UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the Quarterly Period Ended September 30, 2017quarterly period ended March 31, 2021

 

OROr

 

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

 

For the Transition Periodtransition period from _____________ to _____________

 

Commission File Number: 001-37428

RITTER PHARMACEUTICALS, INC.Qualigen Therapeutics, Inc.

(Exact name of Registrantregistrant as specified in its Charter)charter)

 

Delaware 001-3742826-3474527

(State or other jurisdiction of

incorporation or organization)of incorporation)

(Commission

File Number)

 

(I.R.S. Employer

Identification Number)No.)

 

1880 Century Park East, Suite 1000

Los Angeles, CA 900672042 Corte Del Nogal, Carlsbad, California 92011

(Address and zip code of principal executive offices) (Zip Code)

 

(760) 918-9165

(Registrant’s Telephone Number, Including Area Code:(310) 203-1000telephone number, including area code)

n/a

(Former name or former address, if changed since last report)

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

Title of each classTrading SymbolName of each exchange on which registered

Common Stock, par value $.001 per

share

QLGN

The Nasdaq Capital Market of The Nasdaq

Stock Market LLC

 

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] NoYes [  ] 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] NoYes [  ] No

 

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

 

Large Accelerated Fileraccelerated filer[  ]Accelerated Filerfiler[  ]
Non-Accelerated Filer[  ]Smaller Reporting CompanyNon-accelerated filer[X]
(Do not check if a smallerSmaller reporting company)company[X]
  Emerging Growth Companygrowth company[X]  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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

 

As of October 27, 2017,May 7, 2021, there were 49,506,52128,833,059 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

 

 

 

 

 

TABLE OF CONTENTS

 

  Page
PART I.Financial Information1
   
Item 1.Condensed Consolidated Financial Statements (Unaudited)1
 Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited)March 31, 2021 and December 31, 201620201
 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017March 31, 2021 and 2016 (unaudited)20202
 Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2021 and 20203
Condensed Consolidated Statements of Cash Flows for the NineThree Months Ended September 30, 2017March 31, 2021 and 2016 (unaudited)202034
 Notes to Unaudited Condensed Consolidated Financial Statements45
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1324
Item 3.Quantitative and Qualitative Disclosures About Market Risk2531
Item 4.Controls and Procedures2531
   
PART II.Other InformationOther Information2632
   
Item 1.Legal Proceedings2632
Item 1A.Risk Factors2632
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2632
Item 3.Defaults Upon Senior Securities33
Item 4.Mine Safety Disclosures33
Item 5.Other Information33
Item 6.Exhibits2733

 

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

RITTER PHARMACEUTICALS,QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

  September 30, 2017  December 31, 2016 
  (unaudited)    
ASSETS        
Current assets        
Cash and cash equivalents $3,558,874  $7,046,282 
Prepaid expenses  260,597   156,752 
Total current assets  3,819,471   7,203,034 
         
Other assets  10,326   10,326 
Deferred offering costs  310,786    
Property and equipment, net  19,606   23,542 
Total Assets $4,160,189  $7,236,902 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities        
Accounts payable $2,745,370  $1,896,368 
Accrued expenses  196,578   1,222,735 
Other liabilities  15,927   14,736 
Total current liabilities  2,957,875   3,133,839 
         
Stockholders’ equity        
Preferred stock, $0.001 par value; 15,000,000 shares authorized; 0 shares issued and outstanding as of September 30, 2017 and December 31, 2016      
Common stock, $0.001 par value; 225,000,000 shares authorized; 14,756,521 and 11,619,197 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively  14,757   11,619 
Additional paid-in capital  52,302,244   49,559,020 
Accumulated deficit  (51,114,687)  (45,467,576)
Total stockholders’ equity  1,202,314   4,103,063 
         
Total Liabilities and Stockholders’ Equity $4,160,189  $7,236,902 

  March 31, 2021  December 31, 2020 
ASSETS        
Current assets        
Cash and cash equivalents $21,947,912  $23,976,570 
Accounts receivable, net  862,235   615,757 
Inventory, net  885,855   953,458 
Prepaid expenses and other current assets  1,219,759   2,678,894 
Total current assets  24,915,761   28,224,679 
Right-of-use assets  376,616   430,795 
Property and equipment, net  224,932   247,323 
Equipment held for lease, net  10,687   17,947 
Intangible assets, net  189,294   187,694 
Other assets  18,334   18,334 
Total Assets $25,735,624  $29,126,772 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities        
Accounts payable $485,551  $500,768 
Accrued expenses and other current liabilities  1,869,424   746,738 
Notes payable, current portion  10,683   131,766 
Deferred revenue, current portion  381,366   486,031 
Lease liability, current portion  262,601   254,739 
Warrant liabilities  6,187,200   8,310,100 
Total current liabilities  9,196,825   10,430,142 
Notes payable, net of current portion  4,923   6,973 
Lease liability, net of current portion  168,254   236,826 
Deferred revenue, net of current portion  135,235   158,271 
Total liabilities  9,505,237   10,832,212 
         
Stockholders’ equity        
Series Alpha convertible preferred stock, $0.001 par value; 7,000 shares authorized; 180 shares issued and outstanding as of March 31, 2021 and December 31, 2020  1   1 
Common stock, $0.001 par value; 225,000,000 shares authorized; 28,833,059 shares and 27,296,061 shares issued and outstanding as of March 31, 2021 and December 31, 2020  28,833   27,296 
Additional paid-in capital  86,721,672   85,114,755 
Accumulated deficit  (70,520,119)  (66,847,492)
Total stockholders’ equity  16,230,387   18,294,560 
Total Liabilities and Stockholders’ Equity $25,735,624  $29,126,772 

 

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

 

1

 

RITTER PHARMACEUTICALS,QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
Operating costs and expenses:                
Research and development $915,268  $2,348,755  $2,121,898  $7,112,177 
Patent costs  47,431   98,908   175,794   199,888 
General and administrative  1,052,236   1,091,647   3,367,781   3,533,608 
Total operating costs and expenses  2,014,935   3,539,310   5,665,473   10,845,673 
Operating loss  (2,014,935)  (3,539,310)  (5,665,473)  (10,845,673)
                 
Other income:                
Interest income  4,083   13,239   18,362   50,466 
Other income           1,214 
Total other income  4,083   13,239   18,362   51,680 
Net loss $(2,010,852) $(3,526,071) $(5,647,111) $(10,793,993)
                 
Net loss per common share ― basic and diluted $(0.14) $(0.41) $(0.42) $(1.26)
                 
Weighted-average common shares outstanding — basic and diluted  14,756,521   8,585,406   13,443,007   8,584,442 
  For the Three Months Ended
March 31,
 
  2021  2020 
REVENUES        
Net product sales $1,420,842  $1,411,755 
License revenue  

478,654

   

 
Collaborative research revenue  

   45,000 
Total revenues  1,899,496   1,456,755 
         
EXPENSES        
Cost of product sales  1,202,479   991,651 
General and administrative  2,873,939   918,379 
Research and development  3,499,373   238,059 
Sales and marketing  136,587   92,262 
Total expenses  7,712,378   2,240,351 
         
LOSS FROM OPERATIONS  (5,812,882)  (783,596)
         
OTHER (INCOME) EXPENSE, NET        
Gain on change in fair value of warrant liabilities  (2,122,900)   
Interest (income) expense, net  (17,343)  90,757 
Other income, net  (542)  (1,158)
Total other (income) expense, net  (2,140,785)  89,599 
         
LOSS BEFORE PROVISION FOR INCOME TAXES  (3,672,097)  (873,195)
         
PROVISION FOR INCOME TAXES  530   (619)
         
NET LOSS  (3,672,627)  (872,576)
         
Net loss per common share, basic and diluted $(0.13) $(0.16)
Weighted—average number of shares outstanding, basic and diluted  28,165,796   5,602,214 

 

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

 

2

 

RITTER PHARMACEUTICALS,QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

  For the Nine Months Ended
September 30,
 
  2017  2016 
Cash flows from operating activities        
Net loss $(5,647,111) $(10,793,993)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation  3,936   3,894 
Stock-based compensation  746,362   1,041,656 
Changes in operating assets and liabilities:        
Prepaid expenses  (103,845)  (57,092)
Accounts payable  849,002   2,131,022 
Accrued expenses  (1,026,157)  293,793 
Other liabilities  1,191   12,841 
Net cash used in operating activities  (5,176,622)  (7,367,879)
         
Cash flows from investing activities        
Purchases of property and equipment     (8,063)
Net cash used in investing activities     (8,063)
         
Cash flows from financing activities        
Proceeds from the issuance of shares from common stock purchase agreement  2,000,000    
Proceeds from exercise of options on common stock     8,504 
Deferred offering costs  (310,786)   
Net cash provided by financing activities  1,689,214   8,504 
         
Net decrease in cash and cash equivalents  (3,487,408)  (7,367,438)
         
Cash and cash equivalents at beginning of period  7,046,282   15,819,566 
Cash and cash equivalents at end of period $3,558,874  $8,452,128 
         
Supplemental disclosure of cash flow information        
Cash paid for taxes $800  $72,112 
         
Non-cash financing activities        
Shares issued as a commitment fee $93,380    
  Series Alpha Convertible                
  Preferred Stock  Common Stock  Additional       
  Shares  Amount
$
  Shares  Amount
$
  Paid-In Capital  Accumulated Deficit  Total 
Balance at December 31, 2020  180  $1��  27,296,061  $27,296  $85,114,755  $(66,847,492) $(18,294,560)
Stock issued upon cash-exercise of warrants        1,319,625   1,320   243,261      244,581 
Stock issued upon net-exercise of warrants        192,373   192   (192)      
Stock issued for professional services        25,000   25   101,725      101,750 
Stock-based compensation              1,262,123      1,262,123 
Net Loss                 (3,672,627)  (3,672,627)
Balance at March 31, 2021  180  $1   28,833,059  $28,833  $86,721,672  $(70,520,119) $16,230,387 

  Series A Convertible  Series B Convertible  Series C Convertible  Series D Convertible  Series D-1 Convertible  Series Alpha Convertible                
  Preferred Stock  Preferred Stock  Preferred Stock  Preferred Stock  Preferred Stock  Preferred Stock  Common Stock  Additional       
  Shares  Amount $  Shares  Amount $  Shares  Amount $  Shares  Amount $  Shares  Amount $  Shares  Amount $  Shares  Amount $  Paid-In Capital  Accumulated Deficit  Total 
Balance at December 31, 2019  2,412,887  $24,129   7,707,736  $77,077   3,300,715  $33,007   1,508,305  $15,083   643,511  $6,435     $   5,602,214  $56,026  $45,153,733  $(46,428,550) $(1,063,060)
Stock-based compensation                                            7,866      7,866 
Net Loss                                               (872,576)  (872,576)
Balance at March 31, 2020  2,412,887  $24,129   7,707,736  $77,077   3,300,715  $33,007   1,508,305  $15,083   643,511  $6,435     $   5,602,214  $56,026  $45,161,599  $(47,301,126) $(1,927,770)

 

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

 

3

 

RITTER PHARMACEUTICALS,QUALIGEN THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

  For the Three Months Ended
March 31,
 
  2021  2020 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(3,672,627) $(872,576)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:        
Depreciation and amortization  27,453   50,269 
Amortization of right-of-use assets  54,179    
Accounts receivable reserves and allowances  8,490   7,329 
Inventory reserves  29,615   25,960 
Common stock issued for professional services  

101,750

   

 
Stock-based compensation  1,262,123   7,866 
Gain on change in fair value of warrant liabilities  (2,122,900)   
Changes in operating assets and liabilities:        
Accounts receivable  (254,968)  441,369
Inventory and equipment held for lease  107,588   (28,430)
Prepaid expenses and other assets  1,459,135   4,136 
Accounts payable  (15,217)  175,922 
Accrued expenses and other current liabilities  1,122,686   618,597 
Lease liability  (60,710)   
Deferred revenue  (127,701)  (22,728)
Net cash (used in) provided by operating activities  (2,081,104)  407,714 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchases of property and equipment  (62,265)  (1,729)
Payments for patents and licenses  (6,737)  (93,732)
Net cash used in investing activities  (69,002)  (95,461)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Net proceeds from the issuance of notes payable     290,198 
Proceeds from warrant exercises  244,581    
Principal payments on notes payable  (123,133)  (578,026)
Net cash provided by (used in) financing activities  121,448   (287,828)
         
Net change in cash and cash equivalents  (2,028,658)  24,425 
         
CASH AND CASH EQUIVALENTS – beginning of period  23,976,570   128,696 
CASH AND CASH EQUIVALENTS – end of period $21,947,912  $153,121 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid for:        
Interest $831  $19,473 
Taxes $100  $500 
NONCASH FINANCING AND INVESTING ACTIVITIES:        
Net transfers to inventory from equipment held for lease $  $5,439 

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

4

QUALIGEN THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 — ORGANIZATION AND PRINCIPAL ACTIVITIESSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

 

Organization

Qualigen, Inc., now a subsidiary of Qualigen Therapeutics, Inc., was incorporated in Minnesota in 1996 to design, develop, manufacture and sell point-of-care quantitative immunoassay diagnostic products for use in physician offices and other point-of-care settings worldwide, and was reincorporated in Delaware in 1999. Qualigen Therapeutics, Inc. (the “Company”) operates in one business segment. In May 2020, Qualigen, Inc. completed a reverse recapitalization transaction with Ritter Pharmaceuticals, Inc. (“Ritter” or the “Company”) is a Delaware corporation headquartered in Los Angeles, California. The Companyand Ritter was formedrenamed Qualigen Therapeutics, Inc., recognized as a Nevada limited liability companyreverse recapitalization. All shares of Qualigen, Inc.’s capital stock were exchanged for Qualigen Therapeutics, Inc.’s capital stock in the merger. Ritter/Qualigen Therapeutics common stock, which was previously traded on March 29, 2004the Nasdaq Capital Market under the name Ritter Natural Sciences, LLC, and converted intoticker symbol “RTTR,” commenced trading on the Nasdaq Capital Market, on a Delaware corporationpost-reverse-stock-split adjusted basis, under the trading symbol “QLGN” on September 16, 2008.May 26, 2020.

 

Ritter develops therapeutic products that modulateQualigen, Inc. was determined to be the human gut microbiome to treat gastrointestinal diseases. The Company conducts human gut health research by exploring metabolic capacityaccounting acquirer in a reverse recapitalization based upon the terms of the gut microbiotamerger and translatingother factors. All references to financial figures of the functionalityCompany presented in the accompanying condensed consolidated financial statements and in these Notes through May 22, 2020 are to those of prebiotic-based therapeutics. The Company’s lead compound, RP-G28, is currently under development for the treatmentQualigen, Inc. All references to financial figures after May 22, 2020 are to those of lactose intolerance. There currently is no drug approved by the FoodQualigen Therapeutics, Inc. and Drug Administration (“FDA”) for the treatment of lactose intolerance, a debilitating disease that affects over one 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.Qualigen, Inc.

 

NOTE 2 — BASIS OF PRESENTATIONBasis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicablethe rules and regulations of the SEC regardingSecurities and Exchange Commission (“SEC”) applicable to interim financial reporting. Accordingly, they do not include allreports of the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments consisting of normal recurring adjustments considered necessary forcompanies filing as a fair presentation of the financial position and results of operations have been included and management believes the disclosures that are made are adequate to make the information presented not misleading.

The condensed balance sheet at December 31, 2016 has been derived from the auditedsmaller reporting company. These financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the SEC on February 27, 2017 (the “2016 Annual Report”), but does not include all of the information and footnotes required by GAAP for complete financial statements.

The results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results expected for the full fiscal year or any other period. The accompanying interim period unaudited condensed financial statements and related financial information included in this Quarterly Report on Form 10-Q (“Quarterly Report”) should be read in conjunction with the audited financial statements and notes thereto includedcontained in the Company’s 2016 Annual Report.Transition Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on March 31, 2021. In the opinion of management, the accompanying condensed consolidated interim financial statements include all adjustments necessary in order to make the financial statements not misleading. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year or any other future period. Certain notes to the financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year as reported in the Company’s Transition Report on Form 10-K have been omitted. The accompanying condensed consolidated balance sheet at March 31, 2021 has been derived from the audited balance sheet at December 31, 2020 contained in such Form 10-K.

 

Going Concern and LiquidityPrinciples of Consolidation

 

The accompanyingCompany’s unaudited interim condensed consolidated financial statements have been prepared assuminginclude the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company has not generated any product revenue and has not achieved profitable operations. For the nine months ended September 30, 2017, the Company had a net loss of approximately $5.6 million and had net cash used in operating activities of approximately $5.2 million. At September 30, 2017, the Company had working capital of approximately $0.9 million, an accumulated deficit of approximately $51.1 million, and cash and cash equivalents of approximately $3.6 million. There is no assurance that profitable operations will ever be achieved, and, if achieved, could be sustained on a continuing basis. In addition, development activities, clinical and pre-clinical testing, and commercialization of the Company’s products will require significant financing. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

RITTER PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

Since inception, the operationsaccounts of the Company and its wholly owned subsidiary. All intercompany balances and transactions have been funded through the saleeliminated in consolidation. Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP. The Company views its operations and manages its business in one operating segment. All long-lived assets 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 RP-G28; (ii) seek collaborators at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; and/or (iii) relinquish or otherwise dispose of its rights to RP-G28.

The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no material changesreside in the Company’s significant accounting policies as of and for the nine months ended September 30, 2017, as compared with the significant accounting policies described in the Company’s 2016 Annual Report.US.

 

Use ofAccounting Estimates

The preparation ofManagement uses estimates and assumptions in preparing its condensed consolidated financial statements in conformityaccordance with GAAP requires management to makeU.S. GAAP. Those estimates and assumptions that affect the reported amounts of assets and liabilities, andthe disclosure of contingent assets and liabilities, as of the date of the financial statements and the reported amounts of revenues and expenses duringexpenses. The most significant estimates relate to the reporting period.estimated fair value of warrant liabilities, stock-based compensation, write-off of patents and licenses, amortization and depreciation, inventory reserves, allowances for doubtful accounts and returns, and warranty costs. Actual results could differvary from those estimates.the estimates that were used.

 

Cash and Cash Equivalents

 

Cash consistsThe Company considers all highly liquid investments purchased with an initial maturity of amounts held in a financial institution90 days or less and consists of immediately available fund balances. money market funds to be cash equivalents.

The funds are maintained at a stable financial institution, generally at amounts in excess of federally insured limits. As of September 30, 2017 and December 31, 2016, approximately $3.6 million and approximately $6.8 million, respectively, inCompany maintains its cash and cash equivalents were uninsured.in bank deposits which at times may exceed federally insured limits. The Company has not experienced any losslosses in such accounts and believes it is not exposed to any significant credit risks on deposits of cash and cash equivalents to date.equivalents.

5

 

Clinical TrialInventory, Net

Inventory is recorded at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method. The Company reviews the components of its inventory on a periodic basis for excess or obsolete inventory, and Pre-Clinical Study Accrualsrecords specific reserves for identified items.

Long-Lived Assets

 

The Company makes estimates of accrued expenses as of each balance sheet date inassesses potential impairments to its financial statements based on the facts and circumstances known to it atlong-lived assets when there is evidence 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 underestimatesevents 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 estimatescircumstances indicate that assets may result in a material change innot be recoverable. An impairment loss would be recognized when the Company’s accruals.

RITTER PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTSsum of the expected future undiscounted cash flows is less than the carrying amount of the assets. The amount of impairment loss, if any, will generally be measured as the difference between the net book value of the assets and their estimated fair values. During the three months ended March 31, 2021 and 2020, no such impairment losses have been recorded.

 

RecentAccounts Receivable, Net

The Company grants credit to domestic physicians, clinics, and distributors. The Company performs ongoing credit evaluations of its customers and generally requires no collateral. Customers can purchase certain products through a financing agreement that the Company has with an outside leasing company. Under the agreement, the leasing company evaluates the credit worthiness of the customer. Upon acceptance of the product by the customer, the leasing company remits payment to the Company at a discount. This financing arrangement is without recourse to the Company.

The Company provides an allowance for doubtful accounts and returns equal to the estimated uncollectible amounts or expected returns. The Company’s estimates are based on historical collections and returns and a review of the current status of trade accounts receivable.

Accounts receivable is comprised of the following at:

  March 31, 2021  December 31, 2020 
Accounts Receivable $867,617  $629,630 
Less Allowance  (5,382)  (13,873)
  $862,235  $615,757 

Research and Development

The Company expenses research and development costs as incurred.

Shipping and Handling Costs

The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with inbound and outbound freight are generally recorded in cost of sales which totaled approximately $30,000 and $31,000, respectively, for the three months ended March 31, 2021 and 2020. Other shipping and handling costs included in general and administrative, research and development, and sales and marketing expenses totaled approximately $1,000 and $2,000 for the three months ended March 31, 2021 and 2020, respectively.

Revenue from Contracts with Customers

Effective April 1, 2020, the Company adopted Accounting PronouncementsStandards Codification (“ASC”) Topic 606 (“ASC 606”), Revenue from Contracts with Customers, using the modified retrospective approach. The adoption of ASC 606 did not have a material impact on the measurement or on the recognition of revenue of contracts for which all revenue had not been recognized as of April 1, 2020. Therefore, no cumulative adjustment has been made to the opening balance of accumulated deficit at April 1, 2020. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the periods presented.

6

The core principle of ASC 606 is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. 

Product Sales

The Company generates revenue from selling FastPack System analyzers, accessories and disposable products used with the FastPack System. Disposable products include reagent packs which are diagnostic tests for PSA, testosterone, thyroid disorders, pregnancy, and Vitamin D.

The Company provides disposable products and equipment in exchange for consideration, which occurs when a customer submits a purchase order and the Company provides disposable products and equipment at the agreed upon prices in the invoice. Generally, customers purchase disposable products using separate purchase orders after the equipment (“analyzer”) has been provided to the customer. The initial delivery of the equipment and reagent packs represents a single performance obligation and is completed upon receipt by the customer. The delivery of each subsequent individual reagent pack represents a separate performance obligation because the reagent packs are standardized, are not interrelated in any way, and the customer can benefit from each reagent pack without any other product. There are no significant discounts, rebates, returns or other forms of variable consideration. Customers are generally required to pay within 30 days.

The performance obligation arising from the delivery of the equipment is satisfied upon the delivery of the equipment to the customer. The disposable products are shipped Free on Board (“FOB”) shipping point. For disposable products that are shipped FOB shipping point, the customer has the significant risks and rewards of ownership and legal title to the assets when the disposable products leave the Company’s shipping facilities, thus the customer obtains control and revenue is recognized at that point in time.

The Company has elected the practical expedient and accounting policy election to account for the shipping and handling as activities to fulfil the promise to transfer the disposable products and not as a separate performance obligation.

The Company’s contracts with customers generally have an expected duration of one year or less, and therefore the Company has elected the practical expedient in ASC 606 to not disclose information about its remaining performance obligations. Any incremental costs to obtain contracts are recorded as selling, general and administrative expense as incurred due to the short duration of the Company’s contracts.

License Revenue

The Company enters into out-license agreements with counterparties to develop and/or commercialize its products in exchange for nonrefundable upfront license fees and/or sales-based royalties.

If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenue from nonrefundable upfront fees allocated to the license when the license is transferred to the customer and the customer can benefit from the license. For licenses that are bundled with other performance obligations, management uses judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable upfront fees. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of progress and related revenue recognition. During the three months ended March 31, 2021 and 2020, the Company recognized license revenue of $479,000 and $0, respectively.

Collaborative Research Revenue

Prior to the adoption of ASC 606, the Company recognized research revenue over the term of various agreements, as negotiated contracted amounts were earned or reimbursable costs were incurred related to those agreements. Negotiated contracted amounts were earned in relative proportion to the performance required under the applicable contracts. Any amounts received prior to satisfying these revenue recognition criteria were recorded as deferred revenue.

To determine revenue recognition for contracts with customers within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies the relevant performance obligations.

Collaborative research revenue is recognized as research services are performed over the development periods for each agreement. During the three months ended March 31, 2021 and 2020, the Company recognized collaborative research revenue of $0 and $45,000, respectively.

Contract Balances

The timing of the Company’s revenue recognition may differ from the timing of payment by the Company’s customers. The Company records a receivable when revenue is recognized prior to payment and there is an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied.

Prior to the adoption of ASC 606 effective April 1, 2020 (using the modified retrospective approach), the Company accounted for its revenue arrangements under ASC 605, Revenue Recognition (“ASC 605”). Under ASC 605, revenue arrangements with multiple deliverables were evaluated for proper accounting treatment. In these arrangements, the Company recorded revenue as separate units of accounting if the delivered items have value to the customer on a stand-alone basis, if the arrangement includes a general right of return relative to the delivered items, and if delivery or performance of the undelivered items is considered probable and substantially within the Company’s control.

Under ASC 605, revenues from product sales which included both the analyzer and various immunoassay products (“reagents”) were generally recognized upon shipment, as no significant continuing performance obligations remained post shipment. Cash payments received in advance were classified as deferred revenue and recorded as a liability. The Company was generally not contractually obligated to accept returns, except for defective products. Revenue was recorded net of an allowance for estimated returns.

7

Multiple element arrangements included contracts that combined both the Company’s analyzer and a customer’s future reagent purchases under a single contract. In some sales contracts, the Company provided analyzers at no charge to customers. Title to the analyzer was maintained by the Company and the analyzer was returned by the customer to the Company at the end of the purchase agreement.

During the three months ended March 31, 2021 and 2020, product sales are stated net of an allowance for estimated returns of approximately $0 and $12,000, respectively.

Deferred Revenue

Prior to the adoption of ASC 606, payments received in advance from customers pursuant to certain collaborative research and license agreements, deposits against future product sales, multiple element arrangements and extended warranties are recorded as a current or non-current deferred revenue liability based on the time from the balance sheet date to the future date of revenue recognition. The adoption of ASC 606 had no material effect on deferred revenue.

Operating Leases

 

The Company adopted ASC Topic 842, Leases (“Topic 842”) in the nine-months transition period ended December 31, 2020. In February 2016,accordance with 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 outguidance in Topic 842, the principles for the recognition, measurement, presentationCompany recognizes lease liabilities 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 liabilitycorresponding right-of-use-assets for all leases with a termterms of greater than 12 months regardless of their classification.months. Leases with a term of 12 months or less will be accounted for underin a manner similar to the existing guidance for operating leases today.prior to the adoption of Topic 842 supersedes842. Refer to Recent Accounting Pronouncements below and Note 9, Leases for more information.

Property and Equipment, Net

Property and equipment are stated at cost and are presented net of accumulated depreciation. Depreciation is provided for on a straight-line basis over the previousestimated useful lives of the related assets as follows:

Machinery and equipment5 years
Computer equipment3 years
Molds and tooling5 years
Office furniture and equipment5 years

8

Leasehold improvements are amortized on a straight-line basis over the shorter of the lease standard, Topic 840term or their estimated useful lives. The Company occasionally designs and builds its own machinery. The costs of these projects, which includes the cost of construction and other direct costs attributable to the construction, are capitalized as construction in progress. No provision for depreciation is made on construction in progress until the relevant assets are completed and placed in service.

The Company’s policy is to evaluate the remaining lives and recoverability of long-term assets on at least an annual basis or when conditions are present that indicate impairment.

LeasesIntangible Assets, Net

Intangibles consist of patent-related costs and costs for in-license agreements. Management reviews the carrying value of intangible assets that are being amortized on an annual basis or sooner when there is evidence that events or changes in circumstances may indicate that impairment exists. The Company considers relevant cash flow and profitability information, including estimated future operating results, trends and other available information, in assessing whether the carrying value of intangible assets being amortized can be recovered.

If the Company determines that the carrying value of intangible assets will not be recovered from the undiscounted future cash flows expected to result from the use and eventual disposition of the underlying assets, the Company considers the carrying value of such intangible assets as impaired and reduces them by a charge to operations in the amount of the impairment.

Costs related to acquiring patents and licenses are capitalized and amortized over their estimated useful lives, which is generally 5 to 17 years, using the straight-line method. Amortization of patents and licenses commences once final approval of the patent has been obtained. Patent and licenses costs are charged to operations if it is determined that the patent will not be obtained.

The carrying value of the patents of approximately $172,000 and $169,000 at March 31, 2021 and December 31, 2020, respectively, are stated net of accumulated amortization of approximately $307,000 and $303,000, respectively. Amortization of patents charged to operations for the three months ended March 31, 2021 and 2020 were approximately $3,000 for each period. Total future estimated amortization of patent costs for the five succeeding years is approximately $11,000 for the remaining nine months in the year ending December 31, 2021, approximately $15,000 for each of the years ending December 31, 2022 through 2023, approximately $14,000 for year 2024, approximately $11,000 for year 2025 and approximately $106,000 thereafter.

The carrying value of the in-licenses of approximately $17,000 and $19,000 at March 31, 2021 and December 31, 2020 are stated net of accumulated amortization of approximately $402,000 and $400,000, respectively. Amortization of licenses charged to operations for each of the three month periods ended March 31, 2021 and 2020 was approximately $2,000. Total future estimated amortization of license costs is approximately $5,000 for the remaining nine months in the year ending December 31, 2021, approximately $7,000 for the year ending December 31, 2022 and approximately $5,000 for the year ending December 31, 2023.

Derivative Financial Instruments and Warrant Liabilities

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the condensed consolidated statements of operations. Depending on the features of the derivative financial instrument, the Company uses either the Black-Scholes option-pricing model or a Monte Carlo simulation to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period (see Note 8).

9

Fair Value Measurements

The Company determines the fair value measurements of applicable assets and liabilities based on a three-tier fair value hierarchy established by accounting guidance and prioritizes the inputs used in measuring fair value. The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:

Level 1 - Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
Level 2 - Inputs other than quoted prices that are observable for the assets or liability either directly or indirectly, including inputs in markets that are not considered to be active; and
Level 3 - Inputs that are unobservable.

Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and debt are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments.

Stock-Based Compensation

Stock-based compensation cost for equity awards granted to employees and non-employees 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 the Company determines that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by regulators, the fair value calculated for the Company-issued stock options could change significantly. Higher volatility and longer expected lives would result in an increase to stock-based compensation expense to employees and non-employees determined at the date of grant.

Income Taxes

Deferred income taxes are recognized for temporary differences in the basis of assets and liabilities for financial statement and income tax reporting that arise due to net operating loss carry forwards, research and development credit carry forwards and from using different methods and periods to calculate depreciation and amortization, allowance for doubtful accounts, accrued vacation, research and development expenses, and state taxes. A provision has been made for income taxes due on taxable income and for the deferred taxes on the temporary differences. The components of the deferred tax asset and liability are individually classified as current and noncurrent based on their characteristics.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Realization of the deferred income tax asset is dependent on generating sufficient taxable income in future years.

Sales and Excise Taxes

Sales and other taxes collected from customers and subsequently remitted to government authorities are recorded as accounts receivable with corresponding tax payable. These balances are removed from the balance sheet as cash is collected from customers and remitted to the tax authority.

10

Warranty Costs

The Company’s warranty policy generally provides for one year of coverage against defects and nonperformance within published specifications for sold analyzers and for the term of the contract for equipment held for lease. The Company accrues for estimated warranty costs in the period in which the revenue is recognized based on historical data and the Company’s best estimates of analyzer failure rates and costs to repair.

Accrued warranty liabilities were approximately $51,000 and $25,000, respectively, at March 31, 2021 and December 31, 2020 and are included in accrued expenses and other current liabilities on the balance sheets. Warranty costs were approximately $25,000 and $27,000 for the three months ended March 31, 2021 and 2020, respectively, and are included in cost of product sales in the statements of operations.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments, which supersedes current guidance by requiring recognition of credit losses when it is probable that a loss has been incurred. The new standard requires the establishment of an allowance for estimated credit losses on financial assets including trade and other receivables at each reporting date. The new standard will result in earlier recognition of allowances for losses on trade and other receivables and other contractual rights to receive cash. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842), which extends the effective date of Topic 326 for annual periods and interim periods within those annual periodscertain companies until fiscal years beginning after December 15, 2018,2022. The new standard will be effective for the Company in the first quarter of fiscal year beginning January 1, 2023, and early adoption is permitted. The Company has not completed its review of the impact of this standard on its consolidated financial statements. However, based on the Company’s history of immaterial credit losses from trade receivables, management does not expect that the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU No. 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020 and adoption must be as of the year ending December 31, 2019.beginning of the Company’s annual fiscal year. The Company is currently evaluating the impact that the implementation of this standard will have on the Company’sits consolidated financial statements.statements and related disclosures.

 

On March 30, 2016,In May 2014, the FASB issued Accounting Standards Update No. 2016-09,Compensation - Stock CompensationASU 2014-09, Revenue from Contracts with Customers (Topic 718): Improvements606) (“Topic 606”). The guidance in Topic 606 provides that an entity should recognize revenue to Employee Share-Based Payment Accounting (“ASU 2016-09”). Among other things, ASU 2016-09 requires that entities recognize excess tax benefitsdepict the transfer of goods or services provided and deficiencies relatedestablishes the following steps to employee share-based payment transactions as income tax expense or benefit. ASU 2016-09 also eliminatesbe applied by an entity: (1) identify the requirement to reclassify excess tax benefits and deficiencies from operating activities to financing activitiescontract with a customer; (2) identify the performance obligations in the statement of cash flows. The guidance iscontract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies the performance obligation. Topic 606 was effective for the annual periods and interim periods within those annual periodsfiscal years beginning after December 15, 2016.2019 for the Company, based on the issuance of ASU 2020-05, which provided deferral of the effective date for an additional one year in response to the coronavirus (COVID-19) pandemic. The Company adopted the new revenue standard as of April 1, 2020 using the modified retrospective approach. The adoption of this standardASU 2014-09/Topic 606 did not have a material impact on the Company’sits financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718, Compensation—Stock Compensation, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU No. 2018-07 supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. The amendments in ASU No. 2018-07 are effective beginning in 2020, with early adoption permitted, but no earlier than a company’s adoption date of Topic 606 Revenue from Contracts with Customers. The Company elected to adopt ASU 2018-07 as of April 1, 2020. The adoption did not require the Company to restate previously reported results.

 

On August 26, 2016,In July 2018, the FASB issued Accounting Standards UpdateASU No. 2016-15,Statement2018-11, Leases (Topic 842) Targeted Improvements (“Topic 842”), which provides for an alternative transition method by allowing companies to continue to use the legacy guidance in Topic 840, Leases, including its disclosure requirements, in the comparative periods presented in the year of Cash Flows (Topic 230),a consensusadoption of the FASB’s Emerging Issues Task Force (“ASU 2016-15”). The new guidance amends Accounting Standards Codification No. 230 (“ASC 230”)leases standard and recognize a cumulative-effect adjustment to add or clarify guidance on the classificationopening balance of certain cash receipts and paymentsretained earnings in the statementperiod of cash flows. ASC 230 lacks consistent principlesadoption rather than the earliest period presented. The Company adopted the standard as of April 1, 2020 and the most significant impact was the recognition of a right-of-use asset and lease liability for evaluating the classificationCompany’s sole operating lease—the Company had no finance leases. Adoption of cash payments and receipts inTopic 842 did not require the statementCompany to restate previously reported results as it elected to apply a modified retrospective approach at the beginning of cash flows. This has led to diversity in practice and, in certain circumstances, financial statement restatements. Therefore,the period of adoption rather than at the beginning of the earliest comparative period presented.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the ASU 2016-15 withDisclosure Requirements for Fair Value Measurement,” an amendment to the intentaccounting guidance on fair value measurements. The guidance modifies the disclosure requirements on fair value measurements, including the removal of reducing diversity in practice with respectdisclosures of the amount of and reasons for transfers between Level 1 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The guidance also adds certain disclosure requirements related to eight types of cash flows. ASU 2016-15Level 3 fair value measurements. The guidance is effective for annualfiscal years, and interim periods inwithin those fiscal years, beginning after December 15, 2017, and is effective for the Company for the year ending December 31, 2018.2019. The Company is currently evaluating the impact that the implementation of this standard will haveadopted ASU No. 2018-13 on the Company’s financial statements.

In May 2017, the FASB issued Accounting Standards Update No. 2017-09,Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting(“ASU 2017-09”). ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions,April 1, 2020 and classification of the awards are the same immediately before and after the modification. The amendments are effective for the Company’s interim and annual reporting periods beginning January 1, 2018. The Company does not expect the adoption of ASU 2017-09 tothis guidance did not have a material impact on its financial statements.

 

Other accounting standardsstandard updates effective after September 30, 2017are either not applicable to the Company or are not expected to have a material effectimpact on the Company’s condensed consolidated financial statements.

11

RITTER PHARMACEUTICALS, INC.NOTE 2 — LIQUIDITY

The Company has incurred recurring losses from operations and has an accumulated deficit at March 31, 2021, and the Company expects to continue to incur losses subsequent to the balance sheet date of March 31, 2021. The Company’s reverse recapitalization transaction with Ritter closed in May 2020 together with an associated new equity capital raise of approximately $4.0 million, and approximately $1.9 million in convertible notes payable were converted into shares of the Company’s capital stock. In July, August and December 2020, the Company raised an additional $30.0 million through three Securities Purchase Agreements with a single institutional investor (see Note 11). Based on the Company’s current cash position, currently planned expenditures and level of operations, the Company believes it has sufficient capital to fund operations for the 12-month period subsequent to the issuance of the interim financial information. However, there is no assurance that profitable operations will ever be achieved, or if achieved, could be sustained on a continuing basis. Also, beyond such 12-month period, planned research and development activities, capital expenditures, clinical and pre-clinical testing, and commercialization activities of the Company’s products are expected to require significant additional financing. Additional financing may not be available on acceptable terms or at all.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTSNOTE 3 — INVENTORY, NET

Inventory, net consisted of the following at March 31, 2021 and December 31, 2020:

  March 31, 2021  December 31, 2020 
Raw materials $614,926  $579,765 
Work in process  182,550   309,826 
Finished goods  88,379   63,867 
  $885,855  $953,458 

 

NOTE 4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following at March 31, 2021 and December 31, 2020:

  March 31, 2021  December 31, 2020 
Prepaid insurance $955,019  $1,307,864 
Prepaid manufacturing expenses  57,117   1,181,029 
Prepaid investor relations expenses  

133,501

   150,000 
Other prepaid expenses  

74,122

   40,001 
  $1,219,759  $2,678,894 

NOTE 5 — PROPERTY AND EQUIPMENT, NET

 

Property and equipment, consistsnet consisted of the following:following at March 31, 2021 and December 31, 2020:

 

  Estimated Life September 30, 2017  December 31, 2016 
Computer equipment 5 years $10,274  $10,274 
Furniture and fixtures 7 years  23,325   23,325 
Total property and equipment    33,599   33,599 
Accumulated depreciation    (13,993)  (10,057)
Property and equipment, net   $19,606  $23,542 
  March 31, 2021  December 31, 2020 
Machinery and equipment $2,401,470  $2,401,470 
Construction in progress–equipment  89,122   104,400 
Computer equipment  451,808   443,865 
Leasehold improvements  321,033   321,033 
Molds and tooling  260,002   260,002 
Office furniture and equipment  138,699   138,699 
   3,662,134   3,669,469 
Less Accumulated depreciation  (3,437,202)  (3,422,146)
  $224,932  $247,323 

12

 

Depreciation expense relating to property and equipment was approximately $15,000 and $10,000 for the three months ended March 31, 2021 and 2020, respectively.

NOTE 6 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of approximately $1,300the following at March 31, 2021 and December 31, 2020:

  March 31, 2021  December 31, 2020 
Board compensation $15,833  $15,091 
Vacation  248,071   230,457 
Royalties  17,193   491 
Research and development  882,040   237,504 
Professional fees  181,636   58,261 
Warranty costs  51,487   24,871 
Payroll  69,358   4,566 
Patent and license fees     7,204 
Franchise, Sales and use taxes  139,257   30,353 
Income taxes  6,256   3,326 
Interest      
Other  258,293   134,614 
  $1,869,424  $746,738 

NOTE 7 — NOTES PAYABLE

Notes payable consisted of the following at March 31, 2021 and December 31, 2020:

  March 31, 2021  December 31, 2020 
Insurance Financing Agreement with a finance company, monthly payments of $119,943 including interest of 4.54% per annum; secured by an insurance policy; paid January 2021 $  $119,491 
Equipment Financing Agreement with a bank, monthly payments of $720 including imputed interest at 6.95% per annum; secured by laboratory equipment; due October 2022  12,913   14,826 
Equipment Financing Agreement with a bank, monthly payments of $596 including imputed interest at 6.59% per annum; secured by manufacturing equipment; due July 2021  2.693   4,422 
   15,606   138,739 
Less current portion  (10,683)  (131,766)
Notes Payable, net of current portion $4,923  $6,973 

Future maturities of notes payable are as follows as of March 31, 2021:

Year Ending December 31, Amount 
2021 (nine months) $8,633 
2022  6,973 
Total balance $15,606 

13

NOTE 8 – WARRANT LIABILITIES

In 2004, the Company issued warrants to various investors and brokers for the purchase of Series C preferred stock in connection with a private placement (the “Series C Warrants”). The Series C Warrants were subsequently extended and, upon closing of the reverse recapitalization transaction with Ritter, exchanged for warrants to purchase common stock of the Company, pursuant to the Series C Warrant terms as adjusted. The Series C Warrants were classified as liabilities, but had minimal fair value prior to the merger with Ritter.

In exchange for the Series C Warrants, upon closing of the merger with Ritter, the holders received warrants to purchase an aggregate of 4,713,490 shares of the Company’s common stock at $0.72 per share, subject to adjustment. As of March 31, 2021, the warrants received in exchange for the Series C Warrants have remaining terms ranging from 2.7 to 3.2 years. The warrants were determined to be liability-classified pursuant to the guidance in ASC 480 and ASC 815-40, resulting from inclusion of a leveraged ratchet provision for subsequent dilutive issuances.

The following table summarizes the activity in the warrants received in exchange for the Series C Warrants for the three months ended March 31, 2021:

  

Common Stock Warrants (received in exchange for the

Series C Warrants)

 
  Shares  

Weighted–

Average

Exercise

Price

  

Range of Exercise

Price

  

Weighted–

Average

Remaining
Life (Years)

 
Total outstanding – December 31, 2020  3,378,596  $0.72         
Exercised  (473,608)  0.72         
Forfeited  (36,097)  0.72         
Expired              
Granted              
Total outstanding – March 31, 2021  2,868,891  $0.72         
Exercisable  2,868,891  $0.72  $0.72   2.75 

Of the 473,608 shares issued upon the exercise of warrants during the three months ended March 31, 2021, 192,373 shares were issued upon net-exercises rather than upon exercises for cash.

The following table summarizes the Series C Warrants activity for the three months ended March 31, 2020:

  Series C Preferred Stock Warrants 
  Shares  

Weighted–

Average

Exercise

Price

  

Range of Exercise

Price

  

Weighted– Average Remaining

Life (Years)

 
Total outstanding – December 31, 2019  1,441,180  $2.35         
Forfeited              
Expired              
Granted              
Total outstanding – March 31, 2020  1,441,180  $2.35         
Exercisable  1,441,180  $2.35  $2.25 – 2.70   4.85 

14

The following table presents the Company’s fair value hierarchy for its warrant liabilities (all of which arise under the warrants received in exchange for the Series C Warrants) measured at fair value on a recurring basis using Level 3 inputs as of March 31, 2021:

   Quoted             
   Market   Significant         
   Prices for   Other   Significant     
   Identical   Observable   Unobservable     
   Assets   Inputs   Inputs     
Warrant liabilities (Level 1)  (Level 2)  (Level 3)  Total 
Balance as of March 31, 2021 $  $  $6,187,200  $6,187,200 

There were no transfers of financial assets or liabilities between category levels for the three months ended March 31, 2021.

During the three months ended March 31, 2021 the Company experienced $2.1 million in other income because the fair value of the warrant liabilities declined to $6.2 million from $8.3 million at December 31, 2020, primarily due to warrant exercises. For the three months ended March 31, 2020, change in fair value of warrant liabilities was recognized for each$0 because the fair value was immaterial at both the beginning and the end of the three months ended September 30, 2017March 31, 2020.

The value of the warrant liabilities was based on a valuation received from an independent valuation firm determined using a Monte-Carlo simulation. For volatility, the Company considers comparable public companies as a basis for its expected volatility to calculate the fair value of common stock warrants and 2016transitions to its own volatility as the Company develops sufficient appropriate history as a public company. The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected term of the common stock warrant. The Company uses an expected dividend yield of zero based on the fact that the Company has never paid cash dividends and approximately $3,900 was recognized for the nine months ended September 30, 2017 and 2016, and classified in general and administrative expensedoes not expect to pay cash dividends in the accompanying unaudited condensed statementsforeseeable future. Any significant changes in the inputs may result in significantly higher or lower fair value measurements.

The following are the weighted average and the range of operations.assumptions used in estimating the fair value of warrant liabilities (weighted average calculated based on the number of outstanding warrants on each issuance) as of March 31, 2021:

  March 31, 2021 
  Range  

Weighted

Average

 
Risk-free interest rate  0.28% — 0.42%  0.30%
Expected volatility (peer group)  81.00 — 84.00%  83.52%
Term of warrants (in years)  2.65 — 3.24   2.75 
Expected dividend yield  0.00%  0.00%

 

NOTE 59COMMITMENTS AND CONTINGENCIES

Master Services Agreement

On December 30, 2015, the Company entered into a Master Service Agreement with Covance, Inc. (“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 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 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 behalf of the Company.

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.


RITTER PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

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 were subject to a lock-up agreement, pursuant to which RSM agreed that it would not sell these shares for a period ending on 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, which condition was satisfied with the filing of the Company’s quarterly report on Form 10-Q on August 7, 2017.

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 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 the Company 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 AgreementLEASES

 

The Company leases office spaceits facilities under a long-term operating lease agreement expiring in October 2022. The tables below show the operating lease right-of-use assets and operating lease liabilities as of December 31, 2020 and the balances as of March 31, 2021, including the changes during the periods:

  Operating lease right-of-use assets 
Net right-of-use assets at December 31, 2020  430,795 
Less amortization of operating lease right-of-use assets  (54,179)
Operating lease right-of-use assets at March 31, 2021 $376,616 

  Operating lease liabilities 
At December 31, 2020 $491,565 
Less principal payments on operating lease liabilities  (60,710)
Operating lease liabilities at March 31, 2021  430,855 
Less non-current portion  (168,254)
Current portion at March 31, 2021 $262,601 

15

As of March 31, 2021, the Company’s operating leases have a weighted-average remaining lease term of 1.6 years and a weighted-average discount rate of 8.9%.

As of March 31, 2021, future minimum payments during the next five fiscal years and thereafter are as follows:

Year Ending December 31, Amount 
2021 (nine months) $217,156 
2022  246,650 
Total  463,806 
Less present value discount  (32,951)
Operating lease liabilities $430,855 

Total lease expense was approximately $86,000 and $84,000, respectively, for its headquartersthe three month periods ended March 31, 2021 and 2020. Lease expense was recorded in California. On July 9, 2015,cost of product sales, general and administrative expenses, research and development and sales and marketing expenses.

NOTE 10 — RESEARCH AND LICENSE AGREEMENTS

The University of Louisville Research Foundation

Between June 2018 and September 2020, the Company entered into license and sponsored research agreements with the University of Louisville Research Foundation (“ULRF”) for QN-247, a novel aptamer-based compound that has shown promise as an anticancer drug. Under the agreements, the Company will take over development, regulatory approval and commercialization of the compound from ULRF and is responsible for maintenance of the related intellectual property portfolio. In return, ULRF received a $50,000 convertible promissory note in payment of an upfront license fee, which was subsequently converted into the Company’s common stock, and the Company agreed to reimburse ULRF for sponsored research expenses of up to $805,000 and prior patent costs of up to $200,000. In addition, the Company agreed to pay ULRF (i) royalties, on patent-covered net sales associated with the commercialization of anti-nucleolin agent-conjugated nanoparticles, of 4% (on net sales up to a cumulative $250,000,000) or 5% (on net sales above a cumulative $250,000,000), until expiration of the last to expire of the licensed patents, (ii) 30% to 50% of any non-royalty sublicensee income received (50% for sublicenses granted in the first two years of the ULRF license agreement, 40% for sublicenses granted in the third or fourth years of the ULRF license agreement, and 30% for sublicenses granted in the fifth year of the ULRF license agreement or thereafter), (iii) reimbursements for ongoing costs associated with the preparation, filing, prosecution and maintenance of licensed patents, incurred prior to June 2018, and (iv) payments ranging from $100,000 to $5,000,000 upon the achievement of certain regulatory and commercial milestones. Milestone payments for the first therapeutic indication would be $100,000 for first dosing in a Phase 1 clinical trial, $200,000 for first dosing in a Phase 2 clinical trial, $350,000 for first dosing in a Phase 3 clinical trial, $500,000 for regulatory marketing approval and $5,000,000 upon achieving a cumulative $500,000,000 of Licensed Product sales; the Company would also pay another $500,000 milestone payment for any additional regulatory marketing approval for each additional therapeutic (or diagnostic) indication. The Company also must pay ULRF shortfall payments if the total amounts actually paid with respect to royalties and non-royalty sublicensee income for any year is less than the applicable annual minimum (ranging from $10,000 to $50,000) for such year.

16

There was approximately $62,000 and $0 in sponsored research expenses related to these agreements for the three months ended March 31, 2021 and 2020, respectively, and these amounts are recorded in research and development expenses in the statements of operations. Minimum annual royalties of $0 and $10,000 related to these agreements are included in research and development expenses in the statements of operations for the three months ended March 31, 2021 and 2020, respectively. License costs were approximately $36,000 and $0 related to these agreements for the three months ended March 31, 2021 and 2020, respectively, and are included in research and development expenses in the statements of operations.

In March 2019, the Company entered into a leasesponsored research agreement and an option for a license agreement with Century Park, a California limited partnership, pursuant to whichULRF for development of several small-molecule RAS interaction inhibitor drug candidates. Under the terms of this agreement, the Company is leasing approximately 2,780 square feetwill reimburse ULRF for sponsored research expenses of office space in Los Angeles, Californiaup to $693,000 for its headquarters. The lease provides for athis program. In February 2021, the Company extended the term of sixty-one (61)this agreement for an additional 18 months commencing(expires July 2022) and increased the amount that the Company will reimburse ULRF for sponsored research expenses from $693,000 to approximately $1.4 million. In July 2020, the Company entered into an exclusive license agreement with ULRF for RAS interaction inhibitor drug candidates. Under the agreement, the Company will take over development, regulatory approval and commercialization of the candidates from ULRF and is responsible for maintenance of the related intellectual property portfolio. In return, ULRF received approximately $112,000 for an upfront license fee and reimbursement of prior patent costs. In addition, the Company has agreed to pay ULRF (i) royalties, on October 1, 2015. The Company paid no rentpatent-covered net sales associated with the commercialization, of 4% (on net sales up to a cumulative $250,000,000) or 5% (on net sales above a cumulative $250,000,000), until expiration of the licensed patent, and 2.5% (on net sales for any sales not covered by Licensed Patents), (ii) 30% to 50% of any non-royalty sublicensee income received (50% for sublicenses granted in the first two years of the ULRF license agreement, 40% for sublicenses granted in the third or fourth years of the ULRF license agreement, and 30% for sublicenses granted in the fifth year of the ULRF license agreement or thereafter), (iii) reimbursements for ongoing costs associated with the preparation, filing, prosecution and maintenance of licensed patents, incurred prior to July 2020, and (iv) payments ranging from $50,000 to $5,000,000 upon the achievement of certain regulatory and commercial milestones. Milestone payments for the first monththerapeutic indication would be $50,000 for first dosing in a Phase 1 clinical trial, $100,000 for first dosing in a Phase 2 clinical trial, $150,000 for first dosing in a Phase 3 clinical trial, $300,000 for regulatory marketing approval and $5,000,000 upon achieving a cumulative $500,000,000 of the term, paid base rent of $9,174 per month for months 2 through 13 of the term, and will pay base rent of $9,449 per month for months 14 to 25 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.Licensed Product sales. The Company hasalso must pay ULRF shortfall payments if the optiontotal amounts actually paid with respect to extendroyalties and non-royalty sublicensee income for any year is less than the term of the leaseapplicable annual minimum (ranging from $20,000 to $100,000) for one five-year term, provided that the rent would be subject to market adjustment at the beginning of the renewal term.such year.

 

Rent expense, which is recognized on a straight-line basis over the lease term, was approximately $29,000 and $28,000Sponsored research expenses related to these agreements for the three months ended September 30, 2017March 31, 2021 and 2016,2020 were approximately $107,000 and $108,000, respectively, and $86,000 for the nine months ended September 30, 2017 and 2016, and isare recorded in generalresearch and administrativedevelopment expenses in the accompanying unaudited condensedstatements of operations. License costs related to these agreements for the three months ended March 31, 2021 and 2020 were approximately $46,000 and $0, respectively, and are included in research and development expenses in the statements of operations.

In June 2020, the Company entered into an exclusive license agreement with ULRF for its intellectual property in the use of QN-165 as a treatment for COVID-19. Under the agreement, the Company will take over development, regulatory approval and commercialization of the compound (for such use) from ULRF and is responsible for maintenance of the related intellectual property portfolio. In return, ULRF received approximately $24,000 for an upfront license fee and reimbursement of prior patent costs. In addition, the Company was required to enter into a separate sponsored research agreement with ULRF (for QN-165 as a treatment for COVID-19) for at least $250,000. In November 2020, the Company executed a sponsored research agreement with ULRF (for QN-165 as a treatment for COVID-19) supporting up to approximately $430,000 in research which satisfied this requirement.

In addition, the Company has agreed to pay ULRF (i) royalties, on patent-covered net sales associated with the commercialization of QN-165 as a treatment for COVID-19, of 4% (on net sales up to a cumulative $250,000,000) or 5% (on net sales above a cumulative $250,000,000), until expiration of the licensed patents, and 2.5% (on net sales for any sales not covered by Licensed Patents), (ii) 30% to 50% of any non-royalty sublicensee income received (50% for sublicenses granted in the first two years of the ULRF license agreement, 40% for sublicenses granted in the third or fourth years of the ULRF license agreement, and 30% for sublicenses granted in the fifth year of the ULRF license agreement or thereafter), (iii) reimbursements for ongoing costs associated with the preparation, filing, prosecution and maintenance of licensed patents, incurred prior to June 2020, and (iv) payments ranging from $50,000 to $5,000,000 upon the achievement of certain regulatory and commercial milestones. Milestone payments would be $50,000 for first dosing in a Phase 1 clinical trial, $100,000 for first dosing in a Phase 2 clinical trial, $150,000 for first dosing in a Phase 3 clinical trial, $300,000 for regulatory marketing approval and $5,000,000 upon achieving a cumulative $500,000,000 of Licensed Product sales. The Company also must pay ULRF shortfall payments if the total amounts actually paid with respect to royalties and non-royalty sublicensee income for any year is less than the applicable annual minimum (ranging from $5,000 to $50,000) for such year.

Sponsored research expenses related to these agreements for the three months ended March 31, 2021 and 2020 were approximately $69,000 and $0, respectively, and are recorded in research and development expenses in the statements of operations. License costs related to these agreements for the three months ended March 31, 2021 and 2020 were $0 for each period.

17

Advanced Cancer Therapeutics

In December 2018, the Company entered into a license agreement with Advanced Cancer Therapeutics, LLC (“ACT”), granting the Company exclusive rights to develop and commercialize QN-165, an aptamer-based drug candidate. In return, ACT received a $25,000 convertible promissory note in payment of an upfront license fee, which was subsequently converted into the Company’s common stock. In addition, the Company agreed to pay ACT (i) royalties, on net sales associated with the commercialization of QN-165, of 2% (only if patent-covered and only on net sales above a cumulative $3,000,000) or 1% (if not patent-covered, but only on net sales above a cumulative $3,000,000), until the 15th anniversary of the ACT license agreement and (ii) milestone payments of $100,000 for the Company raising a cumulative total of $2,000,000 in new equity financing after the date of the ACT license agreement, $100,000 upon any first QN-165-based licensed product receiving the CE Mark or similar FDA status, and $500,000 upon cumulative worldwide QN-165-based licensed product net sales reaching $3,000,000. For the three months ended March 31, 2021 and 2020, license costs of approximately $2,000 and $0 related to this agreement, respectively, are included in research and development expenses in the statements of operations.

 

LegalPrediction Biosciences

 

In November 2015, the Company entered into a long-term development and supply agreement with Prediction Biosciences SAS to develop and manufacture diagnostic tests for use in the stroke point-of-care market. The Company is not currently involvedrecognizes development revenue and product sales over the performance period of the contract. For the three months ended March 31, 2021 and 2020, there was $0 and $45,000, respectively, in any legal matters arising incollaborative research revenue related to this agreement.

Sekisui Diagnostics

During the normal course of business. From time to time,year ended March 31, 2018, the Company could become involvedextended a strategic partnership entered into in disputesMay 2016 with Sekisui Diagnostics, LLC (“Sekisui”) until May 2022. The Company appointed Sekisui as its diagnostics commercial partner and various litigation matters that arise inexclusive worldwide distributor with the normal courseexception of business. These may include disputescertain customer accounts retained by Qualigen. The agreement contains a right of first refusal for Sekisui against any potential acquisition of the Company until May 2022.

There were product sales to Sekisui of approximately $1.0 million for both of the three month periods ended March 31, 2021 and lawsuits2020, related to intellectual property, licensing, contract law and employee relations matters. Periodically,this agreement.

Yi Xin

In October 2020, the Company reviews the statusentered into a Technology Transfer Agreement with Yi Xin Zhen Duan Jishu (Suzhou) Ltd. (“Yi Xin”), of significant matters, if any exist,Suzhou, China, for Yi Xin to develop, manufacture 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. Becausesell new generations of such uncertainties, accruals arediagnostic test systems based on the best information available atCompany’s core FastPack technology. In addition, the time. As additional information becomes available,Technology Transfer Agreement authorized Yi Xin to manufacture and sell the Company’s current generations of FastPack System diagnostic products (1.0, IP and PRO) in China.

Under the Technology Transfer Agreement, the Company reassessesreceived net cash payments of $250,000 in the potential liability relatedfinal quarter of the year ended December 31, 2020, classified as deferred revenue on the December 31, 2020 balance sheet, and a cash payment of $420,000 during the three months ended March 31, 2021. The Company will also receive low- to pending claimsmid-single-digit royalties on any future new-generations and litigation.current-generations product sales by Yi Xin. Of these amounts, the Company recognized approximately $38,000 in product sales and $479,000 in license revenue included in the statement of operations for the three months ended March 31, 2021. The Company provided technology transfer and patent/know-how license rights to facilitate Yi Xin’s development and commercialization.

18

The Company gave Yi Xin the exclusive rights for China – which is a market the Company has not otherwise entered – both for Yi Xin’s new generations of FastPack-based products and for Yi Xin-manufactured versions of the Company’s existing FastPack product lines. Yi Xin will also have the right to sell its new generations of FastPack-based diagnostic test systems throughout the world (but not to or toward current customers of the Company’s existing generations of FastPack products); any such non-China sales would, until May 1, 2022, need to be through Sekisui. In addition, after May 1, 2022, Yi Xin will have the right to sell Yi Xin-manufactured versions of existing FastPack 1.0, IP and PRO product lines worldwide (other than in the United States and other than to or toward current non-US customers of those products). Also, after May 1, 2022, Yi Xin will have the right to buy Company-manufactured FastPack 1.0, IP and PRO products from the Company at distributor prices for resale in and for the United States (but not to or toward current US customers of those products); the Company did not license Yi Xin to sell in the United States market any Yi Xin-manufactured versions of those legacy FastPack 1.0, IP and PRO product lines, even after May 1, 2022. In the Technology Transfer Agreement, the Company confirmed that it would not, after May 1, 2022, seek new FastPack customers outside the United States.

RITTER PHARMACEUTICALS, INC.STA Pharmaceutical

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

In November 2020, the Company entered into a contract with STA Pharmaceutical Co., Ltd., a subsidiary of WuXi AppTec, for GMP production of QN-165, the Company’s lead drug candidate for the treatment of COVID-19 and other viral diseases, for potential clinical trials in 2021. In connection with this agreement, the Company paid an upfront deposit of approximately $1.1 million which was classified as prepaid expenses on the December 31, 2020 balance sheet date, and all of which was included in research and development expenses in the statement of operations for the three months ended March 31, 2021.

 

NOTE 611 — STOCKHOLDERS’ EQUITY

 

As of March 31, 2021 and December 31, 2020, the Company had two classes of capital stock: common stock and Series Alpha convertible preferred stock.

Authorized Shares

Common Stock

 

On September 15, 2017, the Company amended its Amended and Restated Certificate of Incorporation to authorize the issuance of up to 225,000,000 sharesHolders of common stock $0.001 par value per share, and 15,000,000 sharesgenerally vote as a class with the holders of the preferred stock $0.001 par value per share.

As of September 30, 2017, the Company had 14,756,521 shares of common stock issued and outstanding. Each share of the Company’s common stock isare entitled to one vote and all shares rank equally asfor each share held. Subject to voting and other matters. There are currently no sharesthe rights of the holders of the preferred stock issued and outstanding. Any preferred stock issued into receive preferential dividends, the future will have the rights, preferences and privileges that the Company’s Board of Directors may determine from time to time.

Aspire Capital Financing Arrangement

On December 18, 2015, the Company entered into a common stock purchase agreement (the “2015 Aspire Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”), pursuant to which Aspire Capital was committed to purchase up to an aggregate of $10.0 million of the Company’s sharesholders of common stock overare entitled to receive dividends when and if declared by the approximate 30-month termBoard of Directors. Following payment of the 2015 Aspire Purchase Agreement. Asliquidation preference of September 30, 2017, the Company had issued an aggregatepreferred stock, as of 4,577,699 sharesMarch 31, 2021 any remaining assets would be distributed ratably among the holders of itsthe common stock to Aspire Capital underand, on an as-if-converted basis, the 2015 Aspire Purchase Agreement for approximate proceedsholders of $5.0 million.

On May 4, 2017, the Company terminated the 2015 Aspire Purchase Agreement and entered into a new commonSeries Alpha convertible preferred stock purchase agreement with Aspire Capital (the “2017 Aspire Purchase Agreement”), which provides that upon the terms and conditions set forth therein, Aspire Capital is committed to purchaseliquidation, dissolution or winding up to an aggregate of $6.5 million of shares of the Company’s common stock over the 30-month termaffairs of the 2017 Aspire Purchase Agreement. On any trading day on which the closing sale price of the Company’s common stock exceeds $0.25, 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 $6.5 million of the Company’s common stock in the aggregate at a per share price, calculated by reference to the prevailing market price of the Company’s common stock (as provided in the 2017 Aspire Purchase Agreement).

As a condition to the 2017 Aspire Purchase Agreement, the Company issued 137,324 shares of its common stock to Aspire Capital as a commitment fee. As of the date of this Quarterly Report, no sharesCompany. The holders of common stock have been sold to Aspire Capital under the 2017 Aspire Purchase Agreement.no preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions.

 

October 2016 Public Offering

On OctoberAt March 31, 2016,2021, the Company closed a public offering, selling 2,127,660has reserved 13,886,590 shares of the Company’sauthorized but unissued 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 millionpossible future issuance. At March 31, 2021, shares were reserved in connection with the offering, and approximately $0.2 million of other expenses in connection with the offering.following:

 

Exercise of outstanding stock options and future grants of stock options 94,033,856
Exercise of outstanding stock warrants9,609,316
Conversion of outstanding Series Alpha preferred stock243,418
Total13,886,590 

 

RITTER PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTSSeries Alpha Preferred Stock

 

This offering was made pursuant to a shelf registration statement on Form S-3, which was declared effective byIn 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 ofthree-month period ended March 31, 2021, no shares of common stock, an indeterminate number of shares ofSeries Alpha convertible 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.

October 2017 Public Offering

On October 3, 2017, the Company closed a public offering, selling an aggregate of (i) 34,550,000 Class A Units consisting of 34,550,000were converted into shares of the Company’s common stock, and there were 180 shares of Series Alpha preferred stock outstanding at March 31, 2021.

19

Alpha Securities Purchase Agreements

On July 10, 2020, the Company closed a Securities Purchase Agreement (dated July 8, 2020) with a single institutional investor for the purchase and sale for $8.0 million for (i) 1,140,570 shares of Company common stock, (ii) 780,198 pre-funded warrants (i.e., warrants to purchase 34,550,000 shares of the Company’sCompany common stock, at a public offeringfor which the exercise price of $0.40 per unit,is almost entirely prepaid) and (ii) 9,180 Class B Units consisting of 9,180 shares of Series A Convertible Preferred Stock, with a stated value of $1,000 per unit, and convertible into an aggregate of 22,950,000 shares of the Company’s common stock, and(iii) 1,920,768 two-year warrants to purchase an aggregate of 22,950,000 shares of the Company’sCompany common stock. The warrants havestock for an exercise price of $0.44, are exercisable upon issuance$5.25 per share. Both sets of warrants included a 9.99% beneficial-ownership blocker provision. The 780,198 pre-funded warrants were then exercised on July 21 and expire five years from the date of issuance.22, 2020.

 

TheOn August 4, 2020, the Company grantedclosed a Securities Purchase Agreement (dated August 2, 2020) with a single institutional investor for the underwriters a 45-day option to purchase an additional 8,625,000and sale for $10.0 million for (i) 1,717,106 shares of the Company’sCompany common stock, and/orand (ii) 1,287,829 two-year warrants to purchase an additional 8,625,000 shares of Company common stock for an exercise price of $6.00 per share. The warrants included a 9.99% beneficial-ownership blocker provision.

On December 18, 2020, the Company’sCompany closed a Securities Purchase Agreement (dated December 16, 2020) with a single institutional investor for the purchase and sale for $12,000,000 of (i) 2,370,786 shares of Company common stock. As of the closing of the offering, the underwriters have exercised their over-allotment option forstock, (ii) 1,000,000 pre-funded warrants (i.e., warrants to purchase 2,975,000 shares of Company common stock, for which the Company’sexercise price is almost entirely prepaid) (iii) 1,348,314 two-year warrants to purchase shares of Company common stock.

Aggregate gross proceedsstock for an exercise price of $4.07 per share, and (iv) 842,696 warrants (first exercisable 6 months after issuance, and with an expiration date 30 months after issuance) to thepurchase shares of Company from the public offeringcommon stock for an exercise price of $4.07 per share. The warrants included a 9.99% beneficial-ownership blocker provision. The 1,000,000 pre-funded warrants were approximately $23.0 million. The Company paid to the underwriters underwriting discounts and commissions of approximately $1.6 million in connection with the offering, and approximately $0.4 million of other expenses in connection with the offering of which approximately $0.3 million are recorded as deferred offering costs in the Company’s financial statements as of, and for the nine months ended September 30, 2017.

The securities described above were offered by the Company pursuant to a registration statement filed with the SEC that was declared effectiveexercised on September 28, 2017. The final prospectus relating to the offering was filed with the SEC on October 2, 2017.

February 4, 2021.

NOTE 7 — WARRANTS

The following represents a summary of the warrants outstanding at September 30, 2017 and changes during the period then ended:

  Warrants  Weighted Average Exercise Price 
Outstanding at December 31, 2016  578,323  $8.45 
Granted    $ 
Exercised/Expired/Forfeited   $ 
Outstanding at September 30, 2017  578,323  $8.45 
Exercisable at September 30, 2017  578,323  $8.45 

RITTER PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 8 — STOCK-BASED COMPENSATION

Equity Incentive PlansStock Options and Warrants

 

The Company has issued equity awards pursuant to its 2015 Equityrecognizes all compensatory share-based payments as compensation expense over the service period, which is generally the vesting period.

In April 2020, the Company adopted the 2020 Stock Incentive Plan (the “2015“2020 Plan”), 2009 Stock which provides for the granting of incentive or nonstatutory common stock options to qualified employees, officers, directors, consultants and other service providers. At March 31, 2021 and 2020 there were 3,940,000 and 0 outstanding options respectively under the 2020 Plan and 2008 Stock Plan (collectively the “Plans”). The Plans permit the Company to grant non-statutory stockthere were 117,157 and 0 options incentive stock options and other equity awards to the Company’s employees, outside directors and consultants; however, incentive stock options may only be granted to the Company’s employees. Beginning June 29, 2015, no further awards may be granted under the 2009 Stock Plan or 2008 Stock Plan. However, to the extent awards under the 2008 Plan or 2009 Plan are forfeited or lapse unexercised or are settled in cash, the common stock subject to such awards will be available respectively for future issuance under the 2015 Equity Incentive Plan.

On June 2, 2017, the stockholders of the Company approved an amendment to the 2015 Plan at the 2017 annual meeting of stockholders, which among other things, increased the number of shares that may be issued pursuant to awards under the 2015 Plan by 838,000 shares of common stock.

On September 15, 2017, the stockholders of the Company approved an amendment to the 2015 Plan at a special meeting of stockholders, which among other things, increased the number of shares that may be issued pursuant to awards under the 2015 Plan by 25,858,711 shares of common stock. As of September 30, 2017, the aggregate number of shares of common stock authorized for issuance under the 2015 Plan, as amended, was 27,500,000.grant.

 

The following represents a summary of the options granted (under the 2020 Plan and otherwise) to employees and non-employeesnon-employee service providers that are outstanding at September 30, 2017March 31, 2021, and changes during the three-month period then ended:

 

  Number of Shares  Weighted- Average Exercise Price  Aggregate Intrinsic Value  Weighted- Average Remaining Contractual Life (in years) 
Outstanding at December 31, 2016  2,476,924  $6.01  $497,351   8.3 
Options granted  88,000   2.89      8.8 
Options forfeited (5,000)  2.89       
Outstanding at September 30, 2017  2,559,924   5.91      7.6 
Exercisable at September 30, 2017  1,808,972  $5.88     7.2 
  Shares  Weighted– Average
Exercise
Price
  

Range of Exercise

Price

  Weighted– Average Remaining
Life (Years)
 
Total outstanding – December 31, 2020  4,011,356  $7.05  $3.52—1,465.75   9.29 
Granted  27,000   3.29   3.29   9.91 
Expired            
Forfeited  (4,500)  3.68   3.52—4.97   9.78 
Total outstanding – March 31, 2021  4,033,856  $7.03  $3.29—1,465.75   9.04 
Exercisable (vested)  108,856  $81.38  $4.97—1,465.75   2.26 
Non-Exercisable (non-vested)  3,925,000  $4.96  $3.29—5.13   9.23 

There was approximately $1.3 million and $0 of compensation costs related to outstanding options for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, there was approximately $11.4 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 2.22 years.

No stock options were exercised during the three months ended March 31, 2021 and 2020.

20

 

The exercise price for an option issued under the Plans2020 Plan is determined by the Board of Directors, but will be (i) in the case of an incentive stock option (A) granted to an employee who, at the time of grant of such option, is a 10% stockholder, no less than 110% of the fair market value per share on the date of grant; or (B) granted to any other employee, no less than 100% of the fair market value per share on the date of grant; and (ii) in the case of a non-statutory stock option, no less than 100% of the fair market value per share on the date of grant. The options awarded under the Plans2020 Plan will vest as determined by the Board of Directors but will not exceed a ten-year period. The weighted average grant date fair value per share of options granted during the three months ended March 31, 2021 was $3.29.

 

Fair Value of Equity Awards

 

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

RITTER PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

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 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.Securities and Exchange Commission. 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:

 

  Three Months Ended
September 30,
  

Nine Months Ended

September 30,

 
  2017  2016  2017  2016 
Expected dividend yield  0.00%  0.00%  0.00%  0.00%
Expected stock price volatility  53.08% - 53.68   53.60% - 54.73  53.08% – 53.90%  53.60% - 59.03
Risk-free interest rate  1.89% - 2.29  1.29% - 1.71  1.98% - 2.37  1.29% - 1.78
Term of options  10   10   10   10 
Stock price  $0.35 - $0.65   $1.27 - $1.68   $0.35 - $1.08   $1.13 - $1.68 

Stock-Based Compensation

  

For the three months

ended

March 31, 2021

 
Expected dividend yield  0.00%
Expected stock-price volatility  102%
Risk-free interest rate  0.84% — 1.04%
Average expected remaining years of life of options  6.0 
Stock price $3.29 

 

The Company recognized stock-basedrecorded share-based compensation expense for services within general and administrative expenseclassified it in the accompanyingcondensed consolidated statements of operations as follows:

  For the three months ended March 31, 
  2021  2020 
General and administrative $1,092,228  $ 
Research and development  169,895   

 
Total $1,262,123  $

 

21

Equity Classified Compensatory Warrants

In connection with the $4.0 million equity capital raise as part of approximately $203,000the May 2020 reverse recapitalization transaction, the Company issued common stock warrants to an advisor and $333,000its designees for the purchase of 811,431 shares of the Company’s common stock at an exercise price of $1.11 per share. The issuance cost of these warrants was charged to additional paid-in capital, and did not result in expense on the Company’s statements of operations.

In addition, various service providers hold equity classified compensatory warrants issued in 2017 and earlier (originally exercisable to purchase Series C convertible preferred stock, and now instead exercisable to purchase common stock) for the purchase of 668,024 shares of Company common stock at a weighted average exercise price of $2.34 per share. These are to be differentiated from the Series C Warrants described in Note 8.

No compensatory warrants were issued during the three months ended March 31, 2021.

The following table summarizes the equity classified compensatory warrant activity for the three months ended September 30, 2017 and 2016, respectively, and $746,000 and $1,042,000March 31, 2021:

  Common Stock 
  Shares  

Weighted–

Average

Exercise
Price

  

Range of Exercise

Price

  Weighted–
Average
Remaining
Life (Years)
 
Total outstanding – December 31, 2020  1,294,217  $1.66         
Granted              
Exercised  (38,390)  2.09         
Expired              
Forfeited  (65,179)  2.07         
Total outstanding – March 31, 2021  1,190,648  $1.61         
Exercisable  1,187,052  $1.60  $1.11 —2.54   4.00 
Non-Exercisable  3,596  $2.54  $2.54   5.48 

The following table summarizes the compensatory warrant activity for the ninethree months ended September 30, 2017March 31, 2020:

  Series C Preferred Stock Warrants 
  Shares  

Weighted–

Average

Exercise
Price

  

Range of Exercise

Price

  

Weighted– Average Remaining

Life (Years)

 
Total outstanding – December 31, 2019  754,262  $1.99         
Forfeited              
Expired              
Granted              
Total outstanding – March 31, 2020  754,262  $1.99         
Exercisable  746,142  $1.99  $1.83 – $2.25   4.59 
Non-Exercisable  8,120  $2.25  $2.25   6.48 

There were no compensation costs related to outstanding warrants for the three months ended March 31, 2021 and 2016, respectively.approximately $8,000 for the three months ended March 31, 2020. As of September 30, 2017,March 31, 2021 and 2020, there was approximately $263,000 of totalno unrecognized compensation cost related to unvested stock-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 1.1 years.nonvested warrants.

22

Noncompensatory Equity Classified Warrants

 

NoIn May 2020, as a commitment fee, the Company issued noncompensatory equity classified warrants to an investor for the purchase of 270,478 shares of Company common stock optionsat an exercise price of $1.11 per share (of which warrants for 200,000 shares were subsequently exercised in December 2020). In July 2020 the Company issued noncompensatory equity classified warrants to such investor for the purchase of 780,198 shares of Company common stock at an exercise price of $0.001 per share (which were subsequently exercised in July 2020), and 1,920,678 shares of Company common stock at an exercise price of $5.25 per share. In August 2020 the Company issued noncompensatory equity classified warrants to such investor for the purchase of 1,287,829 shares of Company common stock at an exercise price of $6.00 per share. Lastly, in December 2020, the Company issued noncompensatory equity classified warrants to such investor for the purchase of 1,000,000 shares of Company common stock at an exercise price of $0.01 per share (which were exercised during the threein February 2021) and nine months ended September 30, 2017. Approximately 8,000 options2,191,010 shares of Company common stock at an exercise price of $4.07 per share. No noncompensatory equity classified warrants were exercisedissued during the three months ended September 30, 2016,March 31, 2021.

The following table summarizes the noncompensatory equity classified warrant activity for the three months ended March 31, 2021:

  Common Stock 
  Shares  

Weighted–

Average

Exercise
Price

  

Range of Exercise

Price

  Weighted–
Average
Remaining
Life (Years)
 
Total outstanding – December 31, 2020  6,549,777  $4.36         
Exercised  (1,000,000)  0.01         
Granted              
Expired              
Forfeited             
Total outstanding – March 31, 2021  5,549,777  $5.15         
Exercisable  4,707,081  $5.34  $1.11 – 2,325.00   1.47 
Non-Exercisable  842,696  $4.07   4.07   2.72 

NOTE 12 — RELATED PARTY TRANSACTIONS

In October 2017, Sekisui purchased all outstanding shares of the Company’s Series D and approximately 11,000 optionsSeries D-1 preferred stock from Gen-Probe Incorporated. As such, Sekisui became a related party as of October 2017. These Series D and Series D-1 preferred stock shares were exercised duringconverted into 1,980,233 shares of the Company’s common stock in connection with the reverse recapitalization transaction in May 2020. During the nine months ended September 30, 2016 with approximate proceedsDecember 31, 2020, Sekisui ceased to be a related party as to the CompanyCompany. In the attached financial statements, information for 2020 periods and dates is presented without distinct “related party” treatment for items pertaining to Sekisui.

NOTE 13 — SUBSEQUENT EVENTS

Management has evaluated subsequent events pursuant to the requirements of $9,000. The aggregate intrinsic value of stock options exercised duringASC Topic 855—Subsequent Events, from the nine months ended September 30, 2016 was approximately $18,000.balance sheet date through the date the financial statements were available to be issued, and has determined that there are no material subsequent events that require disclosure in these financial statements.

 

1223

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (“Quarterly Report”) and the audited financial statements and notes thereto as of and for the yearnine-months transition period ended December 31, 2016 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of2020, which are contained in our AnnualTransition Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC”) on February 27, 2017 (the “2016 Annual Report”).March 31, 2021. As used in this report,Quarterly Report, unless the context suggests otherwise, “we,” “us,” “our,” or “Ritter”“Qualigen” refer to Ritter Pharmaceuticals,Qualigen Therapeutics, Inc. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.

SpecialCautionary Note Regarding Forward-LookingForward Looking Statements and Industry Data

 

This Quarterly Report contains forward-looking statements by the Company that involve substantial risks and uncertainties. Alluncertainties and reflect the Company’s judgment as of the date of this Report. These statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy,generally relate to future operations,events or the Company’s 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 toor operating performance. In some cases, you can identify forward-looking statements although not allbecause they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” or “continue” or the negative of these words or other similar terms or expressions that concern the Company’s expectations, strategy, plans or intentions. Such forward-looking statements contain these identifying words. These statements involve knownmay relate to, among other things, potential future development, testing and unknown risks, uncertaintieslaunch of products and other important factors thatproduct candidates. Actual events or results may causediffer from 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.expectations.

 

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;there can be no assurance that we will successfully develop any drugs or therapeutic devices;
   
 the accuracythere can be no assurance that preclinical or clinical development of our estimates regarding expenses, future revenues and capital requirements;candidate drugs or therapeutic devices will be successful;
   
 the success and timing of our preclinical studies andthere can be no assurance that clinical trials;trials will be approved to begin by or will actually begin by or will proceed as contemplated by any projected timeline;
   
 our ability to obtain and maintain regulatory approval of RP-G28 andthere can be no assurance that clinical trials will complete enrollment as contemplated by any other product candidates we may develop, and the labeling under any approval we may obtain;projected timeline;
   
 regulatory developments in the United States andthere can be no assurance that future clinical trial data will be favorable or that such trials will confirm any improvements over other countries;products or lack negative impacts;
   
 the performance of third-party manufacturers;there can be no assurance that any drugs or therapeutic devices will receive required regulatory approvals or that they will be commercially successful;
   
 our ability to develop and commercialize RP-G28 and any other product candidatesthere can be no assurance that we may develop inwill be able to procure or earn sufficient working capital to complete the future;development, testing and launch of our prospective therapeutic products;
   
 there can be no assurance that patents will issue on our ability to obtainowned and maintain intellectual property protection for RP-G28 and any other product candidates we may develop in the future;in-licensed patent applications;
   
 the successful development ofthere can be no assurance that such patents, if any, and our salescurrent owned and marketing capabilities;in-licensed patents would prevent competition;
   
 the potential marketsthere can be no assurance that we will be able to maintain or expand market demand and/or market share for RP-G28our diagnostic products generally, particularly in view of COVID-19-related deferral of patients’ physician-office visits and any other product candidates we may develop in the future and our ability to serve those markets;view of FastPack reimbursement pricing challenges.
   
 the ratethere can be no assurance that adoption and degreeplacement of market acceptance of our products, if approved;
the success of competing drugs that are or become available;FastPack PRO System analyzers will be widespread; and
   
 the loss of key scientific or management personnel.there can be no assurance that we will be able to manufacture our FastPack PRO System analyzers successfully.

24

Our stock price could be harmed if any of the events or trends contemplated by the forward-looking statements fails to occur or is delayed or if any actual future event otherwise differs from expectations. Additional information concerning these and other risk factors affecting our business (including events beyond our control, such as epidemics and resulting changes) can be found in our prior filings with the SEC (including our Transition Report on Form 10-K for the nine-months transition period ended December 31, 2020), available at www.sec.gov. Any forward-looking statement that we make in this Quarterly Report speaks only as of the date of this Quarterly Report, and we disclaim any intent or obligation to update these forward-looking statements beyond the date of this Quarterly Report, except as required by law. This caution is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

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

 

AnyFuture filings with the SEC, future press releases and future oral or written statements made by us or with our approval, which are not statements of historical fact, may also contain forward-looking statement that we make in this Quarterly Report speaksstatements. Because such statements include risks and uncertainties, many of which are beyond our control, actual results may differ materially from those expressed or implied by such forward-looking statements. The forward-looking statements speak only as of the date of such statement,on which they are made, and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date of this Quarterly Report. You should also read carefully the factors described in the “Risk Factors” section of our 2016 Annual Report and this Quarterly Report to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.on which they are made.

 

Overview

 

Ritter Pharmaceuticals, Inc. developsWe are a biotechnology company focused on developing novel therapeutics for the treatment of cancer and infectious diseases, as well as maintaining and expanding our core FDA-approved FastPack® System, which has been used successfully in diagnostics for 20 years. Our cancer therapeutics pipeline includes QN-247, RAS-F and STARS™. QN-247 (formerly referred to as ALAN or AS1411-GNP) is a DNA coated gold nanoparticle cancer drug candidate that has the potential to target various types of cancer with minimal side effects; the nanoparticle coating technology is similar to the core nanoparticle coating technology used in our blood-testing diagnostic products. The foundational aptamer of QN-247, QN-165 (formerly referred to as AS1411), is also a drug candidate for treating COVID-19 and other viral-based infectious diseases; we currently plan that our first clinical trial would be a trial of QN-165 against COVID-19. RAS-F is a family of RAS oncogene protein-protein interaction inhibitor small molecules for preventing mutated RAS genes’ proteins from binding to their effector proteins; preventing this binding could stop tumor growth, especially in pancreatic, colorectal and lung cancers. STARS is a DNA/RNA-based treatment device candidate for removal from circulating blood of precisely targeted tumor-produced and viral compounds.

Because our therapeutic candidates are still in the development stage, our only products that modulateare currently commercially available are the human gut microbiomeFastPack System diagnostic instruments and test kits. The FastPack System menu includes rapid point-of-care diagnostic tests for cancer, men’s health, hormone function and vitamin D status. Since inception, our sales of FastPack products have exceeded $100 million. We have always utilized a “razor and blades” pricing strategy, providing analyzers to treat gastrointestinal diseases.our customers (physician offices, clinics and small hospitals) at low cost in order to increase sales volumes of higher-margin test kits. Pursuant to a distribution agreement, we are required to rely on our diagnostics distribution partner Sekisui Diagnostics, LLC (“Sekisui”) for most FastPack distribution worldwide until May 2022. We are advancing human gutmaintain direct distribution for certain house accounts, including selling our total testosterone test kits to Low T Center, Inc. (“Low T”), the largest men’s health research by exploringgroup in the metabolic capacity ofUS, with 44 locations. We have licensed and technology-transferred our FastPack System technology to Yi Xin Zhen Duan Jishu (Suzhou) Ltd., for 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 completed a Phase 2a clinical trial of our leading product candidate, RP-G28, an orally administered, high purity oligosaccharide in November 2011.China diagnostics market.

25

 

We completed a Phase 2b/3 multi-center, randomized, double-blind, placebo-controlled, parallel group trial of RP-G28 in October 2016. The purpose of the trial wasdo not expect to evaluate the 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 trial aimed 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. On October 17, 2016, the last patient completed dosing and all monitoring visits.

We held a Type C meeting with the FDA in March 2017, prior to the unblinding of our Phase 2b/3 data, to discuss our development plans and Phase 2b/3 clinical trial. The focus of the meeting was to obtain the FDA’s feedback on our Phase 2b/3 clinical trial, including our statistical analysis plan (“SAP”) prior to unblinding any data.

The meeting with the FDA was constructive and productively focused on best defining clinically meaningful benefits to patients suffering from lactose intolerance and how to reflect these benefits in endpoints. We modified aspects of our SAP to address certain FDA recommendations, including a change to our primary endpoint, which was changed to combine abdominal pain with relevant secondary endpoints to establish a composite score (abdominal pain, abdominal cramping, abdominal bloating and abdominal gas). The protocol design and the assessment utilized to collect lactose intolerance symptoms remained unchanged.

Topline results of the trial were announced in March 2017. Due to inconsistent data results from one study site, the data from this site was excluded from the primary analysis population (Efficacy Subset mITT). After excluding the data from the one anomalous study site, results showed a clinically meaningful benefit to subjects in the reduction of lactose intolerance symptoms across a variety of outcome measures. The majority of analyses showed positive outcome measures and the robustness of the data point to a clear drug effect. Treatment patients not only reported meaningful reduced symptoms, but also 30 days after taking the treatment, patients reported adequate relief from lactose intolerance symptoms and satisfaction with the results of the treatment, with RP-G28 preventing or treating their lactose intolerance symptoms. Greater milk and dairy product consumption was also reported by patients.

A subset of subjectsbe profitable before products from our Phase 2b/3 clinical trial has been rolled into a 12-month extension study to evaluate long-term durability of treatment. The study is also evaluating each participant’s microbiome, expanding our knowledge of the effectstherapeutics pipeline are commercialized, because we foresee 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 of 2017.

We held an End-of-Phase 2 meeting with the FDA’s Division of Gastroenterology and Inborn Errors Products in August 2017. The purpose of the meeting was to obtain the FDA’s feedback on our Phase 3 program. We reached general consensus with the FDA on certain elements of our current Phase 3 program and have received clear guidance and recommendations on many necessary components of our Phase 3 program; including the clinical, non-clinical, and chemistry, manufacturing and controls (CMC) requirements needed to support an NDA submission.

We have incorporated much of this guidance into our Phase 3 program. Our current Phase 3 clinical program will consist of two confirmatory clinical trials of similar trial design and size as our Phase 2b/3 clinical trial and will include additional components that may allow for claims for durability of effect. These additional trials may be run in parallel.

Financial Overview

We have incurred net losses in each year since our inception, including net losses of approximately $5.6 million for the nine months ended September 30, 2017. We had an accumulated deficit of approximately $51.1 million as of September 30, 2017. Substantially all of our net losses resulted from costs incurred in connection with our research and development programs, patent costs, stock-based compensation, and from general and administrative costs associated with our operations.

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

From inception through September 30, 2017,on the therapeutics programs will significantly exceed the profits, if any, that we might have incurred approximately $21.9 million in research andfrom our diagnostics products. To experience losses while therapeutic products are still under development expenses. We plan to increase our research and development expensesis, of course, typical 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.biotechnology companies.

 

The successful development of RP-G28Our condensed consolidated financial statements do not separate out our diagnostics-related activities and our therapeutics-related activities. Although to date all our reported revenue is highly uncertain. At this time, we cannot reasonably estimatediagnostics-related, our reported expenses represent the nature, timing or costs of the efforts that will be necessary to complete the remainder of 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.

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 anytotal of our clinical trials, we could be required to expend significant additional financial resourcesdiagnostics-related and time on the completion of clinical development.

Patent Costs

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

General and Administrative Expenses

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

We expect that our general and administrative expenses will increase 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 othertherapeutics-related expenses.

16

 

Interest IncomeCompletion of Reverse Recapitalization Transaction with Ritter

 

Interest income consistsOn May 22, 2020, we completed a “reverse recapitalization” transaction with Qualigen, Inc. (not to be confused with the Company); the Company’s merger subsidiary merged with and into Qualigen, Inc. with Qualigen, Inc. surviving as a wholly owned subsidiary of interest earnedthe Company. The Company, which had previously been known as Ritter Pharmaceuticals, Inc., was renamed Qualigen Therapeutics, Inc., and the former stockholders of Qualigen, Inc. acquired, via the recapitalization, a substantial majority of the shares of the Company. Ritter/Qualigen Therapeutics common stock, which was previously traded on our cash.the Nasdaq Capital Market under the ticker symbol “RTTR,” commenced trading on Nasdaq, on a post-reverse-stock-split adjusted basis, under the ticker symbol “QLGN” on May 26, 2020.

Because Qualigen, Inc. was the accounting acquirer in the reverse recapitalization transaction, all references to financial figures of “the Company” presented in the accompanying condensed consolidated financial statements and Notes are those of Qualigen, Inc.; the corresponding figures of Ritter Pharmaceuticals, Inc. have been disregarded. Moreover, references in this Quarterly Report to “our” pre-May 22, 2020-merger history, securities and agreements are references to the pre-May 22, 2020-merger history, securities and agreements of Qualigen, Inc., except where otherwise expressly specified.

We are no longer pursuing the gastrointestinal disease treatment business on which Ritter Pharmaceuticals, Inc. had focused before the reverse recapitalization transaction.

 

Critical Accounting PoliciesDistribution and EstimatesDevelopment Agreement with Sekisui

 

This discussionIn May 2016, through our wholly-owned diagnostics subsidiary Qualigen, Inc., we entered into a Distribution and analysis is based on our financial statements,Development Agreement (the “Distribution Agreement”) with Sekisui. Under the Distribution Agreement, Sekisui serves as the exclusive worldwide distributor for FastPack products (although we retain certain specific accounts for direct transactions). Sekisui’s exclusive distribution arrangements are effective until May 2022.

Under the Distribution Agreement, we began development of a proposed “FastPack 2.0” product line, which if successfully introduced by us would have been prepareddistributed by Sekisui. Between May 2016 and January 2018, Sekisui paid us a total of approximately $5.5 million upon the achievement of specified development milestones.

Under this program, we developed a FastPack 2.0 diagnostic test for a new whole blood vitamin D assay, and we then conducted a clinical trial of it in accordanceMarch 2019. We determined in May 2019 that it was uncertain whether the results of the trial would enable the test to receive FDA approval, and our FastPack 2.0 project with GAAP. The preparation of these financial statements requires usSekisui was discontinued. Currently no further FastPack 2.0 analyzer or test development is ongoing, and we have licensed and transferred our FastPack 2.0 technology to make estimatesYi Xin Zhen Duan Jishu (Suzhou) Ltd. for them to further develop and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilitiescommercialize.

We became obligated to pay Sekisui $0.9 million for $0.5 million 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 believeadvanced by Sekisui 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. There have been no material changes in our significant accounting policies as ofus and for the nine months ended September 30, 2017, as compared with the significant accounting policies describedreimbursement of $0.4 million in our 2016 Annual Report.certain out-of-pocket development and preclinical study expenses incurred by Sekisui. We satisfied these amounts (plus interest) by payment in full on July 21, 2020.

 

WhileOur expectation is that when we regain FastPack distribution rights from Sekisui, we will be able to improve the profitability of our significant accounting policies are more fully described in Note 3 to the financial statements included in this Quarterly Report, 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.diagnostics business.

26

 

Fair ValueTechnology Transfer Agreement with Yi Xin

Through our wholly-owned diagnostics subsidiary Qualigen, Inc., we entered into a Technology Transfer Agreement dated as of Financial InstrumentsOctober 7, 2020 with Yi Xin Zhen Duan Jishu (Suzhou) Ltd. (“Yi Xin”), of Suzhou, China, for Yi Xin to develop, manufacture and sell new generations of diagnostic test systems based on our core FastPack technology. In addition, the Technology Transfer Agreement authorized Yi Xin to manufacture and sell our current generations of FastPack System diagnostic products (1.0, IP and PRO) in China.

Under the Technology Transfer Agreement, we received net cash payments of $250,000 in the final quarter of calendar 2020, classified as deferred revenue as of the balance sheet date of December 31, 2020, and a cash payment of $420,000 during the three months ended March 31, 2021. In addition, we will receive low- to mid-single-digit royalties on any future new-generations and current-generations product sales by Yi Xin. Of these amounts, we recognized approximately $38,000 in product sales and $479,000 in license revenue included in the statement of operations for the three months ended March 31, 2021.

We provided technology transfer and patent/know-how license rights to facilitate Yi Xin’s development and commercialization.

We gave Yi Xin the exclusive rights for China – which is a market we have not otherwise entered – both for Yi Xin’s new generations of FastPack-based products and for Yi Xin-manufactured versions of our existing FastPack product lines. Yi Xin will also have the right to sell its new generations of FastPack-based diagnostic test systems throughout the world (but not to or toward current customers of our existing generations of FastPack products); any such non-China sales would, until May 1, 2022, need to be through Sekisui. In addition, after May 1, 2022, Yi Xin will have the right to sell Yi Xin-manufactured versions of existing FastPack 1.0, IP and PRO product lines worldwide (other than in the United States and other than to or toward current non-US customers of those products). Also, after May 1, 2022, Yi Xin will have the right to buy Qualigen-manufactured FastPack 1.0, IP and PRO products from us at distributor prices for resale in and for the United States (but not to or toward current US customers of those products); we did not license Yi Xin to sell in the United States market any Yi Xin-manufactured versions of those legacy FastPack product lines, even after May 1, 2022.

In the Technology Transfer Agreement, we confirmed that we would not, after May 1, 2022, seek new FastPack customers outside the United States.

Yi Xin is a newly-formed company and is subject to many risks. There can be no assurance that Yi Xin will successfully commercialize any products or that we will receive any royalties from Yi Xin.

Warrant Liabilities

 

FairIn 2004, Qualigen, Inc. issued a series of Series C preferred stock warrants to investors and brokers in connection with a private placement. These warrants were subsequently extended and survived the May 2020 Ritter reverse recapitalization transaction and are now exercisable for Qualigen Therapeutics common stock. These warrants were so-called “exploding warrants” – they contained a provision that if Qualigen, Inc. issued shares (except in certain defined scenarios) at a price below the warrants’ exercise price, the exercise price would be re-set to such new price and the number of shares underlying the warrants would be increased in the same proportion as the exercise price decrease. For accounting purposes, such “exploding warrants” give rise to “warrant liabilities” (even though there is not any “liability” in the sense that we would be obligated to pay any cash sum to anyone). Although the fair value measurement guidelines are prescribed by accountingof the warrants was immaterial at March 31, 2020, the operation of the “double-ratchet” provisions in these “exploding warrants” in connection with the reverse-recapitalization transaction now allow the holders to exercise for a significantly higher number of shares than before and at a significantly lower price than the current market price of our shares. Accounting principles generally accepted in the United States of America (“U.S. GAAP”) require us 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 torecognize 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 observablewarrants as warrant liabilities on our balance sheets and to reflect period-to-period changes 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 and accrued expenses, 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 usingwarrant liabilities on our statements of operations. The size of these warrant liabilities at March 31, 2021 was quite large ($6.2 million) and caused a significant distortion of our balance sheet at March 31, 2021 and our results of operations for the Black-Scholes option-pricing model,three months period ended March 31, 2021. Because this fair value will be determined each quarter on a “mark-to-market” basis, this item could result in significant variability in our future quarterly and is recognized as an expense, under the straight-line method, over the requisite service period (generally the vesting periodannual statements of the equity grant). If we determine that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by regulators,operations and balance sheets based on changes in our public market common stock price. Pursuant to U.S. GAAP, a quarter-to-quarter increase in our stock price would result in a (possibly quite large) increase in the fair value calculated forof the warrant liabilities and a quarter-to-quarter decrease in our stock options could change significantly. Higher volatility and longer expected livesprice would result in an increase to stock-based compensation expense to non-employees determined at the date of grant.

In addition to the assumptions useda (possibly quite large) decrease in the Black-Scholes option-pricing model, we also estimate a forfeiture ratefair value of the warrant liabilities. Approximately 39% of these “exploding warrants” were exercised or forfeited as of the balance sheet date at March 31, 2021, which will tend to calculatereduce the stock-based compensation for our equity awards.amplitude of this variability. (There were 2,868,891 and 3,378,596 of these “exploding warrants” outstanding at March 31, 2021 and December 31, 2020, respectively.) We will continue to use judgmentencourage the holders of these warrants to exercise them, and if the number of outstanding “exploding warrants” is further reduced the potential amplitude of the changes in evaluating the expected volatility, expected terms and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis.warrant liabilities will correspondingly be further reduced.

 

1827

 

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, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an emerging growth company until the earlier of (i) the last day of the fiscal year (a) following the fifth anniversary of the date we completed our initial public offering, which was June 29, 2015, (b) in which we have total annual gross revenue of at least $1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeded $700.0 million as of the prior June 30th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

19

 

Results of Operations

 

Comparison of the Three Months Ended September 30, 2017March 31, 2021 and 20162020

 

The following table summarizes our results of operations for the three months ended September 30, 2017March 31, 2021 and 2016, together with the changes in those items in dollars and as a percentage:2020:

 

  For the Three Months Ended
September 30,
  Dollar  Percentage 
  2017  2016  Change  Change 
Statement of Operations Data:                
Operating costs and expenses                
Research and development $915,268  $2,348,755  $(1,433,487)  (61)%
Patent costs  47,431   98,908   (51,477)  (52)%
General and administrative  1,052,236   1,091,647   (39,411)  (4)%
Total operating costs and expenses  2,014,935   3,539,310   (1,524,375)  (43)%
Loss from operations  (2,014,935)  (3,539,310)  1,524,375   43%
Other income                
Interest income  4,083   13,239   (9,156)  (69)%
Total other income  4,083   13,239   (9,156)  (69)%
Net loss $(2,010,852) $(3,526,071) $1,515,219   43%
  

For the Three Months Ended

March 31,

 
   2021   2020 
REVENUES        
Net product sales $1,420,842  $1,411,755 
License revenue  

478,654

   

 
Collaborative research revenue  

   45,000 
Total revenues  1,899,496   1,456,755 
         
EXPENSES        
Cost of product sales  1,202,479   991,651 
General and administrative  2,873,939   918,379 
Research and development  3,499,373   238,059 
Sales and marketing  136,587   92,262 
Total expenses  7,712,378   2,240,351 
         
LOSS FROM OPERATIONS  (5,812,882)  (783,596)
         
OTHER EXPENSE (INCOME), NET        
Gain on change in fair value of warrant liabilities  (2,122,900)   
Interest (income) expense, net  (17,343)  90,757 
Other income, net  (542)  (1,158)
Total other expense (income), net  (2,140,785)  89,599 
         
LOSS BEFORE PROVISION FOR INCOME TAXES  (3,672,097)  (873,195)
         
PROVISION FOR INCOME TAXES  530   (619)
         
NET LOSS $(3,672,627) $(872,576)

 

Research and Development ExpensesRevenues

 

Research and development expenses decreased by approximately $1.4 million, or 61%,Our operating revenues are primarily generated from sales of diagnostic tests. Revenues during the three months ended September 30, 2017 asMarch 31, 2021 were $1.9 million compared to the three months ended September 30, 2016. The primary reason for this decrease is that our Phase 2b/3 clinical trial, which was initiated in March 2016, was completed during the fourth quarter of 2016. Research and development expenses$1.5 million during the three months ended September 30, 2017March 31, 2020, an increase of $0.4 million. This increase was primarily reflectdue to recognition of license revenue from Yi Xin under the Phase 2b/3 extension study fees and Phase 3 program planning expenses.Technology Transfer Agreement, an item which had no counterpart in the quarter ended March 31, 2020.

 

Patent CostsNet product sales

 

Patent costs decreased byNet product sales are primarily generated from sales of diagnostic tests. Net product sales remained level at approximately $51,000, or 52%,$1.4 million during the three months ended September 30, 2017 asMarch 31, 2021 and 2020, but improved in the first quarter of 2021 compared to the later calendar 2020 quarters which were negatively impacted by the COVID-19 pandemic.

License revenue

License revenue during the three months ended September 30, 2016. The decreaseMarch 31, 2021 was attributable$0.5 million, due to the overall timingrecognition of certainrevenue from Yi Xin under the Technology Transfer Agreement. There was $0 of license revenue during the three months ended March 31, 2020.

Collaborative research revenue

Collaborative research revenue is recognized as research services are performed over the development period for each agreement. Collaborative research revenue during the three months ended March 31, 2021 was $0, as compared to less than $0.1 million during the three months ended March 31, 2020. Collaborative research revenue during the three months ended March 31, 2020 arose from our development work toward a cellular fibronectin assay for Prediction BioSciences SAS.


28

Expenses

Cost of Product Sales

Cost of product sales increased during the three months ended March 31, 2021, to $1.2 million, or 85% of net product sales, versus approximately $1.0 million, or 68% of net product sales, during the three months ended March 31, 2020. The increase of $0.2 million, and increase in percentage, were primarily due to higher manufacturing labor costs related to our maintenanceand higher allocated manufacturing-support costs of patent rightsresearch and the prosecution of patents.development personnel.

 

General and Administrative Expenses

 

General and administrative expenses decreased slightly by approximately $39,000, or 4%,increased sharply from $0.9 million, during the three months ended September 30, 2017 as comparedMarch 31, 2020, to the three months ended September 30, 2016, mainly due to lower stock-based compensation expense in the current fiscal quarter.

Other Income

Other income decreased by approximately $9,000, or 69%,$2.9 million during the three months ended September 30, 2017 as comparedMarch 31, 2021. This increase was primarily due to $1.1 million in employee/director stock-based compensation expense, a $0.3 million increase in insurance expenses, a $0.3 million increase in payroll expenses, and a $0.3 million increase in other overhead expenses, all primarily related to our public-company status during the three months ended September 30, 2016, dueMarch 31, 2021 in contrast to lower interest income forour private-company status during the current fiscal quarter.

20

Comparison of the Nine Months Ended September 30, 2017 and 2016

The following table summarizes our results of operations for the ninethree months ended September 30, 2017 and 2016, together with the changes in those items in dollars and as a percentage:March 31, 2020.

  For the Nine Months Ended
September 30,
  Dollar  Percentage 
  2017  2016  Change  Change 
Statement of Operations Data:                
Operating costs and expenses                
Research and development $2,121,898  $7,112,177  $(4,990,279)  (70)%
Patent costs  175,794   199,888   (24,094)  (12)%
General and administrative  3,367,781   3,533,608   (165,827)  (5)%
Total operating costs and expenses  5,665,473   10,845,673   (5,180,200)  (48)%
Loss from operations  (5,665,473)  (10,845,673)  (5,180,200)  48%
Other income                
Interest income  18,362   50,466   (32,104)  (64)%
Other income     1,214   (1,214)  (100)%
Total other income  18,362   51,680   (33,318)  (64)%
Net loss $(5,647,111) $(10,793,993) $5,146,882   48%

 

Research and Development ExpensesCosts

 

Research and development expenses decreased by approximately $5.0costs include diagnostic and therapeutic research and product development costs. We have shifted our focus in this category toward therapeutics. Research and development costs increased from $0.2 million or 70%,for the three months ended March 31, 2020 to $3.5 million for the three months ended March 31, 2021. Of the $0.2 million of research and development costs for the three months ended March 31, 2020, 35% was attributable to diagnostics and 65% was attributable to therapeutics. Of the $3.5 million of research and development costs for the three months ended March 31, 2021, $0.3 million (or 9%) was attributable to diagnostics and $3.2 million (or 91%) was attributable to therapeutics.

The increase in diagnostic research and development costs was primarily due to increased stock-based compensation expense related to our public-company status, and wind-down costs related to the withdrawn COVID-19 antibody diagnostic test during the ninethree months ended September 30, 2017March 31, 2021. The increase in therapeutics research and development costs was primarily due to $2.7 million in expenses related to the potential application of QN-165 to treatment of COVID-19 ($1.8 million in drug compound manufacturing costs, and $0.9 million in other pre-clinical research costs for the three months ended March 31, 2021, as compared to the same prior year period. The primary reason$0 for the decrease is that our Phase 2b/3 clinical trial, which was initiatedthree months ended March 31, 2020), as well as pre-clinical research and development cost increases of about $0.2 million for QN-247 and about $0.1 million for RAS. Of the $1.8 million in March 2016, was completeddrug compound manufacturing costs during the fourththree months ended March 31, 2021, $1.1 million consisted of deposits which had been placed in 2020 with STA Pharmaceutical Co., Ltd., a subsidiary of WuXi AppTec, our manufacturer of QN-165 for our anticipated clinical trials; these deposits were recognized as a 2021 first quarter of 2016. Researchexpense.

For the future, we expect our therapeutic research and development expenses during the nine months ended September 30, 2017 primarily reflect the Phase 2b/3 extension study feescosts to continue to increase and Phase 3 program planning expenses.to significantly outweigh our diagnostic research and development costs.

 

Patent Costs

The approximate $24,000, or 12%, decrease in patent costs during the nine months ended September30, 2017 as compared to the nine months ended September 30, 2016 was mainly attributable to the overall timing of certain costs related to our maintenance of patent rightsSales and the prosecution of patents. As of September 30, 2017, we had 14 issued patents and 27 pending patent applications.

General and AdministrativeMarketing Expenses

 

GeneralSales and administrativemarketing expenses decreased by approximately $166,000, or 5%, during the ninethree months ended September 30, 2017March 31, 2021 increased to approximately $137,000 as compared to $92,000 during the ninethree months ended September 30, 2016. The decrease wasMarch 31, 2020 and are primarily due to lower stock compensation expense that was slightly offset by higher legal fees.an increase in payroll and recruiting expenses related to our diagnostics business.

29

Other Expense (Income)

 

Other IncomeChange in Fair Value of Warrant Liabilities

 

Interest income was approximately $18,000 and $50,000 forDuring the ninethree months ended September 30, 2017March 31, 2021 we experienced $2.1 million in other income because the fair value of the warrant liabilities arising from our “exploding warrants” series (containing a “double-ratchet” provision) issued by Qualigen, Inc. many years ago to brokers and 2016, respectively. The decrease of approximately $32,000, or 64%, duringinvestors in connection with a 2004 private placement declined to $6.2 million from $8.3 million at December 31, 2020. For the ninethree months ended September 30, 2017 reflectsMarch 31, 2020, change in fair value of warrant liabilities was $0 because the fair value was immaterial at both the beginning and the end of the three months ended March 31, 2020.

Because the fair value of the warrant liabilities will be determined each quarter on a decrease“mark-to-market” basis, this item could result in interestsignificant variability in our future quarterly and annual statements of operations based on unpredictable changes in our average cash balances as a resultpublic market common stock price and the number of funding our Phase 2b/3 trial and extension study.warrants outstanding at the end of each quarter.

Interest (Income) Expense, Net

 

There was no otherabout $17,000 in net interest income during the ninethree months ended September 30, 2017 as compared to other incomeMarch 31, 2021 versus net interest expense of approximately $1,000 for$0.1 million during the ninethree months ended September 30, 2016.March 31, 2020. Interest on $1.7 million principal amount of convertible notes payable ceased to accrue when they automatically converted in May 2020 upon the closing of the reverse recapitalization transaction. In addition, between April 1, 2020 and December 31, 2020 we paid off our revolving factoring line of credit facility and repaid approximately $0.9 million to Sekisui.

 

21

Liquidity and Capital Resources

 

Since our inception,As of March 31, 2021, we had $21.9 million of cash and cash equivalents. However, we have incurredsuffered recurring losses from operations. Based on our current cash position, and assuming currently planned expenditures and level of operations, we believe we have sufficient capital to fund operations for the twelve-month period subsequent to the date of this Quarterly Report. However, we operate in a rapidly evolving and unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. If we are unable to obtain funding, we could be required to delay, reduce or eliminate research and development programs, product portfolio expansion or future commercialization efforts, which could adversely affect our business prospects.

Our balance sheet at March 31, 2021 included $6.2 million of warrant liabilities. We do not consider that the warrant liabilities constrain our liquidity, as a practical matter. Our current liabilities at March 31, 2021 included $0.5 million of accounts payable and $1.9 million of accrued expenses and other current liabilities.

As a development-stage therapeutics biotechnology company, we expect to continue to have net losses and negative cash flowsflow from operations, and, as of September 30, 2017, we had an accumulated deficit of approximately $51.1 million. Substantially all ofwhich over time will challenge 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.liquidity. There is no assurance that profitable operations will ever be achieved, or, if achieved, could be sustained on a continuing basis.

 

At September 30, 2017,In order to fully execute our business plan, including full clinical trials of therapeutic drug candidates, we had working capital of approximately $0.9 million, and cash of approximately $3.6 million. We have not generated any product revenues and have not achieved profitable operations.will require additional financing. There can be no assurance that further financing can be obtained on favorable terms, or at all.

 

Cash Flows

 

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

 

 For the Nine Months Ended
September 30,
 

For the Three Months Ended

March 31,

 
 2017 2016  2021   2020 
Net cash (used in) provided by:        
Net cash provided by (used in):        
Operating activities $(5,176,622) $(7,367,879) $(2,081,104) $407,714 
Investing activities  —     (8,063)  (69,002)  (95,461)
Financing activities  1,689,214   8,504   121,448   (287,828)
Net decrease in cash $(3,487,408) $(7,367,438)
Net increase (decrease) in cash and cash equivalents $(2,028,658) $24,425 

30

 

Net Cash Used in (Provided by) Operating Activities

 

During the ninethree months ended September 30, 2017, net cash used inMarch 31, 2021, operating activities used $2.1 million of approximately $5.2 millioncash, primarily reflects ourresulting from a net loss of $3.7 million. Cash flows from operating activities (as opposed to net loss) for the period of approximately $5.6three months ended March 31, 2021 benefitted from the $1.6 million offset by non-cash charges of approximately $746,000 fordecrease in prepaid expenses and other assets, a $1.3 million increase in employee/director stock-based compensation expense and changes in our working capital accounts, mainly consisting of an approximate $849,000a $1.1 million increase in accounts payable and an approximate $1.0 million decrease in accrued expenses.

Net cash used in operating activities of approximately $7.4 million during the nine months ended September 30, 2016 reflects our net loss of approximately $10.8 million, partially offset by stock-based compensation of approximately $1.0 million, an increase in prepaid expenses of approximately $57,000, and an increase in accounts payable, accrued expenses and other liabilities of approximatelycurrent liabilities. On the other hand, cash flows from operating activities (as opposed to net loss) for the three months ended March 31, 2021 were disadvantaged by a $2.1 million $294,000decrease in fair value of warrant liabilities and $13,000, respectively.a $0.2 million increase in accounts receivable, net. The decrease in prepaid expenses was primarily due to the expensing during the period of $1.1 million of upfront deposits paid to STA Pharmaceutical Co., Ltd., a subsidiary of WuXi AppTec, our manufacturer of QN-165 for our anticipated clinical trials.

During the three months ended March 31, 2020, operating activities provided $0.4 million of cash, despite a net loss of $0.9 million. Cash flows from operating activities (as opposed to net loss) for the three months ended March 31, 2020 benefitted from a $0.4 million decrease in accounts receivable and a $0.8 million increase in accrued expenses and other current liabilities and accounts payable due to higher payables related to therapeutics research and development. During the three months ended March 31, 2020, the warrant liabilities fair value was zero.

 

Net Cash Used in Investing Activities

 

No cash was used in investing activities forDuring the ninethree months ended September 30, 2017. NetMarch 31, 2021, net cash used in investing activities ofwas approximately $8,000 during the nine months ended September 30, 2016$69,000, primarily related to the purchase of office furnitureproperty and equipment.

 

During the three months ended March 31, 2020, net cash used in investing activities was $95,000, primarily related to payments for patents and licenses.

 


Net Cash Provided by (Used in) Financing Activities

 

Net cash provided by financing activities of approximately $1.7 million duringfor the ninethree months ended September 30, 2017 resultedMarch 31, 2021 was $0.1 million, due to $0.2 million of net proceeds from proceeds received fromexercise of warrants, offset by a $0.1 million principal payment on notes payable. Net cash used in financing activities for the salethree months ended March 31, 2020 was $0.3 million, primarily due to $0.6 million of common shares to Aspire Capital, LLC (“Aspire Capital”) pursuant to the Common Stock Purchase Agreement with Aspire Capital (the “2015 Aspire Purchase Agreement”). Deferred offering costsprincipal payments on notes payable offset by $0.3 million of approximately $311,000, related to our October 2017 public offering that was closed on October 3, 2017, slightly offset the proceeds from the saleissuance of common shares to Aspire Capital.

Sources of Liquidity

2015 Aspire Capital Financing Arrangement

On December 18, 2015, we entered into the 2015 Aspire Purchase Agreement with Aspire Capital, pursuant to which Aspire Capital was committed to purchase up to an aggregate of $10.0 million of our shares of common stock over the approximate 30-month term of the 2015 Aspire Purchase Agreement.

On May 4, 2017, we terminated the 2015 Aspire Purchase Agreement and entered into a new common stock purchase agreement with Aspire Capital (the “2017 Aspire Purchase Agreement”), which provides that upon the terms and conditions set forth therein, Aspire Capital is committed to purchase up to an aggregate of $6.5 million of shares of our common stock over the 30-month term of the 2017 Aspire Purchase Agreement. On any trading day on which the closing sale price of our common stock exceeds $0.25, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice, directing Aspire Capital to purchase up to 100,000 shares of our common stock per trading day, for up to $6.5 million of our common stock in the aggregate at a per share price, calculated by reference to the prevailing market price of our common stock (as provided in the 2017 Aspire Purchase Agreement).

As a condition to the 2017 Aspire Purchase Agreement, we issued 137,324 shares of our common stock to Aspire Capital as a commitment fee. As of the date of this Quarterly Report, no shares of common stock have been sold to Aspire Capital under the 2017 Aspire Purchase Agreement. 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.

October 2017 Public Offering

On October 3, 2017, the Company closed a public offering, selling an aggregate of (i) 34,550,000 Class A Units consisting of 34,550,000 shares of the Company’s common stock and warrants to purchase 34,550,000 shares of the Company’s common stock at a public offering price of $0.40 per unit, and (ii) 9,180 Class B Units consisting of 9,180 shares of Series A Convertible Preferred Stock, with a stated value of $1,000, and convertible into an aggregate of 22,950,000 shares of the Company’s common stock, and warrants to purchase an aggregate of 22,950,000 shares of the Company’s common stock. The warrants have an exercise price of $0.44, are exercisable upon issuance and expire five years from the date of issuance.

The Company granted the underwriters a 45-day option to purchase an additional 8,625,000 shares of the Company’s common stock and/or warrants to purchase an additional 8,625,000 shares of the Company’s common stock. As of the closing of the offering, the underwriters have exercised their over-allotment option for warrants to purchase 2,975,000 shares of the Company’s common stock.

Aggregate gross proceeds to the Company from the public offering were approximately $23.0 million. The Company paid to the underwriters underwriting discounts and commissions of approximately $1.6 million in connection with the offering, and approximately $0.4 million of other expenses in connection with the offering., of which approximately $0.3 are recorded as deferred offering costs in the Company’s financial statements as of, and for the nine months ended September 30, 2017.

The securities described above were offered by the Company pursuant to a registration statement filed with the SEC that was declared effective on September 28, 2017. The final prospectus relating to the offering was filed with the SEC on October 2, 2017.

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 for and commercialize RP-G28. At the same time, we expect our expenses to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for RP-G28. 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 for RP-G28, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations.

Based upon our current operating plan, we believe that our existing cash and cash equivalents (including the net proceeds from our October 2017 public offering), together with interest and any proceeds received from our sale of shares of common stock to Aspire Capital pursuant to the 2017 Aspire Purchase Agreement will enable us to fund our operating expenses and capital expenditure requirements through 2018. We will need to raise additional capital to fund operations and complete ongoing and planned clinical trials beyond 2018.

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

the ability of RP-G28 and any other product candidates that we may develop in the future to progress through clinical development successfully;
the outcome, costs and timing of seeking and obtaining FDA approval;
the willingness of the 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;
our need to expand our research and development activities;
the costs associated with securing and establishing commercialization and manufacturing capabilities;
market acceptance of RP-G28 and any other product candidates that we may develop in the future;
the costs of acquiring, licensing or investing in businesses, products, product candidates and technologies;
our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;

our need and ability to hire additional management and scientific and medical personnel;
the effect of competing technological and market developments;
our need to implement additional internal systems and infrastructure, including financial and reporting systems;
the economic and other terms, timing of and success of our existing licensing arrangements and any collaboration, licensing or other arrangements into which we may enter in the future; and
the costs of operating as a public company.

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.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations and commitments from those disclosed in our 2016 Annual Report.

Off-Balance Sheet Arrangements

Through September 30, 2017, we do not have any off-balance sheet arrangements, as defined by applicable SEC regulations.notes payable.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smallerSmaller reporting company” as defined by Item 10 of Regulation S-K, wecompanies are not required to provide the information required by Item 3.respond to this Item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017,March 31, 2021, the end of the period covered by this Quarterly Report on Form 10-Q.Report.

 

Based on theirthis evaluation, we believeour principal executive officer and principal financial officer have concluded that our disclosure controls and procedures as of September 30, 2017March 31, 2021 were effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. We believe that a disclosure controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the disclosure controls system are met, and no evaluation of disclosure controls can provide absolute assurance that all disclosure control issues, and instances of fraud, if any, within a company have been detected.

 

31

Changes in Internal Control over Financial Reporting

 

There were no changesOur management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. GAAP. As of December 31, 2020, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework, or 2013 Framework. Based on this assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was not effective because of a material weakness in our internal control over financial reporting related to the lack of accounting department resources and/or policies and procedures to ensure recording and disclosure of items in compliance with generally accepted accounting principles. We have taken and are taking steps to remediate the material weakness, including implementing additional procedures and utilizing external consulting resources with experience and expertise in U.S. GAAP and public company accounting and reporting requirements to assist management with its accounting and reporting of complex and/or non-recurring transactions and related disclosures.

We do not believe that during the quarter ended March 31, 2021 there was yet any change in our internal control over financial reporting that occurred during our third fiscal quarter ended September 30, 2017 that have materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.

 

Notwithstanding the identified material weakness, our management believes that the condensed consolidated financial statements included in this Quarterly Report fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP. Nonetheless, we also believe that an internal control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the internal control system are met, and no evaluation of internal control can provide absolute assurance that all internal control issues and instances of fraud, if any, within a company are detected.

PART II - OTHER INFORMATION

 

ItemITEM 1. Legal Proceedings.LEGAL PROCEEDINGS

 

The Company isWe are not currently involved in any legal matters arising in the normal course of business.matters. From time to time, the Companywe 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.

 

ItemITEM 1A. Risk Factors.RISK FACTORS

 

The risks described in Item 1A.Smaller reporting companies are not required to respond to this Item.

Please refer to the Risk Factors section of our 2016 AnnualTransition Report and quarterly reports on Form 10-Q filed with10-K for the SEC on May 9, 2017 and August 7, 2017 (the “2017 Quarterly Reports”) could materially and adversely affect our business, financial condition and results of operations. The risk factors discussed in our 2016 Annual Report and 2017 Quarterly Reports do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations. There have been no material changes in the risk factors discussed in our 2016 Annual Report and 2017 Quarterly Reports.nine-months transition period ended December 31, 2020.

 

ItemITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities and Use of Proceeds

 

Unregistered SalesOn February 10 and 11, 2021, we issued an aggregate of Equity25,000 shares of our common stock to Atlanta Capital Partners, LLC, and Investor Awareness, Inc. in exchange for services valued at $101,750. No underwriter was involved. These were issuances to only two purchasers and accordingly were exempt, by virtue of Section 4(a)(2) of the Securities Act, from the registration requirements of the Securities Act.

 

32

None

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

 

Item 6. Exhibits.ITEM 5. OTHER INFORMATION

 

    Incorporated by Reference 
Exhibit No. Description Form File No. Exhibit Filing
Date
           
1.1 Underwriting Agreement, dated September 29, 2017, between Ritter Pharmaceuticals, Inc. and Aegis Capital Corp., as representative of the several underwriters named therein 8-K 001-37428 1.1 10/4/2017
           
3.1 Certificate of Amendment to the Amended and Restated Certificate of Incorporation 8-K 001-37428 3.1 10/4/2017
           
3.2 Certificate of Designation of Series A Convertible Preferred Stock 8-K 001-37428 3.1 10/4/2017
           
4.1 Warrant Agency Agreement, dated September 29, 2017 by and between Ritter Pharmaceuticals, Inc. and Corporate Stock Transfer, Inc. (including the form of warrant certificate) 8-K 001-37428 4.1 10/4/2017
           
10.1 Ritter Pharmaceuticals, Inc. 2015 Equity Incentive Plan, as amended S-8 333-220907 99.1 10/11/2017
           
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.        

None

 

ITEM 6. EXHIBITS

   Incorporated by Reference
Exhibit No. Description Form File No. Exhibit 

Filing

Date

           
3.1 Amended and Restated Certificate of Incorporation 8-K 001-37428 3.1 July 1, 2015
           
3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation 8-K 001-37428 3.1 September 15, 2017
           
3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation 8-K 001-37428 3.1 March 22, 2018
           
3.4 Certificate of Designation of Preferences, Rights and Limitations of Series Alpha Preferred Stock of the Company, filed with the Delaware Secretary of State on May 20, 2020 8-K   3.1 May 29, 2020
           
3.5 Certificate of Amendment to the Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on May 22, 2020 [reverse stock split] 8-K   3.2 May 29, 2020
           
3.6 Certificate of Merger, filed with the Delaware Secretary of State on May 22, 2020 8-K   3.3 May 29, 2020
           
3.7 Certificate of Amendment to the Certificate of Incorporation of the Company, filed with the Delaware Secretary of State on May 22, 2020 [name change] 8-K   3.4 May 29, 2020
           
3.8 Amended and Restated Bylaws of the Company, as of May 22, 2020 8-K   3.5 May 29, 2020
           
10.1 

Novation Agreement among the Company, Qualigen, Inc. and University of Louisville Research Foundation, Inc. dated January 30, 2021

 

        
10.2 Novation Agreement among the Company, Qualigen, Inc. and University of Louisville Research Foundation, Inc. dated March 1, 2021        
           
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.

# 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.

 

33

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

October 31, 2017May 14, 2021RITTER PHARMACEUTICALS,QUALIGEN THERAPEUTICS, INC.
   
 By:/s/ Michael D. StepS. Poirier
 Name:Michael D. StepS. Poirier
 Title:Chief Executive Officer

 

34