UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended June 30, ~~2019~~2020



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

For the transition period from ________________ to ________________

Commission file number 001-37797

~~INNOVATE BIOPHARMACEUTICALS,~~9 METERS BIOPHARMA, INC.

(Exact name of registrant as specified in its charter)



Delaware		27-3948465
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

8480 Honeycutt Road, Suite 120

Raleigh, North Carolina 27615

(Address of principal executive offices, including zip code)

(919) 275-1933

(Registrant’s telephone number, including area code)

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock $0.0001 Par Value	~~INNT~~NMTR	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 þ No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ No ¨

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



Large accelerated filer	¨	Accelerated filer	þ ¨
Non-accelerated filer	¨ þ	Smaller reporting company	þ
		Emerging growth company	þ

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. þ

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

As of August ~~6, 2019,~~10, 2020, the registrant had ~~35,883,953~~138,933,764 shares of common stock, par value $0.0001 per share, issued and outstanding.

TABLE OF CONTENTS



PART I – FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	3

	Unaudited Condensed Consolidated~~Condensed~~ Balance Sheets as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019	3

	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~ 2019	4

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~ 2019	5

	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2019~~2020 and ~~2018~~ 2019	67

	Notes to Unaudited Condensed Consolidated Financial Statements	78

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2528

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	3638

ITEM 4.	CONTROLS AND PROCEDURES	3638

PART II – OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	3839

ITEM 1A.	RISK FACTORS	3839

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	39

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	39

ITEM 4.	MINE SAFETY DISCLOSURES	39

ITEM 5.	OTHER INFORMATION	3940

ITEM 6.	EXHIBITS	4041

	SIGNATURES	4244

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

~~INNOVATE BIOPHARMACEUTICALS,~~9 METERS BIOPHARMA, INC.

Condensed Consolidated Balance Sheets


	(Unaudited) June 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
Assets							(Unaudited)

Current assets:
Cash and cash equivalents	$	13,337,898		$	5,728,900		$	13,473,467		$	4,592,932
Restricted deposit	75,000			75,000			75,000			75,000
Prepaid expenses and other current assets	1,117,628			504,907			1,061,273			555,052
Deferred offering costs	—			104,706
Total current assets	14,530,526			6,413,513			14,609,740			5,222,984

Property and equipment, net	34,157			35,095			52,104			25,422
Right-of-use asset	69,325			—			14,705			42,830
Other assets	5,580			5,580			5,580			5,580
Total assets	$	14,639,588		$	6,454,188		$	14,682,129		$	5,296,816

Liabilities and Stockholders’ Equity (Deficit)

Current liabilities:
Accounts payable	$	2,712,285		$	3,618,634		$	3,447,824		$	3,890,094
Accrued expenses	974,091			826,327			3,284,095			4,747,751
Convertible note payable, net	4,044,212			5,196,667
Derivative liability	999,000			370,000
Convertible notes payable, net							4,484,277			3,184,655
Derivative liabilities							247,000			408,000
Warrant liabilities	660,200			—			—			2,637,500
Accrued interest	174,166			101,624			136,942			—
Lease liability, current portion	54,620			—			14,705			42,830
Total current liabilities	9,618,574			10,113,252			11,614,843			14,910,830

Lease liability, net of current portion	14,705			—
Total liabilities	9,633,279			10,113,252

Commitments and contingencies (Note 8)

Stockholders’ equity (deficit):
Preferred stock $0.0001 par value, 10,000,000 shares authorized; 0 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively	—			—
Common stock - $0.0001 par value, 350,000,000 shares authorized; 35,883,953 and 26,088,820 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively	3,589			2,609
Preferred stock $0.0001 par value, 10,000,000 shares authorized; 382,779 shares issued and 0 outstanding as of June 30, 2020 (unaudited); 0 issued and outstanding as of December 31, 2019							—			—
Common stock - $0.0001 par value, 350,000,000 shares authorized; 136,232,886 and 39,477,667 shares issued and outstanding as of June 30, 2020 (unaudited) and December 31, 2019, respectively							13,625			3,948
Additional paid-in capital	57,441,695			39,854,297			121,818,976			60,946,816
Accumulated deficit	(52,438,975		)	(43,515,970		)	(118,765,315		)	(70,564,778		)
Total stockholders’ equity (deficit)	5,006,309			(3,659,064		)	3,067,286			(9,614,014		)

Total liabilities and stockholders’ equity (deficit)	$	14,639,588		$	6,454,188		$	14,682,129		$	5,296,816

See accompanying notes to these condensed consolidated financial statements.

~~INNOVATE BIOPHARMACEUTICALS,~~9 METERS BIOPHARMA, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Operating expenses:
Research and development	$	3,073,344		$	1,243,221		$	4,271,659		$	7,601,225		$	444,817		$	3,073,344		$	3,043,802		$	4,271,659
Acquired in-process research and development													32,266,893			—			32,266,893			—
General and administrative	3,049,711			2,132,850			6,164,206			7,103,463			5,659,721			3,049,711			7,329,528			6,164,206
Warrant inducement expense													6,467,048			—			7,157,887			—
Total operating expenses	6,123,055			3,376,071			10,435,865			14,704,688			44,838,479			6,123,055			49,798,110			10,435,865

Loss from operations	(6,123,055		)	(3,376,071		)	(10,435,865		)	(14,704,688		)	(44,838,479		)	(6,123,055		)	(49,798,110		)	(10,435,865		)

Other income (expense):
Interest income	72,641			54,637			99,097			85,129			8,550			72,641			21,365			99,097
Interest expense	(431,626		)	(894,118		)	(858,871		)	(4,555,737		)	(1,019,307		)	(431,626		)	(1,592,292		)	(858,871		)
Loss on extinguishment of convertible note payable	—			—			(1,049,166		)	—			—			—			—			(1,049,166		)
Change in fair value of derivative liability and extinguishment of derivative liability	181,000			—			652,000			—			193,000			181,000			531,000			652,000
Change in fair value of warrant liabilities	1,812,800			—			2,669,800			—			1,058,700			1,812,800			2,637,500			2,669,800
Total other income (expense), net	1,634,815			(839,481		)	1,512,860			(4,470,608		)	240,943			1,634,815			1,597,573			1,512,860

Loss before income taxes	(4,488,240		)	(4,215,552		)	(8,923,005		)	(19,175,296		)	(44,597,536		)	(4,488,240		)	(48,200,537		)	(8,923,005		)
Benefit from income taxes	—			—			—			—			—			—			—			—

Net loss	$	(4,488,240	)	$	(4,215,552	)	$	(8,923,005	)	$	(19,175,296	)	$	(44,597,536	)	$	(4,488,240	)	$	(48,200,537	)	$	(8,923,005	)

Net loss per common share, basic and diluted	$	(0.13	)	$	(0.16	)	$	(0.29	)	$	(0.82	)	$	(0.57	)	$	(0.13	)	$	(0.81	)	$	(0.29	)

Weighted-average common shares, basic and diluted	33,973,788			25,695,171			30,631,601			23,481,834			78,584,900			33,973,788			59,873,598			30,631,601

See accompanying notes to these condensed consolidated financial statements.

~~INNOVATE BIOPHARMACEUTICALS,~~9 METERS BIOPHARMA, INC.

~~Unaudited~~ Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

Six Months Ended June 30, 2019

Common Stock Shares
Common Stock Amount
Additional Paid-in Capital
Accumulated Deficit
Total
Balance as of December 31, 2018
26,088,820

$ 2,609

$ 39,854,297

$ (43,515,970 )
$ (3,659,064 )
Issuance of common stock and warrants
4,886,782

489

11,474,766

—

11,475,255
Allocation of warrants to liabilities —
—
(1,970,000 ) —
(1,970,000 )
Stock issuance costs
—

—

(319,819 )
—

(319,819 )
Share-based compensation —

—

526,000

—

526,000
Issuance of RSUs
90,000

9

(9 )
—

—
Net loss —
—
—
(4,434,765 ) (4,434,765 )
Balance as of March 31, 2019 31,065,602
3,107
49,565,235
(47,950,735 ) 1,617,607
Issuance of common stock and warrants 4,318,272

432

8,744,069

—

8,744,501
Allocation of warrants to liabilities —

—

(1,360,000 )
—

(1,360,000 )
Stock issuance costs —
—
(389,623 ) —
(389,623 )
Exercise of stock options 100,079
10
30,054
—
30,064
Issuance of RSUs 400,000

40

(40 ) —
—
Share-based compensation
—

—

852,000

—

852,000
Net loss
—

—

—

(4,488,240 )
(4,488,240 )
Balance as of June 30, 2019
35,883,953

$ 3,589

$ 57,441,695

$ (52,438,975 )
$ 5,006,309
(Unaudited)

Six Months Ended June 30, 2018
Common Stock Shares* Common Stock Amount Additional Paid-in Capital Accumulated Deficit Total
Balance as of December 31, 2017 11,888,240
$ 11,888
$ 7,167,189
$ (19,353,691 ) $ (12,174,614 )
Change in par value from $0.001 to $0.0001 —
(10,699 ) 10,699
—
—
Issuance of shares as a result of reverse recapitalization 1,864,808
186
(978,860 ) —
(978,674 )
Issuance of common stock 7,111,631
711
16,136,950
—
16,137,661
Warrants issued with common stock —
—
1,995,000
—
1,995,000
Warrants issued to placement agents —
—
913,000
—
913,000
Stock issuance costs —
—
(2,568,079 ) —
(2,568,079 )
Conversion of convertible debt and accrued interest 4,827,001
483
9,229,336
—
9,229,819
Beneficial conversion feature —
—
3,077,887
—
3,077,887
Share-based compensation —
—
7,174,000
—
7,174,000
Net loss —
—
—
(14,959,744 ) (14,959,744 )
Balance as of March 31, 2018 25,691,680
$ 2,569
$ 42,157,122
$ (34,313,435 ) $ 7,846,256
Exercise of warrants 3,922
1
12,471
—
12,472
Share-based compensation —
—
(184,000 ) —
(184,000 )
Net loss —
—
—
(4,215,552 ) (4,215,552 )
Balance as of June 30, 2018 25,695,602
$ 2,570
$ 41,985,593
$ (38,528,987 ) $ 3,459,176



Three and Six Months Ended June 30, 2020
	Series A Preferred Shares		Series A Preferred Amount			Common Stock Shares	Common Stock Amount		Additional Paid-in Capital			Accumulated Deficit			Total
Balance as of December 31, 2019	—		$	—		39,477,667	$	3,948	$	60,946,816		$	(70,564,778	)	$	(9,614,014	)
Warrant exchange	—		—			1,847,309	185		690,654			—			690,839
Share-based compensation	—		—			—	—		276,000			—			276,000
Stock issuance costs - Warrant exchange (FN-1)	—		—			—	—		(300,000		)	—			(300,000		)
Net loss	—		—			—	—		—			(3,603,001		)	(3,603,001		)
Balance as of March 31, 2020	—		—			41,324,976	4,133		61,613,470			(74,167,779		)	(12,550,176		)
Issuance of common stock (RDD & Naia mergers)	—		—			42,695,948	4,270		28,749,756			—			28,754,026
Issuance of preferred stock and warrants (FN-1)	382,779		38			—	—		22,560,956			—			22,560,994
Stock issuance costs	—		—			—	—		(3,589,703		)	—			(3,589,703		)
Share-based compensation	—		—			—	—		4,021,000			—			4,021,000
Exercise of warrants	—		—			12,230,418	1,223		1,217,778			—			1,219,001
Inducement expense	—		—			—	—		6,467,048			—			6,467,048
Conversion of convertible debt and accrued interest	—		—			1,287,696	129		574,871			—			575,000
Beneficial conversion feature	—		—			—	—		207,632			—			207,632
Conversion of preferred stock to common stock	(382,779	)	(38		)	38,277,900	3,828		(3,790		)	—			—
Issuance of RSUs	—		—			415,948	42		(42		)	—			—
Net loss	—		—			—	—		—			(44,597,536		)	(44,597,536		)
Balance as of June 30, 2020	—		$	—		136,232,886	$	13,625	$	121,818,976		$	(118,765,315	)	$	3,067,286

* Common shares adjusted for the exchange ratio from the reverse recapitalization



Three and Six Months Ended June 30, 2019
	Common Stock Shares	Common Stock Amount		Additional Paid-in Capital			Accumulated Deficit			Total
Balance as of December 31, 2018	26,088,820	$	2,609	$	39,854,297		$	(43,515,970	)	$	(3,659,064	)
Issuance of common stock and warrants	4,886,782	489		11,474,766			—			11,475,255
Allocation of warrants to liabilities	—	—		(1,970,000		)	—			(1,970,000		)
Stock issuance costs	—	—		(319,819		)	—			(319,819		)
Share-based compensation	—	—		526,000			—			526,000
Issuance of RSUs	90,000	9		(9		)	—			—
Net loss	—	—		—			(4,434,765		)	(4,434,765		)
Balance as of March 31, 2019	31,065,602	3,107		49,565,235			(47,950,735		)	1,617,607
Issuance of common stock and warrants	4,318,272	432		8,744,069			—			8,744,501
Allocation of warrants to liabilities	—	—		(1,360,000		)	—			(1,360,000		)
Stock issuance costs	—	—		(389,623		)	—			(389,623		)
Exercise of stock options	100,079	10		30,054			—			30,064
Issuance of RSUs	400,000	40		(40		)	—			—
Share-based compensation	—	—		852,000			—			852,000
Net loss	—	—		—			(4,488,240		)	(4,488,240		)
Balance as of June 30, 2019	35,883,953	$	3,589	$	57,441,695		$	(52,438,975	)	$	5,006,309

See accompanying notes to these condensed consolidated financial statements.

~~INNOVATE BIOPHARMACEUTICALS,~~9 METERS BIOPHARMA, INC.

Unaudited Condensed Consolidated Statements of Cash Flows


	Six Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2020			2019
Cash flows from operating activities
Net loss	$	(8,923,005	)	$	(19,175,296	)	$	(48,200,537	)	$	(8,923,005	)
Adjustments to reconcile net loss to net cash used in operating activities:				—
Share-based compensation	1,378,000			6,990,000			4,297,000			1,378,000
Write-off of deferred offering costs	100,056			—			—			100,056
Accrued interest on convertible notes	174,166			25,578			136,942			174,166
Amortization of debt discount	382,212			1,171,985			1,154,847			382,212
Beneficial conversion feature							207,632			—
Depreciation	10,413			9,279			9,745			10,413
Beneficial conversion feature	—			3,077,887
Loss on disposal and write-offs of property and equipment							7,031			—
Change in fair value of derivative liability	(282,000		)	—			(531,000		)	(282,000		)
Change in fair value of warrant liability	(2,669,800		)	—			(2,637,500		)	(2,669,800		)
Warrant inducement expense							7,157,887			—
Acquired in-process research and development							28,754,026			—
Extinguishment of derivative liability	(370,000		)	—			—			(370,000		)
Loss on extinguishment of debt	1,049,166			—			—			1,049,166
Changes in operating assets and liabilities:
Changes in operating assets and liabilities, net of acquisitions:
Prepaid expenses and other assets	(592,375		)	(70,074		)	(506,221		)	(592,375		)
Accounts payable	(1,058,692		)	(289,697		)	(526,498		)	(1,058,692		)
Accrued expenses	147,764			(1,020,430		)	1,764,111			147,764
Accrued interest	(101,624		)	—			82,579			(101,624		)
Net cash used in operating activities	(10,755,719		)	(9,280,768		)	(8,829,956		)	(10,755,719		)

Cash flows from investing activities
Purchase of property and equipment	(9,475		)	(13,943		)	(2,543		)	(9,475		)
Loan payments from related party	—			75,000
Net cash (used in) provided by investing activities	(9,475		)	61,057

Purchase of in-process research and development, net of assets acquired							(3,184,454		)	—
Net cash used in investing activities							(3,186,997		)	(9,475		)
Cash flows from financing activities
Borrowings from convertible notes	5,000,000			3,345,000			2,500,000			5,000,000
Payments of convertible notes	(6,245,833		)	(275,000		)	(1,469,804		)	(6,245,833		)
Payments of debt issuance costs	(57,000		)	(20,000		)	(23,000		)	(57,000		)
Proceeds from the exercise of stock options	15,574			—			—			15,574
Proceeds from issuance of common stock and warrants	20,706,919			18,132,661			—			20,706,919
Payment of deferred offering costs	(1,045,468		)	(1,655,079		)
Proceeds from issuance of preferred stock and warrants							22,560,994			—
Payment of offering costs							(3,889,703		)	(1,045,468		)
Proceeds from exercise of warrants							1,219,001			—
Net cash provided by financing activities	18,374,192			19,527,582			20,897,488			18,374,192

Net increase in cash and cash equivalents	7,608,998			10,307,871			8,880,535			7,608,998

Cash and cash equivalents as of beginning of period	5,728,900			355,563			4,592,932			5,728,900

Cash and cash equivalents as of end of period	$	13,337,898		$	10,663,434		$	13,473,467		$	13,337,898

Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	418,927		$	280,287		$	54,578		$	418,927

Supplemental disclosure of non-cash financing activities
Conversion of convertible notes and accrued interest to common stock	$	—		$	9,229,336		$	575,000		$	—
Assumption of liabilities from reverse recapitalization transaction	$	—		$	978,674
Warrants issued to placement agents	$	—		$	913,000
Non-cash addition of derivative liability	$	1,281,000		$	—		$	370,000		$	1,281,000
Non-cash addition of deferred offering costs	$	151,137		$	—
Addition of non-cash stock issuance and deferred offering costs							$	28,754,026		$	151,137
Receivable for stock options and warrants exercised	$	14,490		$	12,472		$	—		$	14,490

See accompanying notes to these condensed consolidated financial statements.

~~INNOVATE BIOPHARMACEUTICALS,~~9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description

~~Innovate Biopharmaceuticals,~~9 Meters Biopharma, Inc. (the “Company” ~~or “Innovate”~~) is a clinical-stage biopharmaceutical company ~~developing novel medicines for autoimmune~~focused on orphan, rare and ~~inflammatory diseases with~~ unmet ~~medical needs.~~needs in gastroenterology. The Company’s pipeline includes drug candidates for ~~celiac disease, nonalcoholic steatohepatitis (NASH)~~NM-002, a proprietary long-acting GLP-1 agonist for short bowel syndrome (SBS), ~~alcoholic steatohepatitis (ASH), Crohn’s~~an orphan designated disease and ~~ulcerative colitis.~~larazotide, a Phase 3 tight junction regulator being evaluated for celiac disease.

On ~~January 29, 2018, Monster Digital, Inc.~~April 30, 2020, the Company completed its merger with privately-held RDD Pharma, Ltd., an Israel corporation (“~~Monster”~~RDD”) (the “RDD Merger”) and ~~privately held~~changed its name from Innovate Biopharmaceuticals, Inc. (“Private Innovate”) completed a reverse recapitalization in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated July 3, 2017, as amended (the “Merger Agreement”), by and among Monster, Monster Merger Sub, Inc. (“Merger Sub”) and Private Innovate. In connection with the transaction, Private Innovate changed its name to IB Pharmaceuticals Inc. (“IB Pharmaceuticals”). Pursuant to the Merger Agreement, Merger Sub merged with and into IB Pharmaceuticals with IB Pharmaceuticals surviving as the wholly owned subsidiary of Monster (the “Merger”). Immediately following the Merger, Monster changed its name to Innovate Biopharmaceuticals, Inc. (“Innovate”). On March 29, 2018, IB Pharmaceuticals was merged into Innovate and ceased to exist.

Monster, a Delaware corporation (formed in November 2010), and its subsidiary SDJ Technologies, Inc. (“SDJ”), was an importer of high-end memory storage products, flash memory and action sports cameras marketed and sold under the Monster Digital brand name acquired under a long-term licensing agreement with Monster, Inc. In September 2017, Monster incorporated MD Holding Co, Inc. (“MDH”), a Delaware corporation, and transferred all of the businesses and assets of Monster, including all shares of SDJ and those liabilities of Monster not assumed by Innovate pursuant to the Merger to MDH. In January 2018, the name of MDH was changed to NLM Holding Co.,9 Meters Biopharma, Inc.

~~On January 29, 2018, prior to the Merger, Private Innovate completed an equity financing (the “Equity Issuance”). See Note 3—Merger and Financing.~~

Basis of Presentation

The unaudited condensed consolidated interim financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary for a fair statement of the balance sheets, operating results, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Operating results for the three and six months ended June 30, ~~2019~~2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, ~~2019.~~2020. Certain information and footnote disclosure normally included in the annual financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the SEC’s rules and regulations for interim reporting. The Company’s financial position, results of operations and cash flows are presented in U.S. Dollars.

Upon the closing of the Merger, the outstanding shares of Private Innovate were exchanged for shares of common stock of Monster at an exchange ratio of one share of Private Innovate common stock to 0.37686604 shares of Monster common stock (the “Exchange Ratio”). All common share amounts and per share amounts have been adjusted to reflect this Exchange Ratio, which was effected upon the Merger.

The Merger has been accounted for as a reverse recapitalization. Prior to the Merger, Monster spun-out all of its pre-merger business assets and liabilities before it acquired Private Innovate. The owners and management of Private Innovate have actual or effective voting and operating control of the combined company. In the Merger transaction, Monster is the accounting acquiree and Private Innovate is the accounting acquirer. A reverse recapitalization is equivalent to the issuance of stock by the private operating company for the net monetary assets of the accounting acquiree accompanied by a recapitalization with accounting similar to that resulting from a reverse acquisition, except that no goodwill or intangible assets are recorded.

Immediately prior to the effective time of the Merger, Monster effected a reverse stock split at a ratio of one new share for every ten shares of its common stock outstanding. In connection with the Merger, 1,864,808 shares of the Company’s common stock were transferred to the existing Monster stockholders and the Company assumed approximately $1.0 million in liabilities from Monster for certain transaction costs and tail insurance coverage for its directors and officers, which were recorded as a

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

reduction of additional paid-in capital. In addition, warrants to purchase up to 154,403 shares of the Company’s common stock remained outstanding after completion of the Merger. These warrants have a weighted-average exercise price of $55.31 per share and expire in 2021 and 2022.

The accompanying unaudited financial statements and related notes reflect the historical results of Private Innovate prior to the Merger and of the combined company following the Merger, and do not include the historical results of Monster prior to the completion of the Merger. These financial statements and related notes should be read in conjunction with the audited financial statements and related notes thereto for the year ended December 31, ~~2018,~~2019, included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the SEC on March ~~18, 2019.~~20, 2020.

Except as noted below under the section entitled “Recently Issued Accounting Standards—Accounting Pronouncements ~~Adopted”,~~Adopted,” there have been no material changes to the Company’s significant accounting policies during the three and six months ended June 30, ~~2019,~~2020, as compared to the significant accounting policies disclosed in Note 1 of the Company’s financial statements for the years ended December 31, 2019 and 2018 ~~and 2017.~~included in the Company’s Annual Report on Form 10-K. However, the following accounting policies are the most critical in fully understanding the Company’s financial condition and results of operations.

Basis of Consolidation

The accompanying consolidated financial statements reflect the operations of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Shelf Registration Filing

On March 15, 2018, the Company filed a shelf registration statement that was declared effective on July 13, 2018. Under the shelf registration statement, the Company may, from time to time, sell its common stock in one or more offerings up to an aggregate dollar amount of $175 million ~~(of which up~~(Prior to ~~an aggregate of~~the program’s termination on March 19, 2020, $40 million ~~may~~of this amount could be sold in an “at-the-market” offering as defined in Rule 415 of the Securities ~~Act; the use~~Act of ~~this facility was suspended on June 24, 2019)~~1933, as amended (“ATM”)). In addition, the selling stockholders included in the shelf registration statement may from time to time sell up to an aggregate amount of 13,990,403 shares of the Company’s common stock (including up to 2,051,771 shares issuable upon exercise of warrants) in one or more offerings.

On July 22, 2020, the Company filed a prospectus supplement and associated sales agreement related to an ATM pursuant to which the Company may sell, from time to time, common stock with an aggregate offering price of up to $40 million through SunTrust Robinson Humphrey, as sales agent, for general corporate purposes. As of August 12, 2020, the Company had not sold any shares under the ATM. See Note 9—Subsequent Events for additional details.

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

March 2019 Offering

On March 17, 2019, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with SDS Capital Partners II, LLC and certain other accredited investors, pursuant to which the Company sold, on March 18, 2019, 4,181,068 shares of common stock and issued short-term warrants (the “Short-Term Warrants”) to purchase up to 4,181,068 shares of common stock, and long-term warrants (the “March Long-Term Warrants”) to purchase up to 2,508,634 shares of common stock. Pursuant to the Purchase Agreement, the Company issued the common stock and warrants at a purchase price of $2.33 per share for aggregate proceeds of approximately $9.7 million.

The March Long-Term Warrants issued ~~will be~~were exercisable for five years commencing on the six-month anniversary of March 18, 2019, ~~have~~had an initial exercise price of $2.56 per share, subject to certain adjustments, and ~~have~~had an expiration date of March 18, 2024. ~~Any March Long-Term Warrant that has not been exercised by the expiration date shall be automatically exercised via cashless exercise.~~ The Short-Term Warrants ~~are~~were originally exercisable for a period of one year from March 18, 2019, ~~have~~had an expiration date of March 18, 2020 and ~~have~~had an initial exercise price of $4.00 per share, subject to certain adjustments. If at any time after March 18, 2019, the weighted-average price of the Company’s common stock exceeds $5.25 for ten consecutive trading days, the Company may call the outstanding Short-Term Warrants and require that they be exercised in cash, except to the extent that such exercise would surpass the beneficial ownership limitations, as specified in the Purchase Agreement. If not previously exercised in full, at the expiration of their applicable terms, the warrants shall be automatically exercised via cashless exercise. The Short-Term Warrants and March Long-Term Warrants ~~are classified~~were accounted for as warrant liabilities in accordance with Accounting Standards Codification (“ASC”) 480—Distinguishing Liabilities from Equity.

On February 6, 2020, the Company and the holders of the Company’s outstanding Short-Term Warrants amended the Short-Term Warrants to extend the exercise period of each Short-Term Warrant by six months. The Short-Term Warrants, as amended, were exercisable for up to an aggregate of 4,181,068 shares of the Company’s common stock, par value $0.0001 per share, until September 18, 2020. In addition, on February 12, 2020, the ~~accompanying condensed balance sheet.~~Company offered to amend outstanding warrants, including the Short-Term Warrants, to (i) shorten the exercise period to expire concurrently with the closing of the RDD Merger on April 30, 2020 and (ii) reduce the exercise price to $0.10 per share (the “Offer to Amend and Exercise”). All other terms of each Short-Term Warrant remained in full force and effect and were not impacted by this amendment. On April 29, 2020, upon closing of the Offer to Amend and Exercise, the Short-Term Warrants were fully exercised at an exercise price of $0.10 per share.

Additional Issuance of Warrants

On April 25, 2019, the Company entered into an amendment (the “Amendment”) to the Purchase Agreement dated as of March 17, 2019, between the Company and each purchaser party thereto. The Amendment (i) deleted Section 4.12 of the Purchase Agreement, which generally prohibited the Company from issuing, entering into agreements to issue, announcing proposed issuances, selling or granting certain securities between the date of the Purchase Agreement and the date that was 45 days following the closing date thereunder and (ii) gave each purchaser the right to purchase, for $0.125 per underlying share, an additional warrant to purchase shares of the Company’s common stock having an exercise price per share of $2.13 and otherwise having the terms of the March Long-Term Warrants (collectively, the “New Warrants”) pursuant to a securities purchase agreement to be entered into among the Company and each purchaser that desires to purchase the New Warrants. On May 17, 2019, the Company and each purchaser entered into such Securities Purchase Agreement (the “New Agreement”), and the Company issued New Warrants exercisable for an aggregate of 3,897,010 shares of the Company’s common stock.

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

The New Warrants ~~are~~were exercisable for five years beginning on the ~~six months~~six-month anniversary of the date of issuance until the five-year anniversary of their date of issuance. The New Warrants ~~have~~had an initial exercise price equal to $2.13 per share, subject to certain adjustments. ~~However, any holder may increase or decrease such percentage~~The New Warrants were accounted for as warrant liabilities in accordance with ASC 480—Distinguishing Liabilities from Equity.

Offer to ~~any other percentage not in excess of 9.99% upon notice to~~Amend and Exercise

On February 12, 2020, the Company ~~provided that any increase~~offered to amend certain outstanding warrants in ~~such percentage shall not be effective until 61 days after such notice. If not previously exercised~~the Offer to Amend and Exercise. The warrants amended included the warrants classified as equity issued in ~~full, at~~2018 (the “2018 Equity Warrants”), the ~~expiration of their applicable terms,~~outstanding Short-Term Warrants and the outstanding March Long-Term Warrants and the New ~~Warrants will be automatically exercised via cashless exercise, in which case the holder would receive upon such exercise the net number~~Warrants. On April 29, 2020, an aggregate of 12,230,418 shares ~~if any,~~ of common stock ~~determined according to~~were tendered, amended and exercised for $0.10 per share for aggregate gross proceeds of approximately $1.2 million. All of the ~~formula set forth in the New Warrants. The~~Short-Term Warrants, March Long-Term Warrants and New Warrants ~~are classified as warrant liabilities on the accompanying condensed balance sheet.~~were fully exercised at an exercise price of $0.10 per share.

April 2019 Offering

On April 29, 2019, the Company entered into a Securities Purchase Agreement (the “April Purchase Agreement”) with certain institutional and accredited investors providing for the sale by the Company of up to 4,318,272 shares of its common stock at a purchase price of $2.025 per share.

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Pursuant to the April Purchase Agreement, the Company agreed to issue unregistered warrants (the “April Warrants”) to purchase up to 4,318,272 shares of common stock. Subject to certain ownership limitations, the April Warrants ~~are~~were exercisable beginning on the date of their issuance until the five-and-a-half-year anniversary of their date of issuance at an initial exercise price of ~~$2.13.~~$2.13 per share. The exercise price of the April Warrants iswas subject to adjustment for stock splits, reverse splits, and similar capital transactions as described in the April Warrants. Upon a fundamental transaction, the holder shall have the right to receive payment in cash, or under certain circumstances in other consideration, from the Company at the Black-Scholes value as described in the April Warrants. The April Warrants may be exercisable on a “cashless” basis while there is no effective registration statement or current prospectus available for the shares of common stock issuable upon exercise of the April Warrants. A holder will not have the right to exercise any portion of the April Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the April Warrants. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99% upon notice to the Company, provided that any increase in such percentage shall not be effective until 61 days after such notice. If not previously exercised in full, at the expiration of their terms, the April Warrants will be automatically exercised via cashless exercise.

The net proceeds from the offering and the private placement were approximately $7.9 million, after deducting commissions and estimated offering costs. The Company granted the placement agent warrants to purchase up to 215,914 shares of common stock (the “Placement Agent Warrants”). The Placement Agent Warrants ~~have~~had substantially the same terms as the April Warrants, except that the Placement Agent Warrants ~~have~~had an exercise price of $2.53 per share and ~~have~~had a term of 5 years from the effective date of the offering. The Company also paid the placement agent a reimbursement for non-accountable expenses in the amount of $35,000 and a reimbursement for legal fees and expenses of the placement agent in the amount of $25,000. ~~The~~On December 19, 2019, the Company and each of the purchasers of the April Warrants and Placement Agent Warrants (collectively, the “Exchange Warrants”) entered into separate exchange agreements (the “Exchange Agreement”), pursuant to which the Company agreed to issue to the purchasers an aggregate of 5,441,023 shares of the Company’s common stock (the “Exchange Shares”), at a ratio of 1.2 Exchange Shares for each purchaser warrant in exchange for the cancellation and termination of all of the outstanding Exchange Warrants. See “Fair Value of Financial Instruments” below for additional details.

RDD Merger Financing

On April 29, 2020, the Company entered into a securities purchase agreement with various investors (the “Private Placement”) pursuant to which the Company agreed to issue and sell to the investors units consisting of one share of Series A Convertible Preferred Stock (the "Series A Preferred Stock") and one five-year warrant (the "Warrants") to purchase one share of Series A Preferred stock (the "Units"). On May 4, 2020, the Company closed the Private Placement with accredited investors pursuant to which the Company sold an aggregate of (i) 382,779 shares of Series A Convertible Preferred Stock, par value $0.0001 per share, which converted into 38,277,900 shares of common stock on June 30, 2020, and (ii) five-year warrants to purchase up to 382,779 shares of Series A Preferred Stock (the “Preferred Warrants”), which are ~~classified~~convertible into 38,277,900 shares of common stock (the “RDD Merger Financing”). The exercise price of the warrants is $58.94 per share of Series A Preferred Stock, subject to adjustments as ~~warrant liabilities on~~provided under the ~~accompanying condensed balance sheet.~~terms of the warrants. In addition, broker warrants covering 8,112 Units and broker warrants covering 10,899 shares of Series A Preferred Stock, which are convertible into 2,712,300 shares of common stock, were issued in connection with the RDD Merger Financing. Gross proceeds from the RDD Merger Financing were approximately $22.6 million with net proceeds of approximately $19.2 million after deducting commissions and estimated offering costs. See Note 3—Merger & Acquisition for additional details.

Business Risks

The Company faces risks, including those associated with biopharmaceutical companies whose products are in ~~the~~ various stages of development. These risks include, among others, risks related to the potential effects of the ongoing coronavirus outbreak and related mitigation efforts on the Company's clinical, financial and operational activities, the Company’s need for additional financing to achieve key development milestones, the need to defend intellectual property rights, and the dependence on key members of management. See Note 2—Liquidity and Going Concern for further discussion of the risks related to the coronavirus outbreak.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Areas of the financial statements where estimates may have the most significant effect include accrued expenses, share-based compensation, valuation of the derivative liability and warrant liabilities, valuation allowance for income tax assets, management’s estimate of the acquisition costs associated with acquired in-process research and development and management’s assessment of the Company’s ability to continue as a going concern. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from these estimates.

Accrued Expenses

The Company incurs periodic expenses such as research and development, licensing fees, salaries and benefits, and professional fees. The Company is required to estimate its expenses resulting from obligations under contracts with clinical

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

research organizations, vendors and consulting agreements that have been incurred by the Company prior to being invoiced. This process involves reviewing quotations and contracts, identifying services that have been performed on the Company’s behalf and estimating

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company’s service providers invoice monthly in arrears for services performed or when contractual milestones are met. The Company estimates accrued expenses as of each balance sheet date based on facts and circumstances known at that time.

Accrued expenses consisted of the following:


	June 30, 2019		December 31, 2018		June 30, 2020 (Unaudited)		December 31, 2019
Accrued compensation and benefits	$	621,905	$	697,334	$	1,105,521	$	574,332
Accrued clinical expenses					1,995,441		4,143,269
Other accrued expenses	352,186		128,993		183,133		30,150
Total	$	974,091	$	826,327	$	3,284,095	$	4,747,751

Derivative Liability

The Company accounts for derivative instruments in accordance with ~~Accounting Standards Codification (“ASC”)~~ASC 815, Derivative and Hedging, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the condensed consolidated balance sheet at fair value. The Company’s derivative financial ~~instrument consists~~instruments consist of an embedded ~~option~~options in the Company’s convertible ~~debt.~~notes. The embedded ~~derivative includes~~derivatives include provisions that provide the noteholder with certain conversion and put rights at various conversion or redemption values as well as certain call options for the Company. See Note 4—Debt for further details.

~~Warrant~~Classification of Warrants

The Company accounts for warrants in accordance with ASC 480, Distinguishing Liabilities

from Equity and ASC 815, Derivatives and Hedging, to determine whether the warrants should be classified as equity or liability.The warrants the Company issued during 2019 are freestanding financial instruments that contain net settlement options and may require the Company to settle these warrants in cash under certain circumstances. As such, the Company has classified these warrants as liabilities on the accompanying condensed consolidated balance sheets. The warrant liabilities ~~are~~were initially recorded at fair value on the date of issuance and ~~will be~~were subsequently re-measured to fair value at each balance sheet date until the warrant liabilities ~~are settled.~~were exercised. Changes in the fair value of the warrants are recognized as a non-cash component of other income and expense in the accompanying condensed consolidated statements of operations and comprehensive loss. All of the warrants accounted for as warrant liabilities have been exercised or settled as of June 30, 2020.

On May 4, 2020, the Company issued the Preferred Warrants, which are freestanding financial instruments that give the warrant holder the right but not the obligation to purchase the equity security at the warrant exercise price. The Company is not required to settle these warrants in cash and as such, the Company has classified these warrants as equity on the accompanying condensed consolidated balance sheets.

Research and Development

Research and development expenses consist of costs incurred to further the Company’s research and development activities and include salaries and related employee benefits, manufacturing of pharmaceutical active ingredients and drug products, costs associated with clinical trials, nonclinical activities, regulatory activities, research-related overhead expenses and fees paid to expert consultants, external service providers and contract research organizations which conduct certain research and development activities on behalf of the Company. Costs incurred in the research and development of products are charged to research and development expense as incurred.

Costs for preclinical studies and clinical trial activities are recognized based on an evaluation of the vendors’ progress towards completion of specific tasks, using data such as patient enrollment, clinical site activations or information provided by vendors regarding their actual costs incurred. Payments for these activities are based on the terms of individual contracts and payment timing may differ significantly from the period in which the services were performed. The Company determines accrual estimates through reports from and discussions with applicable personnel and outside service providers as to the progress or state of completion of trials, or the services completed. The estimates of accrued expenses as of each balance sheet date are based on the facts and circumstances known at the time. Although the Company does not expect its estimates to be materially different from amounts incurred, the Company’s estimates and assumptions for clinical trial costs could differ significantly from actual costs incurred, which could result in increases or decreases in research and development expenses in future periods when actual results are known.

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NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Nonrefundable advance payments for goods and services that will be used in future research and development activities are expensed when the goods have been received or when the activity is performed, rather than when payment is made.

Acquired In-process Research and Development

The Company has acquired, and may in the future acquire, rights to develop and commercialize new drug candidates and/or other in-process research and development assets. The up-front acquisition payments, as well as future milestone payments that are deemed probable to achieve and do not meet the definition of a derivative, are expensed as acquired in-process research and development provided that the drug has not achieved regulatory approval for marketing, and, absent obtaining such approval, have no alternative future use.

Share-Based Compensation

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

The Company recognizes share-based compensation expense for grants of stock options ~~to employees and non-employee members of the Company’s board of directors~~ based on the grant-date fair value of those awards using the Black-Scholes option-pricing model. Share-based compensation expense is generally recognized on a straight-line basis over the requisite service period for awards expected to vest.

~~Prior to adoption of Accounting Standards Update (“ASU”) 2018-07,~~ ~~Compensation-Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting~~, share-based compensation expense related to stock options granted to non-employees, other than non-employee directors, was adjusted each reporting period for changes in the fair value of the Company’s stock until the measurement date. The measurement date was generally considered to be the date when all services had been rendered or the date that options were fully vested. Effective January 1, 2019, the Company adopted ASU 2018-07, which no longer requires the re-measurement of the fair value for stock options awarded to non-employees. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees.

Share-based compensation expense ~~for both employees and non-employees~~ includes an estimate, which is made at the time of grant, of the number of awards that are expected to be forfeited. This estimate is revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Under the Black-Scholes option-pricing model, fair value is calculated based on assumptions with respect to:

Expected dividend yield. The expected dividend yield 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. Due to limited trading history as a public company, 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. In evaluating comparable companies, the Company considers factors such as industry, stage of life cycle, financial leverage, size and risk profile.

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. Due to limited history of stock option exercises, the Company estimates the expected term of employee stock options based on the simplified method, which calculates the expected term as the average of the time-to-vesting and the contractual life of the options. Pursuant to ~~ASU-2018-07,~~Accounting Standards Update (“ASU”) 2018-07, the Company has elected to use the contractual life of the option as the expected term for non-employee options.

Periodically, the ~~board~~Board may approve the grant of restricted stock units (“RSUs”) pursuant to the ~~Innovate Biopharmaceuticals, Inc.~~Company’s 2012 Omnibus Incentive Plan, as amended, which represent the right to receive shares of the Company’s common stock based on terms of the agreement. The fair value of RSUs is recognized as share-based compensation expense generally on a straight-line basis over the service period, net of estimated forfeitures. The grant date fair value of an RSU represents the closing price of the Company’s common stock on the date of grant.

~~Share-based Compensation Adjustment to Prior Period Results~~

In preparing the Company’s financial statements for the year ended December 31, 2018, the Company determined that an immaterial error was made in the amount of share-based compensation expense recorded in the Company’s Quarterly Report on Form 10-Q for March 31, 2018, which was filed with the SEC on May 15, 2018. The error resulted in an overstatement of share-based compensation expense of approximately $1.2 million for the first quarter of 2018 and the subsequent year-to-date periods through September 30, 2018. The Company disclosed this error in its Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on March 18, 2019. The Company has revised its previously reported financial results for the six months ending June 30, 2018 to correct the error. The Company concluded that this correction did not have a material impact on its previously issued quarterly financial statements or the audited financial statements for the year ended December 31, 2018. The financial results for the six months ended June 30, 2018 included within this Quarterly Report on Form 10-Q reflect the adjustment to the prior period.

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

Fair Value of Financial Instruments

Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Financial instruments recorded in the accompanying condensed consolidated balance sheets are categorized based on the inputs to valuation techniques as follows:

•Level 1 - defined as observable inputs based on unadjusted quoted prices for identical instruments in active markets;

•Level 2 - defined as inputs other than Level 1 that are either directly or indirectly observable in the marketplace for identical or similar instruments in markets that are not active; and

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•Level 3 - defined as unobservable inputs in which little or no market data exists where valuations are derived from techniques in which one or more significant inputs are unobservable.

The fair value of the embedded derivative issued in connection with the ~~Senior~~Unsecured Convertible Note and the ~~Unsecured Convertible~~Additional Note, further described in Note 4—Debt, was determined by using a Monte Carlo simulation technique (“MCS”) to value the embedded derivative associated with each note. As part of the MCS valuation, a discounted cash flow (“DCF”) model is used to value the debt on a stand-alone basis and determine the discount rate to utilize in both the DCF and MCS models. The significant estimates used in the DCF model include the time to maturity of the convertible debt and calculated discount rate, which includes an estimate of the Company’s specific risk premium. The MCS methodology calculates the theoretical value of an option based on certain parameters, including: (i) the threshold of exercising the option, (ii) the price of the underlying security, (iii) the time to expiration, or expected term, (iv) the expected volatility of the underlying security, (v) the risk-free rate and (vi) the number of paths.

These valuation techniques involve management’s estimates and judgment based on unobservable inputs and are classified in Level 3. The table below summarizes the valuation inputs into the MCS model for the derivative liability associated with the ~~Senior~~Unsecured Convertible Note asand the Additional Convertible Note on their respective dates of ~~December 31, 2018 and for the derivative liability associated with the Unsecured Convertible Note~~issuance as of March 8, 2019 and January 10, 2020, respectively, and at the end of the period as of June 30, ~~2019.~~2020.


	Derivative Liability									Derivative Liability
	June 30,			March 8,			December 31,			June 30,			January 10,			March 8,
	2019						2018			2020						2019
Expected dividend yield
Discount rate	29.1		%	29.3		%	13.6		%	24.5		%	21.6		%	29.3		%
Expected stock price volatility	105.6		%	101.1		%	105.6		%	76.7		%	103.9		%	101.1		%
Risk-free interest rate	1.8		%	2.5		%	2.5		%	0.2		%	1.6		%	2.5		%
Expected term	20 months			24 months			21 months			1.1 years			2 years			2 years
Price of the underlying common stock	$	1.16		$	1.99		$	2.31		$	0.57		$	0.65		$	1.99

The fair ~~value~~values of the warrants ~~issued pursuant to the Purchase Agreements~~at their respective dates of issuance further described above in the sections entitled “March 2019 Offering,” “Additional Issuance of Warrants,” and “April 2019 Offering” were determined through the use of an MCS model. The MCS methodology calculates the theoretical value of an option based on certain parameters, including (i) the threshold of exercising the option, (ii) the price of the underlying security, (iii) the time to expiration, or expected term, (iv) the expected volatility of the underlying security, (v) the risk-free interest rate and (vi) the number of paths. Given the high level of the selected volatilities, the methodology selected simulates the Company’s market value of invested capital (“MVIC”) through the maturity date of the respective warrants (ranging from one year to five-and-a-half years). Further, the estimated future stock price of the Company is calculated by subtracting the debt plus accrued interest from the MVIC. The significant estimates used in the MCS model include management’s estimated probability of future financing and liquidation events.

Upon a fundamental transaction (as defined in the applicable warrant agreement), each holder of Short-Term Warrants and each holder of the March Long-Term Warrants and New Warrants (collectively, the “Long-Term Warrants”) can elect to require the Company or a successor entity to purchase such holder’s outstanding, unexercised warrants for a cash payment (or under certain circumstances other consideration) equal to the Black-Scholes value of the warrants on the date of consummation of the fundamental transaction, calculated in accordance with the terms and using the assumptions specified in the applicable warrant agreement. Due to the RDD Merger, the Company entered into the Exchange Agreements with the holders of the Exchange Warrants, pursuant to which the Company agreed to issue the purchasers an aggregate of 5,441,023 shares in exchange for the cancellation and termination of the Exchange Warrants. On December 26, 2019, an aggregate of 2,994,762 warrants were exchanged for 3,593,714 shares of the Company’s common stock. During the six months ended June 30, 2020, 1,539,424 warrants were exchanged for 1,847,309 shares of the Company’s common stock. In addition, the Company amended the Short-Term Warrants and Long-Term Warrants in the Offer to Amend in Exercise on February 12, 2020. Management assumed that the holders of the Short-Term Warrants and Long-Term Warrants would elect to receive cash payments under the respective warrant agreements following completion of the RDD Merger. As such, the Company determined the fair value of the Short-Term Warrants and Long-Term Warrants immediately prior to the Offer to Amend and Exercise, for financial reporting purposes, through the use of the Black-Scholes model. Subsequent to the Offer to Amend and Exercise, the Company determined the fair value of the Short-Term Warrants and Long-Term Warrants using the reduced exercise price of $0.10 as of March 31, 2020 and April 28, 2020. The estimates underlying the assumptions used in both the MCS model and Black-Scholes model are subject to risks and uncertainties and may change over time, and the assumptions used in both the MCS model and the Black-Scholes model for financial reporting purposes

9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

generally differ from the assumptions that would be applied in determining a payout under the applicable warrant agreements. These valuation techniques involve management’s estimates and judgment based on unobservable inputs and are classified in Level 3.

The ~~March Long-term Warrants,~~Company recognized a gain in fair value of the ~~New Warrants, the April~~Short-Term Warrants and Long-Term Warrants of approximately $1.1 million and $2.6 million during the ~~Placement Agent~~three and six months ended June 30, 2020, respectively, and $1.8 million and $2.7 million during the three and six months ended June 30, 2019, respectively. All of the Short-Term Warrants ~~are referred~~and Long-Term Warrants were exercised in the Offer to ~~collectively as~~Amend and Exercise, which closed on April 29, 2020. During the ~~“Long-term Warrants.”~~

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

three and six months ended June 30, 2020, the Company recognized warrant inducement expense of approximately $6.5 million and $7.2 million, respectively. There was no warrant inducement expense recognized during the three and six months ended June 30, 2019. The warrant inducement expense represents the accounting fair value of consideration issued to induce conversion of the Exchange Warrants and exercise of the warrants in the Offer to Amend and Exercise.

The table below summarizes the valuation inputs into the MCS model for the ~~warrant liabilities~~Short-Term Warrants and Long-Term Warrants at their respective dates of issuance.


	Short-Term Warrants			Long-Term Warrants									Short-Term Warrants			Long-Term Warrants
	March 18, 2019			March 18, 2019			May 1, 2019			May 17, 2019			March 18, 2019			March 18, 2019			May 17, 2019
Conversion price	$	4.00		$	2.56		$ 2.13 - $ 2.53			$	2.13		$	4.00		$	2.56		$	2.13
Expected stock price volatility	122.0		%	85.2		%	84.1		%	83.4		%	122.0		%	85.2		%	83.4		%
Risk-free interest rate	2.5		%	2.2		%	2.2		%	2.2		%	2.5		%	2.2		%	2.2		%
Expected term	1 year			5 years			5 - 5.5 years			5 years			1 year			5 years			5 years
Price of the underlying common stock	$	2.48		$	2.48		$	1.54		$	1.58		$	2.48		$	2.48		$	1.58

The table below summarizes the range of valuation inputs into the ~~MCS~~Black-Scholes model for the Exchange Warrants on their date of issuance and immediately prior to the exchange.



	Exchange Warrants
	May 1, 2019			January 6, 2020
Conversion price	$ 2.13 - $ 2.53			$	2.13
Expected stock price volatility	84.1		%	87.3		%
Risk-free interest rate	2.2		%	1.7		%
Expected term	5 - 5.5 years			4.9 years
Price of the underlying common stock	$	1.54		$	0.58

The table below summarizes the range of valuation inputs into the Black-Scholes model for the warrant liabilities as of ~~June 30, 2019.~~February 11, 2020, immediately prior to the reduction in exercise price pursuant to the Offer to Amend and Exercise.


	Short-Term Warrants			Long-Term Warrants	Short-Term Warrants			Long-Term Warrants
	June 30, 2019				February 11, 2020
Conversion price	$	4.00		$2.13 - $2.56	$	4.00		$2.13 - $2.56
Expected stock price volatility	85.3		%	83% - 83.5%	97.1		%	87.9% - 89.2%
Risk-free interest rate	2.0		%	1.8% - 2.0%	1.6		%	1.7		%
Expected term	1 year			5 - 5.5 years	7 months			4 years 2 months
Price of the underlying common stock	$	1.16		1.16	$	0.79		$	0.79

9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The following table summarizes the fair value hierarchy of financial liabilities measured at fair value as of June 30, ~~2019~~2020 and December 31, ~~2018.~~2019, respectively.


	June 30, 2019								June 30, 2020
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Derivative liability	$	—	$	—	$	999,000	$	999,000	$	—	$	—	$	247,000	$	247,000
Warrant liabilities	—		—		660,200		660,200		—		—		—		—
Total liabilities at fair value	$	—	$	—	$	1,659,200	$	1,659,200	$	—	$	—	$	247,000	$	247,000


	December 31, 2018								December 31, 2019
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Derivative liability	$	—	$	—	$	370,000	$	370,000	$	—	$	—	$	408,000	$	408,000
Warrant liabilities	—		—		—		—		—		—		2,637,500		2,637,500
Total liabilities at fair value	$	—	$	—	$	370,000	$	370,000	$	—	$	—	$	3,045,500	$	3,045,500

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

The following table summarizes the changes in fair value of the derivative liability and warrant liabilities classified in Level 3. Gains and losses reported in this table include changes in fair value that are attributable to unobservable inputs.

Six Months Ended June 30, 2019
Beginning balance as of December 31, 2018 $ 370,000

Issuance of warrant liabilities 3,330,000

Extinguishment of derivative liability (the Senior Convertible Note) (370,000 )
Issuance of derivative liability (the Unsecured Convertible Note) 1,281,000

Change in fair value of warrant liabilities (2,669,800 )
Change in fair value of derivative liability (282,000 )
Ending balance as of June 30, 2019 $ 1,659,200

The amount of total gain for the period included in earnings attributable to the change in unrealized gains relating to the fair value liabilities still held at the reporting date $ 2,951,800



	Six Months Ended June 30, 2020
Beginning balance as of December 31, 2019	$	3,045,500
Issuance of derivative liability (the Additional Note)	370,000
Exchange of the April Warrants	(380,600		)
Change in fair value of warrant liabilities	(1,198,200		)
Change in fair value of derivative liability	(531,000		)
Exercise of the Short-Term Warrants and Long-Term Warrants	(1,058,700		)
Ending balance as of June 30, 2020	$	247,000

The amount of total gain for the period included in earnings attributable to the change in unrealized gains relating to the fair value liabilities still held at the end of the period	$	531,000

~~There were no gains or losses included in earnings attributable to changes in unrealized gains or losses for fair value assets or liabilities during the three and six months ended June 30, 2018.~~

The cumulative unrealized gain relating to the change in fair value of the derivative liability and warrant liabilities of ~~$2,951,800~~$1,729,200, the gain on exercise of the warrants in the Offer to Amend and Exercise of $1,058,700 and the ~~extinguishment~~gain on exchange of ~~derivative liability~~the April Warrants of ~~$370,000~~$380,600 for the six months ended June 30, ~~2019~~2020 is included in other income (expense) in the condensed consolidated statements of operations and comprehensive loss.

ASC 820, Fair Value Measurement and Disclosures requires all entities to disclose the fair value of financial instruments, both assets and liabilities, for which it is practicable to estimate fair value. As of June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the recorded values of cash and cash equivalents, restricted deposit, accounts payable, accrued expenses and convertible promissory notes approximate their fair values due to the short-term nature of the instruments.

9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Deferred Offering Costs

Deferred offering costs consist principally of legal, accounting and underwriters’ fees related to offerings or the Company’s shelf registration. Offering costs incurred prior to an offering are initially capitalized and then subsequently reclassified to additional paid-in capital upon completion of the offering. Deferred offering costs associated with the shelf registration will be charged to additional paid-in capital on a pro-rata basis in the event the Company completes an offering under the shelf registration. Due to the voluntary suspension of the “at-the-market” (“ATM”) facility effective June 24, 2019, deferred offering costs associated with the ATM facility were written off during the three and six months ended June 30, 2019.

Patent Costs

Costs associated with the submission of patent applications are expensed as incurred given the uncertainty of the future economic benefits of the patents. Patent and patent related legal and administrative costs included in general and administrative expenses were approximately ~~$126,000~~$108,000 and ~~$161,000~~$126,000 for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$287,000~~$193,000 and ~~$309,000~~$287,000 for the six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

Net Loss Per Share

The Company calculates net loss per share as a measurement of the Company’s performance while giving effect to all potentially dilutive shares that were outstanding during the reporting period. Because the Company had a net loss for all periods presented, the inclusion of common stock options or other similar instruments would be anti-dilutive. Therefore, the weighted average shares outstanding used to calculate both basic and diluted net loss per share are the same. For the three and six months ended June 30, 2020 and 2019, ~~and 2018, 24.5~~54.0 million and ~~8.6~~24.5 million potentially dilutive securities related to warrants and stock options issued and outstanding have been excluded from the computation of diluted weighted average shares outstanding because the effect would be anti-dilutive. The potentially dilutive securities consisted of the following:

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~


	Six Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2020	2019
Options outstanding under the Private Innovate Plan	6,240,792	6,428,577	6,028,781	6,240,792
Options outstanding under the Amended Omnibus Plan	1,266,546	1,683
Options outstanding under the Omnibus Plan			5,651,726	1,266,546
Options outstanding under the Option Grant Agreements granted to RDD Employees			1,014,173	—
Warrants issued at a weighted-average exercise price of $55.31	154,403	154,403	154,403	154,403
Warrants issued at an exercise price of $2.54	349,555	349,555	2,233	349,555
Warrants issued at an exercise price of $3.18	1,410,358	1,702,216	113,980	1,410,358
Warrants issued at an exercise price of $0.5894			40,990,200	—
Short-term warrants issued at an exercise price of $4.00	4,181,068	—	—	4,181,068
Long-term warrants issued at a weighted-average exercise price of $2.24	10,939,830	—	—	10,939,830
Total	24,542,552	8,636,434	53,955,496	24,542,552

Segments

Operating segments are defined as components of an enterprise engaging in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company operates and manages its business as one operating segment and ~~all of~~ the Company’s primary operations are in North America.

9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Recently Issued Accounting Standards

Accounting Pronouncements Adopted

~~The Company adopted ASU No. 2016-02,~~ ~~Leases (Topic 842)~~, as amended, as of January 1, 2019 using the modified retrospective approach at the beginning of the period of adoption. Under this approach, the reporting for comparative periods presented in the financial statements are presented in accordance with the legacy lease standard. In addition, the Company elected the available practical expedients permitted under the transition guidance within the new lease standard.

Under the new leases standard, the Company recognizes a right-of-use (“ROU”) asset and lease liability upon commencement of a lease. The ROU asset represents the Company’s right to use an underlying asset for the lease term and is included in right-of-use asset on the accompanying condensed balance sheet. Lease liabilities represent the Company’s obligation to make lease payments arising from the lease and are included in current and non-current lease liability on the accompanying condensed balance sheet. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. In the absence of an implicit rate, the Company uses their incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. All leases with a term of less than 12 months are not recognized on the balance sheet. Adoption of the new leases standard resulted in the Company recognizing a ROU asset and lease liability of less than $0.1 million as of January 1, 2019. The adoption of ASU 2016-02 did not result in a cumulative adjustment to accumulated deficit.

~~In June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-07,~~ ~~Compensation-Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting.~~ ~~ASU~~ 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. The Company adopted this standard effective January 1, 2019. Effective January 1, 2019, the date of adoption, the Company changed its expense recognition for share-based payments to non-employees to an amount determined at the grant or modification date instead of a variable amount to be re-measured each reporting period. The Company calculated the fair value of its non-employee grants as of the adoption date and determined that there was no impact to the Company’s accumulated deficit or other components of equity upon adoption of ASU 2018-07. The unamortized expense for non-employee grants will be recognized on a straight-line basis over the remaining contractual term of the respective non-employee option agreements. The adoption of ASU 2018-07 did not have a material impact on the Company’s financial statements.

~~Accounting Pronouncements Being Evaluated~~

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This standard no longer requires public companies to disclose transfers between ~~level~~Level 1 and 2 of the fair value hierarchy and adds additional disclosure requirements about the range and

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The Company adopted this guidance effective January 1, 2020 and the adoption of ASU 2018-13 did not have a material impact on the Company’s consolidated financial statements.

Accounting Pronouncements being Evaluated

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 amends the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and improves consistent application of other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, ~~2019, and for interim periods within those fiscal years.~~2020. Early adoption is permitted and the Company is currently evaluating the impact this standard will have on the Company’s consolidated financial statements.

NOTE 2: LIQUIDITY AND GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Although, the Company received gross proceeds of approximately $22.6 million upon completion of the RDD Merger Financing, further described in Note 1—Summary of Significant Accounting Policies, the Company expects to incur substantial losses in the future as it conducts planned operating activities. Based on the Company’s limited operating history, recurring negative cash flows from operations, current plans and available resources, the Company will need substantial additional funding to support its planned and future operating activities, including progression of research and development programs. The Company has concluded that the prevailing conditions and ongoing liquidity risks faced by the Company raise substantial doubt about the Company’s ability to continue as a going concern for at least ~~12 months~~1 year following the date these financial statements are issued. ~~Based~~

The effect of the COVID-19 pandemic and its associated restrictions may increase the anticipated aggregate costs for the development of the Company's product candidates and may adversely impact the anticipated timelines for the development of the Company's product candidates by, among other things, causing disruptions in the supply chain for clinical supplies, delays in the timing and pace of subject enrollment in clinical trials and lower than anticipated subject enrollment and completion rates, delays in the review and approval of the Company’s regulatory submissions by the FDA and other agencies with respect to the Company's product candidates, and other unforeseen disruptions. The economic impact of the COVID-19 pandemic and its effect on capital markets and investor sentiment may adversely impact the Company's ability to raise capital when needed or on terms favorable to the Company and its stockholders to fund its development programs and operations. The Company does not yet know the full extent of potential delays or impacts on its business, clinical trial activities, ability to access capital or on healthcare systems or the global economy as a whole. However, these effects could have a material adverse impact on the ~~Company’s limited operating history~~Company's business and recurring operating losses, the Company will need substantial additional funding to support its planned and future operating activities, including progression of research and development programs. Management’s plans with regard to these matters may include entering into strategic partnerships or licensing arrangements or seeking additional debt or equity financing arrangements or a combination of these activities. financial condition.

There can be no assurance that the Company will be able to obtain additional capital on terms acceptable to the Company, on a timely basis or at all. The failure to obtain sufficient additional funding or enter into strategic partnerships could adversely affect the Company’s ability to achieve its business objectives and product development timelines and could have a material adverse effect on the Company’s results of operations. The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

NOTE 3: MERGER AND ~~FINANCING~~ACQUISITION

~~As noted above, on January 29, 2018, Private Innovate and Monster~~RDD Merger

On April 30, 2020, the Company completed its merger with RDD. Upon closing of the RDD Merger, the Company issued the RDD shareholders upfront consideration consisting of 37,860,510 shares of the Company’s common stock. In addition, the Company assumed 1,014,173 options that had been previously issued to RDD employees. See Note 7—Share-based Compensation for additional details regarding the options assumed.

Naia Acquisition

On May 6, 2020, the Company consummated its merger with Naia Rare Diseases, Inc. in accordance with the terms of an Agreement and Plan of Merger (the “Naia Acquisition”). The consideration for the ~~Merger Agreement. Pursuant to the Merger Agreement, Merger Sub merged with~~Naia Acquisition at closing consisted of $2.1 million in cash and into IB Pharmaceuticals, with IB Pharmaceuticals surviving as the wholly owned subsidiary of Monster. Immediately following the Merger, Monster changed its name to Innovate Biopharmaceuticals, Inc. On March 29, 2018, IB Pharmaceuticals was merged into Innovate and ceased to exist.

~~Immediately prior to the closing of the Merger, accredited investors purchased~~4,835,438 shares of common stock, plus the pre-payment of ~~Private Innovate~~certain operating costs on behalf of Naia totaling $0.1 million. Consideration for the Naia Acquisition also included future development and sales milestone payments worth up to $80.4 million and royalties on net sales of certain products to which Naia has exclusive rights by license.

Accounting Treatment

Both the RDD Merger and the Naia Acquisition were accounted for as asset acquisitions under ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The net tangible and intangible assets acquired, and liabilities assumed in ~~a private placement for gross proceeds~~connection with the transactions were recorded at their estimated fair values on the respective dates of ~~approximately $18.1 million, or $16.5 million, net~~acquisition. The excess of approximately $1.6 million in placement agent fees and expenses (the “Equity Issuance”). Additionally, Private Innovate issued five-year warrants to each cash purchaser of common stock, or an aggregate of approximately 1.4 million warrants, with an exercisepurchase price ~~of $3.18 after giving effect to the Exchange Ratio. The Company calculated the~~over fair value of identified assets acquired and liabilities assumed was expensed as in-process research and development. The Company acquired the ~~warrants issued utilizing~~RDD net assets for shares of the ~~Black-Scholes option pricing model~~Company’s common stock valued at $26.6 million and assumed liabilities of $1.3 million. The net assets received were less than $0.1 million. The Company acquired the Naia technology for $2.1 million in cash, common stock valued at $2.2 million, excluding contingent consideration, and the pre-payment of certain operating costs on behalf of Naia totaling $0.1 million. No contingent consideration associated with the following assumptions: expected dividend yield of 0.0%, expected stock price volatility of 84.8%, risk free rate of 2.5%, and term of 5.0 years. The proceeds were allocated between common stock and warrants utilizing the relative fair value method with the allocated warrant value of approximately $2.0 million recorded as additional paid-in capital.

Private Innovate also issued 349,555 five-year warrants with an exercise price of $2.54 and 279,862 five-year warrants with an exercise price of $3.18 (after giving effect to the Exchange Ratio) to the respective placement agents and their affiliates. The Company calculated the fair value of the warrants issued utilizing the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0.0%, expected stock price volatility of 84.8%, risk free rate of 2.5%, and term of 5.0 years. The total value for these warrants approximated $913,000 andNaia Acquisition was recorded as ~~stock issuance costs~~of June 30, 2020 since the related development and ~~additional paid-in capital.~~

~~Concurrently with~~sales milestones were not deemed probable. See Note 9—Subsequent Events for recent developments that occurred subsequent to June 30, 2020. As a result of the ~~Equity Issuance, convertible promissory notes issued by Private Innovate~~RDD Merger and the Naia Acquisition, approximately $32.3 million was expensed as acquired in-process research and development expense in the ~~aggregate principal amount~~accompanying condensed consolidated statements of approximately $8.6 million plus accrued interest of $582,000 were converted into shares of Private Innovate common stock at a price per share of $0.72, prior to the Exchange Ratio (the “Conversion”), which reflected a 25% discount relative to the shares issued pursuant to the Equity Issuance (the “Conversion Discount”). The Conversion Discount represented a beneficial conversion feature of approximately $3.1 million which was recorded as a charge to interest expenseoperations and ~~a credit to additional paid-in capital.~~comprehensive loss.

NOTE 4: DEBT

Senior Convertible Note

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

~~On January 29, 2018, the Company entered into a Note Purchase Agreement and Senior Note Payable (the “Note”) with a lender.~~ The principal amount of the ~~Note was $4.8 million (“Original Principal”). The Note was~~senior convertible note issued at a discount of $1.8 million and net of $20,000 for financing costs, for total proceeds of $3.0 million. The discount and additional repayment premium were amortized to interest expense using the effective interest method through the scheduled maturity date of September 30, 2018 (the “Maturity Date”). Interest on the Note accrued from January 29, 2018, at a rate of 12.5% per annum and quarterly payments of interest only were due beginning on March 30, 2018 and compounded quarterly. The Company entered into a Waiver Agreement with the noteholder that extended the Maturity Date until October 4, ~~2018. On October 4,~~ 2018 ~~the Company entered into an Amendment and Exchange Agreement (“Exchange Agreement”) with the noteholder exchanging the Note for a new Senior Convertible Note~~ (the “Senior Convertible Note”).

~~The principal amount of the Senior Convertible Note~~, was $5.2 million and bore interest at a rate of eight percent (8%) per annum payable quarterly in cash, with a scheduled maturity date of October 4, 2020. The interest rate would automatically increase to 18% per annum if there was an event of default during the period. The Company evaluated the Exchange Agreement and the Senior Convertible Note and determined that the amendment to the Note constituted an extinguishment of debt, in accordance with authoritative guidance. The Company determined that there was no difference between the reacquisition price of the new debt and the net carrying amount of the extinguished debt and thus there was no gain or loss from the extinguishment. The Company incurred approximately $30,000 of legal fees associated with the Senior Convertible Note, which were recorded as debt issuance costs and are included in the amortization of debt discount discussed below.

The various conversion and redemption features contained in the Senior Convertible Note are embedded derivative instruments, which were recorded as a debt discount and derivative liability at their estimated fair value. See Note 1—Summary of Significant Accounting Policies for details regarding the fair value of derivative liability. During 2018, the VWAP of the Company’s common stock was lower than the Floor Price for more than ten consecutive days. As such, the noteholder had the right to require the Company to redeem the Senior Convertible Note prior to December 31, 2018, at its option. Therefore, the Company has amortized the entire debt discount to interest expense through the triggering of the redemption option, which occurred in 2018. Based on the conversion features, redemption features and subjective acceleration clauses contained in the Senior Convertible Note, the Company recorded the Senior Convertible Note as a short-term obligation as of December 31, 2018.

During January 2019, the noteholder issued a redemption notice to the Company requiring the Company to repay the noteholder $1,049,167 of principal and $1,399 of accrued interest. On January 7, 2019, the Company entered into an Option to Purchase Senior Convertible Note (the “Option Agreement”) with the noteholder. The Company paid the noteholder $250,000 in consideration for the noteholder entering into the Option Agreement with the Company, which was recorded as interest expense in the accompanying statements of operations and comprehensive loss. The Option Agreement provided the Company with the ability to repay (purchase) the outstanding principal and accrued interest of the Senior Convertible Note any time from January 7, 2019 until March 31, 2019 ~~(the “Option~~(“Option Period”).

During March 2019, the Company exercised its repurchase rights ~~from~~under the Option Agreement and paid the noteholder of the Senior Convertible Note approximately $5,200,000 in principal and $60,000 in interest, which was the full purchase amount of the Senior Convertible Note pursuant to the terms of the Option Agreement. There are no further amounts outstanding under the Senior Convertible Note and the Senior Convertible Note has been canceled. The Company accounted for the repayment of the Senior Convertible Note as a liability extinguishment in accordance with ASC 405, Extinguishments of Liabilities, which resulted in the Company recording a loss on extinguishment of debt of approximately $1.0 million in the accompanying statements of operations and comprehensive loss for the six months ended June 30, 2019.

Amortization of debt discount for the Note and Senior Convertible Note recorded as interest expense was approximately $0.7 million and $1.2 million for the three and six months ended June 30, 2018, respectively. There was no such expense for the Note and Senior Convertible Note during the three and six months ended June 30, 2019.

Unsecured Convertible Promissory Note

On March 8, 2019, the Company entered into a Securities Purchase Agreement (the “Note Purchase Agreement”) with a purchaser (the “Convertible Noteholder”). Pursuant to the Note Purchase Agreement, the Company issued the Convertible Noteholder an unsecured Convertible Promissory Note (the “Unsecured Convertible Note”) in the principal amount of ~~$5,500,000.~~$5.5 million. The Convertible Noteholder may elect to convert all or a portion of the Unsecured Convertible Note at any time and from time to time into the Company’s common stock at a conversion price of $3.25 per share, subject to adjustment for stock splits, dividends, combinations and similar events. The Company may prepay all or a portion of the Unsecured Convertible Note at any time for an amount equal to 115% of then outstanding obligations or the portion of the obligations the Company is prepaying. The purchase price of the Unsecured Convertible Note was ~~$5,000,000,~~$5.0 million, and the Unsecured Convertible

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

Note carries an original issuance discount (“OID”) of ~~$500,000,~~$0.5 million, which is included in the principal amount of the Unsecured Convertible Note. In addition, the Company agreed to pay $20,000 of transaction expenses, which were netted out of the purchase price of the Unsecured Convertible Note. The Company also incurred additional transaction costs of approximately $37,000, which were recorded as debt issuance costs. As a result of the redemption features of the Unsecured Convertible Note, further described below, the Company is amortizing the debt issuance costs and accreting the OID to interest expense over the estimated redemption period of 15 months, using the effective interest method.

9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

$1.3 million. Amortization of debt discount and accretion of the OID for the Unsecured Convertible Note recorded as interest expense was approximately $0.4 million and $0.8 million for the three and six months ended June 30, 2020, respectively, and $0.3 million and $0.4 million for the three and six months ended June 30, 2019, respectively.

~~The Unsecured Convertible Note consists of the following:~~

June 30, 2019
Convertible Note $ 5,500,000
Less: unamortized debt discount and OID accretion (1,455,788 )
Total $ 4,044,212

The Unsecured Convertible Note bears interest at the rate of 10% (which will increase to 18% upon and during the continuance of an event of default) per annum, compounding on a daily basis. All principal and accrued interest on the Unsecured Convertible Note is due on the second-year anniversary of the Unsecured Convertible Note’s issuance. During the six months ended June 30, 2020, the Company made principal payments of $2.0 million on the Unsecured Convertible Note, consisting of $1.5 million in cash payments and $0.5 million in stock conversions. There were no principal payments made on the Unsecured Convertible Note during the three and six months ended June 30, 2019. The principal amount of $0.5 million and accrued interest of $0.1 million were converted into 1,287,696 shares of the Company’s common stock at a weighted-average exercise price of $0.45, which reflected a discount of approximately 26% (the “Conversion Discount”). The Conversion Discount represented a beneficial conversion feature of approximately $0.2 million which was recorded as a charge to interest expense and a credit to additional paid-in capital in the accompanying condensed consolidated financial statements.

At any time after the ~~six month~~six-month anniversary of the issuance of the Unsecured Convertible Note, (i) if the average volume weighted average price (“VWAP”) over twenty trading dates exceeds $10.00 per share, the Company may generally require that the Unsecured Convertible Note convert into shares of its common stock at the $3.25 (as adjusted) conversion price, and (ii) the Convertible Noteholder may elect to require all or a portion of the Unsecured Convertible Note be redeemed by the Company. If the Convertible Noteholder requires a redemption, the Company, at its discretion, may pay the redeemed portion of the Unsecured Convertible Note in cash or in the Company’s common stock at a conversion rate equal to the lesser of (i) the $3.25 (as adjusted) conversion rate or (ii) 80% of the average of the five lowest volume weighted average price of the Company’s Common Stock over the preceding twenty trading days. The Convertible Noteholder may not redeem more than $500,000 per calendar month during the period between the ~~six months~~six-month anniversary of the date of issuance until the first-year anniversary of the date of issuance and $750,000 per calendar month thereafter. The obligation or right of the Company to deliver its shares upon the conversion or redemption of the Unsecured Convertible Note is subject to a 19.99% cap and subject to a floor price trading price of $3.25 (unless waived by the Company). Any amounts redeemed ~~or converted~~ once the cap is reached or if the market price is less than the $3.25 floor price must be paid in cash.

If there is an Event of Default under the Unsecured Convertible Note, the Convertible Noteholder may accelerate the Company’s obligations or elect to increase the outstanding obligations under the Unsecured Convertible Note. The amount of the increase ranges from 5% to 15% depending on the type of default (as defined in the Unsecured Convertible Note). In addition, the Unsecured Convertible Note obligations will be increased if there are delays in the Company’s delivery requirements for the shares or cash issuable upon the conversion or redemption of the Unsecured Convertible Note in certain circumstances.

If the Company issues convertible debt in the future with any terms, including conversion terms, that are more favorable to the terms of the Unsecured Convertible Note, the Convertible Noteholder may elect to incorporate the more favorable terms into the Unsecured Convertible Note.

Standstill Agreement

On April 3, 2020, the Company entered into a standstill agreement with the Convertible Noteholder (the “Standstill Agreement”). Pursuant to the Standstill Agreement, the Convertible Noteholder will not seek to redeem any portion of the Unsecured Convertible Note between April 1, 2020 and May 31, 2020. The outstanding balance of the Unsecured Convertible Note was increased by $150,000 on April 3, 2020 as consideration for the Standstill Agreement and was recorded as interest expense during the three and six months ended June 30, 2020. All other terms of the Unsecured Convertible Note remain in full force and effect.

Additional Note

On January 10, 2020, the Company entered into an additional securities purchase agreement and unsecured convertible promissory note with the Convertible Noteholder in the principal amount of $2,750,000 (the “Additional Note”). The Convertible Noteholder may elect to convert all or a portion of the Additional Note, at any time from time to time into the Company’s common stock at a conversion price of $3.25 per share, subject to adjustment for stock splits, dividends, combinations and similar events. The Company may prepay all or a portion of the Additional Note at any time for an amount equal to 115% of then outstanding obligations or the portion of the obligations we are prepaying. The purchase price of the Additional Note was $2.5 million and carries an original issuance discount of $250,000, which is included in the principal amount of the Additional Note.

The various conversion and redemption features contained in the Additional Note are embedded derivative instruments, which were recorded as a debt discount and derivative liability at the issuance date at their estimated fair value of $0.4 million. Amortization

9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

of debt discount and accretion of the OID for the Additional Note recorded as interest expense was approximately $0.1 million and $0.2 million for the three and six months ended June 30, 2020.

The Additional Note bears interest at the rate of 10% (which will increase to 18% upon and during the continuance of an event of default) per annum, compounding on a daily basis. All principal and accrued interest on the Additional Note is due on the second anniversary of the date of the Additional Note’s issuance. There were no principal payments made on the Additional Note during the six months ended June 30, 2020.

At any time after the six-month anniversary of the issuance of the Additional Note, (i) if the average VWAP of the Company’s common stock over twenty trading dates exceeds $10.00 per share, the Company may generally require that the Additional Note convert into share of its common stock at the $3.25 (as adjusted) conversion rate or (ii) 80% of the average of the five lowest VWAP of the Company’s common stock over the preceding twenty trading days. The Convertible Noteholder may not redeem more than $500,000 per calendar month during the period between the six-month anniversary of the date of issuance until the first anniversary of the date of issuance and $750,000 per calendar month thereafter. The obligation or right of the Company to deliver its shares upon the conversion or redemption of the Additional Note is subject to a 19.99% cap and subject to a floor price of $3.25 (unless waived by the Company). Any amounts redeemed or converted once the cap is reached or if the market price is less than the $3.25 floor price must be paid in cash.

If there is an Event of Default under the Additional Note, the Convertible Noteholder may accelerate the Company’s obligations or the Convertible Noteholder may elect to increase the outstanding obligations under the Additional Note. The amount of the increase ranges from 15% for certain “Major Defaults,” 10% for failure to obtain the Convertible Noteholder’s approval for certain equity issuances with anti-dilution, price reset or variable pricing features of less than $2,500,000, and 5% for certain “Minor Defaults.” In addition, the Additional Note obligations will be increased if there are delays in the Company’s delivery requirements for the shares or cash issuable upon the conversion or redemption of the Additional Note in certain circumstances.

If the Company issues convertible debt in the future with any terms, including conversion terms, that are more favorable to the terms of the Additional Note, the Convertible Noteholder may elect to incorporate the more favorable terms into the Additional Note.

The convertible notes payable as of June 30, 2020 and December 31, 2019 consists of the following:



	June 30, 2020 (Unaudited)			December 31, 2019
Convertible Notes	$	8,400,000		$	5,500,000
Less: principal payments of debt	(3,506,951		)	(1,544,724		)
Less: unamortized debt discount and OID accretion	(408,772		)	(770,621		)
Total	$	4,484,277		$	3,184,655

NOTE 5: LICENSE AGREEMENTS

During 2016, the Company entered into a license agreement (the “Alba License”) with Alba Therapeutics Corporation (“Alba”) to obtain the rights to certain intellectual property relating to larazotide acetate and related compounds. The Company’s initial area of focus for these assets relates to the treatment of celiac disease. ~~These assets are now referred to as INN-202 by the Company.~~

Upon execution of the Alba License, the Company paid Alba a non-refundable license fee of $0.5 million. In addition, the Company is required to make milestone payments to Alba upon the achievement of certain clinical and regulatory milestones

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

totaling up to $1.5 million and payments upon regulatory approval and commercial sales of a licensed product totaling up to $150 million, which is based on sales ranging from $100 million to $1.5 billion.

Upon the Company paying Alba $2.5 million for the first commercial sale of a licensed product, the Alba License becomes perpetual and irrevocable. Upon the achievement of net sales in a year exceeding $1.5 billion, the Alba License also becomes free of milestone fees. The Alba License provides Alba with certain termination rights, including failure of the Company to use Commercially Reasonable Efforts to develop the licensed products.

During 2013, the Company entered into an exclusive license agreement with Seachaid Pharmaceuticals, Inc. (the “Seachaid Agreement”) to further develop and commercialize the licensed product, the compound known as APAZA. ~~This product is now referred to as INN-108 by the Company.~~ The agreement shall continue in effect on a country-by-country basis, unless terminated sooner in accordance with the termination provisions of the agreement, until the expiration of the royalty term for such product and such country. The royalty term for each such product and such country shall continue until the earlier of the expiration of certain patent rights (as defined in the agreement) or the date that the sales for one or more generic equivalents makes up a certain percentage of sales in an applicable country during a calendar year.

The Company was required to make an initial, non-refundable payment under the Seachaid Agreement in the amount of $0.2 million. The agreement also calls for milestone payments totaling up to $6.0 million to be paid when certain clinical and regulatory milestones are met. There are also commercialization milestone payments ranging from $1.0 million to $2.5 million depending on net sales of the products in a single calendar year, followed by royalty payments in the single digits based on net product sales.

During 2014, the Company entered into an Asset Purchase Agreement with Repligen Corporation (“Repligen”) to acquire Repligen’s RG-1068 program for the development of Secretin for the Pancreatic Imaging Market and Magnetic Resonance Cholangiopancreatography. ~~This program is now referred to as INN-329 by the Company.~~ As consideration for the Asset Purchase Agreement, the Company agreed to make a non-refundable cash payment on the date of the agreement and future royalty payments consisting of a percentage between five and fifteen of annual net sales, with the royalty payment percentage increasing as annual net sales increase. The royalty payments are made on a product-by-product and country-by-country basis and the obligation to make the payments expires with respect to each country upon the later of (i) the expiration of regulatory exclusivity for the product in that country or (ii) 10 years after the first commercial sale in that country. The royalty amount is subject to reduction in certain situations, such as the entry of generic competition in the market.

There were no milestone or royalty fees incurred during the ~~three and~~ six months ended June 30, ~~2019~~2020 and ~~2018.~~2019.

In connection with the Naia Acquisition, we entered into two amended and restated license agreements with Amunix Pharmaceuticals, Inc. (“Amunix”), pursuant to which we received an exclusive, worldwide, royalty-bearing license, with rights of sublicense, to lead molecules GLP-1 and GLP-2 along with a related XTEN sequence and other intellectual property referenced therein (the “Amunix Licenses”). Also in connection with the Naia Acquisition, we entered into an amended and restated license agreement with Cedars-Sinai Medical Center (“Cedars”), pursuant to which we licensed the rights to GLP-1 Agonist for the treatment of SBS (the “Cedars License” and together with the Amunix Licenses, the “Naia Licenses”). Collectively, the Naia Licenses are intended to support our development of a therapy to treat SBS.

Naia paid initial licenses fees and other development milestone payments due under the Naia Licenses prior to the Naia Acquisition, therefore, we did not pay any initial licenses fees upon the amendment and restatement of the original Naia Licenses. Pursuant to the terms of the Amunix Licenses, we agreed to expend in certain minimum financial amounts in direct support of development of the GLP-1 and GLP-2 products during specified development stages.

As consideration under the Amunix License for GLP-1, we agreed to pay Amunix certain royalty payments and (i) $70.4 million in milestone payments upon achievement of future development and sales milestones in the U.S. and major EU countries,

9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(ii) $20.5 million in milestone payments upon achievement of future development and sales milestones in China and certain related territories, and (iii) $20.5 million in milestone payments upon achievement of future development and sales milestones in South Korean and certain other east Asian countries. As consideration under the Amunix License for GLP-2, we agreed to pay Amunix certain royalty payments and $60.1 million in milestone payments upon achievement of future development and sales milestones in the U.S. and major EU countries.

As consideration under the Cedars License, we agreed to pay Cedars certain royalty payments and approximately $9.4 million in milestone payments upon achievement of future development and sales milestones.

NOTE 6: STOCKHOLDERS’ EQUITY (DEFICIT)

The Company’s authorized capital stock consists of 360 million shares of capital stock, par value $0.0001 per share, of which 350 million shares are designated as common stock and 10 million shares are designated as preferred stock.

Preferred Stock

The Company’s amended and restated certificate of incorporation authorizes the Board to issue preferred stock in one or more classes or one or more series within any class from time to time. Voting powers, designations, preferences, qualifications, limitations, restrictions or other rights will be determined by the Board at that time. On April 29, 2020, the Board designated 600,000 shares of preferred stock as Series A Preferred Stock, par value of $0.0001 per share.

On May 4, 2020, the Company closed the Private Placement, further described in Note 1—Summary of Significant Accounting Policies, pursuant to which the Company sold an aggregate of 382,779 shares of Series A Preferred Stock, par value $0.0001, which were convertible into 38,277,900 shares of common stock. The Series A Preferred Stock was classified as equity in accordance with ASC 480—Distinguishing Liabilities from Equity. Shares of the Series A Preferred Stock and Series A Preferred Warrants were valued using the relative fair value method. The Series A Preferred Warrants were valued using a Black Scholes option pricing model. The Company determined the transaction created a beneficial conversion feature of approximately $3.1 million. The table below summarizes the inputs for the Black Scholes option pricing model on the date of issuance.



	May 4, 2020 (Unaudited)
Conversion price	$	0.5894
Expected stock price volatility	73.7		%
Risk-free interest rate	0.4		%
Expected term	5		years
Price of the underlying common stock	$	0.50

As of May 4, 2020, the stated value of the issued and outstanding Series A Preferred Stock and Series A Preferred Warrants was approximately $12.5 million and $7.0 million, respectively. On June 30, 2020, the Company’s outstanding Series A Preferred Stock automatically converted into 38,277,900 shares of common stock upon receipt of stockholder approval. Upon conversion of the Series A Preferred Stock, the Company reclassified the carrying value of the Series A Preferred Stock to common stock and additional paid-in capital.

There were 382,779 shares of preferred stock issued as of June 30, 2020. There were no shares of preferred stock outstanding as of June 30, 2020 and December 31, 2019.

Liquidation Preference

Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, holders of the Series A Preferred Stock (the “Preferred Holders”) were entitled to receive out of the assets, whether capital or surplus, of the Corporation the same amount that a holder of Common Stock would receive if the Series A Preferred Stock were fully converted.

Dividends

9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Except for stock dividends or distributions for which adjustments are to be made in accordance with Section 7 of the Series A Certificate of Designation, the Preferred Holders were entitled to receive dividends on shares of the Series A Preferred Stock equal to, on an as-if-converted-to-Common-Stock basis, and in the same form as dividends paid on shares of the Common Stock, if such dividends were paid on shares of the Common Stock.

Voting

The Preferred Holders had no voting rights.

Conversion

Each share of Series A Preferred Stock was convertible into 100 shares of fully paid and non-assessable shares of Common Stock. Each issued and outstanding shares of Series A Preferred Stock was automatically converted without the payment of additional consideration into 100 shares of fully paid and non-assessable shares of Common Stock on the date the Company’s stockholders approved the conversion of the Series A Preferred Stock in accordance with the Nasdaq Stock Market Rules, without any further action by the Preferred Holder or the Company.

Common Stock

The holders of the Company’s common stock (i) have equal ratable rights to dividends from funds legally available therefore, when, as and if declared by the ~~Company’s board of directors;~~Board; (ii) are entitled to share in all the Company’s assets available for distribution to holders of common stock upon liquidation, dissolution or winding up of the Company’s affairs; (iii) do not have preemptive, subscription or conversion rights (and there are no redemption or sinking fund provisions or rights); and (iv) are entitled to one non-cumulative vote per share on all matters on which stockholders may vote.

There were 136,232,886 and 39,477,667 shares of common stock outstanding as of June 30, 2020 and December 31, 2019, respectively. The Company had reserved shares of common stock for future issuance as follows:


	June 30,	December 31,	June 30,	December 31,
	2019	2018	2020 (Unaudited)	2019
Outstanding stock options	7,507,338	7,117,002	12,694,680	8,781,615
Warrants to purchase common stock	17,035,214	1,914,316	41,260,816	14,040,452
Shares issuable upon conversion of convertible debt	1,745,897	1,720,224	1,547,689	1,217,008
For possible future issuance under the Amended Omnibus Plan	2,554,083	2,230,057
For possible future issuance under the Omnibus Plan			14,726,818	1,102,739
Total common shares reserved for future issuance	28,842,532	12,981,599	70,230,003	25,141,814

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

On December 19, 2019, the Company and each of the purchasers of the April Warrants and Placement Agent Warrants entered into the Exchange Agreements, pursuant to which the Company agreed to issue the purchasers an aggregate of 5,441,023 shares of Common Stock at a ratio of 1.2 Exchange Shares for each purchaser warrant in exchange for cancellation and termination of all of the outstanding April Warrants and Placement Agent Warrants. On December 26, 2019, an aggregate of 2,994,762 warrants were exchanged for 3,593,714 shares of the Company’s common stock. During the six months ended June 30, ~~2019,~~2020, the Company ~~sold 8,499,340~~issued 1,847,309 shares of common stock in exchange for cancellation and ~~issued Short-Term~~termination of the remaining outstanding Exchange Warrants. As of June 30, 2020, all of the April Warrants and ~~Long-Term~~Placement Agent Warrants ~~to purchase up to 15,120,898 shares of common stock. For further details, see~~were exchanged for Common Stock and there were no April Warrants or Placement Agent Warrants outstanding. See Note 1—Summary of Significant Accounting ~~Policies.~~ Policies for further details.

On April 29, 2020, pursuant to the Offer to Amend and Exercise further described in Note 1—Summary of Significant Accounting Policies, warrants to purchase an aggregate of 12,230,418 shares of common stock were tendered, amended and exercised for aggregate gross proceeds of approximately $1.2 million.

On October 26, 2018, the Company entered into a common stock sales agreement with H.C. Wainwright & Co., LLC and Ladenburg Thalmann & Co., Inc. and filed a prospectus with the SEC relating to such offering. The Company previously filed a Form S-3 that became effective July 13, 2018 that included the registration of $40 million of its shares of common stock in connection with a potential ATM offering. Pursuant to the sales agreement, the Company ~~may~~could issue and sell shares having an

9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

aggregate gross sales price of up to $40 ~~million. The Company is~~million and was required to pay the sales agents commissions of 3% of the gross sales price per share sold. During the six months ended June 30, 2019, the Company sold 705,714 shares under the ATM for total net proceeds of approximately $1,675,000. ~~All proceeds were received as of June 30, 2019.~~ The Company voluntarily suspended the ATM facility ~~was voluntarily suspended~~ as of June 24, ~~2019. Due to suspension of~~2019 and effective March 19, 2020, the Company terminated the ATM ~~facility, deferred~~facility.

On July 22, 2020, the Company filed a prospectus supplement and associated sales agreement related to an ATM pursuant to which the Company may sell, from time to time, common stock with an aggregate offering ~~costs~~price of ~~approximately $0.1~~up to $40 million ~~were written off during~~through SunTrust Robinson Humphrey, as sales agent, for general corporate purposes. As of August 12, 2020, the ~~three months ended June 30, 2019.~~Company had not sold any shares under the ATM. See Note 9-Subsequent Events for additional details.

NOTE 7: SHARE-BASED COMPENSATION

~~Upon consummation of the Merger, the~~The Company ~~had~~has two stock option plans in existence: the ~~Monster Digital, Inc.~~ 2012 Omnibus Incentive Plan (the “Omnibus Plan”) and the Innovate 2015 Stock Incentive Plan (the “Private Innovate Plan”). ~~During 2018,~~In addition, the ~~Company’s board of directors approved an amendment to~~Company assumed 1,014,173 options in accordance with the ~~Omnibus Plan to, among other things, formally change the name~~terms of the Omnibus Plan to the Innovate Biopharmaceuticals, Inc. 2012 Omnibus Incentive Plan (the “Amended Omnibus Plan”) and increase the number of shares authorized for issuance under the Amended Omnibus Plan to provide for an additional 3,000,000 shares. In addition, theRDD Merger Agreement. The shares reserved for issuance under the ~~Amended~~ Omnibus Plan ~~will~~ automatically increase on the first day of each calendar year beginning in 2019 and ending in 2022 by an amount equal to the lesser of (i) five percent of the number of shares of common stock outstanding as of December ~~31st~~31^st of the immediately preceding calendar year or (ii) such lesser number of shares of common stock as determined by the ~~board of directors~~Board (the “Evergreen Provision”). On January 1, 2020 and 2019, the number of shares of common stock available under the ~~Amended~~ Omnibus Plan automatically increased by 1,973,883 and 1,304,441 shares pursuant to the Evergreen ~~Provision.~~Provision, respectively. Additionally, on June 30, 2020, stockholders approved an amendment to the Omnibus Plan to increase the number of shares of common stock available under the Omnibus Plan to 20,794,492 shares.

The terms of the option agreements are determined by the ~~Company’s board of directors.~~Board. The Company’s stock options vest based on the terms in the stock option agreements and typically vest over a period of three toor four years. These stock options typically have a maximum term of ten years.

Private Innovate Plan

As of June 30, ~~2019,~~2020, there were ~~6,240,792~~6,028,781 stock options outstanding under the Private Innovate Plan. ~~Following completion of~~Since 2018, the ~~Merger, the~~ Company has not issued, and does not intend to issue, any additional awards from the Private Innovate Plan.

The range of assumptions used in estimating the fair value of the options granted or re-measured under the Private Innovate Plan using the Black-Scholes option pricing model for the periods presented were as follows:


	Three Months Ended June 30,		Six Months Ended June 30,		Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018	2020	2019	2020	2019
Expected dividend yield	0%			0%	0%	0%	0%	0%
Expected stock-price volatility	—%	67% - 68%	67%	67% - 72%	—%	—%	—%	67%
Risk-free interest rate	—%	2.8% - 2.9%	2.6%	2.7% - 2.9%	—%	—%	—%	2.6%
Expected term of options	0	8.7 - 9.3	8.2 - 8.7	8.7 - 9.5
Expected term of options (in years)					0	0	0	8.2 - 8.7

~~INNOVATE BIOPHARMACEUTICALS,~~9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The following table summarizes stock option activity under the Private Innovate Plan:

Number of
Shares

Weighted-Average
Exercise Price

Aggregate
Intrinsic
Value

Weighted-Average
Remaining
Contractual Life
(in years)
Outstanding at December 31, 2018 6,340,871
$ 1.53
$ 4,978,205
7.7
Options granted —
—
—

Options forfeited —
—
—

Options exercised (100,079 ) 0.30
—

Outstanding at June 30, 2019 6,240,792
1.55
1,662,932
5.9
Exercisable at June 30, 2019 5,659,872
1.49
1,662,932
5.7
Vested and expected to vest at June 30, 2019 6,217,132
$ 1.54
$ 1,662,932
5.9



	Number of Shares		Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life (in years)
Outstanding at December 31, 2019	6,063,745		$	1.53	$	496,275	5.4
Options granted	—		—		—
Options forfeited	(34,964	)	2.16		—
Options exercised	—		—		—
Outstanding at June 30, 2020	6,028,781		1.53		526,849		3.7
Exercisable at June 30, 2020	5,910,695		1.52		526,849		3.6
Vested and expected to vest at June 30, 2020	6,026,508		$	1.53	$	526,849	3.7

There were no options granted under the Private Innovate Plan during the ~~three and~~ six months ended June 30, ~~2019~~2020 and ~~2018. The total intrinsic value of options exercised was approximately $81,000 during the three and six months ended June 30,~~ 2019.

The total fair value of stock option awards vested during the six months ended June 30, ~~2019~~2020 under the Private Innovate Plan was approximately ~~$289,000.~~$361,000. As of June 30, ~~2019,~~2020, there was approximately ~~$0.8~~$0.1 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements under the Private Innovate Plan, which is expected to be recognized over a weighted average period of ~~1.8~~1.5 years.

The Private Innovate Plan provides for accelerated vesting under certain change-of-control transactions, if approved by the Company’s board of directors.

~~Amended~~ Omnibus Plan

As of June 30, ~~2019,~~2020, there were options to purchase ~~1,266,546~~5,651,726 shares of ~~Innovate~~the Company’s common stock outstanding under the ~~Amended~~ Omnibus Plan and ~~2,554,083~~14,726,818 shares available for future grants under the ~~Amended~~ Omnibus Plan.

The range of assumptions used in estimating the fair value of the options granted ~~or re-measured~~ under the ~~Amended~~ Omnibus Plan using the Black-Scholes option pricing model for the periods presented were as follows:


	Three Months Ended June 30,	Six Months Ended June 30,	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2019	2020	2019	2020	2019
Expected dividend yield	0%	0%	0%	0%	0%	0%
Expected stock-price volatility	70%	68% – 72%	72% - 74%	70%	72% - 74%	68% - 72%
Risk-free interest rate	2.0% – 2.2%	2.0% – 2.7%	0.4% - 0.6%	2.0% - 2.2%	0.4% - 0.6%	2.0% - 2.7%
Expected term of options	5.7	5.4 – 10.0
Expected term of options (in years)			5.0 - 10.0	5.7	5.0 - 10.0	5.4 - 10.0

~~INNOVATE BIOPHARMACEUTICALS,~~9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The following table summarizes stock option activity under the Amended Omnibus Plan:

Number of
Shares

Weighted-Average
Exercise Price

Aggregate
Intrinsic
Value

Weighted-Average
Remaining
Contractual Life
(in years)
Outstanding at December 31, 2018 776,131
$ 5.79
$ —
7.4
Options granted 665,000
1.63
—

Options forfeited (174,585 ) 6.02
—

Options exercised —
—
—

Outstanding at June 30, 2019 1,266,546
3.58
—
9.5
Exercisable at June 30, 2019 418,741
4.25
—
9.2
Vested and expected to vest at June 30, 2019 1,201,929
$ 3.61
$ —
9.5



	Number of Shares	Weighted-Average Exercise Price		Aggregate Intrinsic Value		Weighted-Average Remaining Contractual Life (in years)
Outstanding at December 31, 2019	2,717,870	$	1.87	$	—	9.4
Options granted	2,933,856	0.67		—
Options forfeited	—	—		—
Options exercised	—	—		—
Outstanding at June 30, 2020	5,651,726	1.25		—		9.4
Exercisable at June 30, 2020	4,243,881	1.41		—		9.2
Vested and expected to vest at June 30, 2020	5,519,649	$	1.25	$	—	9.4

The weighted-average grant date fair value of options granted under the ~~Amended~~ Omnibus Plan was ~~$0.99 and $1.02~~$0.41 during the three and six months ended June 30, ~~2019, respectively.~~2020. There were 2,933,856 options granted and no options ~~granted~~exercised under the ~~Amended~~ Omnibus Plan during the three and six months ended June 30, ~~2018.~~2020, respectively.

The total fair value of stock option awards vested under the ~~Amended~~ Omnibus Plan was approximately ~~$371,000~~$1,825,893 during the six months ended June 30, ~~2019.~~2020. As of June 30, ~~2019,~~2020, there was approximately ~~$1.2~~$0.6 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements under the ~~Amended~~ Omnibus Plan. This cost is expected to be recognized over a weighted average period of ~~2.9~~3.7 years.

The ~~Amended~~ Omnibus Plan provides for accelerated vesting under certain change-of-control transactions, if approved by the Company’s board of directors. Upon consummation of the RDD Merger on April 30, 2020, the Company’s board of directors approved the acceleration of certain options for employees, board members and key consultants. The Company recognized an additional $2.7 million in non-cash stock compensation expense related to the modification during the three and six months ended June 30, 2020.

During the three and six months ended June 30, 2020, the board approved grants of 415,948 RSUs, which vest immediately upon the date of grant. During the six months ended June 30, 2019, the board approved grants of 490,000 ~~RSUs. 390,000 of the~~ RSUs, ~~vested~~which vest immediately ~~on the date of grant; the remaining 100,000 RSUs vest 50% on the date of grant and the remainder pro-rata over six months following~~upon the date of grant. The weighted-average fair value of RSUs ~~granted~~was $0.57 during the three and six months ended June 30, ~~2019 was~~2020, and $1.44 during the three and ~~the~~six months ended June 30, 2019. The Company recognized share-based compensation expense for the RSUs of approximately $238,000 and $255,000 during the three and six months ended June 30, 2020, respectively, and $449,000 and $639,000 during the three and six months ended June 30, ~~2019.~~2019, respectively.

RDD Option Grants

Pursuant to the RDD Merger Agreement, the Company assumed option grant agreements awarded to RDD employees upon consummation of the RDD Merger (the “RDD Options”) on April 30, 2020. There were ~~no RSUs granted~~1,014,173 RDD Options outstanding as of June 30, 2020 at a weighted-average exercise price of $0.63 per share. The total fair value of RDD Options vested during the three and six months ended was approximately $471,000. All of the RDD Options are fully vested and there is no unrecognized compensation expense as of June 30, ~~2018.~~2020. The range of assumptions used in estimating the fair value of the RDD Options using the Black-Scholes option pricing model for the periods presented were as follows:



	Three and Six Months Ended June 30, 2020
Expected dividend yield	—	%
Expected stock-price volatility	72% - 74%
Risk-free interest rate	0.4% - 0.6%
Expected term of options (in years)	5.0 - 10.0

Total share-based compensation expense recognized in the accompanying condensed consolidated statements of operations and comprehensive loss was as follows:

9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Three Months Ended
June 30, Six Months Ended
June 30,
2019 2018 2019 2018
Research and development $ 351,000
$ (334,000 ) $ 443,000
$ 5,417,000
General and administrative 501,000
150,000
935,000
1,573,000
Total share-based compensation $ 852,000
$ (184,000 ) $ 1,378,000

$ 6,990,000



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Research and development	$	1,460,550	$	351,000	$	1,588,550	$	443,000
General and administrative	2,560,450		501,000		2,708,450		935,000
Total share-based compensation	$	4,021,000	$	852,000	$	4,297,000	$	1,378,000

NOTE 8: COMMITMENTS AND CONTINGENCIES

Clinical Trial Agreement

From time to time, the Company enters into agreements with contract research organizations and other service providers. In August 2018, the Company entered into such an agreement for its planned Phase 3 trial for the treatment of celiac disease. Under this agreement, the Company expects to pay approximately $1.1 million for data management over the course of the Phase 3 celiac disease trial for data management and biostatistics services.

Employment Agreements

~~Prior to March 11, 2018, the~~The Company ~~was party to employment agreements with certain executives of the Company. Under the terms of these agreements, the Company agreed to pay the executives certain payments upon the achievement of~~

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

financial milestone events. These milestone events were based on total debt or equity funding received by the Company. During the six months ended June 30, 2018, financial milestone events were achieved through the Merger and Equity Issuance events and the Company paid these executives approximately $1.1 million in accordance with the agreements.

~~On March 11, 2018, the Company~~has entered into ~~amended and restated~~ executive employment agreements with the executives ~~and new executive employment agreements with certain new executives~~ (the “Executive Employment Agreements”). The Executive Employment Agreements provide an annual base salary and the opportunity to participate in the Company’s equity compensation, employee benefit and bonus plans once they are established and approved by the ~~Company’s board of directors.~~Board. The Executive Employment Agreements contain severance provisions if the executives are terminated under certain conditions that would provide the executive with 12 months of their base salary and up to 12 months of continuation of health insurance benefits.

~~In November 2018 and February 2019,~~Effective upon the consummation of the RDD Merger, the Company entered into an employment agreement with Mr. Temperato for him to serve as the Company’s Chief Executive Officer (the “Employment Agreement”).

Pursuant to the Employment Agreement, Mr. Temperato began full-time employment with the Company upon the effective time of the RDD Merger on April 30, 2020, at an initial base salary of $450,000 per year, subject to review and adjustment by the Board from time to time. The Board approved an option grant to Mr. Temperato to purchase 1,000,000 shares of Common Stock, which will vest 25% upon grant, with the remainder vesting in 48 equal month installments, provided that Mr. Temperato remains an employee of the Company as of each such vesting date. Mr. Temperato will be eligible to receive a discretionary annual bonus with a target amount of 40% of his base salary, as determined by the Board in its sole discretion (and pro-rated for 2020). Mr. Temperato will also be eligible to participate in the Company’s other employee benefit plans in effect from time to time on the same basis as are generally made available to other senior executive employees of the Company.

If the employment of Mr. Temperato is terminated by the Company without “Cause” or by Mr. Temperato for “Good Reason” (each as defined in the Employment Agreement), in each case subject to Mr. Temperato entering into and not revoking a separation agreement, Mr. Temperato will be eligible to receive 12 months of his then-current base salary, the prorated amount of his target year-end bonus, and accelerated vesting of his unvested options and restricted stock unit awards that were scheduled to vest in the 12 months following termination.

Periodically, the Company enters into separation and general release agreements with ~~two~~ former executives of the Company that ~~included~~include separation benefits consistent with ~~each~~the former executives’ employment ~~agreement.~~agreements. The Company recognized severance expense totaling ~~$300,000~~$0.8 million during the three and six months ended June 30, 2020 and $0.3 million during the three and six months ended June 30, 2019, which is ~~being~~ paid in equal installments over 12 months ~~beginning February 2019. There was no severance expense recognized during~~from the ~~three months ended June 30, 2019.~~date of separation. The ~~remaining~~ accrued severance obligation in respect of the ~~two~~ former executives ~~is $0.3~~was approximately $0.5 million as of June 30, ~~2019, which is included in accrued expenses on the accompanying condensed balance sheet.~~2020.

Office Lease

In October 2017, the Company entered into a three-year lease for office space that expires on September 30, 2020. Base annual rent is $60,000, or $5,000 per month. Monthly payments of $5,000 are due and payable over the 24-month term. A security deposit of $5,000 was paid in October 2017. The lease contains a two-year renewal option. See Note 9—Subsequent Events for updated lease agreement executed in July 2020.

~~Effective January 1, 2019, the Company adopted ASC 842 using the transition approach described in Note 1—Summary of Significant Accounting Policies. On the adoption date, the~~

9 METERS BIOPHARMA, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The Company estimated the present value of the lease payments over the remaining term of the lease using a discount rate of 12%, which represented the Company’s estimated incremental borrowing rate. The two-year renewal option was excluded from the lease payments as the Company concluded the exercise of this option was not considered reasonably certain.

Operating lease cost under ASC 842 was approximately $15,000 and $30,000 for the three and six months ended June 30, 2020 and 2019 and is included in general and administrative expenses on the accompanying condensed consolidated statement of operations and comprehensive loss. Lease expense under ASC 840 was $15,000 and $30,000 for the three and six months ended June 30, 2018 and is included in general and administrative expenses on the accompanying condensed statements of operations and comprehensive loss. The total cash paid for amounts included in the measurement of the operating lease liability and reported within operating activities was less than $0.1 million during the six months ended June 30, ~~2019.~~2020.

Future minimum payments under the Company’s lease liability were as follows:


Year ended December 31,	Operating Leases			Operating Leases
2019	$	30,000
2020	45,000
Total lease payment	75,000
2020 Lease payments				15,000
Less: imputed interest	(5,675		)	(295		)
Total	$	69,325		$	14,705

Legal

~~In November 2018,~~On April 8, 2020, the Company received a ~~letter~~summons and ~~draft~~ complaint ~~regarding a former consultant of the Company who~~that was compensated in cash and stock options for his services, demanding damages of up to approximately $3.6 million plus punitive damages in connection with a delay in such consultant’s ability and timing to exercise options and sell shares of the Company’s common stock related to past consulting services. On January 8, 2019, M. Scott Harris and Middleburg Consultants, Inc. (collectively, “Harris”) filed ~~the claim~~ in the Mecklenburg County Superior Court of North Carolina, regarding a vendor that alleges the ~~State of Delaware (the “Delaware Action”). As previously disclosed, the~~Company owes approximately $1.7 million for services rendered prior to February 2019. The Company strongly denies any wrongdoing ~~alleged in the threatened litigation~~ and firmly believes the allegations in the complaint are entirely without merit and intends to defend against them vigorously. On February 25, 2019, the Company filed a motion to dismiss the Delaware Action. The motion to dismiss was heard by the Delaware court on June 26, 2019 and the Company is awaiting the Court’s decision. If the motion is not granted, the Company intends to dispute

~~INNOVATE BIOPHARMACEUTICALS, INC.~~

~~NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS~~

the factual basis of Harris’ claims and also intends to assert affirmative defenses and counterclaims against Harris. The Company is unable to estimate the amount of a potential loss or range of potential loss, if any.

From time to time, the Company could become involved in other disputes and various litigation matters that arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters. Periodically, the Company reviews the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict; therefore, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation. As of June 30, 2020, the Company has accrued approximately $0.6 million for the potential liability.

Note 9: Subsequent Events

ATM Sales Agreement

through SunTrust Robinson Humphrey, as sales agent, for general corporate purposes. Pursuant to the sales agreement, the Company will pay SunTrust Robinson Humphrey a commission rate of 3.0% of the gross proceeds from the sale of any shares of common stock under the ATM. As of August 12, 2020, the Company had not sold any shares under the ATM.

Lease Agreement

In July 2020, the Company entered into a 4-year lease for office space that expires on September 30, 2024. Base annual rent is $72,000, or $6,000 per month. Monthly payments of $6,000 are due and payable over the 4-year term. The lease contains a 3-year renewal option.

Milestone Fees

In July 2020, the Company dosed its first patients in a Phase 1b/2a clinical trial for treatment of short-bowel syndrome. Upon dosing of the first patient in the clinical trial, the Company is required to pay up to $2.1 million in milestone fees in accordance with the terms of the license agreement purchased in the Naia Acquisition.

Stock Option Grants

On July 6, 2020, the compensation committee approved the grant of options to purchase 4.6 million shares of the Company’s common stock, comprised of 2.5 million options granted to management, 1.5 million performance options, and 0.7 million options grant to the Company’s board of directors. The management options and performance options vest over 4 years and the options granted to the board of directors vest over 3 years. The performance options will begin to vest, if at all, upon satisfaction of certain performance criteria as determined by the board of directors in its discretion.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). When used in this report, the words “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “plan,” “indicate,” “seek,” “should,” “would” and similar expressions are intended to identify forward-looking statements, though not all forward-looking statements contain these identifying words. All statements other than statements of historical fact are statements that could be deemed forward-looking statements.

These forward-looking statements are based on our current expectations and beliefs and necessarily involve significant risks and uncertainties that may cause our actual results, performance, prospects and opportunities in the future to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, risks related to the potential effects of the ongoing coronavirus outbreak and related mitigation efforts on the Company's clinical, financial and operational activities; the Company's continued listing on Nasdaq; expectations regarding future financings; the future operations of the Company; the nature, strategy and focus of the Company; the development and commercial potential and potential benefits of any product candidates of the Company; anticipated preclinical and clinical drug development activities and related timelines, including the expected timing for data and other clinical and preclinical results; risks related to our limited operating history; our need for substantial additional funding; ~~the lengthy, expensive and uncertain nature of the clinical trials process;~~ results of earlier studies and trials not being predictive of future trial results; our need to attract and retain senior management and key scientific personnel; our ~~reliance on third parties; our~~ ability to manage our growth; ~~potential delays in commencement and completion of clinical studies;~~ our ability to obtain and maintain effective intellectual property protection; risks associated with our merger with RDD Pharma Ltd. (the “RDD Merger”); and other risks described ~~with these~~ in greater detail in "Item 1A. Risk Factors" of the Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the SEC on March ~~18, 2019.~~20, 2020. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q, and we assume no obligation to update or revise them to reflect new events or circumstances except as required by law.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except as otherwise noted or where the context otherwise requires, as used in this report, the words “we,” “us,” “our,” the “Company” and ~~“Innovate”~~“9 Meters” refer to ~~Innovate Biopharmaceuticals,~~9 Meters Biopharma, Inc. ~~as of~~The following analysis includes historical results and ~~following the closing of the merger of Monster and Private Innovate (the “Merger”) on January 29, 2018, and, where applicable, the business of Private Innovate~~periods that ended prior to the ~~Merger. All references to “Monster” refer to Monster Digital, Inc. prior to the closing~~completion of the ~~Merger.~~

~~The following analysis reflects the historical financial results of Private Innovate prior to the~~RDD Merger on April 30, 2020, and ~~that of Innovate following the Merger and does not~~therefore only include the historical ~~financial~~ results of ~~Monster. All share and per share disclosures have been retroactively adjusted to reflect the exchange of shares in the Merger.~~Innovate Biopharmaceuticals, Inc.

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and related notes thereto for the year ended December 31, ~~2018,~~2019, included in our Annual Report on Form 10-K, ~~for the year ended December 31, 2018,~~ filed with the SEC on March ~~18, 2019.~~20, 2020.

Company Overview

~~We are~~9 Meters Biopharma, Inc.

9 Meters is a clinical-stage biopharmaceutical company ~~developing novel medicines for autoimmune~~focused on orphan, rare and ~~inflammatory diseases with~~ unmet ~~medical~~ needs ~~including~~in gastroenterology. The Company’s pipeline includes drug candidates for celiac disease, ~~nonalcoholic steatohepatitis (NASH), alcoholic steatohepatitis (ASH), Crohn’s disease~~short bowel syndrome (SBS) and ~~ulcerative colitis (UC). We started the~~two candidates for undisclosed rare and/or orphan diseases.

In 2019, we initiated a Phase 3 clinical trial for our lead drug candidate, larazotide acetate or larazotide, ~~(INN-202),~~ for the treatment of celiac ~~disease in June 2019. We will provide updates from time to time as the trial gets further along.~~disease. Larazotide has the potential to be ~~the~~a first-to-market therapeutic for celiac disease, an unmet medical need affecting an estimated 1% of the U.S. population or more than 3 million individuals. ~~Celiac patients~~Patients with celiac disease have no treatment alternative other than a strict lifelong adherence to a gluten-free diet, which is difficult to maintain and can be deficient in key nutrients. In celiac disease, larazotide is the only drug which has successfully met its primary clinical efficacy endpoint with statistical significance in a Phase 2b efficacy trial, which was comprised of 342 patients. ~~Innovate~~We completed the End of Phase 2 meeting with the FDA for the treatment of celiac disease with larazotide and received Fast Track designation. Larazotide has been shown to be safe and effective after being tested in several clinical trials involving nearly 600 patients, most recently in the Phase 2b trial for celiac disease.

We ~~are also developing~~have approximately 100 active clinical trial sites in our Phase 3 trial with three treatment groups, 0.25 mg of larazotide, ~~for~~0.5 mg of larazotide and a placebo arm. Site activation and patient enrollment have recently been impacted by the ~~treatment of NASH, a type of liver disease stemming from the most common liver disorder in the world, fatty liver disease. NASH is an unmet medical need affecting approximately 5% to 6%~~announcement of the ~~U.S. adult population, or more than 15 million individuals.~~RDD Merger and the COVID-19 pandemic. We ~~are developing a proprietary formulation of larazotide for NASH for efficient delivery~~continue to monitor the ~~intestine. Larazotide has the potential to reduce the transport of bacterial toxins and immunogenic antigens, including lipopolysaccharide (LPS). Larazotide may be the first drug~~evolving situation with this novel mechanism to potentially show improvements in validated NASH biomarkers and endpoints. In a 12-week preclinical study of larazotide combined with obeticholic acid (OCA), data demonstrated statistically significant reductions in plasma total cholesterol, absolute and relativeCOVID-19, which is likely

~~liver weights, relative and total liver cholesterol, and relative and absolute liver triglycerides. These data suggest~~to directly or indirectly impact the pace of enrollment over the next several months. In addition, after consultation with the FDA, the analytical approach to the primary endpoint was modified to perform a ~~synergistic effect between larazotide and OCA.~~

~~Intestinal permeability is compromised in numerous diseases where~~continuous variable analysis instead of a ~~disruption~~responder analysis of the ~~epithelial barrier that separates the lumen~~primary efficacy outcome. The new methodology enables a more capital-efficient study, with reduction in participants from 630 to 525. We currently anticipate a readout from the ~~host’s immune system may contribute to uncontrolled inflammation. Larazotide~~trial in 2021.

NM-002 is a ~~gut-restricted peptide which~~long-acting injectable GLP-1 analogue being developed for SBS. The compound links exenatide, a GLP-1 analogue to a long-acting linker technology and is designed specifically to address the gastric effects in SBS patients by slowing digestive transit time. The asset uses proprietary XTEN® technology to extend the half-life of exenatide, allowing for once-to twice-per-month dosing, thus potentially increasing convenience for patients and caregivers. NM-002 is patent-protected and has ~~been shown to re-normalize intestinal permeability~~received orphan drug designation by the FDA. We dosed our first patients in ~~various inflammatory~~a Phase 1b/2a study in July 2020 in adult patients suffering from SBS. Top-line data is expected in the first quarter of 2021.

NM-003 is a proprietary long-acting GLP-2 agonist and ~~metabolic preclinical models. During~~NM-004 is a double-cleaved mesalamine with an immunomodulator. These two assets are being evaluated for development in rare and/or orphan indications. Our product development pipeline is currently positioned as described in the table below.

Agreement and Plan of Merger and Reorganization with RDD Pharma, Ltd.

On October 6, 2019, we ~~initiated a research collaboration with Institut Gustave Roussy’s Laurence Zitovogel, MD, Ph.D.~~entered into an Agreement and Plan of Merger and Reorganization pursuant to which we agreed to acquire all of the outstanding capital stock of privately-held RDD Pharma, Ltd., ~~Department of Immuno-oncology. Through this collaboration, we seek~~an Israel corporation (“RDD”), in exchange for common stock issued by us to ~~understand how~~ the therapeutic effect of immune checkpoint inhibitors, such as antibodies to CTLA-4 and PD-1, are modulated by blocking translocation of certain metabolites and bacterial antigens and toxins from interactingexisting RDD shareholders (the “RDD Merger”). The RDD Merger closed on April 30, 2020. In connection with the ~~host immune system in pre-clinical oncology models.~~ ~~Building on previous research that showed a type~~RDD Merger, we changed our name from Innovate Biopharmaceuticals, Inc. to 9 Meters Biopharma, Inc. On April 30, 2020, the Board appointed John Temperato, the Chief Executive Officer of ~~permeability known~~RDD, as ~~“leaky gut” that may cause microbial translocation of toxic products into circulation~~Chief Executive Officer of the ~~bloodstream,~~combined company, 9 Meters Biopharma, Inc. In connection with the RDD Merger, Jay P. Madan, Anthony E. Maida III, Ph.D., M.A., M.B.A., and Saira Ramasastry, M.S., M. Phil., resigned from the board and Mark Sirgo, Pharm.D., Nissim Darvish, M.D., Ph.D., and John Temperato were appointed to the Board. On June 30, 2020, the board appointed Michael Constantino as a member of the board and Chair of the Audit Committee.

On May 4, 2020, we closed a private placement with accredited investors pursuant to which we sold an aggregate of (i) 382,779 shares of Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), which converted into 38,277,900 shares of common stock on June 30, 2020 upon receipt of approval by our stockholders, and (ii) five-year warrants to purchase up to 382,779 shares of Series A Preferred Stock, which are ~~expanding our work~~convertible into 38,277,900 shares of common stock (the “Financing”). The exercise price of the warrants is $58.94 per share of Series A Preferred Stock, subject to adjustments as provided under the terms of the warrants. In addition, broker warrants covering 8,112 units and 10,899 shares of Series A Preferred Stock, which are convertible into 2,712,300 shares of common stock, were issued in ~~liver disease. Initial~~ ~~in vitro~~ ~~data suggests~~connection with the ~~potential use~~Financing. Gross proceeds from the RDD Merger Financing were approximately $22.6 million with net proceeds of ~~larazotide in alcoholic liver diseases. We entered into a research collaboration with Massachusetts General Hospital to explore larazotide in animal models for the treatment of ASH.~~approximately $19.2 million after deducting commissions and offering costs.

~~INN-108 is~~

In connection with the RDD Merger Financing, on April 29, 2020, we filed a ~~novel oral small molecule therapeutic for UC, which plagues up to 1.4 million individuals in~~Certificate of Designation of Preferences, Rights and Limitations of the ~~U.S. alone. With~~Series A Convertible Preferred Stock with the ~~combination~~Secretary of ~~an immunomodulator, INN-108 could lead to~~State of the State of Delaware creating a ~~more efficacious drug than~~new series of authorized preferred stock designated as the ~~current 5-ASA/mesalamine formations being used to treat UC.~~“Series A Phase 1 trial was successfully completed in the U.S. with 24 subjects. We expect to enter Phase 2 trials for mild to moderate UC and an adult orphan indication, subject to the receipt of additional financing.Convertible Preferred Stock”.

Financial Overview

Since our inception, we have focused our efforts and resources on identifying and developing our research and development programs. We have not had any products approved for commercial sale and have incurred operating losses in each year since inception. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations.

As of June 30, ~~2019,~~2020, we had an accumulated deficit of ~~$52.4~~$118.8 million. We incurred net losses of ~~$4.5~~$44.6 million and ~~$4.2~~$4.5 million for the three months ended June 30, 2020 and 2019, respectively, and ~~2018, respectively,~~$48.2 million and $8.9 million ~~and $19.2 million for~~during the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. We expect to continue to incur significant expenses and increase our operating losses for the foreseeable future, which may fluctuate significantly between periods. We anticipate that our expenses will increase substantially as and to the extent we:

•continue research and development, including preclinical and clinical development of our ~~future~~existing and ~~existing~~future product candidates, including ~~INN-202;~~larazotide and NM-002;

•complete integration of operations and personnel associated with the RDD Merger;

•potentially seek regulatory approval for our product candidates;

•commercialize any product candidates for which we obtain regulatory approval;

•maintain and protect our intellectual property rights;

•add operational, financial and management information systems and personnel; and

•continue to incur additional legal, accounting, regulatory, tax-related and other expenses required to operate as a public company.

As such, we will need substantial additional funding to support our operating activities. Adequate funding may not be available to us on acceptable terms, or at all. We currently anticipate that we will seek to fund our operations through equity or debt financings, strategic alliances or licensing arrangements, or other sources of financing. Our failure to obtain sufficient funds on acceptable terms could have a material adverse effect on our business, results of operations and financial condition.

Other Recent Developments

~~March 2019 Offering~~The effect of the COVID-19 pandemic and its associated restrictions may increase the anticipated aggregate costs for the development of our product candidates and may adversely impact the anticipated timelines for the development of our product candidates by, among other things, causing disruptions in the supply chain for clinical supplies, delays in the timing and pace of subject enrollment in clinical trials and lower than anticipated subject enrollment and completion rates, delays in the review and approval of our regulatory submissions by the FDA and other agencies with respect to our product candidates, and other unforeseen disruptions. The economic impact of the COVID-19 pandemic and its effect on capital markets and investor sentiment may adversely impact our ability to raise capital when needed or on terms favorable to us and our stockholders to fund our development programs and operations. We do not yet know the full extent of potential delays or impacts on our business, clinical trial activities, ability to access capital or on healthcare systems or the global economy as a whole. However, these effects could have a material adverse impact on our business and financial condition.

Naia Acquisition

On ~~March 17, 2019,~~May 6, 2020, we entered into and consummated a ~~securities purchase agreement~~two-step merger with Naia Rare Diseases, Inc. in accordance with the terms of an Agreement and Plan of Merger (the ~~“Purchase Agreement”~~“Naia Acquisition”) ~~with SDS Capital Partners II, LLC~~. The consideration for the Naia Acquisition at closing consisted of $2.1 million in cash and certain other accredited investors, pursuant to which we sold, on March 18, 2019, 4,181,068 shares of our common stock and issued short-term warrants (the “Short-Term Warrants”) to purchase up to 4,181,0684,835,438 shares of common stock valued at $2.2 million, plus the pre-payment of certain operating costs on behalf of Naia totaling $0.1 million. Consideration for the Naia Acquisition also included potential future development and ~~long-term warrants (the “March Long-Term Warrants”) to purchase~~sales milestone payments worth up to ~~2,508,634 shares~~$80.4 million and royalties on net sales of ~~common stock.~~certain products to which Naia has exclusive rights by license. No contingent consideration for the Naia Acquisition was recorded as of June 30, 2020 as the potential development and sales milestones were not deemed probable as of June 30, 2020.

Warrant Exchange

Pursuant to ~~the Purchase Agreement, we issued the common stock and warrants at~~ a purchase ~~price of $2.33 per share for aggregate proceeds of approximately $9.7 million.~~

The March Long-Term Warrants issued will be exercisable commencing on the six-month anniversary of March 18, 2019, have an initial exercise price of $2.56, subject to certain adjustments, and have an expiration date of March 18, 2024. Any March Long-Term Warrant that has not been exercised by the expiration date will be automatically exercised via cashless exercise. The Short-Term Warrants are exercisable from the date of issuance, have an expiration date of March 18, 2020 and have an initial exercise price of $4.00, subject to certain adjustments. If at any time after March 18, 2019, the weighted-average price of our common stock exceeds $5.25 for ten consecutive trading days, we may call the outstanding Short-Term Warrants and require that they be exercised in cash, except to the extent that such exercise would surpass the beneficial ownership limitations, as specified in the Purchase Agreement. If exercised in full, the Short-Term Warrants and March Long-Term Warrants could result in aggregate gross proceeds of $23.1 million; however, there can be no guarantee that any or all of the Short-Term Warrants and March Long-Term Warrants will be exercised, that the market price of our common stock will exceed the exercise price of the Short-Term Warrants or March Long-Term Warrants or that the exercise price will not be subject to certain adjustments. In addition, in certain circumstances, the Short-Term Warrants and March Long-Term Warrants may also be exercised via cashless exercise pursuant to their respective terms.

~~Additional Warrant Issuance~~

~~On April 25, 2019, we entered into an amendment (the “Amendment”) to the Purchase Agreement~~agreement dated as of March 17, 2019, further described in Note 1—Summary of Significant Accounting Policies, between us and each purchaser. The Amendment (i) deleted Section 4.12 of the Purchase Agreement, which generally prohibited us from issuing, entering into agreements to issue, announcing proposed issuances, selling or granting certain securities between the date of the Purchase Agreement and the date that was 45 days following the closing date thereunder and (ii) gave each purchaser the right to purchase, for $0.125 per underlying share, an additional warrant to purchase shares of our common stock having an exercise price per share of $2.13 and otherwise having the terms of the March Long-Term Warrants (collectively, the “New Warrants”) pursuant to a securities purchase agreement (the “New Securities Purchase Agreement”) entered into among us and each purchaser on May 17, 2019.

We issued New Warrants exercisable for an aggregate of 3,897,010 shares of our common stock and the New Warrants are exercisable for five years beginning on the six-month anniversary of the date of issuance. The New Warrants have an initial exercise price equal to $2.13 per share, subject to certain adjustments. If not previously exercised in full, at the expiration of their applicable terms, the New Warrants will be automatically exercised via cashless exercise, in which case the holder would receive upon such exercise the net number of shares, if any, of common stock determined according to the formula set forth in the New Warrant. If exercised in full, the New Warrants could result in aggregate gross proceeds of $8.3 million; however, there can be no guarantee that any or all of the New Warrants will be exercised, that the market price of our common stock will exceed the exercise price of the New Warrants or that the exercise price will not be subject to certain adjustments. In addition, in certain circumstances, the New Warrants may also be exercised via cashless exercise pursuant to the terms of the New Warrants.

~~April 2019 Offering~~

On April 29, 2019, we entered into a Securities Purchase Agreement (the “April Purchase Agreement”) with certain institutional and accredited investors providing for the sale of up to 4,318,272 shares of our common stock at a purchase price of $2.025 per share.

~~Pursuant to the April Purchase Agreement, we agreed to issue unregistered~~issued warrants ~~(the “April Warrants”)~~ to purchase up to 4,318,272 shares of our common stock. Subject to certain ownership limitations, the April Warrants are exercisable beginning on the date of their issuance until the five-and-a-half-year anniversary of their date of issuance at an initial exercise price of $2.13. The exercise price of the April Warrants is subject to adjustment for stock ~~splits, reverse splits,~~(the “April Warrants”) and similar capital transactions as described in the April Warrants. Upon a fundamental transaction, the holder shall have the right to receive payment in cash, or under certain circumstances in other consideration, from us at the Black-Scholes value as described in the April Warrants. The April Warrants may be exercisable on a “cashless” basis while there is no effective registration statement or current prospectus available for the shares of common stock issuable upon exercise of the April Warrants. A holder will not have the right to exercise any portion of the April Warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the April Warrants. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99% upon notice to us, provided that any increase in such percentage shall not be effective until 61 days after such notice. If not

~~previously exercised in full, at the expiration of their terms, the April Warrants will be automatically exercised via cashless exercise.~~

~~The net proceeds from the offering and the private placement are approximately $7.9 million, after deducting commissions and estimated offering costs. We also~~ granted the placement agent warrants to purchase up to 215,914 shares of ~~our~~ common stock (the “Placement Agent Warrants”). ~~The Placement Agent Warrants have substantially the same terms as the April Warrants, except that the Placement Agent Warrants have an exercise price equal to 125%~~On December 19, 2019, we entered into separate exchange agreements with each of the per share purchase price and will have a term of 5 years from the effective date of the offering. We will also pay the placement agent a reimbursement for non-accountable expenses in the amount of $35,000 and a reimbursement for legal fees and expenses of the placement agent in the amount of $25,000. If exercised in full, the warrants issued in the April 2019 Offering, including the Placement Agent Warrants, could result in aggregate gross proceeds of $9.8 million; however, there can be no guarantee that any or allpurchasers of the April Warrants and the Placement Agent Warrants ~~will be exercised, that~~(the “Exchange Agreements”). Pursuant to the ~~market price~~Exchange Agreements, we agreed to issue to the purchasers an aggregate of 5,441,023 shares of our common stock ~~will exceed~~(the “Exchange Shares”) at a ratio of 1.2 Exchange Shares for each purchaser warrant in exchange for the ~~exercise price~~cancellation and termination of all of the ~~April Warrants or Placement Agent Warrants or that the exercise price will not be subject to certain adjustments. In addition, in certain circumstances, the~~outstanding April Warrants and Placement Agent Warrants. On December 26, 2019, we issued 3,593,714 Exchange Shares in exchange for the cancellation and termination of Exchange Warrants ~~may also be exercised via cashless exercise pursuant~~ to ~~their respective terms.~~purchase 2,994,762 shares of common stock. During the six months ended June 30, 2020, we issued 1,847,309 Exchange Shares in exchange for the cancellation and termination of the remaining outstanding Exchange Warrants.

~~Corporate Updates~~Warrant Extension and Offer to Amend and Exercise

In June 2019, we expanded our senior management team by appointing Edward J. Sitar, CPA, to Chief Financial Officer. Mr. Sitar has extensive experience in finance and the life sciences industry. Mr. Sitar will be responsible for developing and implementing our financial strategy and growth plans.

~~Senior Convertible Note~~

~~On October 4, 2018,~~Effective February 6, 2020, we entered into amendments with the holders of our outstanding short-term warrants originally issued March 18, 2019 (the “Short-Term Warrants”) to extend the exercise period of each Short-Term Warrant by six months. The Short-Term Warrants, as amended, are exercisable for up to an ~~Amendment and Exchange Agreement and Senior Convertible Note (“Senior Convertible Note”). The Senior Convertible Note was convertible into~~aggregate of 4,181,068 shares of our common stock, ~~at certain conversion prices depending on certain factors, which include~~par value $0.0001 per share, until September 18, 2020. Except as specifically amended, the ~~volume weighted average price (“VWAP”)~~terms and conditions of ~~our common stock for a period~~each Short-Term Warrant remained in full force and effect and were not affected by this amendment. See “Note 1—Summary of time prior to conversion. In addition, the Senior Convertible Note was redeemable by the noteholder or by us under certain qualifying conditions. The principal balance of the Senior Convertible Note was $5.2 million with a stated interest rate of 8.0% per annum and a maturity date of October 4, 2020. In January 2019, the noteholder issued a redemption notice and we repaid the noteholder $1.1 million of principal and accrued interest. During January 2019, we entered into an Option to Purchase Senior Convertible Note (“Option Agreement”) with the noteholder. The Option Agreement provided us with the ability to repay the Senior Convertible Note prior to March 31, 2019, which we exercised in March 2019. We paid the noteholder of the Senior Convertible Note approximately $5.3 million, which was the full purchase amount, including interest, of the Senior Convertible Note pursuantSignificant Accounting Policies” to the ~~terms of the Option Agreement. There are no further amounts outstanding under the Senior Convertible Note and the Senior Convertible Note has been canceled.~~

~~Unsecured Convertible Promissory Note~~

On March 8, 2019, we entered into a Securities Purchase Agreement and an unsecured Convertible Promissory Note, or the Unsecured Convertible Note, in the principal amount of $5.5 million. The holder of the Unsecured Convertible Note, or the Convertible Noteholder, may elect to convert all or a portion of the Unsecured Convertible Note at any time and from time to time into our common stock at a conversion price of $3.25 per share, subject to adjustment for stock splits, dividends, combinations and similar events. We may prepay all or a portion of the Unsecured Convertible Note at any time for an amount equal to 115% of then outstanding obligations or the portion of the obligations we are prepaying. The purchase price of the Unsecured Convertible Note was $5.0 million and the Unsecured Convertible Note carries an original issuance discount of $0.5 million, which is included in the principal amount of the Unsecured Convertible Note. See “Liquidity and Capital Resources” below and “Note 4—Debt” to the accompanying ~~condensed~~ financial statements included in this Quarterly Report on Form 10-Q for ~~further details regarding the~~additional terms of the ~~Unsecured Convertible Note.~~Short-Term Warrants.

On February 12, 2020, we offered to amend outstanding warrants to purchase an aggregate of 12,346,631 shares of common stock (the “Original Warrants”) held by holders of certain outstanding warrants (the “Offer to Amend and Exercise”). The Original Warrants of eligible holders who elect to participate in the Offer to Amend and Exercise were amended to (i) shorten the exercise period so that they expired concurrently with the closing of the RDD Merger on April 30, 2020 and (ii) reduced the exercise price to $0.10 per share. The amended warrants were required to be exercised for cash, and any cashless exercise provisions in the Original Warrants were omitted. On April 29, 2020, warrants to purchase 12,230,418 shares of common stock were exercised in the Offer to Amend and Exercise for aggregate gross proceeds of approximately $1.2 million.

Amendment to the 2012 Omnibus Incentive Plan

On December 4, 2018, our stockholders approved an amendment to the 2012 Omnibus Incentive Plan (the “Omnibus Plan”) to provide for an additional 3,150,000 shares of common stock to be issued pursuant to the plan and an evergreen provision to automatically increase the number of shares issuable pursuant to the plan on an annual basis for the period commencing January 1, 2019 and ending on January 1, 2022. The plan will automatically terminate on April 30, 2022. Pursuant to the evergreen provision, on January 1, 2020 and 2019, the number of shares of common stock available under the Omnibus Plan automatically increased by 1,973,883 and 1,304,441 shares, respectively. On June 30, 2020, our stockholders approved an amendment to the Omnibus Plan to increase the aggregate number of shares that may be issued under the Omnibus Plan by 15,000,000 shares.

Research and Development Updates

~~We started~~During 2019, we dosed the first patient in our Phase 3 clinical ~~trials~~trial for ~~INN-202, after completing key study start-up activities for the study of~~larazotide in adult patients with celiac ~~disease who~~disease. We have ~~persistent abdominal symptoms while on a gluten-free diet. The~~initiated over 100 clinical trial ~~starts with~~sites, and we are targeting 630 subjects in the ~~screening and monitoring of patients with subsequent randomization. We will provide updates from time to time as the trial gets further along. We anticipate that our~~ first Phase 3 clinical trial, ~~will have approximately 600 subjects, with~~in three parallel treatment groups, ~~(0.25~~0.25 mg of larazotide tid, 0.5 mg of larazotide tid and a placebo ~~arm).~~

~~Recent research and development milestones include:~~

~~continued research collaboration with Institut Gustave Roussy to~~arm. We currently anticipate a readout from the trial in 2021. In May 2020, we received a thorough QT (TQT) study ~~regulation~~waiver from the FDA for the Phase 3 trial of ~~intestinal permeability and the gut microbiota using~~ larazotide in ~~immuno-oncology checkpoint inhibitor failure preclinical models;~~

~~continuation~~celiac disease. The waiver supports larazotide’s strong precedent of ~~data analysis from pre-clinical models in NASH~~safety and could potentially streamline the program’s timeline and cost effectiveness. In addition, after ~~successful initial data from studying larazotide in both~~ ~~ex vivo~~ ~~and animal models;~~

~~continued research collaboration~~consultation with ~~Dr. Anthony Blikslager of North Carolina State University to explore life-cycle extension of our lead molecule larazotide acetate;~~

~~continued research collaboration with Dr. James Nataro~~the FDA, the definition of the ~~University~~primary endpoint was modified to utilize a continuous variable instead of ~~Virginia, Charlottesville~~a responder analysis. The new methodology enables a more capital-efficient study, with reduction in participants from 630 to ~~study larazotide’s effect on Environmental Enteric Dysfunction; and~~

continued research collaboration with Dr. Jay Luther and Dr. Raymond Chung at the Gastroenterology Division at Massachusetts General Hospital in order to research the effects of larazotide on certain forms of alcoholic liver disease, such as ASH.525.

Critical Accounting Policies and Use of Estimates

Use of Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported

amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

Critical Accounting Policies

Areas of the financial statements where estimates may have the most significant effect include acquired in-process research and development, fair value measurements, accrued expenses, share-based compensation, income taxes and management’s assessment of our ability to continue as a going concern. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from these estimates. ~~Except as noted below, there~~There have been no material changes to our critical accounting policies described in "Critical Accounting Policies and Use of Estimates" of the Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the SEC on March ~~18, 2019.~~

The Short-Term Warrants, March Long-Term Warrants, New Warrants, April Warrants and Placement Agent Warrants that we issued during the six months ended June 30, 2019 are freestanding financial instruments that contain net settlement options and may require the Company to settle these warrants in cash under certain circumstances. We have classified these warrants20, 2020, except as liabilities on the accompanying condensed balance sheets. The warrant liabilities are initially recorded at fair value on the date of grant and will be subsequently re-measured to fair value at each balance sheet date until the warrant liabilities are settled. Changes in the fair value of the warrants are recognized as a non-cash component of other income and expense in the accompanying condensed statements of operations and comprehensive loss.noted below.

Acquired In-process Research and Development Expense. We ~~adopted ASU No. 2016-02,~~ ~~Leases (Topic 842), as amended, as of January 1, 2019 using the modified retrospective approach at the beginning of the period of adoption. Under this approach, the reporting for comparative periods presented~~have acquired and may in the future acquire, rights to develop and commercialize new drug candidates and/or other in-process research and development assets. The up-front acquisition payments, as well as future milestone payments associated with asset acquisitions that are deemed probable to achieve the milestones and do not meet the definition of a derivative, are expensed as acquired in-process research and development provided that the drug has not achieved regulatory approval for marketing, and, absent obtaining such approval, have no alternative future use. See “Note 3—Merger and Acquisition” to our condensed consolidated financial statements ~~are presented in accordance with~~for further discussion of acquired in-process research and development expense related to the ~~legacy lease standard. In addition, we elected the available practical expedients permitted under the transition guidance within the new lease standard.~~RDD Merger and Naia Acquisition.

Under the new leases standard, we recognize a right-of-use (“ROU”) asset and lease liability upon commencement of a lease. The ROU asset represents our right to use an underlying asset for the lease term and is included in right-of-use asset on the accompanying condensed balance sheets. Lease liabilities represent our obligation to make lease payments arising from the lease and are included in current and non-current lease liability on the accompanying condensed balance sheets. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. In the absence of an implicit rate, we use their incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. All leases with a term of less than 12 months are not

recognized on the balance sheet. Adoption of the new leases standard resulted in us recognizing a ROU asset and lease liability of less than $0.1 million as of January 1, 2019. The adoption of ASU 2016-02 did not result in a cumulative adjustment to accumulated deficit.

~~We adopted ASU 2018-07,~~ ~~Compensation-Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting~~ effective January 1, 2019. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. Beginning on the adoption date, we changed our expense recognition for share-based payments to non-employees to an amount determined at the grant or modification date instead of a variable amount to be re-measured each reporting period. We calculated the fair value of our non-employee grants as of the adoption date and determined that there was no impact to our accumulated deficit or other components of equity upon adoption of ASU 2018-07. The unamortized expense for non-employee grants will be recognized on a straight-line basis over the remaining contractual term of the respective non-employee option agreements.

Recently Issued Accounting Pronouncements

For details of recent Accounting Standards Updates and our evaluation of their adoption on our condensed consolidated financial statements, see “Note 1—Summary of Significant Accounting Policies—Recent Accounting Pronouncements” to our condensed consolidated financial statements in "Part I. Financial Information - Item I. Financial Statements" included elsewhere in this Quarterly Report on Form 10-Q.

Results of Operations

Comparison of the Three Months Ended June 30, ~~2019~~2020 and ~~2018~~2019

The following table sets forth the key components of our results of operations for the three months ended June 30, ~~2019~~2020 and ~~2018:~~2019:


	Three Months Ended June 30,											Three Months Ended June 30,
	2019			2018			$ Change			% Change		2020			2019			$ Change			% Change
Operating expenses:
Research and development	$	3,073,344		$	1,243,221		$	1,830,123		147	%	$	444,817		$	3,073,344		$	(2,628,527	)	(86	)%
Acquired in-process research and development												32,266,893			—			32,266,893			100	%
General and administrative	3,049,711			2,132,850			916,861			43	%	5,659,721			3,049,711			2,610,010			86	%
Warrant inducement expense												6,467,048			—			6,467,048			100	%
Total operating expenses	6,123,055			3,376,071			2,746,984			81	%	44,838,479			6,123,055			38,715,424			632	%

Income (loss) from operations	(6,123,055		)	(3,376,071		)	(2,746,984		)	(81	)%
Other income (expense), net	1,634,815			(839,481		)	2,474,296			295	%
Loss from operations												(44,838,479		)	(6,123,055		)	(38,715,424		)	(632	)%
Total other income (expense), net												240,943			1,634,815			(1,393,872		)	(85	)%

Net loss	$	(4,488,240	)	$	(4,215,552	)	$	(272,688	)	(6	)%	$	(44,597,536	)	$	(4,488,240	)	$	(40,109,296	)	(894	)%

Research and Development Expense

Research and development expense for the three months ended June 30, ~~2019, increased~~2020, decreased approximately ~~$1.8~~$2.6 million, or ~~147%~~86%, as compared to the three months ended June 30, ~~2018.~~2019. The ~~increase~~decrease of approximately $2.6 million was driven primarily by the ~~start~~decrease of $3.6 million in our clinical trial expense due to significant fees incurred in prior period associated with our former clinical research organization and a decrease of $0.1 million associated with personnel costs and benefits for our research and development personnel. These decreases were offset by increases in non-cash stock compensation expense of approximately $1.1 million due to the accelerated vesting of certain outstanding options upon closing of the ~~Phase 3 trial in celiac disease~~RDD Merger and additional options awarded as a non-cash merger bonus, some of which were fully vested upon grant.

Acquired In-process Research and Development Expense

Acquired in-process research and development expense was approximately $32.3 million during the three months ended June 30, 2019, which represented an increase of approximately $0.9 million. In addition, non-cash share-based compensation expense increased by approximately $0.7 million primarily due to re-measurement of non-employee stock options2020 and represents expenses associated with the RDD Merger and Naia Acquisition that closed during the three months ended June 30, ~~2018, which resulted in a decrease in expense as a result of the decline in the fair value of options vested during the prior period. Compensation costs and related~~ ~~benefits for our~~2020. Approximately $28.8 million represents non-cash acquired in-process research and development ~~personnel increased by~~ ~~approximately $0.2 million due to an increase~~expense paid in equity ownership. There was no acquired in-process research and development ~~personnel.~~expense during the three months ended June 30, 2019.

General and Administrative Expense

General and administrative expense for the three months ended June 30, ~~2019,~~2020, increased approximately ~~$0.9~~$2.6 million, or ~~43%~~86%, as compared to the three months ended June 30, ~~2018.~~2019. The increase was ~~driven~~ primarily bydue to an increase in non-cash ~~share-based~~stock compensation expense of ~~$0.4 million. The increase~~$2.1 million associated with the accelerated vesting of certain outstanding options upon closing of the RDD Merger and additional options awarded as a non-cash merger bonus, some of which were fully vested upon grant. In addition, personnel costs and benefits increased by approximately $1.3 million due to the addition of a new chief executive officer in ~~non-cash share-based compensation expense was~~April 2020 and the addition of a chief financial officer in July 2019. Personnel costs and benefits also increased due to merger bonuses awarded upon closing of the RDD Merger. These increases were offset by a decrease of approximately $0.6 million in professional fees primarily due to ~~RSUs that vested~~legal fees associated with the RDD Merger and RDD Merger Financing being classified as offering fees. Other general corporate fees decreased by approximately $0.2 million due to a reduction in general and administrative consultants during 2020.

Warrant Inducement Expense

During the three months ended June 30, 2020, we recognized warrant inducement expense of approximately $6.5 million. There was no warrant inducement expense during the three months ended June 30, 2019. ~~In addition, business development, patent protection~~The warrant inducement expense represents the accounting fair value of

~~our intellectual property~~ consideration issued to induce exercise of certain warrants in the Offer to Amend and ~~other general corporate costs increased approximately $0.3 million and professional fees increased $0.2 million, which includes~~Exercise by reducing the ~~write-off~~exercise price to $0.10 per share, further described in “Note 1-Summary of ~~deferred offering costs associated with~~Significant Accounting Policies” to the ~~ATM facility of $0.1 million.~~

accompanying financial statements included in this Quarterly Report on Form 10-Q.

Other ~~income (expense)~~Income (Expense), ~~net~~Net

Other income (expense), net for the three months ended June 30, ~~2019, decreased~~2020, changed by approximately ~~$2.5~~$1.4 million, or ~~295%~~85%, as compared to the three months ended June 30, ~~2018. The decrease is primarily~~2019. Other expense increased by approximately $0.6 million due to ~~the decrease in non-cash~~(i) interest expense of ~~$0.5~~approximately $0.2 million associated with the Additional Note entered into in January 2020; (ii) ~~an unrealized gain from~~interest expense associated with the ~~change in fair value~~beneficial conversion feature on conversion of ~~the warrant liabilities of $1.8 million~~principal and ~~(iii) an unrealized gain from the change in fair value~~interest of the Unsecured Convertible Note ~~derivative liability~~ of approximately $0.2 ~~million.~~million; and (iii) a one-time fee of approximately $0.2 million associated with the execution of the Standstill Agreement further described in Note 4—Debt. Other income decreased by approximately $0.8 million due to the non-cash change in the fair value of warrant liabilities recorded during the three months ended June 30, 2019.

Comparison of the Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019

The following table sets forth the key components of our results of operations for the six months ended June 30, ~~2019~~2020 and ~~2018:~~2019:


	Six Months Ended June 30,											Six Months Ended June 30,
	2019			2018			$ Change			% Change		2020			2019			$ Change			% Change
Operating expenses:
Research and development	$	4,271,659		$	7,601,225		$	(3,329,566	)	(44	)%	$	3,043,802		$	4,271,659		$	(1,227,857	)	(29	)%
Acquired in-process research and development												32,266,893			—			32,266,893			100	%
General and administrative	6,164,206			7,103,463			(939,257		)	(13	)%	7,329,528			6,164,206			1,165,322			19	%
Warrant inducement expense												7,157,887			—			7,157,887			100	%
Total operating expenses	10,435,865			14,704,688			(4,268,823		)	(29	)%	49,798,110			10,435,865			39,362,245			377	%

Income (loss) from operations	(10,435,865		)	(14,704,688		)	4,268,823			29	%
Loss from operations												(49,798,110		)	(10,435,865		)	(39,362,245		)	377	%
Other income (expense), net	1,512,860			(4,470,608		)	5,983,468			134	%	1,597,573			1,512,860			84,713			6	%

Net loss	$	(8,923,005	)	$	(19,175,296	)	$	10,252,291		53	%	$	(48,200,537	)	$	(8,923,005	)	$	(39,277,532	)	440	%

Research and Development Expense

Research and development expense for the six months ended June 30, ~~2019,~~2020, decreased approximately ~~$3.3~~$1.2 million,, or ~~44%~~29%, as compared to the six months ended June 30, ~~2018.~~2019. The ~~decrease~~change was driven primarily ~~driven~~ by a decrease of ~~approximately $5.0~~$2.1 million in our clinical trial expense due to significant fees incurred in prior period associated with our former clinical research organization and a decrease of $0.2 million associated with personnel costs and benefits for our research and development personnel. These decreases were offset by increases in non-cash ~~share-based~~stock compensation expense ~~which is primarily~~of approximately $1.1 million due to the accelerated vesting of certain outstanding options upon closing of the RDD Merger and additional options awarded as a ~~decrease in the options granted~~non-cash merger bonus, some of which were fully vested upon grant.

Acquired In-process Research and ~~vested~~Development Expense

Acquired in-process research and development expense was approximately $32.3 million during the six months ended June 30, ~~2019. Non-cash share-based compensation expense also decreased~~2020 and represent expenses associated with the RDD Merger and Naia Acquisition that closed during the six months ended June 30, ~~2019, due to the decrease in fair value of options as a result of the decline in our stock price. This decrease was partially offset by an increase of approximately $1.4~~2020. Approximately $28.8 million ~~associated with the start of our Phase 3 clinical trials in celiac disease and an increase of approximately $0.3 million in compensation costs related to an increase in~~represents non-cash acquired in-process research and development ~~personnel.~~expense paid in equity ownership. There was no acquired in-process research and development expense during the six months ended June 30, 2019.

General and Administrative Expense

General and administrative expense for the six months ended June 30, 2019, ~~decreased~~increased approximately ~~$0.9~~$1.2 million, or ~~13%~~19%, as compared to the six months ended June 30, ~~2018.~~2019. The ~~decrease~~increase was driven ~~primarily~~ by ~~a decrease in accounting and legal fees associated with the Merger of $0.6 million, a decrease of $1.0 million in transaction advisory fees associated with the Merger and a decrease of $0.6 million~~an increase in non-cash stock compensation expense ~~primarily~~of approximately $1.8 million due to the ~~decrease in fair value~~accelerated vesting of certain outstanding options ~~vesting during~~upon closing of the ~~period~~RDD Merger and additional options awarded as a ~~result~~non-cash merger bonus, some of which were fully vested upon grant. In addition, personnel costs and benefits increased by approximately $1.0 million due to an increase in severance costs related to termination of employees following the ~~decline~~RDD Merger and the addition of a new chief executive officer in ~~our stock price.~~April 2020 and chief financial officer in July 2019. These ~~decreases~~increases were offset by ~~an increase~~decreases in (i) general and administrative personnel costs of $0.4 million, which includes severance costs for our former chief executive officer of $0.3 million, (ii) costs associated with operating as a public company of $0.2 million, including directors’ and officers’ liability insurance premiums, investor relations and regulatory fees and (iii) business development, patent protection of our intellectual property and other general corporate fees of approximately $0.3 million, (ii) professional fees of $0.8 million due to legal fees associated with the RDD Merger and RDD Merger Financing that were accounted for as offering fees and (iii) costs associated with operating as a public company of ~~$0.7~~approximately $0.5 million primarily due to merger bonuses awarded to our board of directors and an increase in directors’ and officers’ liability insurance premiums.

Warrant Inducement Expense

During the six months ended June 30, 2020, we recognized warrant inducement expense of approximately $7.2 million. There was no warrant inducement expense during the six months ended June 30, 2019. The warrant inducement expense represents the accounting fair value of consideration issued to induce exercise of certain warrants in the Offer to Amend and Exercise by reducing

the exercise price to $0.10 per share, further described in “Note 1-Summary of Significant Accounting Policies” to the accompanying financial statements included in this Quarterly Report on Form 10-Q.

Other income (expense), net

Other income (expense), net for the six months ended June 30, ~~2019, decreased~~2020, increased by approximately ~~$6.0~~$0.1 million,, or ~~134%~~6%, as compared to the six months ended June 30, ~~2018.~~2019. The ~~decrease primarily~~increase consists of ~~(i) a non-cash charge~~an increase in income of ~~$3.1~~approximately $1.0 million for the loss on extinguishment of debt that was incurred in March 2019. This increase was offset by increases in other expense of (i) $0.2 million associated with the beneficial conversion feature that was triggered when our convertible debt and accrued interest converted to our common

stock at a ~~25%~~ discount ~~on January 29, 2018,~~in June 2020, (ii) ~~an unrealized gain~~$0.5 million in non-cash interest expense and (iii) $0.2 million from the change in fair value of ~~the warrant liabilities of $2.7 million, (iii) an unrealized gain from the change in fair value of the Unsecured Convertible Note~~ derivative liability of $0.7 million and (iv) non-cash interest expense of $0.8. These changes were offset by $1.0 million for the loss on extinguishment of debt in March 2019 and $0.3 million in consideration for the Option Agreement associated with the Senior Convertible Note (see Note 4—Debt).

liability.

Liquidity and Capital Resources

Sources of Liquidity

As of June 30, ~~2019,~~2020, we had cash and cash equivalents of approximately ~~$13.3~~$13.5 million, compared to approximately ~~$5.7~~$4.6 million as of December 31, ~~2018.~~2019. The increase in cash was primarily due to ~~the~~ net proceeds from the ~~March 2019 Offering and April 2019 Offering, in addition to the issuance~~RDD Merger Financing of ~~convertible debt, net of~~approximately $19.2 million which was offset by expenditures for acquisition costs, business operations, research and development and clinical trial ~~preparations, further described below.~~costs.

On April 29, 2020, we entered into a securities purchase agreement with various investors (the “Private Placement”) pursuant to which we agreed to issue and sell to the investors units consisting of one share of Series A Convertible Preferred Stock (the "Series A Preferred Stock") and one five-year warrant (the "Warrants") to purchase one share of Series A Preferred stock (the "Units"). On May 4, 2020, upon closing of the RDD Merger Financing, we received net proceeds of $19.2 million after deducting placement agent fees and other offering expenses. We used $2.1 million to fund the Naia Merger and we plan to use the remaining funds to progress our current pipeline, including the ongoing Phase 3 clinical trial in celiac disease and conducting the Phase 1b/2a trial in SBS which began in June 2020. We expect to incur substantial expenditures in the foreseeable future for the continued development and clinical trials of our product candidates. We will continue to require additional financing to develop our product candidates and fund operations for the foreseeable future. We plan to seek funds through debt or equity financings, strategic alliances and licensing arrangements, and other collaborations or sources of financing. ~~However, there~~

There can be no assurance that we will be able to raise the additional capital needed to continue our pipeline of research and development programs on terms acceptable to us, on a timely basis or at all. If we are unable to raise additional funds when needed, our ability to develop our product candidates will be impaired. We may also be required to delay, reduce or terminate some or all of our development programs and clinical trials.

~~March 2019 Offering~~

On March 17, 2019, we entered into the Purchase Agreement with SDS Capital Partners II, LLC and certain other accredited investors, pursuant to which we sold, on March 18, 2019, 4,181,068 shares of our common stock and issued Short-Term Warrants to purchase up to 4,181,068 shares of our common stock and Long-Term Warrants to purchase up to 2,508,634 shares of common stock. Pursuant to the Purchase Agreement, we issued the shares of common stock and warrants at a purchase price per share of $2.33 for aggregate gross proceeds of approximately $9.7 million. For additional terms of the agreement, see “Recent Development—Corporate Updates—March 2019 Offering” above.

~~April 2019 Offering~~

On April 29, 2019, we entered into the April Purchase Agreement pursuant to which we sold, on May 1, 2019, 4,318,272 shares of our common stock at a purchase price of $2.025 per share for aggregate gross proceeds of approximately $7.9 million, after deducting commissions and estimated offering costs. Pursuant to the April Purchase Agreement, we issued warrants to purchase up to 4,318,272 share of common stock at an initial exercise price of $2.13. Additionally, we granted the placement agent warrants to purchase up to 215,914 shares of common stock (the “Placement Agent Warrants”). The Placement Agent Warrants have substantially the same terms as the April warrants, except that the Placement Agent Warrants have an exercise price of $2.53 and have a term of 5 years from the effective date of the offering. For additional terms of the agreement, see “Recent Developments—Corporate Updates—April 2019 Offering” above.

~~January 2018 Equity Issuance~~

Immediately prior to the closing of the Merger, accredited investors purchased shares of Private Innovate common stock in a private placement for gross proceeds of approximately $18.1 million, or $16.5 million, net of approximately $1.5 million in placement agent fees and $80,000 in non-accountable expense costs (the “Equity Issuance”). Additionally, Private Innovate issued five-year warrants to each cash purchaser of common stock, or an aggregate of approximately 1.4 million warrants, with an exercise price of $3.18 per share after giving effect to the Exchange Ratio. Private Innovate also issued 349,555 five-year warrants with an exercise price of $2.54 per share and 279,862 five-year warrants with an exercise price of $3.18 per share (after giving effect of the Exchange Ratio) to the respective placement agents and their affiliates.

Concurrently with the Equity Issuance, convertible promissory notes issued by Private Innovate in the aggregate principal amount of approximately $8.6 million plus accrued interest of $0.6 million were converted into shares of Private Innovate common stock at an exercise price per share of $0.72, prior to the Exchange Ratio (the “Conversion”), which reflected a 25% discount relative to the shares issued pursuant to the Equity Issuance (the “Conversion Discount”). The Conversion Discount represented a beneficial conversion feature of approximately $3.1 million which was recorded as a charge to interest expense and a credit to additional paid-in capital.

H.C. Wainwright & Co., LLC (“HCW”) and GP Nurmenkari Inc. (“GPN”) were retained as the placement agents for the Equity Issuance. HCW was paid a flat fee of $0.3 million, a cash fee of $0.3 million (equal to 10% of the gross proceeds of the Equity Issuance up to a certain cap) and non-accountable expense allowance of approximately $30,000. GPN was paid a cash fee of $0.9 million (equal to 10% of the gross proceeds of certain investors in the Equity Issuance) and non-accountable expense allowance of $50,000. IB Pharmaceuticals issued to affiliates of HCW five-year warrants to purchase 209,951 shares of common stock with an exercise price per share equal to $3.18 (after giving effect to the Exchange Ratio). IB Pharmaceuticals issued to GPN five-year warrants to purchase 349,555 shares of common stock with an exercise price per share equal to $2.54 and five-year warrants to purchase 69,911 shares of common stock with an exercise price of $3.18 (after giving effect to Exchange Ratio). Upon the closing of the Merger, the outstanding shares of IB Pharmaceuticals’ common stock were exchanged for shares of common stock of Monster at an exchange ratio of one share of IB Pharmaceuticals common stock to 0.37686604 shares of Monster common stock (the “Exchange Ratio”). Immediately following the closing of the Merger, after giving effect to the Equity Issuance and applying the Exchange Ratio, Monster’s securityholders owned approximately 5.8% of our outstanding common stock on a fully-diluted basis and IB Pharmaceuticals’ securityholders owned approximately 94.2% of our outstanding common stock.

~~Senior Convertible Note and Exchange~~Standstill Agreement

~~On January 29, 2018,~~In order to preserve cash until completion of the RDD Merger, we entered into a ~~Note Purchase~~standstill agreement on April 3, 2020, with the Convertible Noteholder (the “Standstill Agreement”). Pursuant to the Standstill Agreement, ~~and Senior Note Payable (the “Note”) with a lender. The principal amount~~the Convertible Noteholder will not seek to redeem any portion of the Unsecured Convertible Note between April 1, 2020 and May 31, 2020. The outstanding balance of the Unsecured Convertible Note was ~~$4.8 million. The~~increased by $150,000 as partial consideration for the Standstill Agreement. All other terms of the Unsecured Convertible Note ~~was issued at a discount of $1.8 million~~remain in full force and ~~net of financing costs, for total proceeds of $3.0 million. Interest on the~~effect.

Additional Note ~~accrued from~~

On January ~~29, 2018, at a rate of 12.5% per annum and quarterly payments of interest only were due beginning on March 30, 2018 and compounded quarterly. On October 4, 2018,~~10, 2020, we entered into an ~~Amendment~~additional securities purchase agreement and ~~Exchange Agreement (“Exchange Agreement”) with the noteholder exchanging the Note for a new Senior Convertible Note (the “Senior Convertible Note”).~~

The principal amount of the Senior Convertible Note was $5.2 million and bore interest at a rate of eight percent (8%) per annum payable quarterly in cash, with a scheduled maturity date of October 4, 2020. The interest rate would automatically increase if there was an event of default to 18% per annum during the default period.

During January 2019, the noteholder issued a redemption notice requiring us to repay the noteholder $1.1 million of principal and accrued interest. On January 7, 2019, we entered into an Option to Purchase Senior Convertible Note (“Option Agreement”) with the noteholder. We paid the noteholder $0.3 million in consideration for the noteholder entering into the Option Agreement with us, which was recorded as interest expense in our accompanying condensed statements of operations and comprehensive loss. The Option Agreement provided us with the ability to repay (purchase) the outstanding principal and accrued interest of the Senior Convertible Note any time from January 7, 2019 until March 31, 2019 (“Option Period”). On March 11, 2019, we exercised our repurchase rights from the Option Agreement and paid the noteholder of the Senior Convertible Note approximately $5.3 million, which was the full purchase amount, including accrued interest, of the Senior Convertible Note pursuant to the terms of the Option Agreement. There are no further amounts outstanding under the Senior Convertible Note and the Senior Convertible Note has been canceled.

Amortization of debt discount for the Note and Senior Convertible Note recorded as interest expense for the Note and the Senior Convertible Note totaled approximately $0.7 million and 1.2 million for the three and six months ended June 30, 2018. There was no such expense related to the Note and the Senior Convertible Note during the three and six months ended June 30, 2019.

~~Unsecured Convertible Promissory Note~~

~~On March 8, 2019, we entered into the Note Purchase Agreement~~unsecured convertible promissory note with the Convertible ~~Noteholder. Pursuant to the Note Purchase Agreement, we issued the Convertible~~ Noteholder ~~the Unsecured Convertible Note~~ in the principal amount of ~~$5,500,000.~~$2,750,000 (the “Additional Note”). The Convertible Noteholder may elect to convert all or a portion of the ~~Unsecured Convertible~~Additional Note, at any time ~~and~~ from time to time into our common stock at a conversion price of $3.25 per share, subject to adjustment for stock splits, dividends, combinations and similar events. We may prepay all or a portion of the ~~Unsecured Convertible~~Additional Note at any time for an amount equal to 115% of ~~any~~ then outstanding obligations or the portion of the obligations we are prepaying. The purchase price of the ~~Unsecured Convertible~~Additional Note was ~~$5,000,000,~~$2.5 million and ~~the Unsecured Convertible Note~~ carries an ~~OID~~original issuance discount of ~~$500,000,~~$250,000, which is included in the principal amount of the ~~Unsecured Convertible~~Additional Note. In addition, we agreed to pay $20,000 of transaction expenses, which were netted out of the purchase price of the Unsecured Convertible Note. We also incurred additional transactions costs of approximately $37,000, which were recorded as debt issuance costs. As a result of the redemption features of the Unsecured Convertible Note, further described in “Note 4—Debt,” we are amortizing the debt

~~issuance costs and accreting the OID to interest expense over the estimated redemption period of 15 months, using the effective interest method.~~

The various conversion and redemption features contained in the Unsecured Convertible Note are embedded derivative instruments, which were recorded as a debt discount and derivative liability at the issuance date at their estimated fair value of $1.3 million. Amortization of debt discount and accretion of the OID for the Unsecured Convertible Note recorded as interest expense was approximately $0.3 million and $0.4 million for the three and six months ended June 30, 2019.

~~The Unsecured Convertible~~Additional Note bears interest at the rate of 10% (which will increase to 18% upon and during the continuance of an event of default) per annum, compounding on a daily basis. All principal and accrued interest on the ~~Unsecured Convertible~~Additional Note is due on the ~~second-year~~second anniversary of the ~~Unsecured Convertible~~date of the Additional Note’s issuance.

At any time after the six-month anniversary of the issuance of the ~~Unsecured Convertible~~Additional Note, (i) if the average ~~volume weighted average price~~VWAP of our common stock over twenty trading dates exceeds $10.00 per share, we may generally require that the ~~Unsecured Convertible~~Additional Note convert into ~~shares~~share of its common stock at the $3.25 (as adjusted) conversion price, and (ii) the Convertible Noteholder may elect to require all or a portion of the Unsecured Convertible Note be redeemed by us. If the Convertible Noteholder requires a redemption, we, at our discretion, may pay the redeemed portion of the Unsecured Convertible Note in cash or in our common stock at a conversion rate equal to the lesser of (i) the $3.25 (as adjusted) conversion rate or (ii) 80% of the average of the five lowest ~~volume weighted average price~~VWAP of our ~~Common Stock~~common stock over the preceding twenty trading days. The Convertible Noteholder may not redeem more than $500,000 per calendar month during the period between the six-month anniversary of the date of issuance until the ~~first-year~~first anniversary of the date of issuance and $750,000 per calendar month thereafter. ~~The~~Our obligation or right ~~of us~~ to deliver our shares upon the conversion or redemption of the ~~Unsecured Convertible~~Additional Note is subject to a 19.99% cap and subject to a floor ~~price trading~~ price of $3.25 (unless waived by us). Any amounts redeemed or converted once the cap is reached or if the market price is less than the $3.25 floor price must be paid in cash.

If there is an Event of Default under the ~~Unsecured Convertible~~Additional Note, the Convertible Noteholder may accelerate our obligations or the Convertible Noteholder may elect to increase the outstanding obligations under the ~~Unsecured Convertible~~Additional Note. The amount of the increase ranges from 15% for certain “Major Defaults,” 10% for failure to obtain the Convertible Noteholder’s approval for certain equity issuances with anti-dilution, price reset or variable pricing features of less than $2,500,000, and 5% ~~to 15% depending on the type of default (as defined in the Unsecured Convertible Note).~~for certain “Minor Defaults.” In addition, the ~~Unsecured Convertible~~Additional Note obligations will be increased if there are delays in our delivery requirements for the shares or cash issuable upon the conversion or redemption of the ~~Unsecured Convertible~~Additional Note in certain circumstances.

If we issue convertible debt in the future with any terms, including conversion terms, that are more favorable to the terms of the ~~Unsecured Convertible~~Additional Note, the Convertible Noteholder may elect to incorporate the more favorable terms into the ~~Unsecured Convertible~~Additional Note. ~~For further details describing our debt obligations, see~~See “Note 4—Debt” toin the accompanying condensed consolidated financial statements included in this Quarterly Report on Form ~~10-Q.~~10-Q for further details regarding our current debt obligations.

~~At-the-market Offering~~Warrant Tender

On ~~October 26, 2018,~~February 12, 2020, we ~~entered into a common stock sales agreement with H.C. Wainwright & Co., LLC and Ladenburg Thalmann & Co. Inc. and filed a prospectus with~~offered to amend the ~~SEC related~~Original Warrants to ~~such offering. We previously filed a Form S-3 that became effective on July 13, 2018 that included the registration~~purchase an aggregate of ~~$40 million of our~~12,346,631 shares of common stock held by holders of certain outstanding warrants. The Original Warrants of eligible holders who elect to participate in ~~connection~~the Offer to Amend and Exercise were amended to (i) shorten the exercise period to expire concurrently with ~~a potential “at-the-market” offering. Pursuant~~the closing of the RDD Merger on April 30, 2020 and (ii) reduced the exercise price to $0.10 per share. The amended warrants are required to be exercised for cash, and any cashless exercise provisions in the ~~sales agreement, we may issue and sell~~Original Warrants have been omitted. On April 29, 2020, warrants to purchase 12,230,418 shares ~~having an~~of common stock were exercised for aggregate gross ~~sales price of up to $40 million. During the three and six months ended June 30, 2019, we sold 705,714 shares under the “at the market” offering for net~~ proceeds of approximately ~~$1.7~~$1.2 million. ~~This facility was suspended as of June 24, 2019 and has remained suspended since that time.~~

Cash Flows

The following table sets forth the primary sources and uses of cash for the six months ended June 30, ~~2019~~2020 and ~~2018:~~2019:


	Six Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2020			2019
Net cash (used in) provided by:
Operating activities	$	(10,755,719	)	$	(9,280,768	)	$	(8,829,956	)	$	(10,755,719	)
Investing activities	(9,475		)	61,057			(3,186,997		)	(9,475		)
Financing activities	18,374,192			19,527,582			20,897,488			18,374,192
Net increase in cash and cash equivalents	$	7,608,998		$	10,307,871		$	8,880,535		$	7,608,998

Operating Activities

For the six months ended June 30, 2020, our net cash used in operating activities of approximately $8.8 million primarily consisted of a net loss of $48.2 million, a non-cash gain of $2.6 million for the change in the fair value of the warrant liabilities and a non-cash gain of $0.5 million for the change in fair value of the convertible note derivative liabilities. These decreases were offset by adjustments for non-cash warrant inducement expense of $7.2 million, non-cash share-based compensation of approximately $4.3 million, non-cash interest expense of approximately $1.2 million, a non-cash beneficial conversion feature of approximately $0.2 million associated with the conversion of convertible note principal and interest, and non-cash in process research and development expense of approximately $28.8 million. These changes were offset by the net change in operating assets and liabilities of $0.8 million.

For the six months ended June 30, 2019, our net cash used in operating activities of approximately $10.8 million primarily consisted of a net loss of $8.9 million, a non-cash gain of $3.3 million for the extinguishment of the Senior Convertible Note derivative liability and changes in the fair value of the warrant liabilities and the Unsecured Convertible Note derivative liability

and the net change in assets and liabilities of $1.6 million. These decreases were offset by adjustments for non-cash share-based compensation of approximately $1.4 million, a non-cash loss of $1.0 million on the extinguishment of debt and non-cash interest expense of approximately $0.6 million.

For the six months ended June 30, 2018, our net cash used in operating activities of approximately $9.3 million primarily consisted of a net loss of $19.2 million, offset by adjustments for share-based compensation of approximately $7.0 million, non-cash interest expense of approximately $4.2 million and decreases in accounts payable and accrued expenses of approximately $1.3 million.

Investing Activities

Net cash used in investing activities for the six months ended June 30, ~~2019~~2020 represents ~~purchases~~the purchase of property and ~~equipment.~~equipment of approximately $2,500 and the purchase of in-process research and development, net of assets received, of approximately $3.2 million. Net cash ~~provided by~~used in investing activities for the six months ended June 30, ~~2018 primarily represented loan payments received from a related party of $75,000 offset by~~2019 represents the purchase of ~~office furniture~~property and ~~computer equipment of $14,000.~~equipment.

Financing Activities

For the six months ended June 30, 2020, net cash provided by financing activities of approximately $20.9 million primarily consisted of the proceeds of $22.6 million from the issuance of preferred stock and warrants in the RDD Merger Financing, proceeds of $2.5 million from the issuance of the Additional Note and proceeds of approximately $1.2 million from the exercise of warrants. These increases were offset by approximately $1.5 million in cash debt repayments and $3.9 million in stock issuance costs associated with the Warrant Exchange, Offer to Amend and Exercise, RDD Merger and RDD Merger Financing.

For the six months ended June 30, 2019, net cash provided by financing activities of approximately $18.4 million primarily consisted of the proceeds of $20.7 million received from the sale of our common stock and warrants, including proceeds of $0.5 million from the purchase of additional warrants, and $5.0 million from the issuance of the Unsecured Convertible Note. These increases were offset by approximately $6.2 million in debt repayments, $1.0 million in stock issuance costs and $0.1 million in debt ~~issuance costs.~~

For the six months ended June 30, 2018, net cash provided by financing activities of approximately $19.5 million primarily consisted of the proceeds of $18.1 million received from the sale of our common stock and warrants in the Equity Issuance and $3.0 million from the issuance of a note payable. These increases were offset by approximately $1.6 million in stock issuance costs.

Capital Requirements

We have not generated any revenue from product sales or any other activities. We do not expect to generate significant revenue unless and until we obtain regulatory approval of and commercialize, or out-license, one or more of our product candidates and do not know when, or if, these will occur. In addition, we expect our expenses to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates. In addition, subject to obtaining regulatory approval of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations, including ~~increased~~ costs associated with being a public ~~company.~~company and integrating the operations of RDD.

The accompanying financial statements have been prepared on a basis which assumes that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Based on our limited operating history and recurring operating losses, there is substantial doubt that we will continue as a going concern for at least one year following the date of this Quarterly Report on Form 10-Q, without additional financing. Management’s plans with regard to these matters include entering into strategic partnerships or seeking additional debt or equity financing arrangements or a combination of these activities. The failure to obtain sufficient financing or strategic partnerships could adversely affect our ability to achieve our business objectives and continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

Contractual Obligations and Commitments

In October 2017, we entered into a three-year lease agreement for office space that initially expires on September 30, 2020 and includes a two-year renewal option. Base annual rent for the initial three-year lease period is $60,000. Monthly rent payments of $5,000 are due in advance of the first day of each month for the 24-month term. A security deposit of approximately $5,000 was paid in October 2017 and is included in other assets on the accompanying condensed consolidated balance sheets included in the condensed consolidated financial statements to this Quarterly Report on Form 10-Q. In July 2020, we signed a four-year lease agreement for the office space that will expire on September 30, 2024 (the “Second Term”). Base annual rent for the Second Term is $72,000 with monthly rent payments of $6,000.

~~Effective January 1, 2019, we adopted ASC 842 using the modified retrospective approach. On the adoption date, we~~We estimated the present value of the lease payments over the remaining term of the lease using a discount rate of 12%, which represented our estimated incremental borrowing rate. The two-year renewal option was excluded from the lease payments as we concluded the exercise of this option was not considered reasonably certain. See ~~Note~~“Note 8—Commitments and ~~Contingencies~~Contingencies” in

the accompanying financial statement included in this Quarterly Report on Form 10-Q for further details regarding ~~the impact~~accounting treatment of ~~adopting ASC 842.~~our lease agreement.

In ~~November 2018~~April 2020 and February 2019, ~~the Company~~we entered into separation and general release agreements with ~~two~~ former executives that included separation benefits consistent with each former ~~executives’~~executive’s employment agreement. We recognized severance expense totaling $0.8 million during the three and six months ended June 30, 2020 and $0.3 million during the three and six months ended June 30, ~~2019, that is being~~2019. Severance payments are paid in equal installments over 12 months ~~beginning February 2019. In addition, we recognized severance expense totaling $0.3 million during~~from the ~~year ended December 31, 2018, that is being paid in equal installments over 12 months beginning November 2018.~~date of separation. The ~~remaining~~ accrued severance obligation in respect of the ~~two~~ former executives ~~is $0.3~~was approximately $0.5 million as of June 30, ~~2019, which is included in accrued expenses on the accompanying condensed balance sheet.~~2020.

We are obligated to make future payments to third parties under in-license agreements, including sublicense fees, royalties, and payments that become due and payable on the achievement of certain development and commercialization milestones. As the amount and timing of sub-license fees and the achievement and timing of these milestones are not probable and estimable, such commitments have not been included on the accompanying condensed consolidated balance sheets.

We also enter into agreements in the normal course of business with contract research organizations and other third parties with respect to services for clinical trials, clinical supply manufacturing and other operating purposes that are generally terminable by us with thirty to ninety days advance notice.

For further details, see “Note 8—Commitments and Contingencies” in the accompanying financial statements included in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

As of June 30, ~~2019,~~2020, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K as promulgated by the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

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 June 30, ~~2019.~~2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. ~~[Based on such evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2019, our disclosure controls and procedures were not effective as~~Management identified a ~~result of the~~ material weakness in ~~our~~ internal control over financial reporting due to our limited resources available to address our internal controls and procedures and our reliance on part-time consultants to assist us with our financial accounting and compliance obligations. Inin connection with ~~the preparation of~~ our audited financial statements for the year ended December 31, 2018, ~~our independent auditors advised management that a material~~

~~weakness existed in internal control over financial reporting~~ due to ~~its~~our inability to adequately segregate duties as a result of ~~its~~our limited number of accounting personnel and this material weakness has not been remediated in the Company’s internal control over financial reporting as of June 30, 2019. Effective July 1, 2019 Edward J. Sitar, CPA, joined the Company as Chief Financial Officer and is one of the stepspersonnel. In an effort to remediate this material weakness during the year ended December 31, 2019, we added two full-time finance positions, a Chief Financial

Officer who is serving as Principal Financial Officer and Principal Accounting Officer and a Controller. During the year ended December 31, 2019, we also enhanced our system of internal controls, including improving our segregation of duties. However, management concluded that as of June 30, 2020, our internal controls over financial reporting are ineffective.

Although we are committed to continuing to improve our internal control processes and intend to implement a plan to remediate our material weakness, we cannot be certain of the effectiveness of such plan or that, in the future, ~~periods.~~additional material weaknesses or significant deficiencies will not exist or otherwise be discovered.

Changes in Internal Control Over Financial Reporting

As of June 30, ~~2019,~~2020, there were no ~~other~~ material changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II -OTHER INFORMATION

Item 1. Legal Proceedings

~~An action is pending~~On April 8, 2020, we received a summons and complaint that was filed in the Mecklenburg County Superior Court of North Carolina, regarding a vendor that alleges the ~~State of Delaware captioned~~ ~~M. Scott Harris, M.D. and Middleburg Consultants Inc. v. Innovate Biopharmaceuticals, Inc.~~ ~~(the “Delaware Action”) filed by M. Scott Harris and Middleburg Consultants, Inc. (collectively, “Harris”) on January 8,~~Company owes approximately $1.7 million for services rendered prior to February 2019. ~~As previously disclosed, we~~We strongly deny any wrongdoing ~~alleged in the threatened litigation~~ and firmly believe the allegations in the complaint are entirely without merit and intend to defend against them vigorously. On February 25, 2019, we filed a motion to dismiss the Delaware Action. The motion to dismiss was heard by the Delaware court on June 26, 2019 and we are awaiting the Court’s decision. We are unable to estimate the amount of a potential loss or range of potential loss, if any.

Other than as described above, we are not currently a party to any legal or governmental regulatory proceedings, nor is our management aware of any pending or threatened legal or government regulatory proceedings proposed to be initiated against us that would have a material adverse effect on our business, financial condition or operating results.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, filed with the SEC on March ~~18, 2019, as supplemented by our subsequent Quarterly Reports on Form 10-Q,~~20, 2020, except ~~as noted below.~~that we have closed the RDD Merger, RDD Merger Financing and the Naia Acquisition.

~~Sales~~The RDD merger and acquisition of ~~substantial amounts~~Naia Rare Diseases will present challenges associated with integrating operations, personnel, and other aspects of the companies and assumption of liabilities.

The results of the combined company following our ~~common stock~~merger with RDD in April 2020, and acquisition of Naia Rare Diseases in May 2020, will depend in part upon our ability to integrate RDD’s and Naia Rare Diseases’ businesses with our business in an efficient and effective manner. Our attempt to integrate three companies that have previously operated independently may result in significant challenges, and we may be unable to accomplish the integration smoothly or successfully. In particular, the necessity of coordinating geographically dispersed organizations and addressing possible differences in corporate cultures and management philosophies may increase the difficulties of integration. The integration may require the dedication of significant management resources, which may temporarily distract management’s attention from the day-to-day operations of the businesses of the combined company. In addition, the combined company may adjust the way in which RDD, Naia Rare Diseases or we have conducted our respective operations and utilized our respective assets, which may require retraining and development of new procedures and methodologies. The process of integrating operations and making such adjustments could cause an interruption of, or loss of momentum in, the ~~public markets, or the perception that such sales might occur, could cause the market price~~activities of ~~our common stock to drop significantly, even if our business is doing well.~~

If we or our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public markets, the trading price of our common stock could decline significantly. On March 17, 2018, we filed a shelf registration statement, or the Shelf Registration Statement, which was declared effective on July 13, 2018. Under the Shelf Registration Statement, we may, from time to time, sell our common stock in one or more ~~offerings, including this offering, up to an aggregate dollar amount of $175.0 million (of which up to an aggregate of $40 million may be sold in an “at-the-market” offering as defined in Rule 415~~ of the ~~Securities Act. The ATM facility was voluntarily suspended effective June 24, 2019).~~ combined company’s businesses and the loss of key personnel. Employee uncertainty, lack of focus, or turnover during the integration process may also disrupt the businesses of the combined company. Any inability of management to integrate the operations of RDD and Naia Rare Diseases into our company successfully could have a material adverse effect on the business and financial condition of the combined company.

In addition, the ~~selling stockholders included in the Shelf Registration Statement may from time~~RDD merger and acquisition of Naia Rare Diseases subject us to ~~time sell up to an aggregate amount~~contractual or other obligations and liabilities of ~~approximately 13.99 million shares~~RDD and Naia Rare Diseases, some of our common stock (including up to approximately 2.1 million shares issuable upon exercise of warrants) in one or more offerings. As of June 30, 2019, we had approximately 35.9 million shares of common stock outstanding and exercisable options and warrants to purchase approximately 2.0 million shares of common stock, excluding out-of-the-money stock options and warrants. In addition, the Unsecured Convertible Notewhich may be ~~converted into shares~~unknown. Although we and our legal and financial advisors have conducted due diligence on RDD and Naia Rare Diseases and their businesses, there can be no assurance that we are aware of ~~our common stock at~~all such obligations and liabilities. These liabilities, and any ~~time at various conversion prices. The March Long-Term Warrants~~additional risks and ~~Short-Term Warrants have initial exercise prices equal~~uncertainties related to ~~$2.56~~RDD’s or Naia Rare Diseases’ business not currently known to us or that we may currently be aware of, but that prove to be more significant than assessed or estimated by us, could negatively impact the business, financial condition, and ~~$4.00 per share, respectively, each subject to certain adjustments. We have also issued to certain existing stockholders additional warrants to purchase up to an aggregate~~results of 3,897,010 shares of our common stock, and have issued warrants to purchase up to 4,318,272 shares of our common stock in a private placement in connection with the offering we completed in April 2019, each of which would have an initial exercise price of $2.13 per share, subject to certain adjustments. We have agreed to file a registration statement registering the issuanceoperations of the shares of common stock underlying the March Long-Term Warrants, Short-Term Warrants, the additional warrants issued to certain accredited investors, the warrants issued in connection with the April 2019 offering and warrants issued to the placement agent in connection with that offering. The Short-Term Warrants issued in the March 2019 Offering and the warrants issued in the April 2019 offering were exercisable immediately upon issuance. Therefore, sales of common stock by us or our stockholders under the Shelf Registration Statement or otherwise (including sales pursuant to Rule 144) may represent a significant percentage of our common stock currently outstanding. If we or our stockholders sell, or the market perceives that we or our stockholders intend to sell, substantial amounts of our common stock under the Shelf Registration Statement or otherwise, the market price of our common stock could decline significantly. For example, our closing stock price on July 13, 2018, prior to the Shelf Registration Statement being declared effective, was $23.70 per share, and our closing stock price on July 16, 2018, after the Shelf Registration Statement was declared effective, was $8.08 per share.

~~The issuance of additional shares of common stock may cause substantial dilution to our existing stockholders and reduce the trading price of our common stock.~~

We have outstanding and exercisable options and warrants that if exercised would result in the issuance of 2.0 million shares of our common stock as of June 30, 2019, excluding out-of-the-money stock options and warrants. In addition, the Unsecured Convertible Note may be converted into shares of our common stock at any time at various conversion prices. We also sold 4,181,068 shares of common stock in the March 2019 offering and issued the Short-Term Warrants and March Long-Term Warrants

to purchase up to 4,181,068 and 2,508,634 shares of our common stock, respectively, in the concurrent private placement. We also issued to certain existing stockholders additional warrants to purchase up to an aggregate of 3,897,010 shares of our common stock, and in connection with the April 2019 offering, issued warrants to purchase up to an aggregate of 4,318,272 shares of our common stock to the purchasers and placement agent warrants to purchase up to 215,914 shares of our common stock. The issuance of shares upon exercise of warrants and options or conversion of the Unsecured Convertible Note may result in dilution to the interests of other stockholders and may reduce the trading price of our common stock.

We may from time to time issue additional shares of our common stock at a discount from the then-current trading price. As a result, our stockholders would experience immediate dilution upon the purchase of any shares of such common stock sold at such discount. In addition, as opportunities present themselves, we may enter into financing or similar arrangements in the future, including the issuance of debt securities, preferred stock or common stock. If we issue common stock or securities convertible into common stock, our common stockholders would experience additional dilution and, as a result, the market price of our common stock may decline.combined company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~None.~~

During the three months ended June 30, 2020 we issued a total of 1,287,696 shares of our common stock for the conversion of outstanding notes payable, reducing the debt by $0.5 million and interest payable by $0.1 million. We relied upon the exemption from registration provided by Section 4(a)(2) of the Securities Act to issue these shares.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6.

~~Exhibit Index~~

FILED

INCORPORATED BY REFERENCE

FILED

INCORPORATED BY REFERENCE

EXHIBIT NO.

DESCRIPTION

HEREWITH

FORM

FILE NO.

EXHIBIT

FILING DATE

DESCRIPTION

HEREWITH

FORM

EXHIBIT

FILING DATE

2.1

Agreement and Plan of Merger, dated April 30, 2020, among Innovate Biopharmaceuticals, Inc., Naia Merger Sub, Inc., Second Naia Merger Sub LLC, and Naia Rare Diseases, Inc.*

8-K

2.1

May 4, 2020

3.1

Certificate of Designation of Series A Convertible Preferred Stock.

8-K

3.1

May 4, 2020

3.2

Amendment to the Amended and Restated Certificate of Incorporation of Innovate Biopharmaceuticals, Inc.

8-K

3.2

May 4, 2020

4.1

Form of Common Stock Purchase Warrant

8-K

001-37797

4.1

May 1, 2019

Form of Series A Convertible Preferred Stock Warrant.

8-K

4.1

May 4, 2020

4.2

Form of Placement Agent Warrant

8-K

001-37797

4.2

May 1, 2019

4.3

Form of New Warrant (included in Exhibit 10.5)

8-K

001-37797

4.1

May 17, 2019

10.1

Amendment to Securities Purchase Agreement, dated April 25, 2019, by and among Innovate Biopharmaceuticals, Inc. and the purchasers party thereto

8-K

001-37797

10.1

April 26, 2019

Securities Purchase Agreement, dated April 29, 2020, between Innovate Biopharmaceuticals, Inc. and the investors named therein.*

8-K

10.1

May 4, 2020

10.2

Securities Purchase Agreement, dated April 29, 2019, by and among Innovate Biopharmaceuticals, Inc. and the purchasers party thereto

8-K

001-37797

10.1

May 1, 2019

Registration Rights Agreement, dated April 29, 2020, between Innovate Biopharmaceuticals, Inc. and the investors named therein.*

8-K

10.2

May 4, 2020

10.3

Engagement Letter, dated April 26, 2019, by and between Innovate Biopharmaceuticals, Inc. and H.C. Wainwright & Co., LLC

8-K

001-37797

10.2

May 1, 2019

Form of Company Support Agreement by and among Innovate Biopharmaceuticals, Inc. and RDD Pharma Ltd.

8-K

10.3

May 4, 2020

10.4

Executive Employment Agreement, dated June 22, 2019, between Innovate Biopharmaceuticals, Inc. and Edward J. Sitar

8-K

001-37797

10.1

June 27, 2019

Separation Agreement, dated April 30, 2020, between Innovate Biopharmaceuticals, Inc. and Sandeep Laumas.#

8-K

10.4

May 4, 2020

10.5

Securities Purchase Agreement, dated May 17, 2019, by and among Innovate Biopharmaceuticals, Inc. and the purchasers party thereto (included in Amendment, dated April 25, 2019, to Securities Purchase Agreement, dated as of March 17, 2019, by and among the Company and the Purchasers party thereto, filed as Exhibit 10.1 to Form 8-K filed on April 26, 2019 and incorporated by reference herein)

8-K

001-37797

10.1

May 17, 2019

Separation Agreement, dated April 30, 2020, between Innovate Biopharmaceuticals, Inc. and Jay Madan.#

8-K

10.5

May 4, 2020

10.6

Employment Agreement, dated April 30, 2020, between Innovate Biopharmaceuticals, Inc. and John Temperato.#

8-K

10.6

May 4, 2020

10.7

Amended and Restated Exclusive License Agreement, dated February 10, 2020, between Cedars-Sinai Medical Center and Naia Rare Diseases, Inc.*

10.8

Side Letter, dated May 1, 20202, between Amunix Pharmaceuticals, Inc. and Naia Rare Diseases, Inc.*

~~FILED~~

~~INCORPORATED BY REFERENCE~~

~~EXHIBIT NO.~~

~~DESCRIPTION~~

~~HEREWITH~~

~~FORM~~

~~FILE NO.~~

~~EXHIBIT~~

~~FILING DATE~~

~~31.1~~

~~Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~

~~31.2~~

~~Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~

~~32.1~~

~~Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~

~~32.2~~

~~Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 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 Document~~

~~101.LAB~~

~~XBRL Taxonomy Extension Label Linkbase Document~~

~~101.PRE~~

~~XBRL Taxonomy Extension Presentation Linkbase Document~~



		FILED	INCORPORATED BY REFERENCE
EXHIBIT NO.	DESCRIPTION	HEREWITH	FORM	EXHIBIT	FILING DATE
10.9	Second Amended and Restated License Agreement, dated May 1, 2020, between Amunix Pharmaceuticals, Inc. and Naia Rare Diseases, Inc.*	X
10.10	Amended and Restated License Agreement, dated May 1, 2020, between Amunix Pharmaceuticals, Inc. and Naia Rare Diseases, Inc.*	X
10.11	Form of RDD Pharma Ltd. Notice of Option Grant.#	X
10.12	9 Meters Biopharma, Inc. 2012 Omnibus Incentive Plan, as amended.#		8-K	10.1	June 30, 2020
31.1	Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
31.2	Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
101.INS	XBRL Instance Document	X
101.SCH	XBRL Taxonomy Extension Schema Document	X
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	X
101.DEF	XBRL Taxonomy Extension Definition Document	X
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	X
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	X

* Certain confidential portions and/or the schedules and attachments to this exhibit have been omitted from this filing pursuant to Item 601(a)(5), 601(b)(2), or 601(b)(10), as applicable, of Regulation S-K. The Company will furnish copies of the unredacted exhibit to the SEC upon request.

# Management contract or other compensatory plan.

SIGNATURES

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



		~~INNOVATE BIOPHARMACEUTICALS,~~9 METERS BIOPHARMA, INC.
		a Delaware corporation

Date:	August ~~8, 2019~~13, 2020	By:	/s/ Edward J. Sitar
			Edward J. Sitar
			Chief Financial Officer (Principal Financial and Principal ~~Financial Officer~~Accounting Officer)

4244



Six Months Ended June 30, 2019
	Common Stock Shares	Common Stock Amount		Additional Paid-in Capital			Accumulated Deficit			Total
Balance as of December 31, 2018	26,088,820	$	2,609	$	39,854,297		$	(43,515,970	)	$	(3,659,064	)
Issuance of common stock and warrants	4,886,782	489		11,474,766			—			11,475,255
Allocation of warrants to liabilities	—	—		(1,970,000		)	—			(1,970,000		)
Stock issuance costs	—	—		(319,819		)	—			(319,819		)
Share-based compensation	—	—		526,000			—			526,000
Issuance of RSUs	90,000	9		(9		)	—			—
Net loss	—	—		—			(4,434,765		)	(4,434,765		)
Balance as of March 31, 2019	31,065,602	3,107		49,565,235			(47,950,735		)	1,617,607
Issuance of common stock and warrants	4,318,272	432		8,744,069			—			8,744,501
Allocation of warrants to liabilities	—	—		(1,360,000		)	—			(1,360,000		)
Stock issuance costs	—	—		(389,623		)	—			(389,623		)
Exercise of stock options	100,079	10		30,054			—			30,064
Issuance of RSUs	400,000	40		(40		)	—			—
Share-based compensation	—	—		852,000			—			852,000
Net loss	—	—		—			(4,488,240		)	(4,488,240		)
Balance as of June 30, 2019	35,883,953	$	3,589	$	57,441,695		$	(52,438,975	)	$	5,006,309



Six Months Ended June 30, 2018
	Common Stock Shares*	Common Stock Amount			Additional Paid-in Capital			Accumulated Deficit			Total
Balance as of December 31, 2017	11,888,240	$	11,888		$	7,167,189		$	(19,353,691	)	$	(12,174,614	)
Change in par value from $0.001 to $0.0001	—	(10,699		)	10,699			—			—
Issuance of shares as a result of reverse recapitalization	1,864,808	186			(978,860		)	—			(978,674		)
Issuance of common stock	7,111,631	711			16,136,950			—			16,137,661
Warrants issued with common stock	—	—			1,995,000			—			1,995,000
Warrants issued to placement agents	—	—			913,000			—			913,000
Stock issuance costs	—	—			(2,568,079		)	—			(2,568,079		)
Conversion of convertible debt and accrued interest	4,827,001	483			9,229,336			—			9,229,819
Beneficial conversion feature	—	—			3,077,887			—			3,077,887
Share-based compensation	—	—			7,174,000			—			7,174,000
Net loss	—	—			—			(14,959,744		)	(14,959,744		)
Balance as of March 31, 2018	25,691,680	$	2,569		$	42,157,122		$	(34,313,435	)	$	7,846,256
Exercise of warrants	3,922	1			12,471			—			12,472
Share-based compensation	—	—			(184,000		)	—			(184,000		)
Net loss	—	—			—			(4,215,552		)	(4,215,552		)
Balance as of June 30, 2018	25,695,602	$	2,570		$	41,985,593		$	(38,528,987	)	$	3,459,176



	June 30, 2019
Convertible Note	$	5,500,000
Less: unamortized debt discount and OID accretion	(1,455,788		)
Total	$	4,044,212