longer lactose intolerant compared with subjects receiving placebo (5.6%); this result was statistically significant (p=0.0389).

 

 

●

The reduction in total symptoms following a post-treatment lactose challenge was consistent with the improvement in post-treatment hydrogen breath test results as compared to baseline (pre-treatment) results. Although rarely used in clinical practice and primarily used to identify lactase deficiency, hydrogen measurements were used as an eligibility criterion as well as an outcome measure in our Phase 2a proof-of-concept study. Our intent was to better understand how lactose intolerant symptoms and hydrogen values correlated and whether a treatment effect could be detected by hydrogen production. In the RP-G28 group, the median peak hydrogen production was 113 ppm on Day 0 and 110 ppm on Day 36. In the placebo group, the median peak hydrogen production was 94 ppm at Day 0 and 113 on day 36. At Day 0 and Day 36, the median total hydrogen production was 385 ppm and 367 ppm, respectively, for the RP-G28 group and 347 and 436 ppm, respectively, for the placebo group. Comparison of the hydrogen breath test results between RP-G28 and placebo shows that median hydrogen production was generally similar between the two treatment groups at Day 0 while at Day 36, median hydrogen production was lower in the RP-G28 group compared to placebo at the peak time points of 2 to 4 hours. While the differences were not large, the RP-G28 group had consistently lower levels of breath hydrogen production from Hours 2 to 6 following lactose challenge, but the results did not correlate with clinical symptoms. In the Placebo group, differences in hydrogen production following lactose challenge were not apparent.

 

Figure 2

 

 

In the Phase 2a study, changes in the fecal microbiome were investigated using both Terminal Restriction Fragment Length Polymorphisms (“TRFLP”), a molecular biology technique for profiling microbial communities based on the position of a restriction site closest to a labeled end of an amplified gene, and microme analysis of 16S rRNA genex by pyrosequencing, a method of DNA sequencing (determining the order of nucleotides in DNA).

 

 

Figure 3

 

 

 

In addition, Principal Component Analysis (“PCA”), a multivariate method that helps transform a number of possibly correlated variables into a smaller number of uncorrelated variables called principal components, thereby reducing the dimensions of a complex dataset, showed statistically significant shifts in the microbiome of subjects fed RP-G28, compared to placebo, at 66 days. Specifically, RP-G28 significantly altered the microbiomes of 82% of the study participants who received the treatment. See Figure 3 above.

 

Pre-treatment, three distinct clusters were identified, whereas post-treatment (Day 66) two distinct clusters were identified, showing a clear shift in certain species represented before and after treatment.

 

Principal Coordinates Analysis (“PCoA”), a multivariate method that helps visualize similarities and dissimilarities in large datasets, was also utilized to analyze the microbiome data. For analysis of 16S amplicon sequencing data, we created Unweighted Unifrac similarity matrices (that is we conducted PCoA) and applied ANOSIM (Analysis of Similarities) and PERMANOVA (Permutational Analysis of Variance) statistical analyses. Our analysis showed a significant association between Day (day 0 or baseline, and day 36 and 66 as categories) and microbiome composition (ANOSIM R = 0.218, P = 0.0001, PERMANOVA Pseudo-F = 3.4318, P = 0.0001). These data indicate that RP-G28 and subsequent introduction of lactose into the diet had impacted the fecal microbiome of participants. Further, lactose metabolizing bacteria were shown to increase in the treatment group.

 

The results of our Phase 2a study were published in Nutrition Journal in a manuscript entitled “Improving lactose digestion and symptoms of lactose intolerance with a novel galactooligosaccharide (RP-G28): a randomized, double-blind clinical trial.”

 

We held a Type C meeting with the FDA’s Division of Gastroenterology and Inborn Errors Products on February 20, 2013. The purpose of the meeting was to obtain the FDA’s feedback on the planned Phase 2 program and Phase 3 programs, inform the FDA of our ongoing development plans, gain feedback on relevant clinical trial design and end points related to patient meaningful benefits, and to inform the FDA of the status of our product characterization. We believe that this meeting was a significant step forward in streamlining the pathway to initial U.S. approval of RP-G28 to reduce symptoms and frequency of symptomatic episodes associated with lactose intolerance. The meeting and official meeting minutes provided valuable guidance on the development path of RP-G28:

 

 

●

The FDA agreed with our decision to develop and validate a new analytical assay for RP-G28 drug substance and drug product. This adjustment will provide additional information about GOS components and non-GOS impurities, which the FDA agrees should be in place before we prepare batches of the drug substance for use in any pivotal Phase 3 clinical trials.

 

	●	Based on our plan to conduct ICH-compliant GLP embryo-fetal development toxicology studies (in two species) and the ICH standard battery of genotoxicity tests using RP-G28, the FDA agreed that no additional nonclinical studies are needed to support Phase 3 studies.
	●	The FDA advised us on potential end points and clinical trial design.

 

●

We addressed the FDA’s recommendation in its June 28, 2010 advice letter that we include a pharmacokinetic study in the Phase 2b study to assess the extent of systemic exposure of RP-G28. We explained to the FDA that we did not collect serum samples for pharmacokinetic measurement in the Phase 2a study because at the time assays for measuring RP-G28 were not available and significant systemic absorption was not anticipated. We then informed the FDA of our plan to evaluate alternatives, as a surrogate for RP-G28 systemic exposure as part of our Phase 2b program. The FDA agreed with this approach.

 

Following analysis of the Phase 2a clinical trial, discussions with the FDA in 2013 about our clinical development plan, and further discussions with our regulatory consultants, we initiated a Phase 2b/3 clinical trial of RP-G28 in March 2016. We believe this trial could serve as one of two pivotal trials should the resulting data and the FDA be supportive of this trial as a pivotal trial. We did not discuss the Phase 2b/3 study design and development plan with the FDA before initiating the study in March 2016, though we did submit a supplement to the IND detailing the protocols for the adaptive study and intend to hold two meetings with the FDA in the near future.

 

Nonclinical Safety Plans

 

Given the established safety profile of GOS in humans and the lack of significant safety concerns with RP-G28 administered to subjects in the Phase 2a study, no additional non-clinical safety studies are planned to support continued evaluation of RP-G28 in the Phase 2 program.

 

Guidelines adopted by the FDA and established by ICH require nonclinical studies that specifically address female fertility to be completed before the inclusion of women of child bearing potential in large-scale or long-duration clinical trials (e.g., Phase 3 trials). In the United States, such assessments of embryo-fetal development can be deferred until before Phase 3 using precautions to prevent pregnancy in clinical trials. As the FDA recommended in their June 28, 2010 advice letter, we will continue to evaluate females of child-bearing potential who are willing to use appropriate contraception throughout the duration of any study.

 

Phase 2b/3 Study

 

Enrollment in our Phase 2b/3 clinical trial of RP-G28 was initiated in March 2016 and completed in August 2016. The final patient completed dosing and all monitoring visits in October 2016. Topline results of this trial are expected to be announced in the first quarter of 2017.

 

The Phase 2b/3 study was designed as a multi-center double-blinded, placebo controlled clinical trial of approximately 377 subjects to determine the maximum tolerated dose and optimal dose-escalation schedule for RP-G28. The trial assessed patients with moderate to severe abdominal pain as measured by a pain Likert scale after a lactose challenge. The Phase 2b/3 clinical trial was intended to measure additional lactose intolerance symptoms (gas, bloating, diarrhea, cramps) as secondary endpoints. Entry criteria in the Phase 2b/3 study included a hydrogen breath test to validate lactase deficiency. The Phase 2b/3 study design included a screening phase; a 30-day course treatment phase and a 30-day post-treatment evaluation phase. The study was designed to gradually escalate the dose beyond the 15 gm/day dose level evaluated in the Phase 2a study. Study subjects abstained from lactose containing food products and were then randomized evenly (1:1:1:1) to receive one of three doses of RP-G28 or placebo for 30 days. Subjects were then followed post-treatment for an additional 30 days while lactose containing food products were re-introduced into their diets. The primary endpoint for the Phase 2b/3 clinical study was a durable reduction in abdominal pain, with secondary endpoints measuring changes in individual lactose intolerance symptoms (gas, bloating, diarrhea, cramps). The Phase 2b/3 study was also designed to include collection of blood samples to assess systemic exposure to RP-G28 using measurement of serum concentrations of a trisaccharide. This was monitored as a surrogate to assess the systemic bioavailability of orally administered RP-G28. Additionally, the study required the collection of fecal samples from patients enrolled to evaluate the baseline and changes to the patient’s microbiome that correlate to symptom reduction and lactose tolerance.

 

In order to gather long-term data on subjects exposed to RP-G28, we also offered enrollment in an observational extension study, G28-004, to subjects who completed the Phase 2b/3 protocol. As RP-G28 is expected to provide extended relief from lactose intolerance symptoms beyond the initial 30-day treatment phase, this extension study for the Phase 2b/3 program will assess the long-term treatment effect. We intend for the results from this study to guide the need to evaluate an additional 30-day course of treatment in a Phase 3 clinical trial in subjects who experience the return of lactose intolerance symptoms after an initial course of RP-G28.

 

 

Adaptive seamless phase 2b/3 designs, such as the Phase 2b/3 pivotal clinical trial for RP-G28, are aimed at interweaving the two phases of full development by combining them into one single, uninterrupted study conducted in two steps. Adaptive seamless phase 2b/3 designs enable a clinical trial to be conducted in steps with the sample size calculation selected on the basis of data observed in the first step to continue along to the second step. The main statistical challenge in such a design is ensuring control of the type I error rate. Most methodology for such trials is based on the same endpoint being used for interim and final analyses. A type I error is one in which the adaptation process leads to design, analysis, or conduct flaws that introduce bias that increases the chance of a false conclusion that a treatment is effective (a type I error). Controlling type I error can be accomplished by prospectively specifying and including in the statistical analysis plan all possible adaptation plans that may be considered during the course of the trial. We worked with Covance, Inc. (“Covance”), a contract research organization (“CRO”) to control a type I error in our Phase 2b/3 study.

 

We did not discuss the Phase 2b/3 study design and development plan with the FDA before initiating the study in March 2016, though we did submit a supplement to the IND detailing the protocols for the adaptive study and have subsequently had communications with the FDA regarding our clinical program. We intend to hold two meetings with the FDA in the near future about our Phase 2b/3 study, including a Type C meeting as well as an End of Phase 2 meeting, both of which the FDA has encouraged us to schedule. These meetings and communications are typical for development stage companies and include the clinical pathway, regulatory requirements, statistical plan and endpoints and similar matters.

 

Master Service Agreement

 

On December 30, 2015, we entered into a Master Service Agreement with Covance, with an effective date of December 29, 2015. Pursuant to the terms of the Master Service Agreement, Covance (or one or more of its affiliates) will provide Phase 1, 2, 3, and 4 clinical services for a clinical study or studies to us, and, at our request, assist us with the design of such studies, in accordance with the terms of separate individual project agreements to be entered into by the parties. The term of the agreement is for three years and will renew automatically for successive one year periods unless Covance is no longer providing services under the agreement or either party has terminated the agreement upon written notice. We may terminate the Master Service Agreement or any individual project agreement entered into under the Master Service Agreement prior to the applicable study’s completion at any time for any reason upon 30 days written notice to Covance, except when the reason for termination is the safety of subjects, in which case it may be terminated immediately. Covance may not terminate any individual project agreement without cause, except when the reason for the termination is the safety of subjects, in which case it may be terminated immediately. In the event of a termination of the Master Service Agreement, Covance will be entitled to full payment for (i) work performed on the applicable project upon through the date work on such project is concluded and (ii) reimbursement for all non-cancellable and non-refundable expenses and financial obligations which Covance (or an affiliate) has incurred or undertaken on our behalf.

 

Manufacturing

 

We do not own or operate manufacturing facilities for the production of RP-G28 or any other product candidates we may develop, nor do we have plans to develop our own manufacturing operations in the foreseeable future. We have an exclusive worldwide agreement (the “Supply Agreement”) to manufacture a higher purity form of GOS (referred to as “Improved GOS”) with Ricerche Sperimentali Montaleor (“RSM”) in connection with the clinical and nonclinical studies we will need to conduct prior to receiving regulatory approval for RPG-28. RSM has also agreed that it will not, except as necessary for RSM to perform its obligations under the Supply Agreement, market or sell Improved GOS, or any GOS that are of greater purity to any third party.

 

Pursuant to the terms of the Supply Agreement, as amended on July 24, 2015, we purchased the exclusive worldwide assignment of all right, title and interest to the Improved GOS (the “Improved GOS IP”) on July 30, 2015 for $800,000. We also issued 100,000 shares of our common stock to RSM pursuant to a stock purchase agreement. The shares issued to RSM are subject to a lock-up agreement, pursuant to which RSM has agreed that it will not sell these shares for a period ending on the earlier of (i) the public release by us of the final results of our Phase 2b/3 clinical trial of RP-G28 and (ii) the filing of a Form 10-Q with the SEC for the fiscal quarter in which we receive the results of our Phase 2b/3 clinical trial of RP-G28.

 

Under the terms of the Supply Agreement, as amended, if we fail to make any future option payment to RSM required under the terms of the Supply Agreement, we may be required to return the Improved GOS IP to RSM. The terms of the Supply Agreement, as amended, require us to pay RSM $400,000 within 10 days following FDA approval of a new drug application for the first product owned or controlled by us using Improved GOS as its active pharmaceutical ingredient and to pay RSM the sum of $250 per kilo for clinical supply of Improved GOS.

 

 

Commercialization

 

Given our stage of development, we have not yet established a commercial organization or distribution capabilities. RP-G28, if approved, is intended to be prescribed to patients suffering from lactose intolerance. These patients are normally under the care of a gastroenterologist and/or a primary care physician. Our current plan is to evaluate a possible partnership to commercialize RP-G28 for the reduction of symptoms associated with lactose intolerance in patients in the United States and Europe if it is approved. We may also build our own commercial infrastructure or utilize contract reimbursement specialists, sales people and medical education specialists, and take other steps to establish the necessary commercial infrastructure at such time as we believe that RP-G28 is approaching marketing approval. Outside of the United States and Europe, subject to obtaining necessary marketing approvals, we will likely seek to commercialize RP-G28 through distribution or other collaboration arrangements for patients suffering from lactose intolerance.

 

Competition

 

The biopharmaceutical industry is characterized by intense competition and rapid innovation. Although we know of no drug candidate, other than RP-G28, in advanced clinical trials for treating lactose intolerance, other biopharmaceutical companies may be able to develop compounds or drugs that are able to achieve similar or better results. Our potential competitors include major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical companies and universities and other research institutions. Some of the pharmaceutical and biotechnology companies we expect to compete with include microbiome-based development companies such as Second Genome, Inc., Seres Health, Inc., Enterome SA, Vedanta Biosciences, Inc., and Rebiotix, Inc. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. We will also compete with providers of a wide variety of lactase supplements (the most widely used supplement in the United States being Lactaid^®), probiotic/dietary supplements, and lactose-free and dairy-free products. We believe the key competitive factors that will affect the development and commercial success of our product candidates are efficacy, safety and tolerability profile, reliability, convenience of dosing, price and reimbursement.

 

Intellectual Property

 

The proprietary nature of, and protection for, our product candidates and our discovery programs, processes and know-how are important to our business. We have sought patent protection in the United States and internationally for uses of RP-G28 and our discovery programs, and any other inventions to which we have rights, where available and when appropriate. Our policy is to pursue, maintain and defend patent rights, whether developed internally or licensed from third parties, and to protect the technology, inventions and improvements that are commercially important to the development of our business. We also rely on trade secrets that may be important to the development of our business. We do not have composition of matter patent protection in the United States for RP-G28, which may result in competitors being able to offer and sell products so long as these competitors do not infringe any other patents that we hold, including patents directed to methods of manufacturing and purified RP-G28 or directed to methods of using RP-G28.

 

Patents and Proprietary Rights Covering Our Drug Candidates

 

We strive to protect our product candidates and exclusivity rights, as well as both maintain and fortify our position in the field of reduction of symptoms associated with lactose intolerance. We believe our intellectual property portfolio consists of early and broad filings in the area. We have focused on patents and patent applications relating to use of our products in disease treatment. We have sought and continue to seek the strongest possible intellectual property protection available to us in order to prevent others from directly competing with us, as well as to exclude competition around our products, their manufacture, and methods for use of the products in disease treatment. Our intellectual property portfolio related to RP-G28 contains four issued patents relating to RP-G28 and its uses. That portfolio also includes at least 15 other related, pending patent applications in the United States and worldwide. We also own a patent family, including claims generally directed to processes for producing an improved form of GOS mixtures (higher purity); this family includes issued patents in United States (not expiring until 2030), Italy (not expiring until 2029), and China, Germany, and the Netherlands (not expiring until 2030), as well as applications pending in the United States, Japan, India, and other jurisdictions that, if issued, will not expire until 2030.

 

This portfolio includes patents and proprietary rights related to:

 

	●	U.S. Patent No. 8,486,668, which has a current expiry date of February 17, 2030, includes claims generally directed to methods for treating lactose intolerance comprising administering, for a predetermined number of days, a high purity GOS pharmaceutical composition, and wherein the administration leads to a persistent decrease in at least one symptom of lactose intolerance;
	●	U.S. Patent No. 8,492,124, which has a current expiry date of February 17, 2030, includes claims generally directed to methods for treating lactose intolerance comprising administering, for a predetermined number of days, a controlled release pharmaceutical composition that contains GOS, but does not contain a probiotic;
	●	U.S. Patent No. 8,785,160, which has a current expiry date of February 17, 2030, includes claims generally directed to methods for treating lactose intolerance comprising administering a hydrogen breath test, diagnosing lactose intolerance based upon the hydrogen breath test, and administering a high purity GOS pharmaceutical composition;

 

 

●

U.S. Patent No. 9,200,303, which has a current expiry date of August 6, 2030 (subject to the payment of maintenance fee), includes claims generally directed to the processes for producing ultra-pure GOS pharmaceutical compositions by utilizing sequential microbiological purifications;

 

	●	U.S. Patent No. 9,370,532, which has a current expiry date of February 17, 2030, includes claims generally directed to methods for preventing or reducing diarrhea associated with lactose intolerance, and methods for the reduction of severity of diarrhea associated with lactose intolerance, comprising administering a high purity GOS having 1-10% by weight pentasaccharides and at least a 45% by weight trisaccharides.
	●	United Kingdom Patent No. GB2480042, which has a current expiry date of February 16, 2030, includes claims generally directed to a solid oral unit-dosage form of a high purity GOS;
	●	European Patent No. EP 2,462,234, validated in six European countries, including Germany, Great Britain, and France, which has a current expiry date of August 6, 2030 (subject to payment of annuities), includes claims generally directed to the processes for producing preparing ultra-pure GOS pharmaceutical compositions by utilizing sequential microbiological purifications;
	●	Italian Patent No. IT 1,395,068, which has a current expiry date of August 7, 2029 (subject to the payment of annuities), includes claims generally directed to the production of ultra-pure GOS pharmaceutical compositions by utilizing sequential microbiological purifications; and

 

●

Chinese Patent No. ZL 201080035013.2, which has a current expiry date of August 6, 2030 (subject to payment of annuities), includes claims generally directed to the production of ultra-pure GOS pharmaceutical compositions by utilizing sequential microbiological purifications.

 

We are pursuing patent applications. These applications are pending in the United States, Europe, Japan and other jurisdictions, and, if they issue as patents, will not expire until at least 2030, and include claims generally directed to (i) oral dosage forms of a higher purity GOS, (ii) use of GOS for treating lactose intolerance, and (iii) methods of preventing or reducing certain symptoms of lactose intolerance using GOS dosage forms. For example, we have paid issue fees (and expect patents to issue in due course) in two United States patent applications: one includes claims directed to an oral dosage forms comprising a prebiotic composition comprising 95% or more GOS by weight and less than 5% digestible saccharides by weight, in which the GOS comprises at least 45% by weight trisaccharides, and the other includes claims directed to oral dosage forms of GOS, comprising 0.1 to 10 g of a liquid GOS composition encapsulated in a gelatin capsule, in which the GOS composition comprises at least about 95% GOS by weight, less than about 5% digestible saccharides by weight, and at least 45% by weight trisaccharides.

 

Trade Secrets

 

In addition to patents, we rely on trade secrets and know-how to develop and maintain our competitive position. Trade secrets and know-how can be difficult to protect. We seek to protect our proprietary processes, in part, by confidentiality agreements and invention assignment agreements with our employees, consultants, scientific advisors, contractors and commercial partners. These agreements are designed to protect our proprietary information. We also seek to preserve the integrity and confidentiality of our data, trade secrets and know-how by maintaining physical security of our premises and physical and electronic security of our information technology systems.

 

Government Regulation and Product Approval

 

Governmental authorities in the United States, at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, labeling, packaging, promotion, storage, advertising, distribution, marketing and export and import of products such as those we are developing. Our product candidates must be approved by the FDA through the NDA process before they may be legally marketed in the United States and by the European Medicines Agency (the “EMA”) through the Marketing Authorization Application (“MAA”) process before they may be legally marketed in Europe. Our product candidates will be subject to similar requirements in other countries prior to marketing in those countries. The process of obtaining regulatory approvals and the subsequent compliance with applicable federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources.

 

 

United States Government Regulation

 

NDA Approval Processes

 

In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act (the “FDCA”) and implementing regulations. Failure to comply with the applicable U.S. requirements at any time during the product development process or approval process, or after approval, may subject an applicant to administrative or judicial sanctions, any of which could have a material adverse effect on us. These sanctions could include:

 

	●	refusal to approve pending applications;
	●	withdrawal of an approval;
	●	imposition of a clinical hold;
	●	warning letters;
	●	product seizures and/or condemnation and destruction;
	●	total or partial suspension of production or distribution; or
	●	injunctions, fines, disgorgement, or civil or criminal penalties.

 

The process required by the FDA before a drug may be marketed in the United States generally involves the following:

 

	●	completion of nonclinical laboratory tests, animal studies and formulation studies conducted according to Good Laboratory Practices (“GLPs”) or other applicable regulations;
	●	submission to the FDA of an IND, which must become effective before human clinical trials may begin;
	●	performance of adequate and well-controlled human clinical trials according to Good Clinical Practices (“GCPs”), to establish the safety and efficacy of the proposed drug for its intended use;
	●	submission to the FDA of a NDA;
	●	satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current Good Manufacturing Practices (“cGMPs”) to assure that the facilities, methods and controls are adequate to preserve the drug’s identity, strength, quality and purity; and
	●	FDA review and approval of the NDA.

 

Once a pharmaceutical candidate is identified for development, it enters the preclinical or nonclinical testing stage. Nonclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies. An IND sponsor must submit the results of the nonclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. Some nonclinical testing may continue even after the IND is submitted. In addition to including the results of the nonclinical studies, the IND will also include a protocol detailing, among other things, the objectives of the clinical trial, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated if the first phase lends itself to an efficacy determination. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, places the IND on clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. A clinical hold may occur at any time during the life of an IND, and may affect one or more specific studies or all studies conducted under the IND.

 

All clinical trials must be conducted under the supervision of one or more qualified investigators in accordance with GCPs. They must be conducted under protocols detailing the objectives of the trial, dosing procedures, research subject selection and exclusion criteria and the safety and effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND, and progress reports detailing the status of the clinical trials must be submitted to the FDA annually. Sponsors also must timely report to FDA serious and unexpected adverse reactions, any clinically important increase in the rate of a serious suspected adverse reaction over that listed in the protocol or investigation brochure, or any findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the drug. An institutional review board, or IRB, at each institution participating in the clinical trial must review and approve the protocol before a clinical trial commences at that institution and must also approve the information regarding the trial and the consent form that must be provided to each research subject or the subject’s legal representative, monitor the study until completed and otherwise comply with IRB regulations.

 

 

Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:

 

	●	Phase 1. The drug is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution and elimination. In the case of some products for severe or life-threatening diseases, such as cancer, especially when the product may be inherently too toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.
	●	Phase 2. Clinical trials are performed on a limited patient population intended to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage. Although there are no statutory or regulatory definitions for Phase 2a and Phase 2b, Phase 2a is commonly used to describe a Phase 2 clinical trial designed to evaluate efficacy, adverse effects and safety risks and Phase 2b is commonly used to describe a subsequent Phase 2 clinical trial that also evaluates dosage tolerance and optimal dosage.
	●	Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical efficacy and safety in an expanded patient population at geographically dispersed clinical study sites. These studies are intended to establish the overall risk-benefit ratio of the product and provide an adequate basis for product labeling.

 

Adaptive seamless phase 2b/3 designs, such as the Phase 2b/3 pivotal clinical trial for RP-G28 that we recently completed enrolling and dosing in October 2016, are aimed at interweaving the two phases of full development by combining them into one single, uninterrupted study conducted in two steps. Adaptive seamless phase 2b/3 designs enable a clinical trial to be conducted in steps with the sample size calculation selected on the basis of data observed in the first step to continue along to the second step. The main statistical challenge in such a design is ensuring control of the type I error rate. Most methodology for such trials is based on the same endpoint being used for interim and final analyses. A type I error is one in which the adaptation process leads to design, analysis, or conduct flaws that introduce bias that increases the chance of a false conclusion that a treatment is effective (a type I error). Controlling a type I error can be accomplished by prospectively specifying and including in the statistical analysis plan all possible adaptation plans that may be considered during the course of the trial. We have worked with our CRO to determine how best to control type I error in our Phase 2b/3 study.

 

Human clinical trials are inherently uncertain and Phase 1, Phase 2 and Phase 3 testing may not be successfully completed. The FDA or the sponsor may suspend a clinical trial at any time for a variety of reasons, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients.

 

During the development of a new drug, sponsors are given opportunities to meet with the FDA at certain points. These points may be prior to the submission of an IND, at the end of Phase 2 and before an NDA is submitted. Meetings at other times may be requested. For instance, we held a Type C meeting with the FDA’s Division of Gastroenterology and Inborn Errors Products on February 20, 2013. The purpose of the meeting was to obtain the FDA’s feedback on the planned clinical development program and future necessary clinical studies, inform the FDA of our ongoing development plans, gain feedback on relevant clinical trial design and end points related to patient meaningful benefits, and to inform the FDA of the status of our product characterization. Following analysis of the Phase 2a clinical trial, discussions with the FDA during the Type C Meeting in early 2013 about our clinical development plan, and further discussions with our regulatory consultants, we initiated an adaptive design Phase 2b/3 clinical trial of RPG-28 in March 2016 and completed final enrollment and dosing in October 2016. As part of this process, we submitted a supplement to the IND detailing the protocols for the adaptive study.

 

We have had subsequent communications with FDA regarding our clinical program and regulatory path towards getting our product adequately studied and eventually approved. We intend to hold two meetings with the FDA in the near future about our Phase 2b/3 study, including a Type C meeting as well as an End of Phase 2 meeting, both of which the FDA has encouraged us to schedule. These meetings and communications are typical for development stage companies and include the clinical pathway, regulatory requirements, statistical plan and endpoints and similar matters.

 

FDA meetings can provide an opportunity for the sponsor to share information about the data gathered to date and for the FDA to provide advice on the next phase of development. Sponsors typically use the meeting at the end of Phase 2 to discuss their Phase 2 clinical results and present their plans for the pivotal Phase 3 clinical trial that they believe will support the approval of the new drug.

 

Concurrent with clinical trials, sponsors usually complete additional animal safety studies and also develop additional information about the chemistry and physical characteristics of the drug and finalize a process for manufacturing commercial quantities of the product in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug and the manufacturer must develop methods for testing the quality, purity and potency of the drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its proposed shelf-life.

 

 

The results of product development, nonclinical studies and clinical trials, along with descriptions of the manufacturing process, analytical tests and other control mechanisms, proposed labeling and other relevant information are submitted to the FDA as part of an NDA requesting approval to market the product. The submission of an NDA is subject to the payment of user fees, but a waiver of such fees may be obtained under specified circumstances. The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency’s threshold determination of whether it is sufficiently complete to permit substantive review. It may request additional information rather than accept an NDA for filing. In this event, the NDA must be resubmitted with the additional information. The resubmitted application also is subject to review before the FDA accepts it for filing.

 

Once the submission is accepted for filing, the FDA begins an in-depth review. NDAs receive either standard or priority review. A drug representing a significant improvement in treatment, prevention or diagnosis of disease may receive priority review. The FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may require additional clinical or other data. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is cGMP-compliant. The FDA may refer the NDA to an advisory committee for review and recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. Before approving an NDA, the FDA will inspect the facility or facilities where the product is manufactured and tested.

 

Patent Term Restoration and Marketing Exclusivity

 

Depending upon the timing, duration and specifics of FDA marketing approval of RP-G28, one of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Act. The Hatch-Waxman Act permits a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND, and the submission date of an NDA, plus the time between the submission date of an NDA and the approval of that application. Only one patent applicable to an approved drug is eligible for the extension and the application for extension must be made prior to expiration of the patent. The United States Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration. In the future, we intend to apply for restorations of patent term for some of our currently owned or licensed patents to add patent life beyond their current expiration date, depending on the expected length of clinical trials and other factors involved in the submission of the relevant NDA.

 

Market exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application (“ANDA”), or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an approved NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example, for new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA; however, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

 

Pediatric Exclusivity and Pediatric Use

 

Under the Best Pharmaceuticals for Children Act (“BPCA”), certain drugs may obtain an additional six months of exclusivity, if the sponsor submits information requested in writing by the FDA (a Written Request) relating to the use of the active moiety of the drug in children. The FDA may not issue a Written Request for studies on unapproved or approved indications or where it determines that information relating to the use of a drug in a pediatric population, or part of the pediatric population, may not produce health benefits in that population.

 

We have not received a Written Request for such pediatric studies, although we may ask the FDA to issue a Written Request for such studies in the future. To receive the six-month pediatric market exclusivity, we would have to receive a Written Request from the FDA, conduct the requested studies in accordance with a written agreement with the FDA or, if there is no written agreement, in accordance with commonly accepted scientific principles, and submit reports of the studies. A Written Request may include studies for indications that are not currently in the labeling if the FDA determines that such information will benefit the public health. The FDA will accept the reports upon its determination that the studies were conducted in accordance with and are responsive to the original Written Request or commonly accepted scientific principles, as appropriate, and that the reports comply with the FDA’s filing requirements.

 

 

In addition, the Pediatric Research Equity Act (“PREA”) requires all applications (or supplements to an application) submitted under section 505 of the FDCA (21 U.S.C. §355) for a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration to contain a pediatric assessment unless the applicant has obtained a waiver or deferral. It also authorizes the FDA to require holders of approved NDAs for marketed drugs to conduct pediatric studies under certain circumstances. In general, PREA applies only to those drugs developed for diseases and/or conditions that occur in both the adult and pediatric populations. Products intended for pediatric-specific indications will be subject to the requirements of PREA only if they are initially developed for a subset of the relevant pediatric population.

 

As part of the Food and Drug Administration Safety and Innovation Act, Congress reauthorized both BPCA and PREA, which were slated to expire on September 30, 2012, and made both laws permanent.

 

Orphan Drugs

 

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, defined as a disease or condition with a patient population of fewer than 200,000 individuals in the United States, or a patient population greater than 200,000 individuals in the United States and when there is no reasonable expectation that the cost of developing and making available the drug or biologic in the United States will be recovered from sales in the United States for that drug or biologic.

 

If a product that has orphan drug designation subsequently receives the first FDA approval for a particular active ingredient for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a full NDA, to market the same product for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or if the FDA finds that the holder of the orphan drug exclusivity has not shown that it can assure the availability of sufficient quantities of the orphan drug to meet the needs of patients with the disease or condition for which the drug was designated. Orphan drug exclusivity does not prevent the FDA from approving a different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA application user fee.

 

A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. Orphan drug exclusive marketing rights in the United States also may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition.

 

We intend to explore orphan drug designation for RP-G28 for any orphan indication in which there is a medically plausible basis for treatment of the indication through colonic adaptation of gut bacteria.

 

Post-approval Requirements

 

Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the product from the market. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further FDA review and approval. In addition, the FDA may require testing and surveillance programs to monitor the effect of approved products that have been commercialized, and the FDA has the power to prevent or limit further marketing of a product based on the results of these post-marketing programs.

 

Any drug products manufactured or distributed by us pursuant to FDA approvals are subject to continuing regulation by the FDA, including, among other things:

 

	●	compliance with current good manufacturing practices;
	●	record-keeping requirements;
	●	reporting of adverse experiences with the drug;
	●	providing the FDA with updated safety and efficacy information;
	●	drug sampling and distribution requirements;
	●	notifying the FDA and gaining its approval of specified manufacturing or labeling changes; and
	●	complying with FDA promotion and advertising requirements.

 

 

Drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and some state agencies for compliance with cGMP and other laws.

 

We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products. Future FDA and state inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct.

 

From time to time, legislation is drafted, introduced and passed in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of products regulated by the FDA. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted, or FDA regulations, guidance or interpretations changed or what the impact of such changes, if any, may be.

 

Regulation Outside of the United States

 

In addition to regulations in the United States, we will be subject to regulations of other countries governing clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we must obtain approval by the comparable regulatory authorities of countries outside of the United States before we can commence clinical trials in such countries and approval of the regulators of such countries or economic areas, such as the European Union, before we may market products in those countries or areas. The approval process and requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary greatly from place to place, and the time may be longer or shorter than that required for FDA approval.

 

Under European Union regulatory systems, a company may submit marketing authorization applications either under a centralized or decentralized procedure. The centralized procedure, which is compulsory for medicines produced by biotechnology or those medicines intended to treat AIDS, cancer, neurodegenerative disorders or diabetes and optional for those medicines which are highly innovative, provides for the grant of a single marketing authorization that is valid for all European Union member states. The decentralized procedure provides for mutual recognition of national approval decisions. Under this procedure, the holder of a national marketing authorization may submit an application to the remaining member states. Within 90 days of receiving the applications and assessments report, each member state must decide whether to recognize approval. If a member state does not recognize the marketing authorization, the disputed points are eventually referred to the European Commission, whose decision is binding on all member states.

 

Reimbursement

 

Sales of our products will depend, in part, on the extent to which the costs of our products will be covered by third-party payors, such as government health programs, commercial insurance and managed healthcare organizations. These third-party payors are increasingly challenging the prices charged for medical products and services. Additionally, the containment of healthcare costs has become a priority of federal and state governments and the prices of drugs have been a focus in this effort. The U.S. government, state legislatures and foreign governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit our net revenue and results. If these third-party payors do not consider our products to be cost-effective compared to other therapies, they may not cover our products after approved as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.

 

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “MMA”) imposed new requirements for the distribution and pricing of prescription drugs for Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities which will provide coverage of outpatient prescription drugs. Part D plans include both stand-alone prescription drug benefit plans and prescription drug coverage as a supplement to Medicare Advantage plans. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for our products for which we receive marketing approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.

 

 

The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different treatments for the same illness. A plan for the research will be developed by the Department of Health and Human Services, the Agency for Healthcare Research and Quality and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it is not clear what effect, if any, the research will have on the sales of any product, if any such product or the condition that it is intended to treat is the subject of a study. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sales of our product candidates. If third-party payors do not consider our products to be cost-effective compared to other available therapies, they may not cover our products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.

 

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (collectively, the “ACA”), enacted in March 2010, is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. With regard to pharmaceutical products, among other things, the ACA is expected to expand and increase industry rebates for drugs covered under Medicaid programs and make changes to the coverage requirements under the Medicare Part D program. Although it is too early to determine the full effect of the ACA, the law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs. In addition, some members of the U.S. Congress have been seeking to repeal in full or amend portions of the legislation and we expect they will continue to review and assess this legislation and alternative health care reform proposals. Ongoing Congressional efforts to repeal or amend the ACA, add to the uncertainty of the legislative changes enacted as part of the ACA.

 

In addition, in some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the European Union do not follow price structures of the United States and generally tend to be significantly lower.

 

Employees

 

As of the date of this Annual Report, we have seven employees, all of whom are full time employees. None of our employees are represented by a labor union, and we consider our relationship with our employees to be good.

 

Available Information

 

We file with the Securities and Exchange Commission (“SEC”) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy and information statements and amendments to reports filed or furnished pursuant to Sections 13(a), 14 and 15(d) of the Securities Exchange Act of 1934, as amended. The public may obtain these filings at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding Ritter Pharmaceuticals, Inc. and other companies that file materials with the SEC electronically. As soon as practicable after filing with the SEC, we make copies of our reports on Form 10-K, Forms 10-Q and Forms 8-K available to the public, free of charge, through the investor relations tab on our web site, http://www.ritterpharmaceuticals.com/investors.

 

Item 1A. Risk Factors

 

We operate in a dynamic and rapidly changing business environment that involves multiple risks and substantial uncertainty. The following discussion addresses risks and uncertainties that could cause, or contribute to causing, actual results to differ from expectations in material ways. In evaluating our business, investors should pay particular attention to the risks and uncertainties described below and in other sections of this Annual Report and in our subsequent filings with the SEC. These risks and uncertainties, or other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations, cash flows and financial condition. The trading price of our common stock could also decline due to any of these risks, and you could lose all or part of your investment. The following information should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report.

 

 

Risks Relating to Our Financial Position and Need for Additional Capital

 

We have incurred net losses in each year since our inception. Currently, we have no products approved for commercial sale. As a result, our ability to reduce our losses and reach profitability is unknown, and we may never achieve or sustain profitability.

 

We have incurred net losses in each year since our inception. The accompanying financial statements have been prepared assuming that we 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. For the years ended December 31, 2016 and 2015, we had net losses of approximately $18.4 million and $8.8 million, respectively, and had net cash used in operating activities of approximately $15.2 million and $5.7 million, respectively. These net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

 

To date, we have devoted most of our financial resources to our corporate overhead and research and development, including our drug discovery research, preclinical development activities and clinical trials. We currently have no products that are approved for commercial sale. We expect to continue to incur net losses and negative operating cash flow for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, RP-G28, and other product candidates, prepare for and begin the commercialization of any approved products, and add infrastructure and personnel to support our product development efforts and operations as a public company. We anticipate that any such losses could be significant for the next several years as we complete our Phase 2b/3 and begin any Phase 3 clinical trials for RP-G28 for the reduction of symptoms associated with lactose intolerance and related activities required for regulatory approval of RP-G28. If RP-G28 does not gain regulatory approval, or does not achieve market acceptance, we may never become profitable, unless we are able to develop and market some other product. These net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.

 

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. In addition, our expenses could increase if we are required by the FDA or the EMA, to perform studies or trials in addition to those currently expected, or if there are any delays in completing our clinical trials or the development of RP-G28, or any other product candidate we may develop in the future. The amount of future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues.

 

We will require substantial additional funding, which may not be available to us on acceptable terms, or at all, and, if not so available, may require us to delay, limit, reduce or cease our operations.

 

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. As of December 31, 2016, we have a total of approximately $7.0 million in cash.

 

On June 29, 2015, we closed our initial public offering of 4,000,000 shares of common stock at a public offering price of $5.00 per share. Total gross proceeds from our initial public offering were $20.0 million before deducting underwriting discounts and commissions and other offering expenses payable by us, resulting in net proceeds of $17.4 million.

 

On December 18, 2015, we entered into a common stock purchase agreement (the “Aspire Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of our shares of common stock over the approximately 30-month term of the Aspire Purchase Agreement. As of the date of this Annual Report, we have sold 1,577,699 shares of common stock to Aspire Capital for proceeds of $3.0 million.

 

On October 31, 2016, we closed a public offering of 2,127,660 shares of our common stock at a price to the public of $2.35 per share, for net proceeds of approximately $4.4 million, after deducting underwriting discounts and commissions and offering expenses payable by us in the offering.

 

We expect our existing cash and cash equivalents, together with interest, and any proceeds received from our sale of shares of common stock to Aspire Capital in the future pursuant to the Aspire Purchase Agreement, will be sufficient to fund our current operations through 2017. We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. For example, our clinical trials may encounter technical, enrollment or other difficulties that could increase our development costs more than we expect.

 

 

We do not expect our existing capital resources will be sufficient to enable us to complete the commercialization of RP-G28, if approved, or to initiate any clinical trials or additional development work for other product candidates, other than as described above. We will need to secure additional financing in order to complete clinical development and commercialize RP-G28 and to generally fund our operations. To complete the work necessary to file a NDA and a MAA for RP-G28 as a treatment for patients with lactose intolerance, which is currently anticipated to occur in 2019, we estimate that our RP-G28 clinical trials, and our planned clinical and nonclinical studies, as well as other work needed to submit RP-G28 for regulatory approval in the United States, Europe and other countries, will cost approximately $85 million, including the internal resources needed to manage the program. If the FDA or EMA requires that we perform additional nonclinical studies or clinical trials, our expenses would further increase beyond what we currently expect and the anticipated timing of any potential NDA or MAA would likely be delayed.

 

If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs. We also could be required to seek funds through arrangements with collaborative partners or otherwise that may require us to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us.

 

The extent to which we utilize the Aspire Purchase Agreement with Aspire Capital as a source of funding will depend on a number of factors, including the prevailing market price of our common stock, the volume of trading in our common stock and the extent to which we are able to secure funds from other sources. The number of shares that we may sell to Aspire Capital under the Aspire Purchase Agreement on any given day and during the term of the agreement is limited. Additionally, we and Aspire Capital may not effect any sales of shares of our common stock under the Aspire Purchase Agreement during the continuance of an event of default or on any trading day that the closing sale price of our common stock is less than $0.50 per share. Even if we are able to access the full $10 million under the Aspire Purchase Agreement, we will still need additional capital to fully implement our business, operating and development plans.

 

We may sell additional equity or debt securities to fund our operations, which would result in dilution to our stockholders and imposed restrictions on our business.

 

We may seek additional funding through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. Additional funding may not be available to us on acceptable terms or at all. To the extent that we raise additional funds by issuing equity securities (including any common stock issued to Aspire Capital pursuant to the Aspire Purchase Agreement), our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we are not able to raise additional capital when required or on acceptable terms, we 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 we would otherwise seek to develop or commercialize. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional shares by us, or the possibility of such issuance, may cause the market price of our shares to decline.

 

Our financial condition and operating results have varied significantly since our formation and are expected to continue to fluctuate significantly from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control.

 

Our operations since 2010 have been limited to developing our technology and undertaking preclinical studies and clinical trials of our lead product candidate, RP-G28. We have not yet obtained regulatory approvals for RP-G28, or any other product candidate. Consequently, any predictions made about our future success or viability may not be as accurate as they could be if we had approved products on the market. Our financial condition and operating results have varied significantly since our formation and are expected to continue to significantly fluctuate from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include:

 

	●	any delays in regulatory review and approval of our product candidates in clinical development, including our ability to receive approval from the FDA and the EMA for RP-G28 based on our Phase 2b/3 and any Phase 3 trials of RP-G28, and our other completed and planned clinical and nonclinical studies and other work, as the basis for review and approval of RP-G28;
	●	delays in the commencement, enrollment and timing of clinical trials;
	●	difficulties in identifying and treating patients suffering from our target indications;
	●	the success of our clinical trials through all phases of clinical development, including our Phase 2b/3 and any Phase 3 trials of RP-G28;
	●	potential side effects of our product candidates that could delay or prevent approval or cause an approved drug to be taken off the market;
	●	our ability to obtain additional funding to develop our product candidates;
	●	our ability to identify and develop additional product candidates;

 

 

●

market acceptance of our product candidates;

 

	●	our ability to establish an effective sales and marketing infrastructure directly or through collaborations with third parties;
	●	competition from existing products or new products that may emerge;

 

	●	the ability of patients or healthcare providers to obtain coverage or sufficient reimbursement for our products;
	●	our ability to adhere to clinical study requirements directly or with third parties such as CROs;
	●	our dependency on third-party manufacturers to manufacture our products and key ingredients;
	●	our ability to establish or maintain collaborations, licensing or other arrangements;
	●	the costs to us, and our ability and our third-party collaborators’ ability to obtain, maintain and protect our intellectual property rights;
	●	costs related to and outcomes of potential intellectual property litigation;
	●	our ability to adequately support future growth;
	●	our ability to attract and retain key personnel to manage our business effectively; and
	●	potential product liability claims.

 

Accordingly, the results of any quarterly or annual periods should not be relied upon as indications of future operating performance.

 

Risks Relating to Regulatory Review and Approval of Our Product Candidates

 

We are substantially dependent on the success of RP-G28.

 

We currently have no products approved for sale and we cannot guarantee that we will ever have marketable products. We currently invest nearly all of our efforts and financial resources in the research and development of RP-G28, which is currently our only product candidate. Our business currently depends entirely on the successful development and commercialization of RP-G28.

 

We cannot be certain that RP-G28 will receive regulatory approval, and without regulatory approval we will not be able to market RP-G28 as a prescription drug.

 

The development of a product candidate and issues relating to its approval and marketing are subject to extensive regulation by the FDA in the United States, the EMA in Europe, and regulatory authorities in other countries, with regulations differing from country to country. We are not permitted to market our product candidates in the United States or Europe until we receive approval of a NDA from the FDA or a MAA from the EMA, respectively. We have not submitted any marketing applications for RP-G28.

 

NDAs and MAAs must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each desired indication. NDAs and MAAs must also include significant information regarding the chemistry, manufacturing and controls for the product. Obtaining approval of a NDA or a MAA is a lengthy, expensive and uncertain process, and we may not be successful in obtaining approval. The FDA and the EMA review processes can take years to complete and approval is never guaranteed. If we submit a NDA to the FDA, the FDA must decide whether to accept or reject the submission for filing. We cannot be certain that any submissions will be accepted for filing and review by the FDA. Regulators of other jurisdictions, such as the EMA, have their own procedures for approval of product candidates. Even if a product is approved, the FDA or the EMA, as the case may be, may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming clinical trials or reporting as conditions of approval. Regulatory authorities in countries outside of the United States and Europe also have requirements for approval of drug candidates with which we must comply prior to marketing in those countries. Obtaining regulatory approval for marketing of a product candidate in one country does not ensure that we will be able to obtain regulatory approval in any other country. In addition, delays in approvals or rejections of marketing applications in the United States, Europe or other countries may be based upon many factors, including regulatory requests for additional analyses, reports, data, preclinical studies and clinical trials, regulatory questions regarding different interpretations of data and results, changes in regulatory policy during the period of product development and the emergence of new information regarding our product candidates or other products. Also, regulatory approval for any product candidates may be withdrawn.

 

 

We have completed one Phase 2a trial and an adaptive design Phase 2b/3 clinical trial for RP-G28. Before we submit a NDA to the FDA or a MAA to the EMA for RP-G28 for the treatment of pain and the reduction in the frequency of symptomatic episodes of lactose intolerance, we must successfully complete a Phase 2b/3 trial and Phase 3 trials. Following analysis of the Phase 2a clinical trial, discussions with the FDA during the Type C meeting in 2013 about our clinical development plan, and further discussions with our regulatory consultants, we initiated an adaptive design Phase 2b/3 clinical trial of RPG-28 in March 2016. A trial that is designed as an adaptive seamless clinical trial refers to a trial that combines the objectives of what are typically separate trials into a single uninterrupted trial with multiple objectives.

 

Regulatory authorities in the United States and Europe have both published guidance documents on the use and implementation of adaptive design trials. These documents include description of adaptive trials and include a requirement for prospectively written standard operating procedures and working processes for executing adaptive trials and a recommendation that sponsor companies engage with CROs that have the necessary experience in running such trials. In addition, the regulations governing INDs are extensive and involve numerous notification requirements including that, generally, an IND supplement must be submitted to and cleared by the FDA before a sponsor or an investigator may make any change to the investigational plan that may affect its scientific soundness or the rights, safety or welfare of human subjects. We intend to comply with these requirements. We submitted an IND supplement containing amended protocols for the Phase 2b/3 adaptive trial, and have had subsequent communications with FDA regarding our clinical program and regulatory path towards getting our product adequately studied and eventually approved. We intend to hold two meetings with the FDA in the near future about our Phase 2b/3 study, including a Type C meeting as well as an End of Phase 2 meeting, both of which the FDA has encouraged us to schedule. These meetings and communications are typical for development stage companies and include the clinical pathway, regulatory requirements, statistical plan and endpoints and similar matters. There can be no assurance that this trial and other trials will not be delayed or disrupted as a result of our current development plan.

 

In addition, guidelines adopted by the FDA and established by the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) require nonclinical studies that specifically address female fertility to be completed before the inclusion of women of child bearing potential in large-scale or long-duration clinical trials (e.g., Phase 3 trials). In the United States, such assessments of embryo-fetal development can be deferred until before Phase 3 using precautions to prevent pregnancy in clinical trials. As the FDA recommended in their June 28, 2010 advice letter, we will continue to evaluate females of child-bearing potential who are willing to use appropriate contraception throughout the duration of any study. We cannot predict whether our future trials and studies will be successful or whether regulators will agree with our conclusions regarding the preclinical studies and clinical trials we have conducted to date.

 

If we are unable to obtain approval from the FDA, the EMA or other regulatory agencies for RP-G28, or if, subsequent to approval, we are unable to successfully commercialize RP-G28, we will not be able to generate sufficient revenue to become profitable or to continue our operations.

 

Any statements in this document indicating that RP-G28 has demonstrated preliminary evidence of efficacy are our own and are not based on the FDA’s or any other comparable governmental agency’s assessment of RP-G28 and do not indicate that RP-G28 will achieve favorable efficacy results in any later stage trials or that the FDA or any comparable agency will ultimately determine that RP-G28 is effective for purposes of granting marketing approval.

 

The FDA and other regulatory agencies outside the United States, such as the EMA, may not agree to our proposed endpoint for approval of RP-G28 for the reduction of symptoms associated with lactose intolerance in patients, in which case we would need to complete an additional clinical trial in order to seek approval outside the United States.

 

During our Type C Meeting with the FDA in February 2013, we had proposed that future studies with RP-G28 in subjects with lactose intolerance would utilize a total lactose intolerance symptom score, measured by a patient reporting instrument that we were going to develop, as the primary, stand-alone endpoint. However, based on RP-G28’s mechanism of action, data from the Phase 2a clinical study, further research conducted after the Type C Meeting with the FDA along with FDA guidance and products under the review of the Division of Gastroenterology and Inborn Errors Products, we used abdominal pain, measured by the Patient Assessment of Adequate Relief Item instrument administered monthly, as the primary endpoint for the Phase 2b/Phase 3 study that assessed RP-G28 for the management of lactose intolerant patients with moderate to severe abdominal pain associated with lactose intake. We believe that evaluation of abdominal pain is a reliable clinical assessment of treatment response and treatment benefit in a lactose intolerant patient. Although no FDA-approved product exists for lactose intolerance, the use of a pain scale as a primary endpoint has been used as a validated primary measurement in many approved products, including other gastrointestinal products used to treat diseases such as Irritable Bowel Syndrome (IBS). We did not consult with the FDA about our intent to use abdominal pain as a primary endpoint. We also did not discuss the Phase 2b/3 study design and development plan with the FDA before initiating the study in March 2016, though we did submit a supplement to the IND detailing the protocols for the adaptive study. We intend to hold two meetings with the FDA in the near future about our Phase 2b/3 study, including a Type C meeting as well as an End of Phase 2 meeting, both of which the FDA has encouraged us to schedule.

 

 

We do not know if the FDA, the EMA or regulatory authorities in other countries will agree with our final primary endpoint for approval of RP-G28. The FDA, the EMA and regulatory authorities in other countries in which we may seek approval for and market RP-G28, may require additional nonclinical studies and/or clinical trials prior to granting approval. It may be expensive and time consuming to conduct and complete additional nonclinical studies and clinical trials that the EMA and other regulatory authorities may require us to perform. As such, any requirement by the EMA or other regulatory authorities that we conduct additional nonclinical studies or clinical trials could materially and adversely affect our business, financial condition and results of operations. Furthermore, even if we receive regulatory approval of RP-G28 for the reduction of symptoms associated with lactose intolerance in patients, the labeling for RP-G28 in the United States, Europe or other countries in which we seek approval may include limitations that could impact the commercial success of RP-G28.

 

The results from our planned Phase 2b/3 trial with adaptive design may not be sufficiently robust to support the submission of marketing approval for RP-G28.

 

We conducted our Phase 2b clinical trial as an adaptive design seamless Phase 2b/3 clinical trial. We did not meet with the FDA to discuss the Phase 2b/3 study design or the development plan for RP-G28 before initiating the Phase 2b/3 study in march 2016. The FDA standard for traditional approval of a drug generally requires two well-controlled Phase 3 studies. If the FDA disagrees with our choice of primary endpoint for our Phase 2b/3 trial or the results for the primary endpoint are not robust or significant relative to control, are subject to confounding factors, or are not adequately supported by other study endpoints, the FDA may not recognize the Phase 2b/3 trial as one of the required pivotal trials required for FDA approval. If the FDA or other regulatory authorities do not recognize this trial as a pivotal trial, we would incur increased costs and delays in the marketing approval process, which would require us to expend more resources than we have available.

 

Delays in the commencement, enrollment and completion of clinical trials could result in increased costs to us and delay or limit our ability to obtain regulatory approval for RP-G28 or our other product candidates we may develop in the future.

 

Delays in the commencement, enrollment and completion of clinical trials could increase our product development costs or limit the regulatory approval of RP-G28 or other product candidates we may develop in the future. Although we believe that our existing cash and cash equivalents, together with interest, and any proceeds received from our sale of shares of common stock to Aspire Capital in the future pursuant to the pursuant to the Aspire Purchase Agreement should be sufficient to fund our projected operating requirements through the completion of the Phase 2b/3 and the design of any Phase 3 trials of RP-G28, we may not be able to complete these trials on time or we may be required to conduct additional clinical trials or nonclinical studies not currently planned to receive approval for RP-G28 as a treatment for lactose intolerance. The commencement, enrollment and completion of clinical trials may be delayed or suspended for a variety of reasons, including:

 

	●	inability to obtain sufficient funds required for a clinical trial;
	●	inability to reach agreements on acceptable terms with prospective CROs and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
	●	clinical holds, other regulatory objections to commencing or continuing a clinical trial or the inability to obtain regulatory approval to commence a clinical trial in countries that require such approvals;
	●	discussions with the FDA or non-U.S. regulators regarding the scope or design of our clinical trials;
	●	inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indications targeted by our product candidates;
	●	inability to obtain approval from institutional review boards, or IRBs, to conduct a clinical trial at their respective sites;
	●	severe or unexpected drug-related adverse effects experienced by patients;
	●	inability to timely manufacture sufficient quantities of the product candidate required for a clinical trial;
	●	difficulty recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including meeting the enrollment criteria for our study and competition from other clinical trial programs for the same indications as our product candidates;
	●	inability to get FDA approval of our end points; and
	●	inability to retain enrolled patients after a clinical trial is underway.

 

 

Changes in regulatory requirements and guidance may also occur and we may need to amend clinical trial protocols to reflect these changes with appropriate regulatory authorities. Amendments may require us to resubmit clinical trial protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical trial. In addition, a clinical trial may be suspended or terminated at any time by us, our future collaborators, the FDA or other regulatory authorities due to a number of factors, including:

 

	●	our failure or the failure of our potential future collaborators to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

 

	●	unforeseen safety issues or any determination that a clinical trial presents unacceptable health risks;
	●	lack of adequate funding to continue the clinical trial due to unforeseen costs or other business decisions; and
	●	a breach of the terms of any agreement with, or for any other reason by, future collaborators who have responsibility for the clinical development of our product candidates.

 

In addition, if we or any of our potential future collaborators are required to conduct additional clinical trials or other nonclinical studies of our product candidates beyond those contemplated, our ability to obtain regulatory approval of these product candidates and to generate revenue from their sales would be similarly harmed.

 

Clinical failure can occur at any stage of clinical development. The results of earlier clinical trials are not necessarily predictive of future results and any product candidate we or our potential future collaborators advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.

 

Clinical failure can occur at any stage of our clinical development. Clinical trials may produce negative or inconclusive results, and we or our collaborators may decide, or regulators may require us, to conduct additional clinical trials or nonclinical studies. In addition, data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval. Success in preclinical studies and early clinical trials does not ensure that subsequent clinical trials will generate the same or similar results or otherwise provide adequate data to demonstrate the efficacy and safety of a product candidate. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in Phase 2b and/or Phase 3 clinical trials, including adaptive seamless clinical trials even after seeing promising results in earlier clinical trials.

 

In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well-advanced. We may be unable to design and execute a clinical trial to support regulatory approval. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts.

 

If RP-G28, or any of the other product candidates that we may develop in the future, is found to be unsafe or lack efficacy, we will not be able to obtain regulatory approval for it and our business would be harmed. For example, if the results of our Phase 2b/3 and any Phase 3 trials of RP-G28 do not achieve the primary efficacy endpoints or demonstrate expected safety, the prospects for approval of RP-G28 would be materially and adversely affected.

 

In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial protocols, differences in composition of the patient populations, adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. We do not know whether any Phase 2, Phase 3 or other clinical trials we or any of our potential future collaborators may conduct will demonstrate the consistent or adequate efficacy and safety that would be required to obtain regulatory approval and market RP-G28. Our adaptive Phase 2b/3 clinical trial for RP-G28 may not be deemed to be a pivotal trial by the FDA or may not provide sufficient support for NDA approval. The FDA may require us to make changes to the proposed study design for this adaptive trial or may require us to conduct one or more additional clinical trials, possibly involving a larger sample size or a different clinical trial design, or may require longer follow-up periods, particularly if the FDA does not find the results from our adaptive Phase 2b/3 clinical trial to be sufficiently persuasive as one of the required pivotal trials required for FDA approval. If we are unable to bring RP-G28 to market, our ability to create long-term stockholder value will be limited.

 

Our product candidates may have undesirable side effects which may delay or prevent marketing approval, or, if approval is received, require them to be taken off the market, require them to include safety warnings or otherwise limit their sales.

 

Unforeseen side effects from RP-G28, or other product candidates we may develop in the future, could arise either during clinical development or, if approved, after the approved product has been marketed. The most common side effects observed in clinical trials of RP-G28 were headache (nine out of 57), nausea (three out of 57), upper respiratory tract infection (two of 57), nasal congestion (two of 57), and pain (two out of 57). No patients were withdrawn from our Phase 2b/3 clinical trial for these side effects.

 

Any undesirable or unacceptable side effects associated with our product candidates could interrupt, delay or halt clinical trials, and result in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities.

 

 

In addition:

 

	●	regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies;
	●	we may be required to change instructions regarding the way the product is administered, conduct additional clinical trials or change the labeling of the product;
	●	we may be subject to limitations on how we may promote the product;
	●	sales of the product may decrease significantly;
	●	regulatory authorities may require us to take our approved product off the market;
	●	we may be subject to litigation or product liability claims; and
	●	our reputation may suffer.

 

Any of these events could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from the sale of our products.

 

Reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance. If there is not sufficient reimbursement for our products, it is less likely that they will be widely used.

 

Market acceptance and sales of RP-G28, or any other product candidates we may develop in the future, if approved, will depend on reimbursement policies and may be affected by, among other things, future healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will cover and establish payment levels. We cannot be certain that reimbursement will be available for RP-G28 or any other product candidates that we may develop. Also, we cannot be certain that reimbursement policies will not reduce the demand for, or the price paid for, our products. If reimbursement is not available or is available on a limited basis, we may not be able to successfully commercialize RP-G28, or other product candidates that we develop.

 

In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “MMA”), changed the way Medicare covers and pays for pharmaceutical products. The legislation established Medicare Part D, which expanded Medicare coverage for outpatient prescription drug purchases by the elderly but provided authority for limiting the number of drugs that will be covered in any therapeutic class. The MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered drugs. Any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain in the United States. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.

 

The United States and several other jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access to healthcare. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. We expect to experience pricing pressures in connection with the sale of RP-G28, and any other product candidates that we develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals.

 

The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (collectively, the “ACA”), enacted in March 2010, is a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. With regard to pharmaceutical products, among other things, the ACA is expected to expand and increase industry rebates for drugs covered under Medicaid programs and make changes to the coverage requirements under the Medicare Part D program. Although it is too early to determine the full effect of the ACA, the law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs. In addition, some members of the U.S. Congress have been seeking to repeal in full or amend portions of the legislation and we expect they will continue to review and assess this legislation and alternative health care reform proposals. Ongoing Congressional efforts to repeal or amend the ACA, add to the uncertainty of the legislative changes enacted as part of the ACA.

 

 

If we do not obtain protection under the Hatch-Waxman Act and similar legislation outside of the United States by extending the patent terms and obtaining data exclusivity for our product candidates, our business may be materially harmed.

 

Depending upon the timing, duration and specifics of FDA marketing approval of RP-G28, one of our U.S. patents may be eligible for a limited Patent Term Extension under the Drug Price Competition and Patent Term Restoration Act of 1984 (which is sometimes referred to as the “Hatch-Waxman Act”), provided our U.S. patent claims a method of treating lactose intolerance that is approved by the FDA. The Hatch-Waxman Act, 35 U.S.C. §156, permits a patent extension of up to five years as compensation for patent term lost during the FDA regulatory review process. The scope of protection afforded by the patent during the extended term is not commensurate with the scope of the unextended portion of the patent; for example, the “rights derived” from a method of use patent during the extended period are “limited to any use claimed by the patent and approved for the product.” 35 U.S.C. §156(b)(2). We may not be granted an extension because of, for example, failing to apply for the extension within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable statutory and/or regulatory requirements including, for example, the requirement that the patent to be extended “claim” the approved product or a method of using the approved product. Moreover, the applicable period of extension could be less than we request. If we are unable to obtain patent term extension or if the term of any such extension is shorter than we request, the period during which we will be able to exclude others from marketing their versions of our product will be shortened and our competitors may obtain approval of generic products following our patent expiration, and our revenue could be reduced, possibly materially. Similar concerns are associated with obtaining Supplemental Protection Certificates (SPCs) of certain patents issued in Europe and owned by Inalco, to which we have an exclusive options of assignment, based upon patent terms lost during European regulatory review processes. In the event that we are unable to obtain any patent term extension, the issued patents for RP-G28 are expected to expire in 2030, assuming they withstand any challenge toothier validity and/or patentability.

 

If we market products in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting laws, we may be subject to civil or criminal penalties.

 

In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal healthcare laws, commonly referred to as “fraud and abuse” laws, have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. Other jurisdictions such as Europe have similar laws. These laws include false claims and anti-kickback statutes. If we market our products and our products are paid for by governmental programs, it is possible that some of our business activities could be subject to challenge under one or more of these laws.

 

Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement to get a false claim paid. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service covered by Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers or formulary managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Most states also have statutes or regulations similar to the federal anti-kickback law and federal false claims laws, which apply to items and services covered by Medicaid and other state programs, or, in several states, apply regardless of the payor. Administrative, civil and criminal sanctions may be imposed under these federal and state laws.

 

Over the past few years, a number of pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of promotional and marketing activities, such as: providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid rebates.

 

Any delay or disruption in the manufacture and supply of RP-G28 may negatively impact our operations.

 

We do not intend to manufacture the pharmaceutical products that we plan to sell. We have an agreement with RSM, our contract manufacturer, for the production of Improved GOS, the active pharmaceutical ingredient in RP-G28, and the formulation of sufficient quantities of Improved GOS for the clinical and nonclinical studies that we believe we will need to conduct prior to seeking regulatory approval for RPG-28. However, we do not have agreements for commercial supplies of RP-G28 and we may not be able to reach agreements with these or other contract manufacturers for sufficient supplies to commercialize RP-G28 if it is approved.

 

 

Reliance on third-party manufacturers entails risks, to which we would not be subject if we manufactured the product candidates ourselves, including:

 

	●	the possibility that we are unable to enter into a manufacturing agreement with a third party to manufacture our product candidates;
	●	the possible breach of the manufacturing agreements by the third parties because of factors beyond our control; and
	●	the possibility of termination or nonrenewal of the agreements by the third parties before we are able to arrange for a qualified replacement third-party manufacturer.

 

Any of these factors could cause the delay of approval or commercialization of our product candidates, cause us to incur higher costs or prevent us from commercializing our product candidates successfully. Furthermore, if RP-G28 or other product candidates are approved and contract manufacturers fail to deliver the required commercial quantities of finished product on a timely basis and at commercially reasonable prices and we are unable to find one or more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volumes and quality and on a timely basis, we would likely be unable to meet demand for our products and could lose potential revenue. It may take several years to establish an alternative source of supply for our product candidates and to have any such new source approved by the government agencies that regulate our products. In the event we do need to identify alternative manufacturing partners, we may have to secure licenses to manufacturing and/or purification technologies, including third-party patent licenses, to allow us to manufacture RP-G28 that is suitable for the late-stage regulatory review process and/or adequate to manufacture commercial quantities of RP-G28.

 

If the FDA and EMA and other regulatory agencies do not approve the manufacturing facilities of our future contract manufacturers for commercial production, we may not be able to commercialize any of our product candidates.

 

The facilities used by any contract manufacturer to manufacture RP-G28, or other product candidates we may develop in the future, must be the subject of a satisfactory inspection before the FDA or the regulators in other jurisdictions approve the product candidate manufactured at that facility. We are completely dependent on these third-party manufacturers for compliance with the requirements of U.S. and non-U.S. regulators for the manufacture of our finished products. If our manufacturers cannot successfully manufacture material that conform to our specifications and current good manufacturing practice requirements of any governmental agency whose jurisdiction to which we are subject, our product candidates will not be approved or, if already approved, may be subject to recalls.

 

Even if our product candidates receive regulatory approval, we may still face future development and regulatory difficulties.

 

RP-G28 and any other product candidates we develop in the future, if approved, will be subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information. In addition, approved products, manufacturers and manufacturers’ facilities are required to comply with extensive FDA and EMA requirements and requirements of other similar agencies, including ensuring that quality control and manufacturing procedures conform to current cGMPs. As such, we and our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMPs. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA and EMA and other similar agencies and to comply with certain requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved label. Accordingly, we may not promote our approved products, if any, for indications or uses for which they are not approved.

 

If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, it may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

	●	issue warning letters;
	●	mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
	●	require us or our potential future collaborators to enter into a consent decree or permanent injunction, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;
	●	impose other administrative or judicial civil or criminal penalties;

 

 

	●	withdraw regulatory approval;
	●	refuse to approve pending applications or supplements to approved applications filed by us or our potential future collaborators;
	●	impose restrictions on operations, including costly new manufacturing requirements; or
	●	detain, seize and/or condemn and destroy products.

 

Risks Relating to the Commercialization of Our Products

 

Even if approved, our product candidates may not achieve broad market acceptance among physicians, patients and healthcare payors, and as a result our revenues generated from their sales may be limited.

 

The commercial success of RP-G28, if approved, will depend upon its acceptance among the medical community, including physicians, health care payors and patients. The degree of market acceptance of RP-G28, or other product candidates we may develop in the future, will depend on a number of factors, including:

 

	●	limitations or warnings contained in our product candidates’ FDA-approved labeling;
	●	changes in the standard of care or availability of alternative therapies at similar or lower costs for the targeted indications for such product candidates;
	●	limitations in the approved clinical indications for such product candidates;
	●	demonstrated clinical safety and efficacy compared to other products;
	●	lack of significant adverse side effects;
	●	sales, marketing and distribution support;
	●	availability of reimbursement from managed care plans and other third-party payors;
	●	timing of market introduction and perceived effectiveness of competitive products;
	●	the degree of cost-effectiveness;
	●	availability of alternative therapies at similar or lower cost, including generics and over-the-counter products;
	●	enforcement by the FDA and EMA of laws and rulings that prohibit the illegal sale of RP-G28 (or any other product candidate) as a dietary supplement;
	●	the extent to which our product candidates are approved for inclusion on formularies of hospitals and managed care organizations;
	●	whether our product candidates are designated under physician treatment guidelines for the treatment of or reduction of symptoms associated with the indications for which we have received regulatory approval;
	●	adverse publicity about our product candidates or favorable publicity about competitive products;
	●	convenience and ease of administration of our product candidates; and
	●	potential product liability claims.

 

If our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, patients, the medical community and healthcare payors, sufficient revenue may not be generated from these products and we may not become or remain profitable. In addition, efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.

 

 

We have no internal sales, distribution and/or marketing capabilities at this time and we will have to invest significant resources to develop those capabilities or enter into acceptable third-party sales and marketing arrangements.

 

We have no internal sales, distribution and/or marketing capabilities at this time. To develop these capabilities, we will have to invest significant amounts of financial and management resources, some of which will be committed prior to any confirmation that RP-G28 will be approved. For product candidates for which we decide to perform sales, marketing and distribution functions ourselves or through third parties, we could face a number of additional risks, including:

 

	●	we or our third-party sales collaborators may not be able to attract and build an effective marketing or sales force;
	●	the cost of securing or establishing a marketing or sales force may exceed the revenues generated by any products; and
	●	our direct sales and marketing efforts may not be successful.

 

We may have limited or no control over the sales, marketing and distribution activities of these third parties. Our future revenues may depend heavily on the success of the efforts of these third parties.

 

We may not be successful in establishing and maintaining development and commercialization collaborations, which could adversely affect our ability to develop RP-G28 or other product candidates and our financial condition and operating results.

 

Because developing pharmaceutical products, conducting clinical trials, obtaining regulatory approval, establishing manufacturing capabilities and marketing approved products are expensive, we may seek to enter into collaborations with companies that have more experience. Additionally, if RP-G28, or any other product candidate we develop in the future, receives marketing approval, we may enter into sales and marketing arrangements with third parties with respect to our unlicensed territories. If we are unable to enter into arrangements on acceptable terms, we may be unable to effectively market and sell our products in our target markets. We expect to face competition in seeking appropriate collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement and they may require substantial resources to maintain. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements for the development of our product candidates.

 

When we collaborate with a third party for the development and commercialization of a product candidate, we can expect to relinquish some or all of the control over the future success of that product candidate to the third party. For example, we may relinquish the rights to RP-G28 in jurisdictions outside of the United States. Our collaboration partner may not devote sufficient resources to the commercialization of our product candidates or may otherwise fail in their commercialization. The terms of any collaboration or other arrangement that we establish may not be favorable to us. In addition, any collaboration that we enter into may be unsuccessful in the development and commercialization of our product candidates. In some cases, we may be responsible for continuing preclinical and initial clinical development of a product candidate or research program under a collaboration arrangement, and the payment we receive from our collaboration partner may be insufficient to cover the cost of this development. If we are unable to reach agreements with suitable collaborators for our product candidates, we would face increased costs, we may be forced to limit the number of our product candidates we can commercially develop or the territories in which we commercialize them and we might fail to commercialize products or programs for which a suitable collaborator cannot be found. If we fail to achieve successful collaborations, our operating results and financial condition will be materially and adversely affected.

 

Risks Relating to Our Business and Strategy

 

We may face competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.

 

Although we know of no other drug candidates in advanced clinical trials for treating lactose intolerance, the biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have potential competitors in the United States, Europe and other jurisdictions, including major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical and generic drug companies and universities and other research institutions. Many of these potential competitors have greater financial and other resources, such as larger research and development staff and more experienced marketing and manufacturing organizations. Large pharmaceutical companies, in particular, have extensive experience in clinical testing, obtaining regulatory approvals, recruiting patients and manufacturing pharmaceutical products. These companies also have significantly greater research, sales and marketing capabilities and collaborative arrangements in our target markets with leading companies and research institutions. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make the product candidates that we develop obsolete. As a result of all of these factors, these potential competitors may succeed in obtaining patent protection and/or FDA approval or discovering, developing and commercializing drugs for the diseases that we are targeting before we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Some of the pharmaceutical and biotechnology companies we expect to compete with include microbiome based development companies: Second Genome, Inc., Seres Health, Inc., Enterome SA, Vedanta Biosciences, Inc., and Rebiotix Inc. In addition, many universities and private and public research institutes may become active in our target disease areas. These potential competitors may succeed in developing, acquiring or licensing on an exclusive basis, technologies and drug products that are more effective or less costly than RP-G28 or any other product candidates that we are currently developing or that we may develop, which could render our products obsolete and noncompetitive.

 

 

We believe that our ability to successfully compete will depend on, among other things:

 

	●	the results of our and our potential strategic collaborators’ clinical trials and preclinical studies;
	●	our ability to recruit and enroll patients for our clinical trials;
	●	the efficacy, safety and reliability of our product candidates;
	●	the speed at which we develop our product candidates;
	●	our ability to design and successfully execute appropriate clinical trials;
	●	our ability to maintain a good relationship with regulatory authorities;
	●	the ability to get FDA approval of our end points;
	●	the timing and scope of regulatory approvals, if any;
	●	our ability to commercialize and market any of our product candidates that receive regulatory approval;
	●	the price of our products;
	●	adequate levels of reimbursement under private and governmental health insurance plans, including Medicare;
	●	our ability to protect intellectual property rights related to our products;
	●	our ability to manufacture and sell commercial quantities of any approved products to the market; and
	●	acceptance of our product candidates by physicians and other health care providers.

 

If our competitors market products that are more effective, safer or less expensive than ours, or that reach the market sooner than ours, we may not achieve commercial success. In addition, the biopharmaceutical industry is characterized by rapid technological change. Because our research approach integrates many technologies, it may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Technological advances or products developed by our competitors may render our technologies or product candidates obsolete, less competitive or not economical.

 

We depend on third-party contractors for a substantial portion of our operations and may not be able to control their work as effectively as if we performed these functions ourselves.

 

We outsource substantial portions of our operations to third-party service providers, including the conduct of preclinical studies and clinical trials, collection and analysis of data, and manufacturing. Our agreements with third-party service providers and CROs are on a study-by-study and project-by-project basis. Typically, we may terminate the agreements with notice and are responsible for the supplier’s previously incurred costs. In addition, any CRO that we retain will be subject to the FDA’s and EMA’s regulatory requirements and similar standards outside of the United States and Europe and we do not have control over compliance with these regulations by these providers. Consequently, if these providers do not adhere to applicable governing practices and standards, the development and commercialization of our product candidates could be delayed or stopped, which could severely harm our business and financial condition.

 

Because we have relied on third parties, our internal capacity to perform these functions is limited to management oversight. Outsourcing these functions involves the risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. Although we have not experienced any significant difficulties with our third-party contractors, it is possible that we could experience difficulties in the future. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated. There are a limited number of third-party service providers that specialize or have the expertise required to achieve our business objectives. Identifying, qualifying and managing performance of third-party service providers can be difficult, time consuming and cause delays in our development programs. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor third-party service providers. To the extent we are unable to identify, retain and successfully manage the performance of third-party service providers in the future, our business may be adversely affected, and we may be subject to the imposition of civil or criminal penalties if their conduct of clinical trials violates applicable law.

 

 

We may enter into agreements with other third parties for the development and commercialization of RP-G28, or other product candidates we develop in the future, in international markets. International business relationships subject us to additional risks that may materially adversely affect our ability to attain or sustain profitable operations, including:

 

	●	differing regulatory requirements for drug approvals internationally;
	●	potentially reduced protection for intellectual property rights;
	●	potential third-party patent rights in the United States and/or in countries outside of the United States;
	●	the potential for so-called “parallel importing,” which is what occurs when a local seller, faced with relatively high local prices, opts to import goods from another jurisdiction with relatively low prices, rather than buying them locally;
	●	unexpected changes in tariffs, trade barriers and regulatory requirements;
	●	economic weakness, including inflation, or political instability, particularly in non-U.S. economies and markets, including several countries in Europe;
	●	compliance with tax, employment, immigration and labor laws for employees traveling abroad;
	●	taxes in other countries;
	●	foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;
	●	workforce uncertainty in countries where labor unrest is more common than in the United States;
	●	production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
	●	business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.

 

We will need to expand our operations and increase the size of our company, and we may experience difficulties in managing growth.

 

As we increase the number of ongoing product development programs and advance our product candidates through preclinical studies and clinical trials, we will need to increase our product development, scientific and administrative headcount to manage these programs. In addition, to meet our obligations as a public company, we will need to increase our general and administrative capabilities. Our management, personnel and systems currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and various projects requires that we:

 

	●	successfully attract and recruit new employees or consultants with the expertise and experience we will require;
	●	manage our clinical programs effectively, which we anticipate being conducted at numerous clinical sites;
	●	develop a marketing and sales infrastructure; and
	●	continue to improve our operational, financial and management controls, reporting systems and procedures.

 

If we are unable to successfully manage this growth and increased complexity of operations, our business may be adversely affected.

 

We may not be able to manage our business effectively if we are unable to attract and retain key personnel and consultants.

 

We may not be able to attract or retain qualified management, finance, scientific and clinical personnel and consultants due to the intense competition for qualified personnel and consultants among biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain necessary personnel and consultants to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

 

 

We are highly dependent on the development, regulatory, commercialization and business development expertise of Michael D. Step, our Chief Executive Officer, Andrew J. Ritter, our Founder and President, and Ira E. Ritter, our Executive Chairman and Chief Strategic Officer. If we were to lose one or more of these key employees, our ability to implement our business strategy successfully could be seriously harmed. Any of our executive officers may terminate their employment at any time. Replacing any of these persons would be difficult and could take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully.

 

There is also a risk that other obligations could distract our officers and employees from our business, which could have negative impact on our ability to effectuate our business plans.

 

In addition, we have scientific and clinical advisors and consultants who assist us in formulating our research, development and clinical strategies. Competition to hire and retain consultants from a limited pool is intense. Further, because these advisors are not our employees, they may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, and typically they will not enter into non-compete agreements with us. If a conflict of interest arises between their work for us and their work for another entity, we may lose their services. In addition, our advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with ours.

 

If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our financial condition, results of operations or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

 

The Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. Commencing with this Annual Report, we are required, under Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment must include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. However, for as long as we remain an emerging growth company, as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm’s requirement to attest to the effectiveness of our internal controls over financial reporting.

 

Our compliance with Section 404 will require that we incur substantial accounting expense and expend significant management efforts. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting once that firm begin its Section 404 reviews, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by the NASDAQ stock market, the SEC, or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

 

Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.

 

We are subject to the periodic reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements or insufficient disclosure due to error or fraud may occur and not be detected.

 

 

Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading, which could significantly harm our business.

 

We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations of the FDA and non-U.S. regulators, provide accurate information to the FDA and non-U.S. regulators, comply with health care fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the health care industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted an employee handbook, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

 

We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

 

The use of our product candidates in clinical trials and the sale of any products for which we may obtain marketing approval expose us to the risk of product liability claims. Product liability claims may be brought against us or our potential future collaborators by participants enrolled in our clinical trials, patients, health care providers or others using, administering or selling our products. If we cannot successfully defend ourselves against any such claims, we would incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:

 

	●	withdrawal of clinical trial participants;
	●	termination of clinical trial sites or entire trial programs;
	●	costs of related litigation;
	●	substantial monetary awards to patients or other claimants;
	●	decreased demand for our product candidates and loss of revenues;
	●	impairment of our business reputation;
	●	diversion of management and scientific resources from our business operations; and
	●	the inability to commercialize our product candidates.

 

We have product liability insurance coverage for our Phase 2b/3 clinical trials in the United States and in selected other jurisdictions where we intend to conduct clinical trials at levels we believe are sufficient and consistent with industry standards for companies at our stage of development. However, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. We intend to expand our insurance coverage for products to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash resources and adversely affect our business.

 

Our insurance policies are expensive and only protect us from some business risks, which will leave us exposed to significant uninsured liabilities.

 

We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability ($2.0 million coverage), employment practices liability, workers’ compensation, and directors’ and officers’ insurance at levels we believe are typical for a company in our industry and at our stage of development. We currently carry clinical trial liability insurance for our Phase 2b/3 clinical trials at levels we believe are sufficient and consistent with industry standards for companies at our stage of development. We do not know, however, if we will be able to maintain insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our financial position and results of operations.

 

 

If we engage in an acquisition, reorganization or business combination, we will incur a variety of risks that could adversely affect our business operations or our stockholders.

 

From time to time we have considered, and we will continue to consider in the future, strategic business initiatives intended to further the expansion and development of our business. These initiatives may include acquiring businesses, technologies or products or entering into a business combination with another company. If we pursue such a strategy, we could, among other things:

 

	●	issue equity securities that would dilute our current stockholders’ percentage ownership;
	●	incur substantial debt that may place strains on our operations;
	●	spend substantial operational, financial and management resources to integrate new businesses, technologies and products;
	●	assume substantial actual or contingent liabilities;
	●	reprioritize our development programs and even cease development and commercialization of our product candidates; or
	●	merge with, or otherwise enter into a business combination with, another company in which our stockholders would receive cash and/or shares of the other company on terms that certain of our stockholders may not deem desirable.

 

Although we intend to evaluate and consider acquisitions, reorganizations and business combinations in the future, we have no agreements or understandings with respect to any acquisition, reorganization or business combination at this time.

 

Risks Relating to Our Intellectual Property

 

It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection. If our patent position does not adequately protect our product candidates, others could compete against us more directly, which would harm our business, possibly materially.

 

Our commercial success will depend in part on obtaining, maintaining and enforcing patent protection and on developing, preserving and enforcing current trade secret protection. In particular, it will depend in part on our ability to obtain, maintain and enforce patents, especially those related to methods of using our current product, RP-G28, and other future drug candidates, and those related to the methods used to develop and manufacture our products, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products depends on the extent to which we have rights under valid and enforceable patents (and/or trade secrets) that cover these activities. We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will withstand subsequent challenges to their validity and or patentability, or if they will be commercially useful in protecting our product candidates, discovery programs and processes. Furthermore, we cannot be sure that our existing patents and patent applications will embrace (or “claim”) the particular uses for RP-G28 that will be approved by FDA.

 

The patent positions of biotechnology and pharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved.

 

No consistent policy regarding the patentability and/or validity of patent claims related to pharmaceutical patents has emerged, to date, in the United States or in most jurisdictions outside of the United States. Changes in either the patent laws (be they substantive or procedural) or in the interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that will issue or will be enforceable in the patents that have or may be issued from the patents and applications we currently own or may in the future own or license from third parties. Further, if any patents we obtain, or to which we obtain licenses, are deemed invalid, unpatentable and unenforceable, our ability to commercialize or license our technology could be adversely affected.

 

In the future others may file patent applications covering products, uses for products, and manufacturing techniques and related technologies that are similar, identical or competitive to ours or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications filed or in-licensed by us in the future, or that we or our licensors will not be involved in interference, opposition, inter partes review or invalidity proceedings before U.S. or non-U.S. patent offices or courts.

 

 

The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

 

	●	others may be able to develop a platform similar to, or better than, ours in a way that is not covered by the claims of our patents;
	●	others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of our patents;
	●	others may be able to manufacture compounds that are similar or identical to our product candidates using processes that are not covered by the claims of our method of making patents;
	●	others may obtain regulatory approval for uses of compounds, similar or identical to our product, that are not covered by the claims of our method of use patents;
	●	we may not be able to obtain licenses for patents that are essential to the process of making the product;

 

	●	we might not have been the first to make the inventions covered by our pending patent applications;
	●	we might not have been the first to file patent applications for these inventions;
	●	others may independently develop similar or alternative technologies or duplicate any of our technologies;
	●	any patents that we obtain may not provide us with any competitive advantages;
	●	we may not develop additional proprietary technologies that are patentable; or
	●	the patents of others may have an adverse effect on our business.

 

Patents covering methods of using RP-G28 expire in 2030 if the appropriate maintenance fee renewal, annuity, or other government fees are paid, unless a patent term extension based on regulatory delay is obtained. We expect that expiration in 2030 of some of our method-of-use patents covering use of RP-G28 for treating lactose intolerance will have a limited impact on our ability to protect our intellectual property in the United States, where we have additional issued patents covering this use that extend until 2030. In other countries, our pending patent applications covering use of RP-G28 for treating other indications, if issued, would expire in 2030. We will attempt to mitigate the effect of patent expiration by seeking data exclusivity, or the foreign equivalent thereof, in conjunction with product approval, as well as by filing additional patent applications covering improvements in our intellectual property.

 

We expect that the other patent applications for the RP-G28 portfolio, if issued, and if the appropriate maintenance, renewal, annuity or other governmental fees are paid, would expire in 2030. We own pending applications in the United States and Europe covering RP-G28 analogs, and uses of such analogs as therapeutics to treat a variety of disorders, including lactose intolerance. Patent protection, to the extent it issues, would be expected to extend to 2030, unless a patent term extension based on regulatory delay is obtained.

 

Due to the patent laws of a country, or the decisions of a patent examiner in a country, or our own filing strategies, we may not obtain patent coverage for all of our product candidates or methods involving these candidates in the parent patent application. We plan to pursue divisional patent applications or continuation patent applications in the United States and other countries to obtain claim coverage for inventions which were disclosed but not claimed in the parent patent application.

 

We may also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or feasible. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

 

 

RP-G28 does not have composition of matter patent protection.

 

Although we own certain patents and patent applications with claims directed to specific methods of using RP-G28 to treat lactose intolerance, RP-G28 has no composition of matter patent protection in the United States or elsewhere. As a result, we may be limited in our ability to list our patents in the FDA’s Orange Book if the use of our product, consistent with its FDA-approved label, would not fall within the scope of our patent claims. Also, our competitors may be able to offer and sell products so long as these competitors do not infringe any other patents that we (or third parties) hold, including patents with claims directed to the manufacture of RP-G28 and/or method of use patents. In general, method of use patents are more difficult to enforce than composition of matter patents because, for example, of the risks that FDA may approve alternative uses of the subject compounds not covered by the method of use patents, and others may engage in off-label sale or use of the subject compounds. Physicians are permitted to prescribe an approved product for uses that are not described in the product’s labeling. Although off-label prescriptions may infringe our method of use patents, the practice is common across medical specialties and such infringement is difficult to prevent or prosecute. FDA approval of uses that are not covered by our patents would limit our ability to generate revenue from the sale of RP-G28, if approved for commercial sale. Off-label sales would limit our ability to generate revenue from the sale of RP-G28, if approved for commercial sale.

 

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

 

If we choose to go to court to stop another party from using the inventions claimed in any patents we obtain, that individual or company may seek a post grant review (including inter parte review) of our patents, and has the right to ask the court to rule that such patents are invalid or should not be enforced against that third party. These lawsuits and administrative proceedings are expensive and would consume time and resources and divert the attention of managerial and scientific personnel even if we were successful in stopping the infringement of such patents. In addition, there is a risk that the court or administrative body will decide that such patents are not valid or unpatentable and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity/patentability of such patents is upheld, the court will refuse to stop the other party on the ground that such other party’s activities do not infringe our rights to such patents. In addition, the U.S. Supreme Court and the Court of Appeals for the Federal Circuit have recently articulated and/or modified certain tests used by the U.S. Patent and Trademark Office (the “USPTO”), in assessing patentability and by the courts in assessing validity and claim scope, which may decrease the likelihood that we will be able to obtain patents and increase the likelihood that others may succeed in challenging any patents we obtain or license.

 

We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing our product candidates.

 

Our success will depend in part on our ability to operate without infringing the proprietary rights of third parties. We cannot guarantee that our products, our methods of manufacture, or our uses of RP-G28 (or our other product candidates), will not infringe third-party patents. Furthermore, a third party may claim that we or our manufacturing or commercialization collaborators are using inventions covered by the third party’s patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and scientific personnel. There is a risk that a court would decide that we or our commercialization collaborators are infringing the third party’s patents and would order us or our collaborators to stop the activities covered by the patents. In that event, we or our commercialization collaborators may not have a viable way around the patent and may need to halt commercialization of the relevant product. In addition, there is a risk that a court will order us or our collaborators to pay the other party damages for having violated the other party’s patents. In the future, we may agree to indemnify our commercial collaborators against certain intellectual property infringement claims brought by third parties. The pharmaceutical and biotechnology industries have produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The scope of coverage of a patent is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, the patentee would need to demonstrate, by a preponderance of the evidence that our products or methods infringe the patent claims of the relevant patent, and we would need to demonstrate either that we do not infringe or, by clear and convincing evidence, that the patent claims are invalid; we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and divert management’s time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, which may not be available, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, develop or obtain non-infringing technology, fail to defend an infringement action successfully or have infringed patents declared invalid, we may incur substantial monetary damages, encounter significant delays in bringing our product candidates to market and be precluded from manufacturing or selling our product candidates.

 

 

We cannot be certain that others have not filed patent applications for technology covered by our pending applications, or that we were the first to invent the technology, because:

 

	●	some patent applications in the United States may be maintained in secrecy until the patents are issued;
	●	patent applications in the United States are typically not published until at least 18 months after the earliest asserted priority date; and
	●	publications in the scientific literature often lag behind actual discoveries.

 

Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions. Other countries have similar laws that permit secrecy of patent applications, and may be entitled to priority over our applications in such jurisdictions.

 

Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

 

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. We employ an outside firm and rely on our outside counsel to pay these fees due to non-U.S. patent agencies and this outside firm has systems in place to ensure compliance on payment of fees. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have a material adverse effect on our business.

 

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. If we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology and products could be significantly diminished.

 

As is common in the biotechnology and pharmaceutical industries, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

 

We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. For example, the FDA, as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

Failure to secure trademark registrations could adversely affect our business.

 

We have not developed a trademark for our RP-G28 product. Hence, we do not currently own any actual or potential trademark rights associated with our RP-G28 product. If we seek to register additional trademarks, including trademarks associated with our RP-G28 product, our trademark applications may not be allowed for registration or our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many other jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would.

 

 

Risks Relating to Our Common Stock

 

An active trading market for our common stock may not develop or be sustained.

 

Prior to our initial public offering, there was no public market for our common stock. Since our initial public offering in June 2015, there has been, and we expect that there will continue to be, only a limited volume of trading in our common stock. An active trading market in our common stock may not develop or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

 

Our share price may be volatile, which could subject us to securities class action litigation and prevent you from being able to sell your shares at or above your purchase price.

 

The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:

 

	●	results of our clinical trials;
	●	results of clinical trials of our competitors’ products;
	●	regulatory actions with respect to our products or our competitors’ products;
	●	actual or anticipated fluctuations in our financial condition and operating results;
	●	actual or anticipated changes in our growth rate relative to our competitors;
	●	actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate;
	●	competition from existing products or new products that may emerge;
	●	announcements by us, our potential future collaborators or our competitors of significant acquisitions, strategic collaborations, joint ventures, or capital commitments;
	●	issuance of new or updated research or reports by securities analysts;
	●	fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

	●	share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
	●	additions or departures of key management or scientific personnel;
	●	disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
	●	announcement or expectation of additional financing efforts;
	●	sales of our common stock by us, our insiders or our other stockholders;
	●	market conditions for biopharmaceutical stocks in general; and
	●	general economic and market conditions.

 

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of shares of our common stock. In addition, such fluctuations could subject us to securities class action litigation, which could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

 

 

Our executive officers, directors and principal stockholders maintain the ability to exert substantial influence over all matters submitted to stockholders for approval.

 

Our executive officers, directors and principal stockholders beneficially own shares representing approximately 28.6% of our outstanding capital stock. As a result, if these stockholders were to choose to act together, they would be able to exert substantial influence over all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, would exert substantial influence over the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition of our Company on terms that other stockholders may desire.

 

We are an “emerging growth company” and avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an emerging growth company until the earlier of  (i) the last day of the fiscal year (a) following the fifth anniversary of the date we completed our initial public offering, which was June 29, 2015, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeded $700.0 million as of the prior June 30^th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

Future sales of our common stock, or the perception that future sales may occur, may cause the market price of our common stock to decline, even if our business is doing well.

 

Sales by our stockholders of a substantial number of shares of our common stock in the public market could occur in the future. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. We had 11,619,197 outstanding shares of common stock as of December 31, 2016. Of the shares outstanding, a total of 8,144,018 shares may be resold in the public market at any time and the remaining 3,475,179 shares are currently restricted under securities laws.

 

In connection with the Aspire Capital financing transaction, we registered and issued 1,577,699 shares of our common stock to Aspire Capital under the Aspire Purchase Agreement. We have registered an additional 3,000,000 shares of common stock that we may issue to Aspire Capital in the future under the terms of the Aspire Purchase Agreement. The number of shares ultimately offered for sale by Aspire Capital is dependent upon the number of shares we elect to sell to Aspire Capital under the Aspire Purchase Agreement. Aspire Capital may sell all, some or none of our shares that it holds or comes to hold under the Aspire Purchase Agreement. The sale of a substantial number of shares of our common stock by Aspire Capital, or anticipation of such sales, could cause the trading price of our common stock to decline or make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise desire. However, we have the right under the Aspire Purchase Agreement to control the timing and amount of sales of our shares to Aspire Capital, and the Aspire Purchase Agreement may be terminated by us at any time at our discretion without any penalty or cost to us.

 

We have also registered 2,565,284 shares of common stock that have been or may be issued under our equity compensation plans. These shares may be sold in the public market subject to any vesting conditions.

 

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.

 

The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us or provide favorable coverage. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

 

 

Our failure to meet the continued listing requirements of NASDAQ could result in a de-listing of our common stock.

 

If we fail to satisfy the continued listing requirements of NASDAQ, such as the corporate governance requirements or the minimum closing bid price requirement, NASDAQ may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a de-listing, we would take actions to restore our compliance with NASDAQ’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the NASDAQ minimum bid price requirement or prevent future non-compliance with NASDAQ’s listing requirements.

 

Provisions in our corporate charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

 

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions provide that:

 

	●	the authorized number of directors can be changed only by resolution of our board of directors;
	●	our bylaws may be amended or repealed by our board of directors or our stockholders;
	●	stockholders may not call special meetings of the stockholders or fill vacancies on the board of directors;
	●	our board of directors is authorized to issue, without stockholder approval, preferred stock, the rights of which will be determined at the discretion of the board of directors and that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that our board of directors does not approve;
	●	our stockholders do not have cumulative voting rights, and therefore our stockholders holding a majority of the shares of common stock outstanding will be able to elect all of our directors; and
	●	our stockholders must comply with advance notice provisions to bring business before or nominate directors for election at a stockholder meeting.

 

Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law (the “DGCL”), which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.

 

Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful stockholder claims against us and may reduce the amount of money available to us.

 

As permitted by Section 102(b)(7) of the DGCL, our amended and restated certificate of incorporation limits the liability of our directors to the fullest extent permitted by law. In addition, as permitted by Section 145 of the DGCL, our amended and restated certificate of incorporation and our amended and restated bylaws provide that we shall indemnify, to the fullest extent authorized by the DGCL, each person who is involved in any litigation or other proceeding because such person is or was a director or officer of our company or is or was serving as an officer or director of another entity at our request, against all expense, loss or liability reasonably incurred or suffered in connection therewith. Our amended and restated certificate of incorporation provides that the right to indemnification includes the right to be paid expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that such advance payment will only be made upon delivery to us of an undertaking, by or on behalf of the director or officer, to repay all amounts so advanced if it is ultimately determined that such director is not entitled to indemnification. If we do not pay a proper claim for indemnification in full within 60 days after we receive a written claim for such indemnification, except in the case of a claim for an advancement of expenses, in which case such period is 20 days, our restated certificate of incorporation and our restated bylaws authorize the claimant to bring an action against us and prescribe what constitutes a defense to such action.

 

 

Section 145 of the DGCL permits a corporation to indemnify any director or officer of the corporation against expenses (including attorney’s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any action, suit or proceeding brought by reason of the fact that such person is or was a director or officer of the corporation, if such person acted in good faith and in a manner that he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, if he or she had no reason to believe his or her conduct was unlawful. In a derivative action, (i.e., one brought by or on behalf of the corporation), indemnification may be provided only for expenses actually and reasonably incurred by any director or officer in connection with the defense or settlement of such an action or suit if such person acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification shall be provided if such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine that the defendant is fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability.

 

The rights conferred in the restated certificate of incorporation and the restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons. We have entered into indemnification agreements with each of our officers and directors.

 

The above limitations on liability and our indemnification obligations limit the personal liability of our directors and officers for monetary damages for breach of their fiduciary duty as directors by shifting the burden of such losses and expenses to us. Although we plan to increase the coverage under our directors’ and officers’ liability insurance, certain liabilities or expenses covered by our indemnification obligations may not be covered by such insurance or the coverage limitation amounts may be exceeded. As a result, we may need to use a significant amount of our funds to satisfy our indemnification obligations, which could severely harm our business and financial condition and limit the funds available to stockholders who may choose to bring a claim against our company.

 

We have never paid dividends on our common stock and do not anticipate paying dividends for the foreseeable future, and accordingly, stockholders must rely on stock appreciation for any return on their investment.

 

We have never paid dividends on our common stock and we do not anticipate paying dividends on our common stock for the foreseeable future. Accordingly, any return on an investment in our common stock will be realized, if at all, only when stockholders sell their shares. In addition, our failure to pay dividends may make our stock less attractive to investors, adversely impacting trading volume and price.

 

Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.

 

As of December 31, 2016, we had federal net operating loss carryforwards, or NOLs, of approximately $26.7 million which begin to expire in 2028. Our ability to utilize our NOLs may be limited under Section 382 and 383 of the Internal Revenue Code. The limitations apply if an ownership change, as defined by Section 382, occurs. Generally, an ownership change occurs when certain shareholders increase their aggregate ownership by more than 50 percentage points over their lowest ownership percentage in a testing period (typically three years). Although we have not undergone a Section 382 analysis, it is possible that the utilization of the NOLs, could be substantially limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be utilized against future taxes. As a result, we may not be able to take full advantage of these carryforwards for federal and state tax purposes. Future changes in stock ownership may also trigger an ownership change and, consequently, a Section 382 limitation.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

On July 9, 2015, we entered into a lease with Century Park, pursuant to which we lease approximately 2,780 square feet of office space in Los Angeles, California for our headquarters. The lease provides for a term of sixty-one (61) months, which commenced October 1, 2015. We paid no rent for the first month of the term and will pay base rent of $9,174 per month for months two 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. We have 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. We believe that our facility is suitable and adequate for our current needs.

 

Item 3. Legal Proceedings

 

From time to time, we have been and may again become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any material litigation.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our shares of common stock have been listed and traded on The NASDAQ Capital Market under the symbol “RTTR” since June 24, 2015. Prior to that date, there was no public market for our common stock.

 

The following table sets forth, for the periods indicated, the high and low intra-day sale prices in dollars on The NASDAQ Capital Market for our common stock.

 

		2016
		High				Low
First Quarter		$	1.79			$	0.98
Second Quarter		$	1.89			$	1.10
Third Quarter		$	2.47			$	1.20
Fourth Quarter		$	3.26			$	1.62

 

		2015
		High				Low
Second Quarter (beginning June 24, 2015)		$	5.50			$	3.80
Third Quarter		$	4.70			$	2.00
Fourth Quarter		$	2.63			$	1.61

 

Holders

 

As of February 20, 2017 there were approximately 42 registered holders of record of our common stock. These figures do not reflect the beneficial ownership or shares held in nominee name.

 

Dividend Policy

 

We have never paid or declared any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain all available funds and any future earnings to fund the development and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon a number of factors, including our results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. See “Risk Factors — Risks Relating to Our Common Stock— We have never paid dividends on our common stock and do not anticipate paying dividends for the foreseeable future, and accordingly, stockholders must rely on stock appreciation for any return on their investment.”

 

Recent Sales of Unregistered Securities

 

On December 18, 2015, we entered into a common stock purchase agreement (the “Aspire Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of shares of our common stock over a 30-month period. Upon execution of the Aspire Purchase Agreement, we sold 500,000 shares of common stock (the “Initial Purchase Shares”) at $2.00 per share to Aspire Capital for proceeds of $1,000,000. In consideration for entering into the Aspire Purchase Agreement, we also issued to Aspire Capital 188,864 shares of our common stock (the “Commitment Shares”) concurrently with the execution of the Aspire Purchase Agreement. As of the date of this Annual Report, we have issued an aggregate of 1,577,699 shares to Aspire Capital for gross proceeds of $3.0 million. The issuance of the Initial Purchase Shares and the Commitment Shares were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to the exemption for transactions by an issuer not involving any public offering under Section 4(a)(2) of the Securities Act.

 

Use of Proceeds from Initial Public Offering of Common Stock

 

On June 24, 2015, our registration statement on Form S-1 (File No. 333-202924) relating to our initial public offering of our common stock was declared effective by the Securities and Exchange Commission (the “SEC”). Our initial public offering closed on June 29, 2015, and 4,000,000 shares of our common stock were sold at an initial public offering price of $5.00 per share, for aggregate gross proceeds to us of $20 million and net proceeds to us, after deducting underwriting discounts and commissions and offering expenses, of approximately $17.4 million.

 

 

Proceeds from the initial public offering have been used to fund our Phase 2b/3 trials and product development, including a $0.8 million payment to exercise an option with a research and development supplies. A portion of the proceeds ($227,250) was used to pay the annual bonuses earned by Andrew and Ira Ritter for 2015, based upon the achievement of specific performance goals, pursuant to the terms of their respective offer letters. Remaining proceeds from the initial public offering were spent to support general corporate purposes, general and administrative expenses, capital expenditures, working capital and prosecution and maintenance of our intellectual property. Therefore, our net cash proceeds from our initial public offering were expended as of December 31, 2016.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

Item 6. Selected Financial Data

 

Not applicable.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis should be read together with our financial statements and the related notes appearing elsewhere in this Annual Report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements and Industry Data” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report.

 

Overview

 

Ritter Pharmaceuticals, Inc. develops novel therapeutic products that modulate the human gut microbiome to treat gastrointestinal diseases. We are advancing human gut health research by exploring the metabolic capacity of the gut microbiota and translating the functionality of prebiotic-based therapeutics into applications intended to have a meaningful impact on a patient’s health. We have completed a Phase 2a clinical trial of our leading product candidate, RP-G28, an orally administered, high purity oligosaccharide. We initiated a Phase 2b/3 clinical trial of RP-G28 in March 2016 with enrollment completed in August 2016. In October 2016, the last patient completed dosing and all monitoring visits in our Phase 2b/3 clinical trial of RP-G28 for the treatment of lactose intolerance. Topline results of the trial are expected to be announced in the first quarter of 2017.

 

We have devoted substantially all of our resources to development efforts relating to RP-G28, including conducting clinical trials of RP-G28, providing general and administrative support for these operations and protecting our intellectual property. We currently do not have any products approved for sale and we have not generated any revenue from product sales since our inception. Prior to our initial public offering, we funded our operations primarily through the private placement of preferred stock, common stock and promissory notes.

 

On June 24, 2015, our registration statement on Form S-1 (File No. 333-202924) relating to our initial public offering of common stock was declared effective by the SEC. The shares began trading on the NASDAQ Capital Market on June 24, 2015. The initial public offering closed on June 29, 2015, and 4,000,000 shares of common stock were sold at an initial public offering price of $5.00 per share, for aggregate gross proceeds to us of $20 million. After deducting underwriting discounts and commissions and other offering expenses payable by us, net proceeds were approximately $17.4 million.

 

On October 31, 2016, we closed a public offering of 2,127,660 shares of our common stock at a price to the public of $2.35 per share, for net proceeds of approximately $4.4 million, after deducting underwriting discounts and commissions and offering expenses payable by us in the offering.

 

We have incurred net losses in each year since our inception, including a net loss of approximately $18.4 million for the year ended December 31, 2016. We had an accumulated deficit of approximately $45.5 million as of December 31, 2016. Substantially all our net losses resulted from costs incurred in connection with our research and development programs, stock-based compensation, and from general and administrative costs associated with our operations.

 

We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we:

 

	●	complete the development of our lead product candidate, RP-G28, for the reduction of symptoms associated with lactose intolerance in patients;
	●	seek to obtain regulatory approvals for RP-G28;

 

 

	●	outsource the commercial manufacturing of RP-G28 for any indications for which we receive regulatory approval;
	●	contract with third parties for the sales, marketing and distribution of RP-G28 for any indications for which we receive regulatory approval;
	●	maintain, expand and protect our intellectual property portfolio;
	●	continue our research and development efforts; and
	●	add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts.

 

We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain marketing approval for RP-G28, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we anticipate that we will need to raise additional capital in addition to the net proceeds received in our initial public offering and follow-on offering, and any proceeds received from our sale of shares of common stock to Aspire Capital pursuant to the Aspire Purchase Agreement, prior to the commercialization of RP-G28. Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our product candidates.

 

Financial Overview

 

Revenue

 

We have not generated any revenue since our inception. Our ability to generate revenue in the future will depend almost entirely on our ability to successfully develop, obtain regulatory approval for and then successfully commercialize RP-G28 in the United States. In the event we choose to pursue a partnering arrangement to commercialize RP-G28 or other products outside the United States, we would expect to initiate additional research and development and clinical trial activities in the future.

 

Research and Development Expenses

 

Since our inception, we have focused our resources on our research and development activities, including conducting nonclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for RP-G28. Our research and development expenses consist primarily of:

 

	●	fees paid to consultants and CROs, including in connection with our nonclinical and clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work, clinical trial database management, clinical trial material management and statistical compilation and analysis;
	●	costs related to acquiring and manufacturing clinical trial materials;
	●	depreciation of equipment, computers and furniture and fixtures;
	●	costs related to compliance with regulatory requirements; and
	●	overhead expenses for personnel in research and development functions.

 

From inception through December 31, 2016, we have incurred approximately $19.2 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we continue the development of RP-G28 for the reduction of symptoms associated with lactose intolerance in patients and other indications, subject to the availability of additional funding.

 

The successful development of product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the development of RP-G28 or the period, if any, in which material net cash inflows from RP-G28 may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

 

	●	the scope, rate of progress and expense of our ongoing, as well as any additional, clinical trials and other research and development activities;
	●	future clinical trial results; and
	●	the timing and receipt of any regulatory approvals.

 

 

A change in the outcome of any of these variables with respect to the development of RP-G28 could mean a significant change in the costs and timing associated with its development. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of RP-G28 or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.

 

RP-G28

 

Our research and development resources are focused on completing our Phase 2b/3 clinical trial and any other clinical and nonclinical studies and other work needed to submit RP-G28 for the reduction of symptoms associated with lactose intolerance in patients for regulatory approval in the United States and Europe. We have incurred and expect to continue to incur expenses in connection with these efforts.

 

Patent Costs

 

Patent costs consist primarily of professional fees for legal services to prosecute patents and maintain patent rights.

 

General and Administrative Expenses

 

General and administrative expenses include allocation of facilities costs, salaries, benefits, and stock-based compensation for employees, professional fees for directors, fees for independent contractors and accounting and legal services.

 

We expect that our general and administrative expenses will increase as we continue to operate as a public company and will increase further if RP-G28 is approved for commercialization. We believe that these increases will likely include increased costs for director and officer liability insurance, and increased fees for outside consultants, lawyers and accountants, among other expenses.

 

Interest Income

 

Interest income consists of interest earned on our cash.

 

Critical Accounting Estimates

 

This discussion and analysis is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to fair value of financial instruments, research and development costs, accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

While our significant accounting policies are more fully described in Note 3 to our financial statements appearing in “Item 8. Financial Statements and Supplementary Data,” we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations.

 

Fair Value of Financial Instruments

 

Fair value measurement guidelines are prescribed by GAAP to value financial instruments. The guidance includes a definition of fair value, prescribes methods for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and expands disclosures about the use of fair value measurements.

 

The valuation techniques utilized are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect internal market assumptions. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

 

These two types of inputs create the following fair value hierarchy:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.

 

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models consider various assumptions, including volatility factors, current market prices and contractual prices for the underlying financial instruments. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

 

Level 3 — Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.

 

The carrying amounts reported in the balance sheet for cash and cash equivalents, prepaid expenses, accounts payable, accrued expenses, and the notes payable approximate the fair values due to the short-term nature of the instruments.

 

Research and Development Costs

 

We expense the cost of research and development as incurred. Research and development expenses comprise costs incurred in performing research and development activities, including clinical study costs, contracted services, and other external costs. Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made, in accordance with ASC 730, Research and Development.

 

Accrued Expenses

 

As part of the process of preparing our financial statements, we are required to estimate our accrued expenses. This process involves reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued research and development expenses include fees due to service providers.

 

We base our expenses on our estimates of the services received and efforts expended pursuant to quotes and contracts with our service providers that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and could result in us reporting amounts that are too high or too low in any particular period.

 

Stock-Based Compensation

 

Stock-based compensation cost for equity awards granted to employees and nonemployees is measured at the grant date based on the calculated fair value of the award using the Black-Scholes option-pricing model, and is recognized as an expense, under the straight-line method, over the requisite service period (generally the vesting period of the equity grant). If we determine that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by regulators, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected lives would result in an increase to stock-based compensation expense to non-employees determined at the date of grant.

 

In addition to the assumptions used in the Black-Scholes option-pricing model, we also estimate a forfeiture rate to calculate the stock-based compensation for our equity awards. We will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis.

 

 

Emerging Growth Company Status

 

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

 

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (a) following the fifth anniversary of the date we completed our initial public offering, which was June 29, 2015, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeded $700.0 million as of the prior June 30th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

Results of Operations

 

Comparison of the years ended December 31, 2016 and 2015

 

The following table summarizes the results of our operations for the years ended December 31, 2016 and 2015, together with the changes in those items in dollars and as a percentage:

 

		For the Years Ended December 31,								Dollar				Percentage
		2016				2015				Change				Change
Statements of Operations Data:
Operating costs and expenses
Research and development		$	13,292,488			$	2,260,297			$	11,032,191				488	%
Patent costs			272,514				243,463				29,051				12	%
General and administrative			4,881,725				6,404,643				(1,522,918	)			(24	)%
Total operating costs and expenses			18,446,727				8,908,403				9,538,324				107	%
Loss from operations			(18,446,727	)			(8,908,403	)			(9,538,324	)			107	%
Other income
Interest income			60,879				40,876				20,003				49	%
Other income			1,214				79,756				(78,542	)			(98	)%
Total other income			62,093				120,632				(58,539	)			(49	)%
Net loss		$	(18,384,634	)		$	(8,787,771	)		$	(9,596,863	)			109	%

 

Research and Development Expenses

 

Research and development expenses increased by approximately $11.0 million, or 488%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The majority of the increase was due to costs incurred in connection with our Phase 2b/3 clinical trial that was initiated in March 2016. An increase of approximately $11.1 million was attributable to fees paid to our third-party CRO as part of our Phase 2b/3 clinical trial, offset by approximately $0.3 lower manufacturing costs and approximately $0.5 lower pre-trial research fees. The remaining $0.6 million increase was the result of higher consulting fees and new costs incurred for the onset of a 12-month extension study to evaluate the long-term durability of treatment. There was no clinical trial during the 2015 year.

 

Patent Costs

 

Patent costs were approximately $273,000 and $243,000 for the years ended December 31, 2016 and 2015, respectively, representing an increase of approximately $29,000, or 12%. The increase was primarily due to overall timing of certain costs related to our maintenance of patent rights, our prosecution of patents for an increased number of patents and our application for the issuance of patents as well as our preparation to file national phase applications in certain foreign countries. During 2016, three patents were issued - U.S. Patent Nos. 9,200,303, 9,226,933 and 9,370,532.

 

 

General and Administrative Expenses

 

General and administrative expenses decreased by approximately $1.5 million, or 24%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The decrease in general and administrative expenses was mainly due to a decrease in stock-based compensation expense of approximately $1.5 million. The increase in cost of being a public company for the full year 2016 was offset by lower expenses as a result of cost containment practices.

 

Other Income

 

Interest income increased by approximately $20,000, or 49%, during the year ended December 31, 2016 as compared to the year ended December 31, 2015, due to the longer period interest earned on cash balances from the net proceeds of our initial public offering. Other income decreased by approximately $79,000, or 98%, during year ended December 31, 2016 as compared to the same 2015 period, as gains on the settlement of accounts payable during the year ended December 31, 2015 were not realized during the same 2016 period.

 

Liquidity and Capital Resources

 

Sources of Liquidity

 

Since our inception, we have incurred net losses and negative cash flows from operations, and, as of December 31, 2016, we had an accumulated deficit of approximately $45.5 million. Substantially all our net losses resulted from costs incurred in connection with our research and development programs, stock-based compensation, and from general and administrative costs associated with our operations.

 

At December 31, 2016, we had working capital of $4.1 million, and cash of $7.0 million. We have not generated any product revenues and have not achieved profitable operations.

 

Aspire Capital Financing Arrangement

 

On December 18, 2015, we entered into the Aspire Purchase Agreement with Aspire Capital, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of our shares of common stock over the approximately 30-month term of the Aspire Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, we issued to Aspire Capital 188,864 shares of our common stock as a commitment fee, or the Commitment Shares. Upon execution of the Aspire Purchase Agreement, we sold 500,000 shares of common stock to Aspire Capital at $2.00 per share for proceeds of $1.0 million. On December 8, 2016, we sold the remaining 888,835 shares of common stock available pursuant to the terms of the Aspire Purchase Agreement to Aspire Capital at $2.28 per share for proceeds of $2.0 million. As of December 31, 2016, we have issued an aggregate of 1,577,699 shares of our common stock to Aspire Capital under the Purchase Agreement for aggregate proceeds of approximately $3.0 million.

 

On any trading day on which the closing sale price of our common stock exceeds $0.50, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice (each a “Purchase Notice”), directing Aspire Capital (as principal) to purchase up to 100,000 shares of our common stock per trading day, for up to $7.0 million of our common stock in the aggregate at a per share price (the “Purchase Price”), calculated by reference to the prevailing market price of our common stock (as provided in the Aspire Purchase Agreement).

 

In addition, any date on which we submit a Purchase Notice for 100,000 shares to Aspire Capital and the closing sale price of our stock is equal to or greater than $0.50 per share of common stock, we also have the right, in our sole discretion, to present Aspire Capital with a volume-weighted average price purchase notice (each a “VWAP Purchase Notice”), directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of our common stock traded on the Nasdaq Capital Market on the next trading day (the “VWAP Purchase Date”), subject to a maximum number of shares we may determine (the “VWAP Purchase Share Volume Maximum”), and a minimum trading price (the “VWAP Minimum Price Threshold”) (as more specifically described below). The purchase price per share pursuant to such VWAP Purchase Notice (the “VWAP Purchase Price”) is calculated by reference to the prevailing market price of our common stock (as provided in the Aspire Purchase Agreement).

 

The Aspire Purchase Agreement provides that we and Aspire Capital will not effect any sales under the Aspire Purchase Agreement on any purchase date where the closing sale price of our common stock is less than $0.50 per share (the “Floor Price”). This Floor Price and the respective prices and share numbers in the preceding paragraphs will be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction. There are no trading volume requirements or restrictions under the Aspire Purchase Agreement, and we will control the timing and amount of any sales of our common stock to Aspire Capital. Aspire Capital has no right to require any sales by us, but is obligated to make purchases from us as we direct in accordance with the Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future fundings, rights of first refusal, participation rights, penalties or liquidated damages in the Aspire Purchase Agreement. Aspire Capital may not assign its rights or obligations under the Purchase Agreement. The Purchase Agreement may be terminated by us at any time, at our discretion, without any penalty or cost to us.

 

We expect to use the Aspire facility to complement, rather than replace, other financing that may be required during the next twelve months to continue our operations and support our capital needs.

 

 

October 2016 Public Offering

 

On October 31, 2016, we closed a public offering of 2,127,660 shares of our common stock at a price to the public of $2.35 per share, for net proceeds of approximately $4.4 million, after deducting underwriting discounts and commissions and offering expenses payable by us in the offering. The offering was made pursuant to a shelf registration statement on Form S-3 (Registration Number 333-213087).

 

Cash Flows

 

The following table sets forth the significant sources and uses of cash for the periods set forth below:

 

		For the Year Ended December 31,
		2016				2015
Net cash (used in) provided by:
Operating activities		$	(15,208,718	)		$	(5,721,565	)
Investing activities			(8,063	)			(16,999	)
Financing activities			6,443,497				18,810,882
Net (decrease) increase in cash		$	(8,773,284	)		$	13,072,318

 

Operating Activities

 

The use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital. Net cash used in operating activities was approximately $15.2 million during the year ended December 31, 2016 compared to $5.7 million during the year ended December 31, 2015. The increase in cash used in operating activities was driven by the initiation of our Phase 2b/3 clinical trial in March 2016. Patient enrollment was completed in August 2016 and the last patient was dosed in October 2016. A total of 377 patients enrolled at 18 clinical sites throughout the United States. There was no clinical trial during 2015.

 

Investing Activities

 

Net cash used in investing activities of was approximately $8,000 during the year ended December 31, 2016 compared to approximately $17,000 for the year ended December 31, 2015 due to the reduction in purchases of property and equipment.

 

Financing Activities

 

Net cash provided by financing activities was approximately $6.4 million during the year ended December 31, 2016 compared to $18.8 million during the year ended December 31, 2015. As described below, during the 2015 year, we received proceeds from our initial public offering whereas we did not have the same level of financing activities during the 2016, resulting in the decrease.

 

Net cash provided by financing activities of approximately $6.4 million during the year ended December 31, 2016 was due to net proceeds from the October 2016 follow-on offering of approximately $4.4 million and issuance of shares to Aspire Capital under the Aspire Purchase Agreement of approximately $2.0 million. Net cash provided by financing activities of approximately $18.8 million during the year ended December 31, 2015 was attributable to the net proceeds of approximately $17.4 million received upon closing of our initial public offering, selling 4,000,000 shares of our common stock. Additionally, proceeds of $1.0 million were received in connection with the sale of shares of our common stock to Aspire Capital pursuant to the Aspire Purchase Agreement.

 

 

Future Funding Requirements

 

To date, we have not generated any revenue. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize RP-G28 or any of our other product candidates. At the same time, we expect our expenses to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates. Additionally, we have incurred and will continue to incur additional costs associated with operating as a public company. In addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations.

 

Based upon our current operating plan, we believe that our existing cash and cash equivalents, together with interest and any proceeds received from our sale of shares of common stock to Aspire Capital in the future pursuant to the Aspire Purchase Agreement, will enable us to fund our operating expenses and capital expenditure requirements through 2017. We intend to devote our existing financial resources to fund the continued clinical development of RP-G28, including completion of our Phase 2b/3 trial and extension study; to fund expenses associated with the manufacture and product development of RP-G28; to explore potential orphan indications; and for general corporate purposes, general and administrative expenses, capital expenditures, working capital and prosecution and maintenance of our intellectual property.

 

Our future capital requirements will depend on many factors, including:

 

	●	the progress, costs, results of and timing of completing our Phase 2b/3 clinical trial and extension study;
	●	the willingness of the EMA or other regulatory agencies outside the United States to accept our Phase 2b/3 and any Phase 3 trials of RP-G28, as well as our other completed and planned clinical and nonclinical studies and other work, as the basis for review and approval of RP-G28 in the European Union for the reduction of symptoms associated with lactose intolerance in patients;
	●	the outcome, costs and timing of seeking and obtaining FDA, EMA and any other regulatory approvals;
	●	the number and characteristics of product candidates that we pursue, including our product candidates in preclinical development;
	●	the ability of our product candidates to progress through clinical development successfully;
	●	our need to expand our research and development activities;
	●	the costs associated with securing and establishing commercialization and manufacturing capabilities;
	●	market acceptance of our product candidates;
	●	the costs of acquiring, licensing or investing in businesses, products, product candidates and technologies;
	●	our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;
	●	our need and ability to hire additional management and scientific and medical personnel;
	●	the effect of competing technological and market developments;
	●	our need to implement additional internal systems and infrastructure, including financial and reporting systems;
	●	the economic and other terms, timing of and success of our existing licensing arrangements and any collaboration, licensing or other arrangements into which we may enter in the future; and
	●	the costs of operating as a public company.

 

Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, commercialization, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.

 

 

Off-Balance Sheet Arrangements

 

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under SEC rules.

 

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”). The provisions of ASU 2016-02 set out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for under the existing guidance for operating leases today. Topic 842 supersedes the previous lease standard, Topic 840 Leases. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018, and is effective for the Company for the year ending December 31, 2019. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s financial statements.

 

On March 30, 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). Among other things, ASU 2016-09 requires that entities recognize excess tax benefits and deficiencies related to employee share-based payment transactions as income tax expense or benefit. ASU 2016-09 also eliminates the requirement to reclassify excess tax benefits and deficiencies from operating activities to financing activities in the statement of cash flows. The guidance is effective for the annual periods and interim periods within those annual periods beginning after December 15, 2016. The adoption of this standard did not have any impact on the Company’s financial statements.

 

On August 26, 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). The new guidance amends Accounting Standards Codification No. 230 (“ASC 230”) to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU 2016-15 with the intent of reducing diversity in practice with respect to eight types of cash flows. ASU 2016-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and is effective for the Company for the year ending December 31, 2018. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s financial statements.

 

Other accounting standards updates effective after December 31, 2016, are not expected to have a material effect on our financial position, annual results of operations and/or cash flows.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data.

 

The financial statements and the reports of our independent registered accounting firm required pursuant to this item are included in Item 15 of this report and are presented beginning on page F-1.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

There has been no change of accountants nor any disagreements with accountants on any matter of accounting principles or practices or financial disclosure required to be reported under this Item.

 

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer (our principal executive officer) and vice president finance (our principal financial officer), evaluated the effectiveness of our disclosures controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”), as of December 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

 

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2016, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

Internal control over financial reporting refers to the process designed by, or under the supervision of, our chief executive officer and vice president finance, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide a reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitation. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgement and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

Management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our chief executive officer and vice president finance, we conducted an evaluation of the effectiveness of our internal control over financial reporting. Management has used the framework set forth in the report entitled “Internal Control – Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of our internal control over financial reporting. Based on its evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2016, the end of our most recent fiscal year.

 

Item 9B. Other Information

 

None.

 

PART III

 

Item 10. Directors, Executive Officers, and Corporate Governance

 

The information required by this item with respect to our directors and executive officers will be contained in our 2017 Proxy Statement under the caption “Board of Directors and Corporate Governance—The Board of Directors in General” and “—Executive Officers” and is incorporated by reference into Item 10 of this Annual Report.

 

The information required by this item with respect to Section 16(a) beneficial ownership reporting compliance will be contained in our 2017 Proxy Statement under the caption “Ownership of the Company—Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated by reference into Item 10 of this Annual Report.

 

The information required by this item with respect to Audit Committee matters will be contained in our 2017 Proxy Statement under the caption “Board of Directors and Corporate Governance—Committees of the Board of Directors—Audit Committee” and is incorporated by reference into Item 10 of this Annual Report.

 

 

The information required by this item with respect to our Code of Business Conduct and Ethics will be contained in our 2017 Proxy Statement under the caption “Board of Directors and Corporate Governance – Code of Business Conduct and Ethics” and is incorporated by reference into item 10 of this Annual Report.

 

Item 11. Executive Compensation

 

Summary Compensation Table (2016 and 2015)

 

The following table sets forth the compensation paid or earned for the fiscal years ended December 31, 2016 and 2015 to our named executive officers for each of those years, who are comprised of (1) our principal executive officer for such year, and (2) our next two highest compensated executive officers other than the principal executive officer (whose compensation exceeded $100,000).

 

Name and Principal Position		Year		Salary ($)				Bonus ($)				Option Awards(1) ($)				Nonequity Incentive Compensation ($)				All Other Compensation ($)				Total ($)
Michael D. Step		2016		$	376,269			$	—			$	126,280				—			$	—			$	502,549
Chief Executive Officer		2015		$	348,692			$	—			$	—				—			$	—			$	348,692
Andrew J. Ritter		2016		$	324,010			$	117,180	(2)		$	490,394				—			$	—			$	931,584
President		2015		$	259,260			$	124,000	(2)		$	—			$	225,000	(3)		$	109,952	(4)		$	718,212
Ira E. Ritter		2016		$	308,332			$	97,571	(2)		$	490,394				—			$	—			$	896,297
Executive Chairman and		2015		$	249,980			$	103,250	(2)		$	—				225,000	(3)		$	7,157	(4)		$	585,387
Chief Strategic Officer

 

(1)	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.

 

(2)	Represents annual bonuses earned for 2016 and 2015 based upon the achievement of specific performance goals, pursuant to the terms of their respective offer letters. For 2016, the annual bonuses earned were equal to 90% of the target bonus opportunities for each of Andrew Ritter (target bonus equal to 40% of his base salary) and Ira Ritter (target bonus equal to 35% of his base salary). For 2015, the annual bonuses earned were equal to 100% of the target bonus opportunities for each of Andrew Ritter (target bonus equal to 40% of his base salary) and Ira Ritter (target bonus equal to 35% of his base salary).
(3)	For 2015, represents cash bonuses of $75,000 and $150,000 attributable to the Clinical Trial Funding Commitment Bonus Opportunities and the Fundraising Bonus Opportunities, respectively (as described below under “Compensation Arrangements with Andrew Ritter and Ira Ritter”), paid to each of Andrew Ritter and Ira Ritter.
(4)	For 2015, represents auto allowances of $4,952 and $7,157 paid on behalf of Andrew Ritter and Ira Ritter, respectively. Also represents $105,000 paid as tuition reimbursement pursuant to Andrew Ritter’s offer letter.

 

 

Narrative to Summary Compensation Table

 

Letter Agreement with Michael D. Step

 

On December 2, 2014, we entered into a letter agreement (the “Step Letter Agreement”), with Mr. Step, our current Chief Executive Officer, setting forth the terms of his employment. The Step Letter Agreement provides that Mr. Step will be entitled to an annual base salary of $360,000. Pursuant to the Step Letter Agreement, Mr. Step was also entitled to receive three stock options.

 

The first two options entitle Mr. Step to purchase 646,537 and 73,377 shares of Common Stock of the Company, respectively, for an exercise price of $5.86 per share. Each of these options was immediately exercisable in full as of the date of the grant, with 44/48^ths of the total number of shares covered by each option subject to a right of repurchase by the Company upon termination of Mr. Step’s employment with us for any reason. This right of repurchase will lapse over a period of 44 months, with 1/44^th of the total number of shares subject to the right of repurchase lapsing on January 1, 2015 and on the first day of each month thereafter. In addition, the right of repurchase will lapse in its entirety upon a termination of the employment of Mr. Step by us without Cause or by Mr. Step with Good Reason and upon a Termination upon a Change in Control.

 

The third option became exercisable upon the closing of our initial public offering on June 29, 2015. Pursuant to the terms of the agreement, the option is exercisable for a total of 163,799 shares of our Common Stock, which, together with the shares subject to the first option, represent 7.5% of the shares of Common Stock deemed to be outstanding at June 29, 2015 on a fully-diluted basis, after giving effect to the number of shares subject to the third option. Seventy-five percent of the shares subject to the third option are subject to a right of repurchase by us upon termination of Mr. Step’s employment for any reason. This right of repurchase will lapse with respect to 1/36^th of the total number of shares subject to the right of repurchase on the first day of each month following the date on which the third option first becomes exercisable. In addition, the right of repurchase will lapse in its entirety upon Mr. Step’s termination of employment under certain circumstances.

 

For purposes of the Step Letter Agreement, the terms “Cause,” “Good Reason,” and “Termination upon a Change in Control” each have the meanings ascribed to such terms in the Executive Severance & Change in Control Agreement described below.

 

Compensation Arrangements with Andrew Ritter and Ira Ritter

 

On September 25, 2013, our board of directors approved the Executive Compensation Plan setting forth certain compensation to be paid to Andrew Ritter and Ira Ritter for their contributions to the Company. Effective June 29, 2015, in connection with our initial public offering, Andrew Ritter and Ira Ritter accepted offer letters from us setting for the terms of their employment as President and Chief Strategic Officer, respectively. The offer letter superseded the Executive Compensation Plan.

 

Executive Compensation Plan

 

Pursuant to the terms of the Executive Compensation Plan Andrew Ritter’s salary was $225,000 per year and Ira Ritter’s salary was $210,000 per year. Andrew Ritter was entitled to an annual car allowance of up to $8,400 and Ira Ritter was entitled to an annual car allowance of up to $12,000. Any car allowance claimed by Andrew or Ira Ritter would result in an automatic reduction in such person’s base salary then in effect.

 

Under the Executive Compensation Plan, each of Andrew and Ira Ritter had bonus opportunities to receive cash payments and options to purchase up to 48,951 shares of the Common Stock (each referred to in this section as an “Executive Option Grant”) as described below. On December 2, 2014, they also each received an option to purchase up to 432,434 shares of the Common Stock. See “Outstanding Equity Awards at 2015 Fiscal Year-End” for additional information regarding these options.

 

Pursuant to the terms of the Executive Compensation Plan, Andrew and Ira Ritter were entitled to the following cash and equity payments upon the satisfaction of the events described below:

 

	●	FDA Meeting Bonus Opportunities. In April 2013, Andrew and Ira Ritter each received a one-time cash bonus of $10,000 for meeting with the FDA regarding RP-G28’s pathway to FDA approval. Upon satisfaction of this milestone, 2,360 shares under the Executive Option Grant vested and became exercisable as of September 25, 2013. An additional 1,136 shares were to vest ratably on a monthly basis beginning on September 30, 2013.
	●	Clinical Trial Funding Commitment Bonus Opportunities. Pursuant to the terms of the Executive Compensation Plan, Andrew and Ira Ritter were each entitled to receive a one-time cash bonus of $75,000 upon the Company’s receipt of a commitment by a third party to fund a Phase 2 or later clinical trial whether or not any such committed funds were paid directly to the Company; provided, however, that no such bonus would be paid at any time the Company has less than $2,000,000 in available cash. In addition, the Executive Compensation Plan provided that upon the satisfaction of this milestone, 35% of 10,489 shares of each of their Executive Option Grants would vest, with the balance of such 10,489 shares vesting in 36 equal monthly installments beginning on the last day of the following month. The board of directors determined that this milestone was satisfied; accordingly, each executive received the cash bonus and 3,671 shares of the Executive Options vested and became exercisable as of June 29, 2015, with the balance of 6,818 shares vesting ratably on a monthly basis beginning July 31, 2015.

 

 

●

Fundraising Bonus Opportunities. Pursuant to the terms of the Executive Compensation Plan, Andrew and Ira Ritter were each entitled to receive (i) a one-time cash bonus of  $50,000 upon the sale of additional equity capital for cash, in one or more closings after July 17, 2012, and/or the actual deployment of funds by a third party for a clinical trial in an aggregate amount in excess of $2,000,000 and (ii) a one-time cash bonus of  $150,000 upon the sale of additional equity capital for cash, in one or more closings after July 17, 2012 and/or the actual deployment of funds by a third party for a clinical trial in an aggregate amount in excess of  $10,000,000 (which such bonus would be reduced by any cash bonus paid under subsection (i)); provided, however, that no bonus under subsection (i) or (ii) would be paid at any time the Company has less than $2,000,000 in available cash. In addition, upon the satisfaction of the milestone described in subsection (i), 35% of 6,993 shares of each of their Executive Option Grants would vest, with the balance of the 6,993 shares vesting in 36 equal monthly installments beginning on the last day of the following month, and, upon satisfaction of the milestone described in subsection (ii), 35% of 13,986 shares of each of their Executive Option Grants would vest, with the balance of the 13,986 shares vesting in 36 monthly installments beginning on the last day of the following month. The board of directors determined that the milestone as described in subsection (ii) above was satisfied upon the closing of the Company’s initial public offering on June 29, 2015 raising approximately $17.4 million, net of offering costs; accordingly, each executive received a bonus of $150,000 and 4,895 shares of the Executive Options vested and became exercisable as of June 29, 2015, with the balance of 9,091 shares vesting ratably on a monthly basis beginning July 31, 2015.

 

Further, pursuant to the terms of the Executive Compensation Plan, Andrew and Ira Ritter were each entitled to receive the following cash and equity bonus payments in connection with the closing of an exclusive license of RP-G28 and/or any future product candidate developed by the Company from time to time during the term of the Executive Compensation Plan by and/or any option to exclusively license such product candidate to a third party (referred to under the Executive Compensation Plan as a “License Event”) with a minimum upfront payment to the Company of $2,000,000:

 

●

A graduated cash bonus equal to (i) 5% of the Initial Period License Payment (as defined below) up to $5,000,000; (ii) 4% of the Initial Period License Payment in excess of $5,000,000 up to $10,000,000; and (iii) 3% of the Initial Period License Payment in excess of $10,000,000. In addition, upon the Company’s receipt of an Initial Period License Payment of more than $2,000,000, 35% of 45,454 shares of their Executive Option Grants would vest, with the balance of the 45,454 shares vesting in 36 monthly installments beginning on the last day of the following month.

 

●

A cash bonus equal to 3% of any Annual Excess Milestone Payments (as defined below); provided, however that no such bonus would be paid at any time the Company has less than $1,000,000 in available cash. In addition, upon the Company’s receipt of an Annual Excess Milestone Payment, 35% of 6,993 shares of their Executive Option Grants would vest and become exercisable, with the balance of the 6,993 shares vesting in 36 monthly installments beginning on the last day of the following month.

 

Notwithstanding any of the vesting provisions described above, the total potential number of shares under the Executive Option Grant that could vest would not exceed 48,951 and the Executive Option Grant automatically terminated for any shares for which a vesting date or performance condition had not been met by September 25, 2015. Accordingly, as of September 30, 2015, 27,972 of the maximum 48,951 Executive Option Grants potentially issuable to Andrew and Ira Ritter had been issued to each executive subject to the vesting conditions described above.

 

For purposes of the Executive Compensation Plan, the term “Initial Period License Payment” meant the aggregate amount in cash received by the Company (not including any amount placed in escrow or subject to earn-outs, contingencies or other deferrals or earmarked to pay or reimburse the Company for research and development activities) in respect of the License Event over a 24 month period beginning on the closing date of such License Event (which period is referred to therein as the “Initial Period”). The term “Annual Excess Milestone Payments” meant the amount in cash in excess of $2,000,000 (not including any amounts placed in escrow or subject to earn-outs, contingencies or other deferrals) that was received by the Company in respect of any Post-Closing Milestones (as defined below) in each 12-month period beginning on the expiration of the Initial Period. The term “Post-Closing Milestones” meant any post-closing payouts set forth in the definitive transaction documentation executed in connection with a License Event; provided, however, that such amounts would not include any amounts that were determined by the board of directors to comprise all or any portion of any upfront payment made in connection with a License Event and any royalty payment based on product sales.

 

Under the terms of the Executive Compensation Plan, receipt by the Company of more than one bona fide term sheet for a proposed License Event with respect to RP-G28 would result in the payment of an additional 10% of any cash bonus earned as Clinical Trial and Fundraising Bonus or a License Event Bonus.

 

 

Offer Letters with Andrew Ritter and Ira Ritter

 

The compensation terms outlined in the offer letters, which became effective June 29, 2015, superseded and replaced those provided in the Executive Compensation Plan, which is described above, other than certain provisions related to the bonus opportunities. The offer letters provide that Andrew Ritter is entitled to an annual base salary of $310,000 and Ira Ritter is entitled to an annual base salary of $295,000. In accordance with his offer letter, Andrew Ritter also became entitled to receive up to $180,000 payable over a three-year period for tuition reimbursement.

 

Pursuant to their respective offer letters, Andrew Ritter and Ira Ritter each have the opportunity to earn an annual bonus based upon a percentage of their base salary and the achievement of specific performance as determined by the Company. The initial target bonus opportunities are 40% and 35% of the base salary for Andrew Ritter and Ira Ritter, respectively.

 

2008 Stock Plan

 

Our 2008 Stock Plan permitted us to grant non-statutory stock options, incentive stock options and restricted stock to our employees, directors and consultants; however, incentive stock options may only be granted to our employees. The maximum aggregate number of shares of Common Stock that were issuable under the 2008 Stock Plan was 2,046,158 shares, after giving effect to the 1-for-7.15 reverse stock split. Beginning June 29, 2015, no further awards may be issued under the 2008 Stock Plan.

 

The 2008 Stock Plan is administered by either our board of directors or a committee of our board of directors, which in either case, we refer to as the Administrator. The Administrator has full authority and discretion to, among other things, determine the terms and conditions of any awards granted under the 2008 Stock Plan, and construe and interpret the terms of the 2008 Stock Plan and any awards granted thereunder.

 

Stock Options. Each option will be designated in the option agreement as either an incentive stock option or a nonstatutory stock option. Notwithstanding such designation, however, to the extent that the aggregate Fair Market Value (as defined in the 2008 Stock Plan) of the shares with respect to which an incentive stock option is exercisable for the first time by the optionee during any calendar year (under all plans of the Company and any parent or subsidiary) exceeds $100,000, such options will be treated as nonstatutory stock options. The term of any stock option awarded under the 2008 Stock Plan will not exceed 10 years from the date of grant. In the case of an incentive stock option granted to a person who, at the time the stock option is granted, owns stock representing more than 10% of the voting power of all classes of our stock or any parent or subsidiary, who we refer to as a 10% Holder, the term of the option will be five years from the date of grant or such shorter period as may be provided in the option agreement. The per share exercise price for shares to be issued upon exercise of an option will be such price as is determined by the Administrator, 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% Holder, 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 nonstatutory stock option, no less than 100% of the Fair Market Value per share on the date of grant. The consideration to be paid for the shares to be issued upon exercise of a stock option, including the method of payment, will be determined by the Administrator (and, in the case of an incentive stock option, will be determined at the time of grant). Such consideration may consist of, without limitation, (1) cash, (2) check, (3) promissory note, (4) other shares (provided that such shares have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the shares as to which such option may be exercised and provided that accepting such shares, in the sole discretion of the Administrator, will not result in any adverse accounting consequences to the Company), (5) consideration received by us under a cashless exercise program we have implemented in connection with the 2008 Stock Plan, or (6) such other consideration and method of payment for the issuance of shares to the extent permitted by applicable laws, or (7) any combination of the foregoing methods of payment.

 

Restricted Stock. Restricted stock may be issued either alone, in addition to, or in tandem with other awards granted under the 2008 Stock Plan and/or cash awards made outside of the 2008 Stock Plan, at a purchase price determined by the Administrator. Any restricted stock granted under the 2008 Stock Plan will be subject to the terms and conditions of a restricted stock purchase agreement, which, unless the Administrator determines otherwise, will grant us a repurchase option according to terms the Administrator determines. The term of each restricted stock award will be no more than 10 years from the date of grant.

 

Under the 2008 Stock Plan, if an optionee ceases to be an employee, director, consultant, such optionee may exercise his or her option within 30 days of termination, or such longer period of time as specified in the option agreement, to the extent that the option is vested on the date of termination (but in no event later than the expiration of the term of the option as set forth in the option agreement). Unless the Administrator provides otherwise, if, on the date of termination, the optionee is not vested as to his or her entire option, the shares covered by the unvested portion of the option will revert to the 2008 Stock Plan. If, after termination, the optionee does not exercise his or her option within the time specified by the Administrator, the option will terminate, and the shares covered by such option will revert to the 2008 Stock Plan. Unless the Administrator provides otherwise, or except as otherwise required by applicable laws, vesting of options granted to employees, officers and directors will be suspended during any unpaid leave of absence. For purposes of incentive stock options, no such leave may exceed 90 days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by us is not so guaranteed, then six months following the first day of such leave, any incentive stock option held by the optionee will be treated for tax purposes as a nonstatutory stock option.

 

 

If an optionee ceases to be an employee, director, consultant as a result of the optionee’s Disability (as defined in the 2008 Stock Plan), the optionee may exercise his or her option within six months of termination, or such longer period of time as specified in the option agreement, to the extent the option is vested on the date of termination (but in no event later than the expiration of the term of the option as set forth in the option agreement). Unless the Administrator provides otherwise, if, on the date of termination, the optionee is not vested as to his or her entire option, the shares covered by the unvested portion of the option will revert to the 2008 Stock Plan. If, after termination, the optionee does not exercise his or her option within the time specified, the option will terminate, and the shares covered by such option will revert to the 2008 Stock Plan.

 

If an optionee dies while an employee, director, consultant, the option may be exercised within six months following the optionee’s death, or such longer period of time as specified in the option agreement, to the extent the option is vested on the date of termination (but in no event later than the expiration of the term of the option as set forth in the option agreement) by the optionee’s designated beneficiary; provided such beneficiary has been designated prior to optionee’s death in a form acceptable to the Administrator. If no such beneficiary has been designated by the optionee, then such option may be exercised by the personal representative of the optionee’s estate or by the person(s) to whom the option is transferred pursuant to the optionee’s will or in accordance with the laws of descent and distribution. If, at the time of death, the optionee is not vested as to his or her entire option, the shares covered by the unvested portion of the option will revert to the 2008 Stock Plan. If the option is not so exercised within the time specified, the option will terminate, and the shares covered by such option will revert to the 2008 Stock Plan.

 

If an option or restricted stock purchase right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an exchange program, the unpurchased shares that were subject to such award will become available for future grant or sale under the 2008 Stock Plan (unless the 2008 Stock Plan has terminated). However, shares that have actually been issued under the 2008 Stock Plan, upon exercise of either an option or restricted stock purchase right, will not be returned to the 2008 Stock Plan and will not become available for future distribution under the 2008 Stock Plan, except that if unvested shares of restricted stock are repurchased by us at their original purchase price, such shares will become available for future grant under the 2008 Stock Plan.

 

Unless determined otherwise by the Administrator, options and restricted stock purchase rights may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner, and may be exercised only by the optionee during such person’s lifetime.

 

In the event that any dividend or other distribution (whether in the form of cash, shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of our shares or other securities, or other change in our corporate structure affecting the shares occurs, the Administrator, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under the 2008 Stock Plan, will adjust the number of and class of shares that may be delivered under the 2008 Stock Plan and/or the number, class and price of shares covered by each outstanding option or stock purchase right; provided, however, that the Administrator will make such adjustments to the extent required by Section 25102(o) of the California Corporations Code.

 

The board of directors may at any time amend, alter, suspend or terminate the 2008 Stock Plan, but must obtain stockholder approval of any amendment to the extent necessary and desirable to comply with applicable laws. No amendment, alteration, suspension or termination of the 2008 Stock Plan may impair the rights of any optionee, unless otherwise mutually agreed in writing by the optionee and the Administrator. The 2008 Stock Plan will continue in effect for a term of ten years from the later of (a) the effective date of the Plan or (b) the earlier of the most recent board or stockholder approval of an increase in the number of shares reserved for issuance under the 2008 Stock Plan.

 

2009 Stock Plan

 

Our 2009 Stock Plan permitted us to grant non-statutory stock options, incentive stock options and stock purchase rights to our employees, outside directors and consultants; however, incentive stock options could only be granted to our employees. The maximum aggregate number of shares of Common Stock that were issuable under the 2009 Stock Plan was 69,930 shares, after giving effect to the 1-for-7.15 reverse stock split. Beginning June 29, 2015, no further awards may be issued under the 2009 Stock Plan.

 

The 2009 Stock Plan is administered by either our board of directors or a committee of our board of directors, which in either case, we refer to as the Administrator. The Administrator has full authority and discretion to, among other things, determine the terms and conditions of any awards granted under the 2009 Stock Plan, and construe and interpret the terms of the 2009 Stock Plan and any awards granted thereunder.

 

 

Stock Options. Each option will be designated in the option agreement as either an incentive stock option or a nonstatutory stock option. Notwithstanding such designation, however, to the extent that the aggregate Fair Market Value (as defined in the 2009 Stock Plan) of the shares with respect to which an incentive stock option is exercisable for the first time by the optionee during any calendar year (under all plans of the Company and any parent or subsidiary) exceeds $100,000, such options will be treated as nonstatutory stock options. The term of any stock option awarded under the 2009 Stock Plan shall not exceed 10 years from the date of grant. In the case of an incentive stock option granted to a person who, at the time the stock option is granted, owns stock representing more than 10% of the voting power of all classes of our stock or any parent or subsidiary of, who we refer to as a 10% Holder, the term of the option will be five years from the date of grant or such shorter period as may be provided in the option agreement. The per share exercise price for shares to be issued upon exercise of an option will be such price as is determined by the Administrator, 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% Holder, 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 nonstatutory stock option, no less than 100% of the Fair Market Value per share on the date of grant. The consideration to be paid for the shares to be issued upon exercise of a stock option, including the method of payment, will be determined by the Administrator (and, in the case of an incentive stock option, will be determined at the time of grant). Such consideration may consist of, without limitation, (1) cash, (2) check, (3) promissory note, (4) other shares (provided shares acquired directly from us (x) have been owned by the optionee for more than six months of the date of surrender and (y) have a Fair Market Value of the date of surrender equal to the aggregate exercise price of the shares as to which such option may be exercised), (5) consideration received by us under a cashless exercise program we have implemented in connection with the 2009 Stock Plan, or (6) any combination of the foregoing methods of payment.

 

Stock Purchase Rights. Stock Purchase Rights may be issued either alone, in addition to, or in tandem with other awards granted under the 2009 Stock Plan and/or cash awards made outside of the 2009 Stock Plan, and will entitle the recipient to purchase shares of our Common Stock at a purchase price determined by the Administrator. Any stock purchase rights granted under the 2009 Stock Plan will be subject to the terms and conditions of a restricted stock purchase agreement, which, unless the Administrator determines otherwise, will grant us a repurchase option exercisable within 90 days of the voluntary or involuntary termination of the purchaser’s service with us for any reason (including death or disability) at the original price paid by the purchase, which may be paid by us by cancellation of any indebtedness of the purchaser to us, and which right will lapse at such rate as the Administrator may determine.

 

Under the 2009 Stock Plan, if an optionee ceases to be an employee, director, consultant (or other permitted recipient under Rule 701 under the Securities Act), such optionee may exercise his or her option within 30 days of termination, or such longer period of time as specified in the option agreement, to the extent that the option is vested on the date of termination (but in no event later than the expiration of the term of the option as set forth in the option agreement, and in the case of an incentive stock option, in no event later than the earlier of three months after the date of termination and the expiration of the term of the option as set forth in the option agreement). If, on the date of termination, the optionee is not vested as to his or her entire option, the shares covered by the unvested portion of the option will revert to the 2009 Stock Plan. If, after termination, the optionee does not exercise his or her option within the time specified by the Administrator, the option will terminate, and the shares covered by such option will revert to the 2009 Stock Plan. Unless the Administrator provides otherwise, vesting of options granted to employees, officers and directors will be suspended during any unpaid leave of absence. For purposes of incentive stock options, no such leave may exceed 90 days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by us is not so guaranteed, then following the 91^st day of such leave, any incentive stock option held by the optionee will cease to be treated as an incentive stock option and will instead be treated for tax purposes as a nonstatutory stock option.

 

If an optionee ceases to be an employee, director, consultant (or other permitted recipient under Rule 701 under the Securities Act), as a result of the optionee’s Disability (as defined in the 2009 Stock Plan), the optionee may exercise his or her option within six months of termination, or such longer period of time as specified in the option agreement, to the extent the option is vested on the date of termination (but in no event later than the expiration of the term of the option as set forth in the option agreement, and in the case of an incentive stock option, in no event later than the earlier of three months after the date of termination and the expiration of the term of the option as set forth in the option agreement). If, on the date of termination, the optionee is not vested as to his or her entire option, the shares covered by the unvested portion of the option will revert to the 2009 Stock Plan. If, after termination, the optionee does not exercise his or her option within the time specified by the Administrator, the option will terminate, and the shares covered by such option will revert to the 2009 Stock Plan.

 

If an optionee dies while an employee, director, consultant (or other permitted recipient under Rule 701 under the Securities Act), the option may be exercised within six months following the optionee’s death, or such longer period of time as specified in the option agreement, to the extent the option is vested on the date of termination (but in no event later than the expiration of the term of the option as set forth in the option agreement) by the optionee’s designated beneficiary; provided such beneficiary has been designated prior to optionee’s death in a form acceptable to the Administrator. If no such beneficiary has been designated by the optionee, then such option may be exercised by the personal representative of the optionee’s estate or by the person(s) to whom the option is transferred pursuant to the optionee’s will or in accordance with the laws of descent and distribution. If, at the time of death, the optionee is not vested as to his or her entire option, the shares covered by the unvested portion of the option will revert to the 2009 Stock Plan. If the option is not so exercised within the time specified above, the option will terminate, and the shares covered by such option will revert to the 2009 Stock Plan.

 

 

If an option or stock purchase right expires or becomes unexercisable without having been exercised in full, the unpurchased shares that were subject to such award will become available for future grant or sale under the 2009 Stock Plan (unless the 2009 Stock Plan has terminated). However, shares that have actually been issued under the 2009 Stock Plan, upon exercise of either an option or stock purchase right, will not be returned to the 2009 Stock Plan and will not become available for future distribution under the 2009 Stock Plan, except that if unvested shares of restricted stock are repurchased by us at their original purchase price, such shares will become available for future grant under the 2009 Stock Plan.

 

Unless determined otherwise by the Administrator, options and stock purchase rights may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner, and may be exercised only by the optionee during such person’s lifetime.

 

In the event that any dividend or other distribution (whether in the form of cash, shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of our shares or other securities, or other change in our corporate structure affecting the shares occurs, the Administrator, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under the 2009 Stock Plan, may (in its sole discretion) adjust the number of and class of shares that may be delivered under the 2009 Stock Plan and/or the number, class and price of shares covered by each outstanding option or stock purchase right; provided, however, that the Administrator will make such adjustments to the extent required by Section 25102(o) of the California Corporations Code.

 

The board of directors may at any time amend, alter, suspend or terminate the 2009 Stock Plan, but must obtain stockholder approval of any amendment to the extent necessary and desirable to comply with applicable laws. The 2009 Stock Plan will also be subject to approval by our stockholders prior to the later of  (i) 12 months after the 2009 Stock Plan is adopted or (ii) the date of first grant of an option or stock purchase right to an employee, director or consultant (or other permitted recipient under Rule 701 under the Securities Act) in California. No amendment, alteration, suspension or termination of the 2009 Stock Plan may impair the rights of any optionee, unless otherwise mutually agreed in writing by the optionee and the Administrator.

 

2015 Equity Incentive Plan

 

On June 15, 2015, our board of directors approved the 2015 Equity Incentive Plan, and on June 17, 2015, the 2015 Equity Incentive Plan was approved by our stockholders. On June 3, 2016, the stockholders of the Company approved an amendment to the 2015 Equity Incentive Plan at the 2016 Annual Meeting of Stockholders, which, among other things, increased the number of shares that may be issued pursuant to awards under the plan by 475,000 shares of Common Stock.

 

The purposes of the 2015 Equity Incentive 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 Equity Incentive 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 Equity Incentive Plan is (i) 803,289 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 Equity Incentive Plan or were subject to awards under the Prior Plans which, after the effective date of the 2015 Equity Incentive Plan, were or are forfeited or lapse unexercised or are settled in cash and are not issued under the Prior Plans. No more than 803,289 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 Equity Incentive Plan continue to be subject to the terms and conditions of such Prior Plan. The maximum number of shares of Common Stock subject to awards of any combination that may be granted under the 2015 Equity Incentive Plan during any calendar year to any one individual is limited to 300,000 shares; provided, however, that the foregoing limitation will not apply until the earliest of  (a) the first material modification of the 2015 Equity Incentive Plan (including any increase in the number of shares reserved for issuance under the 2015 Equity Incentive Plan); (b) the issuance of all of the shares reserved for issuance under the 2015 Equity Incentive Plan; (c) the first meeting of stockholders at which members of the board of directors are elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security of the Company under Section 12 of the Exchange Act; or (d) such other date required by Section 162(m) of the Code.

 

 

These limits will be appropriately adjusted to reflect any stock dividend, stock split, combination or exchange of shares, merger, consolidation or other distribution and/or similar transactions. To the extent that (i) an award terminates, expires, lapses or is forfeited for any reason, (ii) any award is settled in cash (in whole or in part) without the delivery of shares to the Grantee, or (iii) any shares subject to an award under any Prior Plan terminate, expire, lapse or are forfeited for any reason or an award under any Prior Plan is settled for cash (in whole or in part), then any shares subject to the award, to the extent of such termination, expiration, lapse, forfeiture or cash settlement, will again be available for the grant of an award pursuant to the 2015 Equity Incentive Plan. Any shares tendered or withheld to satisfy the grant or exercise prior or tax withholding obligation pursuant to any award will again be available for the grant of an award pursuant to the 2015 Equity Incentive Plan.

 

The 2015 Equity Incentive Plan may be administered by a committee or subcommittee of the board of directors as the board of directors may appoint from time to time, or by our full board of directors if no committee is designated or for other specific purposes. At present, the 2015 Equity Incentive Plan is administered by our compensation committee. The plan administrator has the full authority and discretion to administer the 2015 Equity Incentive Plan and to take any action that is necessary or advisable in connection with the administration of the 2015 Equity Incentive Plan, including without limitation the authority and discretion to interpret and administer the 2015 Equity Incentive Plan and any award agreement relating to the 2015 Equity Incentive Plan or any award made thereunder, the authority to designate Grantees to receive awards under the 2015 Equity Incentive Plan and to determine the type or types of awards to be granted to such Grantees, the authority to determine the terms and conditions of awards granted under the 2015 Equity Incentive Plan, and the authority to determine whether, to what extent, and pursuant to what circumstances and award may be settled in, or the exercise price of an award may be paid in, cash, shares, other awards, or other property, or an award may be canceled, forfeited or surrendered. The plan administrator’s determinations will be final and conclusive. The plan administrator may delegate certain of its authority to others as specified in the 2015 Equity Incentive Plan.

 

The 2015 Equity Incentive 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.

 

Stock options. The 2015 Equity Incentive Plan allows the plan administrator to grant incentive stock options, as that term is defined in Section 422 of the Code, or nonqualified stock options. No incentive stock option award may be granted to any person who is not an employee of the Company or any subsidiary. Options must have an exercise price at least equal to the fair market value of the underlying shares on the date of grant. In addition, in the case of incentive stock options granted to a greater than 10% stockholder of the Company, such exercise price may not be less than 110% of the fair market value of the underlying shares on the date of grant. The option holder may pay the exercise price in cash or by check, by tendering shares of Common Stock (including shares issuable in settlement of the award), payment through a broker or by any other means that the plan administrator approves. Options granted under the 2015 Equity Incentive Plan will have a term of no more than 10 years, or five years in the case of incentive stock options granted to a greater than 10% stockholder of the Company; however, the options will expire earlier if the option holder’s service relationship with us terminates or as otherwise provided in an award agreement.

 

Restricted stock awards. The 2015 Equity Incentive Plan allows the plan administrator to grant restricted stock awards, which issue to the holder a certain number of shares of Common Stock that are subject to restrictions or conditions as the plan administrator deems appropriate, such as time-based or performance-based criteria, and which become vested upon the lapse or satisfaction of such conditions. The plan administrator may apply limitations to any restricted stock award and establish the purchase price (or provide for no purchase price), provided that if a purchase price is established, it may not be less than par value of the shares to be purchased.

 

Stock appreciation rights. The 2015 Equity Incentive Plan allows the plan administrator to grant awards of stock appreciation rights, which entitle the holder to receive a payment in cash, in shares of Common Stock, or in a combination of both, having an aggregate value equal to the spread on the date of exercise between the fair market value of the underlying shares on that date and the base price of the shares specified in the grant agreement, multiplied by the number of shares specified in the award being exercised and as otherwise provided in an award agreement. Stock appreciation rights may not have a base price of less than 100% of the fair market value of the underlying shares on the date of grant.

 

Restricted stock units. The 2015 Equity Incentive Plan allows the plan administrator to grant awards of restricted stock units (“RSUs”), which entitle the holder to a number of shares of Common Stock, a cash payment or some combination thereof, upon satisfaction of vesting and other criteria for issuance or upon such later date as specified in the award agreement, as established by the plan administrator in the award agreement.

 

Other stock-based awards. The 2015 Equity Incentive Plan allows the plan administrator to grant other stock-based stock awards to eligible participants, including dividend equivalent rights, stock payments and/or deferred stock. A dividend equivalent may be granted alone or in conjunction with another type of award, and generally provides for payment, in cash, Common Stock or some combination thereof, of an amount equal to the dividends that would have been payable with respect to a specified number of underlying shares. A stock payment is an award to a Grantee, only upon satisfaction of performance-based criteria or other criteria specified by the plan administrator, of a specified number of shares of Common Stock, or an option to purchase Common Stock, which may be (but is not required to be) in lieu of base salary, bonus, fees or other cash consideration to the Grantee. A deferred stock award is a grant to a Grantee, only upon satisfaction of performance-based criteria or other criteria specified by the plan administrator, of a specified number of shares of Common Stock.

 

 

Performance awards. The 2015 Equity Incentive Plan allows the plan administrator to grant performance awards which become payable in Common Stock, in cash or in a combination of Common Stock and cash, on account of attainment of one or more performance goals established by the plan administrator on one or more specified dates or over a specified period or periods. The plan administrator may establish performance goals relating to any of the following: (i) gross or net earnings (either before or after one or more of the following: interest, taxes, depreciation and amortization); (ii) gross or net sales or revenue; (iii) gross or net income or adjusted income (either before or after taxes); (iv) operating earnings or profit; (v) cash flow (including, but not limited to, operating cash flow and free cash flow); (vi) return on assets; (vii) return on capital; (viii) return on stockholders’ equity; (ix) return on sales; (x) gross or net profit or operating margin; (xi) costs; (xii) funds from operations; (xiii) expenses; (xiv) working capital; (xv) earnings per share or adjusted earnings per share; (xvi) price per share of Common Stock; (xvii) regulatory body approval for commercialization of a product; (xviii) implementation or completion of critical projects; (xix) market share; or (xx) total stockholder return; any of which may be measured either in absolute terms or as compared to any incremental increase or decrease or as compared to results of a peer group or to market performance indicators or indices.

 

The plan administrator may, in its sole discretion, provide that one or more objectively determinable adjustments will be made to one or more of the performance goals described above, such as adjustments to account for changes in the Company’s or segment’s business (e.g., restructuring, acquisition or disposal or discontinuance of a business segment), accounting or financial reporting (e.g., change in accounting principles, significant income or expense or amortization of assets) or for other unusual or non-recurring events, all as further detailed in the 2015 Equity Incentive Plan. For all awards intended to qualify as performance-based compensation, such determinations shall be made within the time periods prescribed by, and otherwise in compliance with, Section 162(m) of the Code.

 

Amendment and termination. No award will be granted under the 2015 Equity Incentive Plan after the tenth anniversary of the effective date of the 2015 Equity Incentive Plan. Subject to applicable laws and exchange limitations, our board of directors or the plan administrator may terminate, amend or modify the 2015 Equity Incentive Plan, or any portion thereof, at any time. Stockholder approval will be required to (i) increase the limits imposed on the maximum number of shares which may be issued under the 2015 Equity Incentive Plan or as incentive stock options (other than an appropriate adjustment due to stock dividend, stock split, combination or exchange of shares, merger, consolidation or similar circumstance), (ii) reduce the price per share of any outstanding option or stock appreciation right or cancel any such award in exchange for cash when the exercise price per share exceeds the fair market value of the underlying shares, or (iii) materially change the class of persons who are eligible to participate in the 2015 Equity Incentive Plan; provided, however, that no amendment, suspension or termination of the 2015 Equity Incentive Plan may, without the consent of the Grantee, materially impair any rights or obligations under any award granted or awarded thereunder, unless the award itself otherwise expressly so provides.

 

Outstanding Equity Awards at 2016 Fiscal Year-End

 

The following table presents the outstanding equity awards held by each of the named executive officers as of December 31, 2016.

 

Name		Number of Securities Underlying Unexercised Options Exercisable				Number of Securities Underlying Unexercised Options Unexercisable				Option Exercise Price ($)				Option Expiration Date
Michael D. Step			26,163				—			$	1.14			8/16/2022
			646,537	(1)			—			$	5.86			12/2/2024
			73,377	(2)			—			$	5.86			12/2/2024
			163,799	(3)			—			$	5.86			12/2/2024
			8,542	(4)			73,458	(4)		$	1.54			7/5/2026
Andrew J. Ritter			19,575	(5)			8,397	(5)		$	1.27			9/25/2023
			20,979				—			$	5.86			12/2/2024
			243,245	(6)			189,190	(6)			1	(6)		12/2/2024
			8,542	(7)			73,458	(7)		$	1.54			7/5/2026
			—				140,044	(8)		$	2.60			10/25/2026
Ira E. Ritter			19,575	(9)			8,397	(9)		$	1.27			9/25/2023
			20,979				—			$	5.86			12/2/2024
			243,245	(10)			189,190	(10)			1	(10)		12/2/2024
			8,542	(11)			73,458	(11)		$	1.54			7/5/2026
			—				140,044	(12)		$	2.60			10/25/2026

 

 

(1)	This option was granted to Mr. Step on December 2, 2014 and was immediately exercisable in full as of the date of grant. Of the shares subject to this option, 592,659 shares are subject to a right of repurchase in favor of us at a price of $5.86 per share, which right expires ratably over 44 months commencing January 1, 2015 and in full upon a change of control or upon Mr. Step’s employment termination by us without Cause, subject to his continued employment with us (as described in the stock option award agreement).
(2)	This option was granted to Mr. Step on December 2, 2014 and was immediately exercisable in full as of the date of grant. Of the shares subject to this option, 67,262 shares are subject to a right of repurchase in favor of us at a price of $5.86 per share, which rights expires ratably over 44 months commencing January 1, 2015 and in full upon a change of control or upon Mr. Step’s employment termination by us without Cause, subject to his continued employment with us (as described in the stock option award agreement).
(3)	This option was granted to Mr. Step on December 2, 2014. The total number of shares issued under this option equaled the number of shares of Common Stock, together with the 646,537 shares subject to the option granted to Mr. Step on December 2, 2014, representing in the aggregate 7.5% of the shares of Common Stock deemed to be outstanding on a fully-diluted basis as of the date that we raised in the aggregate a minimum of  $15,000,000 in one or more private and/or public offerings (a “Qualified Financing”), after giving effect to (i) the issuance of the shares issued in the Qualified Financing, (ii) the issuance of this option and (iii) any adjustments. 75% of the shares subject to the third option are subject to a right of repurchase upon termination of Mr. Step’s employment for any reason, which right expires ratably over 36 months commencing with July 1, 2015 and in full upon a change of control or upon Mr. Step’s employment termination by us without Cause, subject to his continued employment with us (as described in the stock option award agreement).

 

(4)	This option was granted to Mr. Step on July 5, 2016 for an aggregate of 82,000 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.
(5)	This option was granted to Andrew Ritter on September 25, 2013 for an aggregate of up to 48,951 shares, subject to the achievement of certain milestones. The option included 2,360 shares that vested and became exercisable as of the date of grant (with a balance of 1,137 shares vesting ratably on a monthly basis from September 30, 2013 over 36 months) attributable to the FDA Meeting Bonus milestone. An additional 3,671 shares vested and became exercisable as of June 29, 2015 (with a balance of 6,818 shares vesting ratably on a monthly basis from July 31, 2015 over 36 months) attributable to the Clinical Trial Funding Commitment Bonus Opportunity milestone. An additional 4,895 shares vested and became exercisable as of June 29, 2015 (with a balance of 9,091 shares vesting ratably on a monthly basis beginning July 31, 2015 over 36 months) attributable to the Fundraising Bonus Opportunities milestone. The option for the remaining balance of the 20,979 shares expired unvested as of September 30, 2015.
(6)	This option was granted to Andrew Ritter on December 2, 2014 and vests as follows: 25% of the shares vest on September 1, 2015 and the remaining 75% of the shares will vest in 36 equal monthly installments beginning on the last day of the first full month thereafter, subject to his continued employment with us. The exercise price for this option is as follows: (i) $5.86 for the first 152,347 shares; (ii) $9.30 for the next 140,044 shares; and (iii) $13.23 for the remaining 140,043 shares.
(7)	This option was granted to Andrew Ritter on July 5, 2016 for an aggregate of 82,000 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 Andrew Ritter on October 25, 2016 for an aggregate of 140,044 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/3 clinical trial.
(9)	This option was granted to Ira Ritter on September 25, 2013 and is subject to the same vesting schedule as the option granted to Andrew Ritter on this date as reflected in footnote (5) above.
(10)	This option was granted to Ira Ritter on December 2, 2014 and is subject to the same vesting schedule as the option granted to Andrew Ritter on this date as reflected in footnote (8) above.
(11)	This option was granted to Ira Ritter on July 5, 2016 for an aggregate of 82,000 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.
(12)	This option was granted to Ira Ritter on October 25, 2016 for an aggregate of 140,044 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/3 clinical trial.

 

 

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 twelve (12) months of base salary, 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, 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 more than 50 miles from the executive’ principal work location to a location that is more than 50 miles from the prior location. Notwithstanding the foregoing, a relocation of Mr. Step’s principal place of employment to a location closer to Mr. Step’s principal residence in San Diego, California shall not constitute “Good Reason.” 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) occurs, 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 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;
	(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.
	(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.

 

 

2009 Stock Plan

 

The 2009 Stock Plan provides that in the event we merge with or into another corporation, or a Change in Control (as defined below) occurs, each outstanding option and stock purchase right will be assumed or an equivalent option substituted by the successor corporation or a parent or subsidiary of the successor corporation. In the event that the successor corporation in a merger or Change in Control refuses to assume or substitute for the option or stock purchase right, then the optionee will fully vest in and have the right to exercise the option or stock purchase right as to all of the optioned stock, including shares as to which it would not otherwise be vested or exercisable; provided, however, that such exercise will only be permitted as and to the extent it complies with Code Section 409A or does not cause the option or stock purchase right to cease to be exempt from that statute.

 

For purposes of the 2009 Stock Plan, “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 the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of securities representing fifty percent (50%) or more of the total voting power represented by our then outstanding voting securities; or
	(ii)	The consummation of the sale or disposition by us of all or substantially all of our assets; or
	(iii)	The consummation of a merger or our consolidation with any other corporation, other than a merger or consolidation which would result in our voting securities outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or its parent) at least 50% of the total voting power represented by the our voting securities or such surviving entity or its parent outstanding immediately after such merger or consolidation. Notwithstanding the foregoing, only a Change in Control event that also qualifies as a “change in the ownership” or a “change in the effective control” of the Company or a “change in the ownership of a substantial portion” of our assets within the meaning of Treasury Regulation Section 1.409A-3(i)(5) shall be recognized as a Change of Control for purposes of triggering exercise, distribution or settlement rights under any option or stock purchase right granted under the Stock Plan that is subject to Code Section 409A.

 

2015 Equity Incentive Plan

 

The 2015 Equity Incentive Plan provides that notwithstanding any other provision of the 2015 Equity Incentive 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 Equity Incentive 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

 

Prior to our initial public offering, we did not pay compensation to our directors for their service on our board of directors. Effective upon the closing of our initial public offering on June 29, 2015, our non-employee directors are entitled to receive the following compensation for their services:

 

	●	Annual Cash Retainer — $20,000
	●	Chairman of the Board Cash Retainer — $15,000
	●	Audit Committee Chair Retainer — $7,500
	●	Compensation Committee Chair Retainer — $5,000
	●	Nominating and Corporate Governance Committee Chair Retainer — $3,500
	●	Initial Equity Grant — 10,000 shares
	●	Annual Equity Grant — 7,000 shares

 

2016 Director Compensation

 

The following table sets forth the compensation paid or earned for the fiscal year ended December 31, 2016 to our non-employee directors. Compensation paid to Michael D. Step, Andrew Ritter, and Ira Ritter is presented as part of the “Summary Compensation Table (2016 and 2015)” above. Our employee directors do not receive compensation for their service as directors. Dr. Merino is not included in the table below, as he was not appointed to our board of directors until January 17, 2017.

 

Name of Director		Fees Earned and Paid in Cash ($)				Option Awards(2) ($)				All other compensation ($)				Total ($)
Noah Doyle(1)		$	—			$	—				—			$	—
Matthew W. Foehr		$	25,000			$	16,590				—			$	41,590
Paul V. Maier		$	27,500			$	16,590				—			$	44,090
Gerald T. Proehl		$	23,500			$	16,590				—			$	40,090

 

(1)	Mr. Doyle has declined to receive any compensation for his service as director.
(2)	Represents the aggregate grant date fair value of the options to purchase 7,000 shares of our Common Stock granted to each of our non-employee directors on November 29, 2016, determined in accordance with FASB ASC 718. Of the 7,000 shares granted pursuant to these options, 730 shares were vested as of the grant date and the remaining 6,270 shares vest ratably over the 43 months thereafter.

 

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, 2016, each of our non-employee directors (other than Mr. Doyle) held option awards to purchase an aggregate of 17,000 shares of our Common Stock and no stock awards. Mr. Doyle held no stock awards or option awards as of December 31, 2016.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required by this item will be contained in our 2017 Proxy Statement under the caption “Ownership of the Company—Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” and is incorporated by reference into Item 12 of this Annual Report.

 

Item 13. Certain Relationships and Related Transactions and Director Independence

 

The information required by this item will be contained in our 2017 Proxy Statement under the caption “Board of Directors and Corporate Governance—Certain Relationships and Related Party Transactions” and “—Director Independence” and is incorporated by reference into Item 13 of this Annual Report.

 

Item 14. Principal Accountant Fees and Services

 

The information required by this item will be contained in our 2017 under the caption “Relationship With Independent Registered Public Accounting Firm” and is incorporated by reference into Item 14 of this Annual Report.

 

PART IV

 

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)(1)

Financial Statements.

 

The following financial statements of Ritter Pharmaceuticals, Inc., together with the report thereon of Mayer Hoffman McCann P.C., an independent registered public accounting firm, are included in this Annual Report on Form 10-K:

 

		Page
Report of Independent Registered Public Accounting Firm		F-1
Financial Statements:
Balance Sheets as of December 31, 2016 and 2015		F-2
Statements of Operations for the years ended December 31, 2016 and 2015		F-3
Statements of Changes in Securities Subject to Redemption and Stockholders’ Equity (Deficit) for the years ended December 31, 2016 and 2015		F-4
Statements of Cash Flows for the years ended December 31, 2016 and 2015		F-5
Notes to Financial Statements		F-6

 

(a)(2)

Financial Statement Schedules.

 

All schedules have been omitted because they are not required or because the required information is given in the Financial Statements or Notes thereto set forth under Item 8 above.

 

(a)(3)

Exhibits.

 

See the Exhibit Index immediately following the signature page of this Annual Report. The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this Annual Report.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

RITTER PHARMACEUTICALS, INC.
By:	/s/ Michael D. Step
Name:	Michael D. Step
Title:	Chief Executive Officer

 

Date: February 27, 2017

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant on February 27, 2017 in the capacities indicated.

 

Signature		Title		Date
/s/ Michael D. Step		Chief Executive Officer and Director		February 27, 2017
Michael D. Step		(Principal Executive Officer)
/s/ Ellen Mochizuki		Vice President Finance		February 27, 2017
Ellen Mochizuki		(Principal Financial Officer and Principal Accounting Officer)
/s/ Ira E. Ritter		Executive Chairman, Chief Strategic Officer		February 27, 2017
Ira E. Ritter		and Director
/s/ Andrew J. Ritter		President and Director		February 27, 2017
Andrew J. Ritter
/s/ Noah Doyle		Director		February 27, 2017
Noah Doyle
/s/ Matthew W. Foehr		Director		February 27, 2017
Matthew W. Foehr
/s/ Paul V. Maier		Director		February 27, 2017
Paul V. Maier
/s/ William M. Merino		Director		February 27, 2017
William M. Merino
/s/ Gerald T. Proehl		Director		February 27, 2017
Gerald T. Proehl

 

 

EXHIBIT INDEX

 

				Incorporated by Reference
Exhibit No.		Description		Form		File No.		Exhibit		Filing Date
3.1		Amended and Restated Certificate of Incorporation of Ritter Pharmaceuticals, Inc.		8-K		001-37428		3.1		7/1/2015
3.2		Amended and Restated Bylaws of Ritter Pharmaceuticals, Inc.		8-K		001-37428		3.2		7/1/2015
4.1		Form of Common Stock Certificate of Ritter Pharmaceuticals, Inc.		S-1/A		333-202924		4.1		5/22/2015
4.2		Amended and Restated Investors’ Rights Agreement, dated as of November 17, 2010, by and among Ritter Pharmaceuticals, Inc. and the persons and entities named therein		S-1		333-202924		4.2		3/23/2015
4.3		Amendment No. 1 to the Amended and Restated Investors’ Rights Agreement, dated as of January 13, 2011, by and among Ritter Pharmaceuticals, Inc. and the persons and entities named therein		S-1		333-202924		4.3		3/23/2015
4.4		Amendment No. 2 to the Amended and Restated Investors’ Rights Agreement, dated as of February 6, 2012, by and among Ritter Pharmaceuticals, Inc. and the persons and entities named therein		S-1		333-202924		4.4		3/23/2015
4.5		Amendment No. 3 to the Amended and Restated Investors’ Rights Agreement, dated as of December 4, 2014, by and among Ritter Pharmaceuticals, Inc. and the persons and entities named therein		S-1		333-202924		4.5		3/23/2015
4.6		Amendment No. 4 to the Amended and Restated Investors’ Rights Agreement, by and among Ritter Pharmaceuticals, Inc. and the persons and entities named therein		S-1		333-208818		4.6		12/31/2015
4.7		Form of Common Stock Purchase Warrant		S-1		333-208818		4.7		12/31/2015
4.8		Form of Representative’s Warrant Agreement		S-1/A		333-202924		4.7		5/8/2015
4.9		Registration Rights Agreement, dated December 18, 2015, by and between Ritter Pharmaceuticals, Inc. and Aspire Capital Fund, LLC		8-K		001-37428		4.1		12/21/2015
10.1		Office Lease, dated June 25, 2013, by and between Douglas Emmett 1997, LLC and Ritter Pharmaceuticals, Inc.		S-1		333-202924		10.1		5/8/2015
10.2+		Offer Letter, dated December 2, 2014, by and between Michael D. Step and Ritter Pharmaceuticals, Inc.		S-1		333-202924		10.2		5/8/2015
10.3+		Executive Compensation Plan		S-1		333-202924		10.3		5/8/2015
10.4+		Executive Severance & Change in Control Agreement, dated October 1, 2014, by and between Ritter Pharmaceuticals, Inc. and Michael D. Step		S-1		333-202924		10.4		5/8/2015
10.5+		2008 Stock Plan		S-8		333-207709		99.1		10/30/15
10.6+		2009 Stock Plan		S-1		333-202924		10.6		3/23/2015

 

 

10.7+		2015 Equity Incentive Plan		S-8		333-207709		99.3		10/30/15
10.8+		Form of Notice of Grant of Stock Option under the 2015 Equity Incentive Plan		S-8		333-207709		99.4		10/30/15
10.9+		Stock Option Agreement, dated December 2, 2014, by and between Ritter Pharmaceuticals, Inc. and Michael D. Step		S-1		333-202924		10.8		5/8/2015
10.10+		Stock Option Agreement, dated December 2, 2014, by and between Ritter Pharmaceuticals, Inc. and Michael D. Step		S-1		333-202924		10.9		5/8/2015
10.11+		Stock Option Agreement, dated December 2, 2014, by and between Ritter Pharmaceuticals, Inc. and Michael D. Step		S-1		333-202924		10.10		5/8/2015
10.12+		Stock Option Agreement, dated September 25, 2013, by and between Ritter Pharmaceuticals, Inc. and Andrew J. Ritter		S-1		333-202924		10.11		5/8/2015
10.13+		Stock Option Agreement, dated December 2, 2014, by and between Ritter Pharmaceuticals, Inc. and Andrew J. Ritter		S-1		333-202924		10.12		5/8/2015
10.14+		Stock Option Agreement, dated December 2, 2014, by and between Ritter Pharmaceuticals, Inc. and Andrew J. Ritter		S-1		333-202924		10.13		5/8/2015

 

10.15+		Stock Option Agreement, dated September 25, 2013, by and between Ritter Pharmaceuticals, Inc. and Ira E. Ritter		S-1		333-202924		10.14		5/8/2015
10.16+		Stock Option Agreement, dated December 2, 2014, by and between Ritter Pharmaceuticals, Inc. and Ira E. Ritter		S-1		333-202924		10.15		5/8/2015
10.17+		Stock Option Agreement, dated December 2, 2014, by and between Ritter Pharmaceuticals, Inc. and Ira E. Ritter		S-1		333-202924		10.16		5/8/2015
10.18		Research and Development Agreement & License, dated November 30, 2010, by and among Kolu Pohaku Technologies, LLC, Kolu Pohaku Management, LLC and Ritter Pharmaceuticals, Inc.		S-1		333-202924		10.17		5/8/2015
10.19		Amendment No. 1 to Research and Development Agreement & License, dated July 6, 2011, by and among Kolu Pohaku Technologies, LLC, Kolu Pohaku Management, LLC and Ritter Pharmaceuticals, Inc.		S-1		333-202924		10.18		5/8/2015
10.20		Amendment No. 2 to Research and Development Agreement & License, dated September 30, 2011, by and among Kolu Pohaku Technologies, LLC, Kolu Pohaku Management, LLC and Ritter Pharmaceuticals, Inc.		S-1		333-202924		10.19		5/8/2015
10.21		Amendment No. 3 to Research and Development Agreement & License, dated February 6, 2012, by and among Kolu Pohaku Technologies, LLC, Kolu Pohaku Management, LLC and Ritter Pharmaceuticals, Inc.		S-1		333-202924		10.20		5/8/2015
10.22		Amendment No. 4 to Research and Development Agreement & License, dated November 4, 2013, by and among Kolu Pohaku Technologies, LLC, Kolu Pohaku Management, LLC and Ritter Pharmaceuticals, Inc.		S-1		333-202924		10.21		5/8/2015
10.23		Put and Call Option Agreement, dated November 30, 2010, by and between Kolu Pohaku Technologies, LLC and Ritter Pharmaceuticals, Inc.		S-1		333-202924		10.22		5/8/2015

 

 

10.24		Subordinated Convertible Promissory Note to SJ Investment Company, LLC, dated May 23, 2014, in the principal amount of $25,000.00		S-1		333-202924		10.23		5/8/2015
10.25		Subordinated Convertible Promissory Note to Javelin Venture Partners, L.P., dated May 23, 2014, in the principal amount of $350,000.00		S-1		333-202924		10.24		5/8/2015
10.26		Subordinated Convertible Promissory Note to Javelin Venture Partners, L.P., dated September 8, 2014, in the principal amount of $80,000.00		S-1		333-202924		10.25		5/8/2015
10.27		Unsecured Promissory Note to Javelin Venture Partners, L.P., dated October 9, 2014, in the principal amount of $70,000.00		S-1		333-202924		10.26		5/8/2015
10.28		Subordinated Convertible Promissory Note, dated October 20, 2014, in the principal amount of $80,000.00		S-1		333-202924		10.27		5/8/2015
10.29		Series C Preferred Stock and Warrant Purchase Agreement, dated December 4, 2014, by and among Ritter Pharmaceuticals, Inc. and the Investors named therein		S-1		333-202924		10.28		5/8/2015
10.30+		Form of Indemnification Agreement between Ritter Pharmaceuticals, Inc. and each of its directors and executive officers		S-1/A		333-202924		10.29		4/24/2015
10.31		Clinical Supply and Operation Agreement, dated December 16, 2009, by and among Ritter Pharmaceuticals, Inc. and Ricerche Sperimentali Montale SpA and Inalco SpA		S-1/A		333-202924		10.30		4/24/2015
10.32		Amendment 1 to the Clinical Supply and Cooperation Agreement, dated September 25, 2010, by and among Ritter Pharmaceuticals, Inc. and Ricerche Sperimentali Montale SpA and Inalco SpA		S-1/A		333-202924		10.31		4/24/2015
10.33+		Offer Letter, by and between Ritter Pharmaceuticals, Inc. and Andrew J. Ritter		10-Q		001-37428		10.1		8/12/2015
10.34+		Offer Letter, by and between Ritter Pharmaceuticals, Inc. and Ira E. Ritter		10-Q		001-37428		10.2		8/12/2015
10.35+		Executive Severance & Change in Control Agreement, by and between Ritter Pharmaceuticals, Inc. and Andrew J. Ritter		10-Q		001-37428		10.3		8/12/2015
10.36+		Executive Severance & Change in Control Agreement, by and between Ritter Pharmaceuticals, Inc. and Ira E. Ritter		10-Q		001-37428		10.4		8/12/2015
10.37		Lease Agreement, dated July 9, 2015, between the Company and Century Park		10-Q		001-37428		10.1		11/10/2015
10.38		Amendment No. 2 to Clinical Supply and Cooperation Agreement, effective July 24, 2015, between Ritter Pharmaceuticals, Inc., Ricerche Sperimentali Montale SpA, and Inalco SpA		10-Q		001-37428		10.2		11/10/2015

 

10.39+		Offer Letter, dated August 14, 2015, by and between Ritter Pharmaceuticals, Inc. and Ellen Mochizuki		10-Q		001-37428		10.3		11/10/2015
10.40+		Letter of Agreement, dated October 20, 2015 between Ritter Pharmaceuticals, Inc. and Chord Advisors, LLC		10-Q		001-37428		10.4		11/10/2015

 

 

10.41		Common Stock Purchase Agreement, dated December 18, 2015, by and between Ritter Pharmaceuticals, Inc. and Aspire Capital Fund, LLC		8-K		001-37428		10.1		12/21/2015
10.42		Master Services Agreement, effective December 29, 2015, by and between Covance Inc. and Ritter Pharmaceuticals, Inc.		S-1		333-208818		10.42		12/30/2015
10.43		Amendment to 2015 Equity Incentive Plan		8-K		001-37428		10.1		06/06/2016
23.1		Consent of Mayer Hoffman McCann P.C., independent registered public accounting firm
24.1*		Power of Attorney (included on signature page)
31.1*		Certificate of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certificate of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certificate of principal executive officer and principal financial officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS#		XBRL Instance Document.
101.SCH#		XBRL Taxonomy Extension Schema Document.
101.CAL#		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF#		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB#		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE#		XBRL Taxonomy Extension Presentation Linkbase Document.

 

* Filed herewith.

 

+ Indicates management contract or compensatory plan or arrangement.

 

# XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

 

INDEX TO FINANCIAL STATEMENTS

 

		Page
Report of Independent Registered Public Accounting Firm		F-1
Financial Statements:
Balance Sheets as of December 31, 2016 and 2015		F-2
Statements of Operations for the years ended December 31, 2016 and 2015		F-3
Statements of Changes in Securities Subject to Redemption and Stockholders’ Equity (Deficit) for the years ended December 31, 2016 and 2015		F-4
Statements of Cash Flows for the years ended December 31, 2016 and 2015		F-5
Notes to Financial Statements		F-6

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

 

RITTER PHARMACEUTICALS, INC.

 

We have audited the accompanying balance sheets of Ritter Pharmaceuticals, Inc. (the “Company”) as of December 31, 2016 and 2015, and the related statements of operations, statements of changes in securities subject to redemption and stockholders’ equity (deficit), and cash flows for each of the years in the two year period ended December 31, 2016, and the related notes to the financial statements. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ritter Pharmaceuticals, Inc. as of December 31, 2016 and 2015, and results of its operations and its cash flows for each of the years in the two year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred recurring operating losses and is dependent on additional financing to fund operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are described in Note 2 to the financial statements. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

/s/ Mayer Hoffman McCann P.C.
Orange County, California
February 27, 2017

 

 

RITTER PHARMACEUTICALS, INC.

BALANCE SHEETS

 

		December 31,
		2016				2015
ASSETS
Current assets
Cash and cash equivalents		$	7,046,282			$	15,819,566
Prepaid expenses			156,752				189,136
Total current assets			7,203,034				16,008,702
Other assets			10,326				10,326
Property and equipment, net			23,542				20,688
Total Assets		$	7,236,902			$	16,039,716
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Accounts payable		$	1,896,368			$	739,357
Accrued expenses			1,222,735				614,141
Other liabilities			14,736				1,223
Total current liabilities			3,133,839				1,354,721
Stockholders’ equity (deficit)
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding			—				—
Common stock, $0.001 par value; 25,000,000 shares authorized; 11,619,197 and 8,582,004 shares issued and outstanding as of December 31, 2016 and December 31, 2015, respectively			11,619				8,582
Additional paid-in capital			49,559,020				41,759,355
Accumulated deficit			(45,467,576	)			(27,082,942	)
Total stockholders’ equity (deficit)			4,103,063				14,684,995
Total Liabilities and Stockholders’ Equity (Deficit)		$	7,236,902			$	16,039,716

 

The accompanying notes are an integral part of these financial statements.

 

 

RITTER PHARMACEUTICALS, INC.

STATEMENTS OF OPERATIONS

 

		Years Ended December 31,
		2016				2015
Operating costs and expenses
Research and development		$	13,292,488			$	2,260,297
Patent costs			272,514				243,463
General and administrative			4,881,725				6,404,643
Total operating costs and expenses			18,446,727				8,908,403
Operating loss			(18,446,727	)			(8,908,403	)
Other income
Interest income			60,879				40,876
Other income			1,214				79,756
Other income			62,093				120,632
Net loss		$	(18,384,634	)		$	(8,787,771	)
Cumulative preferred stock dividends			—				(327,569	)
Accretion of discount of Series C preferred stock			—				(63,283	)
Net loss attributable to common stockholders		$	(18,384,634	)		$	(9,178,623	)
Net loss attributable to common stockholders per share, basic and diluted		$	(2.04	)		$	(3.11	)
Weighted average shares outstanding, basic and diluted			8,993,317				2,946,792

 

The accompanying notes are an integral part of these financial statements.

 

 

RITTER PHARMACEUTICALS, INC.

STATEMENTS OF CHANGES IN SECURITIES SUBJECT TO REDEMPTION AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

		Preferred								Stockholders’ Equity (Deficit)																								Total
		Stock Subject to Redemption								Preferred Stock								Common Stock								Additional Paid-in				Accumulated				Stockholders’ Equity
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				Deficit				(Deficit)
Balance at December 31, 2014			13,399,668			$	16,203,612				8,887,500			$	8,888				465,384			$	465			$	3,399,924			$	(17,904,319	)		$	(14,495,042	)
Exercise of prepaid forward sale of Series B preferred stock			1,469,994				—				—				—				—				—				—				—				—
Cumulative dividends on Series B preferred stock			—				327,569				—				—				—				—				—				(327,569	)			(327,569	)
Accretion of discount on Series C preferred stock			—				63,283				—				—				—				—				—				(63,283	)			(63,283	)
Conversion of all outstanding preferred stock to common stock			—				—				(8,887,500	)			(8,888	)			1,243,002				1,243				7,645				—				—
Conversion of all outstanding preferred stock subject to redemption to common stock			(14,869,662	)			(16,594,464	)			—				—				2,079,650				2,080				16,592,384				—				16,594,464
Common stock subject to repurchase			—				—				—				—				—				—				(180	)			—				(180	)
Issuance of common stock upon closing of initial public offering			—				—				—				—				4,000,000				4,000				19,996,000				—				20,000,000
Commissions and offering costs of initial public offering			—				—				—				—				—				—				(2,551,390	)			—				(2,551,390	)
Issuance of common stock under common stock purchase agreement			—				—				—				—				500,000				500				999,500				—				1,000,000
Issuance of common stock for commitment fee			—				—				—				—				188,864				189				(189	)			—				—
Issuance of common stock to supplier			—				—				—				—				100,000				100				415,900				—				416,000
Exercise of options on common stock			—				—				—				—				5,104				5				5,252				—				5,257
Stock-based compensation			—				—				—				—				—				—				2,894,509				—				2,894,509
Net loss			—				—				—				—				—				—				—				(8,787,771	)			(8,787,771	)
Balance at December 31, 2015			—				—				—				—				8,582,004				8,582				41,759,355				(27,082,942	)			14,684,995
Issuance of common stock upon closing of follow-on public offering			—				—				—				—				2,127,660				2,127				4,997,873				—				5,000,000
Commissions and offering costs of follow-on public offering			—				—				—				—				—				—				(598,118	)			—				(598,118	)
Issuance of common stock under common stock purchase agreement			—				—				—				—				888,835				889				2,025,173				—				2,026,062
Exercise of options on common stock			—				—				—				—				20,698				21				15,532				—				15,553
Stock-based compensation			—				—				—				—				—				—				1,359,205				—				1,359,205
Net loss			—				—				—				—				—				—				—				(18,384,634	)			(18,384,634	)
Balance at December 31, 2016			—			$	—				—			$	—				11,619,197			$	11,619			$	49,559,020			$	(45,467,576	)		$	4,103,063

 

The accompanying notes are an integral part of these financial statements.

 

 

RITTER PHARMACEUTICALS, INC.

STATEMENTS OF CASH FLOWS

 

		Years Ended December 31,
		2016				2015
Cash flows from operating activities
Net loss		$	(18,384,634	)		$	(8,787,771	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			5,209				1,939
Stock-based compensation			1,359,205				2,894,509
Gain on disposal of equipment			—				(456	)
Issuance of shares of common stock to supplier			—				416,000
Changes in operating assets and liabilities:
Prepaid expenses			32,384				(132,021	)
Accounts payable			1,157,011				(344,240	)
Accrued expenses			608,594				231,950
Other liabilities			13,513				(1,475	)
Net cash used in operating activities			(15,208,718	)			(5,721,565	)
Cash flows from investing activities
Purchases of property and equipment			(8,063	)			(16,999	)
Net cash used in investing activities			(8,063	)			(16,999	)
Cash flows from financing activities
Proceeds from issuance of shares upon closing of follow-on offering			5,000,000				—
Discounts and issuance costs of follow-on offering			(598,118	)			—
Proceeds from the issuance of shares from common stock purchase agreement			2,026,062				1,000,000
Proceeds from exercise of options on common stock			15,553				5,257
Proceeds from issuance of shares upon closing of initial public offering			—				20,000,000
Commissions and issuance costs of initial public offering			—				(2,194,375	)
Net cash provided by financing activities			6,443,497				18,810,882
Net (decrease) increase in cash and cash equivalents			(8,773,284	)			13,072,318
Cash and cash equivalents at beginning of year			15,819,566				2,747,248
Cash and cash equivalents at end of year		$	7,046,282			$	15,819,566
Supplemental disclosure of cash flow information
Cash paid for interest		$	—			$	—
Cash paid for taxes		$	80,702			$	—
Supplemental disclosure of noncash financing activities
Accrual of commissions and issuance costs of the initial public offering		$	—			$	213,561
Deferred offering costs reclassified to additional paid-in capital		$	—			$	665,603
Conversion of all outstanding preferred stock into common stock		$	—			$	8,888
Conversion of all outstanding preferred stock subject to redemption into common stock		$	—			$	16,594,464
Common stock subject to repurchase		$	—			$	180
Cumulative preferred stock dividends		$	—			$	327,569
Accretion of discount on Series C preferred stock		$	—			$	63,283
Common stock issued as commitment fee for stock purchase agreement		$	—			$	400,392

 

The accompanying notes are an integral part of these financial statements.

 

 

RITTER PHARMACEUTICALS, INC.

NOTES TO FINANCIAL STATEMENTS

 

NOTE 1 — ORGANIZATION AND PRINCIPAL ACTIVITIES

 

Ritter Pharmaceuticals, Inc. (“Ritter” or the “Company”) is a Delaware corporation headquartered in Los Angeles, California. The Company was formed as a Nevada limited liability company on March 29, 2004 under the name Ritter Natural Sciences, LLC, and converted into a Delaware corporation on September 16, 2008.

 

Ritter Pharmaceuticals, Inc. develops therapeutic products that modulate the human gut microbiome to treat gastrointestinal diseases. The Company conducts human gut health research by exploring metabolic capacity of the gut microbiota and translating the functionality of prebiotic-based therapeutics. The Company’s lead compound, RP-G28 is currently under development for the treatment of lactose intolerance. There currently is no drug approved by the Food and Drug Administration (“FDA”) for the treatment of lactose intolerance, a debilitating disease that affects over 1 billion people worldwide.

 

The Company currently operates in one business segment focusing on the development and commercialization of RP-G28. The Company is not organized by market and is managed and operated as one business. A single management team reports to the chief operating decision maker, the Chief Executive Officer. The Company does not currently operate any separate lines of business or separate business entities.

 

Initial Public Offering

 

On June 24, 2015, the Company’s registration statement on Form S-1 (File No. 333-202924) relating to its initial public offering of its common stock was declared effective by the Securities and Exchange Commission (“SEC”). The shares began trading on the NASDAQ Capital Market on June 24, 2015. The initial public offering closed on June 29, 2015, and 4,000,000 shares of common stock were sold at an initial public offering price of $5.00 per share.

 

The Company paid to the underwriters underwriting discounts and commissions of approximately $1.6 million in connection with the offering. In addition, the Company incurred expenses of approximately $1 million in connection with the offering. Thus, the net offering proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, were approximately $17.4 million.

 

Capitalization

 

In connection with the Company’s initial public offering in June 2015, the Company effected a 1–for-7.15 reverse split of its common stock. All references to shares of common stock outstanding, average number of shares outstanding and per share amounts in these financial statements and notes to financial statements have been adjusted to reflect the reverse split on a retroactive basis.

 

NOTE 2 — BASIS OF PRESENTATION

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 $18.4 million and $8.8 million for the years ended December 31, 2016 and 2015, respectively, and had net cash used in operating activities of approximately $15.2 million and $5.7 million, for the years ended December 31, 2016 and 2015, respectively. There is no assurance that profitable operations will ever be achieved, and, if achieved, could be sustained on a continuing basis. In addition, development activities, clinical and pre-clinical testing, and commercialization of the Company’s products will require significant financing. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

 

 

Since inception, the operations of the Company have been funded through the sale of common shares, preferred shares and convertible debt. Management cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business. If the Company is not able to raise additional capital when required or on acceptable terms, the Company may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of 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; (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 accordance 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 a financial institution and consists of immediately available fund balances. The funds were maintained at a stable financial institution, generally at amounts in excess of federally insured limits, which represents a concentration of credit risk. The Company has not experienced any losses on deposits of cash and cash equivalents to 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, 2016 or 2015.

 

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 Company follows authoritative accounting guidance, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

 

As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

 

	Level 1:	Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities;
	Level 2:	Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
	Level 3:	Unobservable inputs that reflect the reporting entity’s own assumptions.

 

As of December 31, 2016 and 2015, the carrying amounts of cash and cash equivalents, prepaid expenses, accounts payable and accrued expenses are generally considered to be representative of their fair value because of the short term nature of these instruments. No transfers between levels have occurred during the periods presented.

 

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

 

Basic net loss per share is calculated by dividing net loss by the weighted-average common shares outstanding during the period. Diluted net loss per share is 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 Equity Incentive Plan (described in Note 8) and warrants on the Company’s common stock (described in Note 7) are not considered in the computation of diluted net loss per share because they would be anti-dilutive.

 

All common share amounts and per share amounts have been adjusted to reflect a 1-for-7.15 reverse stock split of the Company’s common stock effected in June 2015.

 

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, 2016 and 2015, comprehensive loss was equal to the net loss.

 

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-02, Leases (Topic 842) (“ASU 2016-02”). The provisions of ASU 2016-02 set out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for under the existing guidance for operating leases today. Topic 842 supersedes the previous lease standard, Topic 840 Leases. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018, and is effective for the Company for the year ending December 31, 2019. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s financial statements.

 

On March 30, 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). Among other things, ASU 2016-09 requires that entities recognize excess tax benefits and deficiencies related to employee share-based payment transactions as income tax expense or benefit. ASU 2016-09 also eliminates the requirement to reclassify excess tax benefits and deficiencies from operating activities to financing activities in the statement of cash flows. The guidance is effective for the annual periods and interim periods within those annual periods beginning after December 15, 2016. The adoption of this standard did not have a material impact on the Company’s financial statements.

 

On August 26, 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). The new guidance amends Accounting Standards Codification No. 230 (“ASC 230”) to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASC 230 lacks consistent principles for evaluating the classification of cash payments and receipts in the statement of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore, the FASB issued the ASU 2016-15 with the intent of reducing diversity in practice with respect to eight types of cash flows. ASU 2016-15 is effective for annual and interim periods in fiscal years beginning after December 15, 2017, and is effective for the Company for the year ending December 31, 2018. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’s financial statements.

 

Other accounting standards updates effective after December 31, 2016 are not expected to have a material effect on the Company’s financial statements.

 

 

NOTE 4 — PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following:

 

		Useful Life (Years)				December 31, 2016				December 31, 2015
Furniture and fixtures			7			$	23,325			$	15,840
Computer equipment			5				10,274				9,696
							33,599				25,536
Less: Accumulated depreciation and amortization							(10,057	)			(4,848	)
Property and equipment, net						$	23,542			$	20,688

 

Depreciation expense of approximately $5,200 and $1,900 was recognized for the years ended December 31, 2016 and 2015, respectively, and is classified in general and administrative expense in the accompanying Statements of Operations.

 

NOTE 5 — COMMITMENTS AND CONTINGENCIES

 

Master Services Agreement

 

On December 30, 2015, the Company entered into a Master Service Agreement with an effective date of December 29, 2015. Pursuant to the terms of the Master Service Agreement, Covance, Inc., or one or more of its affiliates, (“Covance”) will provide Phase 1, 2, 3, and 4 clinical services for a clinical study or studies to the Company, and, at the request of the Company, assist with the design of such studies, in accordance with the terms of separate individual project agreements to be entered into by the parties. The term of the agreement is for three years and will renew automatically for successive one year periods unless Covance is no longer providing services under the agreement or either party has terminated the agreement upon written notice. The Company may terminate the Master Service Agreement or any individual project agreement entered into under the Master Service Agreement prior to the applicable study’s completion at any time for any reason upon 30 days written notice to Covance, except when the reason for termination is the safety of subjects, in which case it may be terminated immediately. Covance may not terminate any individual project agreement without cause, except when the reason for the termination is the safety of subjects, in which case it may be terminated immediately. In the event of a termination of the Master Service Agreement, Covance will be entitled to full payment for (i) work performed on the applicable project upon through the date work on such project is concluded and (ii) reimbursement for all non-cancellable and non-refundable expenses and financial obligations which Covance (or an affiliate) has incurred or undertaken on our behalf.

 

Clinical Supply and Cooperation Agreement with Ricerche Sperimentali Montale (“Ricerche”) and Inalco SpA (“Inalco”)

 

Effective July 24, 2015, the Company entered into an amended Clinical Supply and Cooperation Agreement (the “Amended Supply Agreement”) with Ricerche and Inalco (collectively, “RSM”). The Amended Supply Agreement amends certain terms of the Clinical Supply and Cooperation Agreement, dated December 16, 2009, amended on September 25, 2010 (the “Existing Supply Agreement”).

 

Pursuant to the terms of the Amended Supply Agreement, the Company purchased the exclusive worldwide assignment of all right, title and interest to a purified GOS product (“Improved GOS”), the composition of matter of the Improved GOS and any information relating to the Improved GOS, including certain specified technical information and other intellectual property rights (the “Improved GOS IP”) on July 30, 2015 for $800,000. The Company also issued 100,000 shares of its common stock to RSM pursuant to a stock purchase agreement. The shares issued to RSM are subject to a lock-up agreement, pursuant to which RSM has agreed that it will not sell these shares for a period ending of the earlier of (i) the public release by the Company of the final results of its Phase 2b/3 clinical trial of RP-G28 and (ii) the filing of a Form 10-Q with the SEC for the fiscal quarter in which the Company receives the results of its Phase 2b/3 clinical trial of RP-G28.

 

Under the terms of the Amended Supply Agreement, if the Company fails to make any future option payment to RSM as required under the terms of the Amended Supply Agreement, the Company may be required to return the Improved GOS IP to RSM. The Amended Supply Agreement also provides that the Company must pay RSM $400,000 within 10 days following FDA approval of a new drug application for the first product owned or controlled by us using Improved GOS as its active pharmaceutical ingredient and to pay RSM the sum of $250 per kilo for clinical supply of Improved GOS.

 

 

Lease Agreement

 

The Company leases office space for its headquarters in California. Until September 30, 2015, the Company leased office and storage space pursuant to a two-year agreement which called for a minimum monthly rent of approximately $5,000 and an annual increase of 3%.

 

On July 9, 2015, the Company entered into a lease with Century Park, a California limited partnership, pursuant to which the Company leases 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 over the term of the lease, was approximately $115,000 and $74,000 for the years ended December 31, 2016 and 2015, respectively, and is recorded in general and administrative expenses in the accompanying statements of operations.

 

The following table summarized our lease obligations at December 31, 2016:

 

			LEASE COMMITMENTS
Years ended December 31,			Operating Lease
2017			$	113,958
2018				117,376
2019				120,898
2020				103,254
Total minimum lease payments			$	455,486

 

Legal

 

The Company is not currently involved in any legal matters arising in the normal course of business. From time to time, the Company could become involved in disputes and various litigation matters that arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters. Periodically, the Company reviews the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation.

 

NOTE 6 — STOCKHOLDERS’ EQUITY (DEFICIT)

 

Authorized Shares

 

On June 29, 2015, the Company amended and restated its Certificate of Incorporation (“the Amended Certificate”) authorizing the issuance of 25,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. Each share of the Company’s common stock is entitled to one vote, and all shares rank equally as to voting and other matters. Preferred stock has the rights, preferences and privileges that the Company’s Board of Directors may determine from time to time.

 

 

Initial Public Offering

 

On June 24, 2015, the Company’s registration statement on Form S-1 (File No. 333-202924) relating to its initial public offering of its common stock was declared effective by the SEC. The shares began trading on the NASDAQ Capital Market on June 24, 2015. On June 29, 2015, the Company closed its initial public offering, selling 4,000,000 shares of the Company’s common stock at an initial public offering price of $5.00 per share, for aggregate gross proceeds to the Company of $20 million. The Company paid to the underwriters underwriting discounts and commissions of approximately $1.6 million in connection with the offering, and approximately $1 million of other expenses in connection with the offering. The underwriters paid an aggregate purchase price of $100 for warrants to purchase 160,000 shares of the Company’s common stock, representing 4.0% of the initial public offering shares, at an exercise price of $6.25 per share, which equaled 125.0% of the initial public offering price. The warrants were exercisable on June 29, 2016 and expire on June 29, 2020. Effective prior to the closing of the initial public offering, the Company converted all of its outstanding shares of Series A-1, Series A-2, Series A-3, Series B, and Series C preferred into an aggregate of 3,322,652 shares of the Company’s common stock.

 

Common Stock Purchase Agreement

 

On December 18, 2015, the Company entered into a common stock purchase agreement (the “Aspire Purchase Agreement”), with Aspire Capital Fund, LLC, an Illinois limited liability company, (“Aspire Capital”), which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of the Company’s shares of common stock over the approximate 30-month term of the Aspire Purchase Agreement. In consideration for entering into the Aspire Purchase Agreement, concurrently with the execution of the Aspire Purchase Agreement, the Company issued to Aspire Capital 188,864 shares of the Company’s common stock as a commitment fee (the “Commitment Shares”). The fair value of the Commitment Shares were capitalized and recorded as a reduction of additional paid-in capital. Upon execution of the Aspire Purchase Agreement, the Company agreed to sell to Aspire Capital 500,000 shares of common stock at $2.00 per share for proceeds of $1.0 million. The Company sold an additional 888,835 shares of common stock to Aspire Capital pursuant to the terms of the Aspire Purchase Agreement on December 8, 2016 at $2.28 per share for approximate proceeds of $2.0 million. As of December 31, 2016, the Company issued an aggregate of 1,577,699 shares of its common stock to Aspire Capital under the Aspire Purchase Agreement for approximate proceeds of $3.0 million.

 

Any trading day on which the closing sale price of the Company’s common stock exceeds $0.50, the Company has the right, in its sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital (as principal) to purchase up to 100,000 shares of the Company’s common stock per trading day, for up to $7.0 million of the Company’s common stock in the aggregate at a per share price, calculated by reference to the prevailing market price of the Company’s common stock (as provided in the Aspire Purchase Agreement).

 

Concurrently with entering into the Aspire Purchase Agreement, the Company also entered into a registration rights agreement with Aspire Capital, as amended (the “Registration Agreement”), in which the Company agreed to file one or more registration statements, as permissible and necessary to register under the Securities Act of 1933, as amended (the “Securities Act”), the sale of the shares of its common stock that have been and may be issued to Aspire Capital under the Aspire Purchase Agreement. On December 31, 2015, the Company filed a registration statement on Form S-1 (File No. 333-208818) pursuant to the terms of the Registration Agreement, which registration statement was declared effective on February 11, 2016. The Company filed a second registration statement on Form S-1 (File No. 333-215143), which registration statement was declared effective on February 13, 2017.

 

October 2016 Public Offering

 

On October 31, 2016, the Company closed a public offering, selling 2,127,660 shares of the Company’s common stock at a price to the public of $2.35 per share, for aggregate gross proceeds to the Company of approximately $5.0 million. The Company paid to the underwriters underwriting discounts and commissions of approximately $0.4 million in connection with the offering, and approximately $0.2 million of other expenses in connection with the offering.

 

This offering was made pursuant to a shelf registration statement on Form S-3 (File No. 333-213087), which was declared effective by the SEC on August 23, 2016. The shelf registration statement allows the Company to issue, from time to time at prices and on terms to be determined at or prior to the time of an offering, up to $150,000,000 of any combination of an indeterminate number of shares of common stock, an indeterminate number of shares of preferred stock, an indeterminate principal amount of debt securities, an indeterminate number of warrants, rights and purchase contracts to purchase common stock or debt securities, and an indeterminate number of units. If any debt securities are issued at an original issue discount, then the offering price of such debt securities shall be in such greater principal amount as shall result in an aggregate offering price not to exceed $150,000,000, less the aggregate dollar amount of all securities previously issued hereunder. The securities registered also include such indeterminate number of shares of common stock and preferred stock that may be issued upon conversion or exchange of convertible or exchangeable securities being registered or pursuant to the anti-dilution provisions of any such securities.

 

 

NOTE 7 — WARRANTS

 

Warrants to purchase an aggregate of 578,323 shares of the Company’s common stock were outstanding at December 31, 2016. These warrants are all vested and exercisable, have exercise prices ranging from $6.25 to $9.30 per share, with a weighted average exercise price of $8.45, and expire at various dates through December 2021.

 

NOTE 8 — STOCK BASED COMPENSATION

 

Equity Incentive Plans

 

The Company issued equity awards under the terms of its 2015 Equity Incentive 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. As of December 31, 2016, the aggregate number of shares of common stock available for issuance under the 2015 Equity Incentive Plan is 88,360. However, to the extent awards under the 2008 Plan or 2009 Plan are forfeited or lapse unexercised or are settled in cash, the common stock subject to such awards will be available for future issuance under the 2015 Equity Incentive Plan.

 

The following table summarizes stock option activity under the equity incentive plans for the year ended December 31, 2016:

 

		Number of Shares				Weighted- Average Exercise Price				Aggregate Intrinsic Value				Weighted- Average Remaining Contractual Life (in years)
Outstanding at December 31, 2015			1,938,534			$	7.08			$	65,601				8.7
Options granted			574,088			$	2.08
Options forfeited			(15,000	)		$	1.39
Options exercised			(20,698	)		$	0.75
Outstanding at December 31, 2016			2,476,924			$	6.01			$	497,351				8.3
Exercisable at December 31, 2016			1,528,536

 

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 shall vest as determined by the Board of Directors but shall not exceed a ten-year period.

 

Fair Value of Equity Awards

 

The Company utilizes the Black-Scholes option pricing model to value awards under its Plans. Key valuation assumptions include:

 

	●	Expected dividend yield. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on the Company’s common stock.
	●	Expected stock-price volatility. As the Company’s common stock only recently became publicly traded, the expected volatility is derived from the average historical volatilities of publicly traded companies within the Company’s industry that the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term.
	●	Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term.

 

 

●

Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, the Company estimates the expected term by using the simplified method provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options.

 

The Company elected to adopt the amendments of ASU 2016-09 (described in Note 3) related to the presentation of excess tax benefits on the statement of cash flows using a prospective transition method but does not expect any impact on its financial statements.

 

The material factors incorporated in the Black-Scholes model in estimating the fair value of the options granted for the periods presented were as follows:

 

		Years ended December 31,
		2016				2015
Expected dividend yield			0.00	%			0.00	%
Expected stock-price volatility			53.60% - 59.03	%			51.45% - 67.08	%
Risk-free interest rate			1.29% - 2.60	%			0.77% - 2.27	%
Term of options			10				10
Stock price			$1.13 - $2.91				$1.70 - $5.86

 

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 $1.4 million and $2.9 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, there was approximately $1.1 million of total unrecognized compensation cost related to un-vested stock-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 1.4 years.

 

The aggregate intrinsic value of stock options exercised during the years ended December 31, 2016 and 2015 was approximately $56,000 and $9,000, respectively. The cash received from exercised options was approximately $16,000 and $5,000 for the years ended December 31, 2016 and 2015, respectively.

 

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 significant 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, 2016, the Company has net operating loss carryforwards of approximately $32.3 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, 2016, the Company has Federal and state research and development credit carryforwards of approximately $1.2 million and $734,000, 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, 2016. 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,
			2016				2015
Statutory U.S. federal rate			34.0	%			34.0	%
State income tax, net of federal benefit			5.8	%			5.8	%
Meals & entertainment			(0.1	)%			(0.1	)%
Valuation allowance			(39.7	)%			(39.7	)%
Provision for income taxes			0.0	%			0.0	%

 

The tax effects of the temporary differences and carryforwards that give rise to deferred tax assets consist of the following:

 

		As of December 31,
		2016				2015
Deferred tax assets:
Net operating loss carryforwards		$	12,862,811			$	6,192,058
Patent costs			363,775				410,913
Capitalized interest			—				85,568
Accrued vacation			31,583				27,852
Research and development credit			1,951,539				345,721
Stock-based compensation			2,095,076				1,480,266
Other			7,535				5,195
Gross deferred tax assets			17,312,319				8,547,573
Valuation allowance			(17,312,319	)			(8,547,573	)
Net deferred tax assets		$	—			$	—

 

The Company did not record any accruals for income tax accounting uncertainties for the years ended December 31, 2016 and 2015.

 

Authoritative guidance requires companies to accrue interest and related penalties, if applicable, on all tax positions for whichsss 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, 2016.

 

The Company does not have any unrecognized tax benefits that will significantly decrease or increase within 12 months of December 31, 2016.

 

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.