Filed Pursuant to Rule 424(b)(3)

Registration No. 333-208818

 

 

1,577,699 Shares

Common Stock

 

 

 

This prospectus relates to the sale of up to 1,577,699 shares of our common stock by Aspire Capital Fund, LLC, or Aspire Capital. Aspire Capital is also referred to in this prospectus as the selling stockholder. The prices at which the selling stockholder may sell the shares will be determined by the prevailing market price for the shares or in negotiated transactions. We will not receive proceeds from the sale of the shares by the selling stockholder. However, we have received proceeds of $1.0 million, and may receive additional proceeds of up to $9.0 million, for an aggregate of $10.0 million, from the sale of our common stock to the selling stockholder, pursuant to a common stock purchase agreement entered into with the selling stockholder on December 18, 2015.

 

The selling stockholder is an “underwriter” within the meaning of the Securities Act of 1933, as amended. We will pay the expenses of registering these shares, but all selling and other expenses incurred by the selling stockholder will be paid by the selling stockholder.

 

Our common stock is listed on the Nasdaq Capital Market under the ticker symbol “RTTR.” On February 24, 2016 the last reported sale price per share of our common stock was $1.55 per share.

 

You should read this prospectus and any prospectus supplement, together with additional information described under the headings “Incorporation of Certain Documents by Reference” and “Where You Can Find More Information,” carefully before you invest in any of our securities.

 

Investing in our securities involves a high degree of risk. See “Risk Factors” on page 8 of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is February 25, 2016.

 

   
   

 

TABLE OF CONTENTS

 

  Page
Prospectus Summary 1
Risk Factors 8
Cautionary Note Regarding Forward-Looking Statements and Industry Data 32
The Aspire Capital Transaction 33
Use of Proceeds 37
Price Range of Common Stock 38
Dividend Policy 38
Dilution 39
Management’s Discussion and Analysis of Financial Condition and Results of Operations 40
Business 57
Management 82
Executive and Director Compensation 90
Security Ownership of Certain Beneficial Owners and Management 103
Certain Relationships and Related Person Transactions 105
Description of Capital Stock 107
Selling Stockholder 110
Plan of Distribution 111
Legal Matters 112
Experts 112
Where You Can Find More Information 112
Index to Financial Statements F-1

 

Neither we nor the selling stockholder has authorized anyone to provide any information or to make any representations other than as contained in this prospectus or in any free writing prospectuses we have prepared. We and the selling stockholder take no responsibility for, and provide no assurance as to the reliability of, any information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

For investors outside of the United States: Neither we nor the selling stockholder have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus outside of the United States.

  

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PROSPECTUS SUMMARY

 

This summary highlights certain information about us, this offering and selected information contained in the prospectus. This summary is not complete and does not contain all of the information that you should consider before deciding whether to invest in our common stock. For a more complete understanding of our company and this offering, we encourage you to read and consider the more detailed information in the prospectus, including “Risk Factors” and the financial statements and related notes. Unless we specify otherwise, all references in this prospectus to “Ritter Pharmaceuticals,” “we,” “our,” “us” and “our company” refer to Ritter Pharmaceuticals, Inc.

 

Our Business

 

Ritter Pharmaceuticals, Inc. develops novel therapeutic products that modulate the human gut microbiome to treat gastrointestinal diseases. We are advancing human gut health research by exploring the metabolic capacity of the gut microbiota and translating the functionality of prebiotic-based therapeutics into applications intended to have a meaningful impact on a patient’s health. “Prebiotics” is a general term used to refer to chemicals that induce the growth and/or activity of commensal microorganisms that contribute to the well-being of their host.

 

Our first novel microbiome modulator, RP-G28, an orally administered, high purity galacto-oligosaccharide (a carbohydrate found naturally, at least in small amounts, in plants, consisting of three to ten simple sugars linked together), is currently under development for the reduction of symptoms associated with lactose intolerance. RP-G28, is designed to stimulate the growth of lactose-metabolizing bacteria in the colon, thereby effectively adapting the gut microbiome to assist in digesting the lactose that reaches the large intestine. RP-G28 has the potential to become the first drug approved by the U.S. Food and Drug Administration, or FDA, for the reduction of symptoms associated with lactose intolerance. RP-G28 has been studied in a Phase 2a clinical trial and is a first-in-class compound.

 

Our Market Opportunity

 

Lactose intolerance is a common condition attributed to insufficient levels of the enzyme lactase, which is needed to properly digest lactose, a complex sugar found in milk and milk-containing foods. People with lactose intolerance who ingest lactose-containing foods may experience painful and embarrassing digestive symptoms.

 

Lactose intolerance is a widespread condition affecting over one billion people worldwide and over 40 million people in the United States (or 15% of the U.S. population), with an estimated nine million of those individuals demonstrating moderate to severe symptoms [NIH Consensus Statement, LIH, Vol. 27, #2 (February 2010); Objective Insights, “Market Research Analysis and Forecasts on Lactose Intolerance and RP-G28,” p. 4 and 7 (June 2012)].

 

In the United States alone, we believe lactose intolerance is a large and underserved market. Current annual spending on over-the-counter lactose intolerance aids in the United States has been estimated at approximately $2.45 billion [Zpryme Research & Consulting, “The Digestive Health Prescription Drug Market,” (May 2009)]. However, these options are limited and there is no long-term treatment available.

 

The most common therapeutic approach is dairy avoidance, which physicians recommend to the majority of their patients. However, dairy avoidance may lead to inadequate calcium and vitamin D intake, which can predispose individuals to decreased bone accrual, osteoporosis, and other adverse health outcomes. The 2010 National Institutes of Health conference on lactose intolerance highlighted the long-term consequences of dairy avoidance demonstrating both the importance of treating the condition and the need to find improved solutions for patients.

 

Our Leading Product Candidate — RP-G28

 

We completed a double-blinded, randomized, multi-center, placebo-controlled Phase 2a clinical study of RP-G28. The purpose of the study was to assess the effectiveness, safety and tolerability of RP-G28 compared to a placebo when administered to subjects with symptoms associated with lactose intolerance.

 

An additional goal was to establish proof-of-concept that treatment with RP-G28 facilitates improved lactose metabolism via the adaptation of intestinal bacteria metabolism (i.e., colonic adaptation). The study evaluated RP-G28 in 62 patients with lactose intolerance over a treatment period of 35 consecutive days. Post-treatment, subjects reintroduced dairy into their diets and were followed for an additional 30 days. The results of our Phase 2a study were published in Nutrition Journal in a manuscript entitled, “Improving lactose digestion and symptoms of lactose intolerance with a novel galacto-oligosaccharide (RP-G28): a randomized, double-blind clinical trial.”

 

 

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Key findings of the Phase 2a study include:  
       
  RP-G28 was well tolerated, with no significant adverse events reported.  
       
  The combined data suggest that RP-G28 exerted a positive therapeutic effect and clinically meaningful benefits to patients on treatment, though not all results were statistically significant.  
       
  Positive trends were seen when the entire per protocol study population was analyzed, including some statistically significant subgroup analysis.  
       
  Treated subjects reported increased tolerance to lactose and dairy foods: reduced lactose intolerance symptoms (gas, bloating, cramping and abdominal pain) were reported in subjects on RP-G28, a durable reduction in abdominal pain (p=0.019) was reported, and treated patients were 6 times more likely to describe themselves as lactose tolerant (p=0.039). We believe these results are signals of a clinically meaningful benefit to patients treated with RP-G28. P-value is a conventional statistical method for measuring the statistical significance of clinical results. In clinical trials, the “p-value” is the probability that the result was obtained by chance. By convention, a “p-value” that is less than 0.05 is considered statistically significant.  
       
  Principal Component Analysis (PCA), a multivariate method that helps transform a number of possibly correlated variables into a smaller number of uncorrelated variables called principal components, thereby reducing the dimensions of a complex dataset, also showed statistically significant shifts in the microbiome of subjects fed RP-G28, compared to placebo, at 66 days.  
       

 In sum, positive trends were seen when the entire per protocol study population was analyzed, including some statistically significant subgroup analysis. We believe these positive trends along with the benign safety profile seen in the Phase 2a study support continued drug development of RP-G28. We held a Type C meeting with the FDA’s Division of Gastroenterology and Inborn Errors Products on February 20, 2013. The purpose of the meeting was to obtain the FDA’s feedback on the planned Phase 2 program and Phase 3 programs, inform the FDA of our ongoing development plans, gain feedback on relevant clinical trial design and end points related to patient meaningful benefits, and to inform the FDA of the status of our product characterization. We believe that this meeting was a significant step forward in streamlining the pathway to initial U.S. approval of RP-G28 to reduce symptoms and frequency of symptomatic episodes associated with lactose intolerance.

 

Following analysis of the Phase 2a clinical trial, discussions with the FDA about the clinical development plan, and further discussions with our regulatory consultants, we intend to conduct our planned Phase 2b clinical trial as an adaptive design Phase 2b/3 clinical trial. A trial that is designed as an adaptive seamless clinical trial refers to a trial that combines the objectives of what are typically separate trials into a single uninterrupted trial with multiple objectives. We believe this trial could serve as one of two pivotal trials should the resulting data and the FDA be supportive of this trial as a pivotal trial. Neither the FDA nor any other comparable governmental agency has considered the Phase 2b/3 study or our current development plan for RP-G28, and we do not intend to request a meeting with the FDA to discuss these matters. Regulatory authorities in the United States and Europe have both published guidance documents on the use and implementation of adaptive design trials. In addition, the regulations governing INDs are extensive and involve numerous notification requirements including that, generally, an IND supplement must be submitted to and cleared by the FDA before a sponsor or an investigator may make any change to the investigational plan that may affect its scientific soundness or the rights, safety or welfare of human subjects. We intend to comply with these requirements. We believe we will need to submit an IND supplement containing amended protocols for a Phase 2b/3 adaptive trial to FDA for review. These amended protocols must also be approved by the IRB with responsibility for review and approval of the Phase 2b/3 study.

 

The Phase 2b/3 clinical trial that we intend to conduct is being designed as a multi-center double-blinded, placebo controlled clinical trial of approximately 300 subjects to determine the maximum tolerated dose and optimal dose-escalation schedule for RP-G28. The trial is going to assess patients with moderate to severe abdominal pain as measured by a pain Likert scale after a lactose challenge, in which lactose intolerance symptoms and hydrogen production via hydrogen breath test will be assessed for five hours post-lactose dose, as well as several additional secondary endpoints.

 

We have not consulted with the FDA about our intent to use abdominal pain as a primary endpoint for the Phase 2b/3 pivotal clinical trial. During our Type C Meeting with the FDA in February 2013, we had proposed that future studies with RP-G28 in subjects with lactose intolerance would utilize a total lactose intolerance symptom score, measured by a patient reporting instrument that we were going to develop, as the primary, stand-alone endpoint. However, based on RP-G28’s mechanism of action, data from the Phase 2a clinical study, further research conducted after the Type C Meeting in 2013 along with FDA guidance and products under the review of the Division of Gastroenterology and Inborn Errors Products, we subsequently decided to use abdominal pain as the primary endpoint for a Phase 2b/Phase 3 study. We believe that evaluation of abdominal pain is a reliable clinical assessment of treatment response and treatment benefit in a lactose intolerant patient.

 

  

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Our Competitive Strengths

 

Market Opportunity

 

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

 

Renowned Scientific Team and Management Team

 

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

 

Substantial Patent Portfolio and Product Exclusivity

 

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

 

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

 

Our Growth Strategy

 

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

 

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

 

Risks Relating to Our Business

 

We are an early stage pharmaceutical company, and our business and ability to execute our business strategy are subject to a number of risks of which you should be aware before you decide to buy our common stock. In particular, you should consider the risks discussed in the “Risk Factors” section of this prospectus, including, but not limited to, the following:

 

  We have incurred net losses in each year since our inception. We expect to incur net losses and negative operating cash flow for the foreseeable future, and may never achieve or maintain profitability.  
       
 

We will require substantial additional funding to complete the development and commercialization of RP-G28 and to fund our operations generally and such funding may not be available on acceptable terms or at all.

 
       

  

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  We are substantially dependent on the success of our only product candidate, RP-G28, which is under clinical development. We cannot be certain that RP-G28 will receive regulatory approval or be successfully commercialized even if we receive regulatory approval.  
       
  Future clinical trials of RP-G28, or other product candidates, may not be successful. If we are unable to obtain required marketing approvals for, commercialize, obtain and maintain patent protection for or gain sufficient market acceptance by physicians, patients and healthcare payers of RP-G28, or other product candidates, or experience significant delays in doing so, our business will be materially harmed and our ability to generate revenue will be materially impaired.  
       
  RP-G28 and any other product candidates we may develop in the future will be subject to ongoing regulatory requirements and any violations of these requirements could negatively affect our business and results of operation.  
       
  Any delay or disruption in the manufacture and supply of RP-G28 (including delays related to required regulatory approvals) may negatively impact our operations.  
       
  We will be substantially dependent on third-party manufacturers to manufacture our products and key ingredients in sufficient quantities and on a timely basis, while complying with extensive FDA and European Medicines Agency, or EMA, requirements.  
       
  We may not be able to manage our business effectively if we are unable to attract and retain key personnel and consultants.  
       
  If we are unable to maintain valid and enforceable intellectual property rights or if our intellectual property rights are inadequate for RP-G28 and our product candidates, our competitive position could be harmed.  
       
  We could face competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.  

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. See “Risk Factors — Risks Relating to Our Common Stock and this Offering — We are an ‘emerging growth company’ and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.” These provisions include:

 

  being permitted to provide only two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;  
       
  reduced disclosure obligations regarding executive compensation arrangements;  
       
  not being required to hold a non-binding advisory vote on executive compensation or golden parachute arrangements; and  
       
  exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting.  

 

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

 

We will remain an emerging growth company until the earlier of  (i) the last day of the fiscal year (a) following the fifth anniversary of the date we completed our initial public offering, which was June 29, 2015, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeded $700.0 million as of the prior June 30th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. We may choose to take advantage of some but not all of these exemptions. We have taken advantage of reduced reporting requirements in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.

 

We refer to the Jumpstart Our Business Startups Act of 2012 in this prospectus as the “JOBS Act,” and references in this prospectus to “emerging growth company” have the meaning associated with that term as used in the JOBS Act. 

 

  

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Notwithstanding the above, we are also currently a “smaller reporting company” meaning that we are not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent company that is not a smaller reporting company and have a public float of less than $75 million and annual revenues of less than $50 million during the most recently completed fiscal year. In the event that we are still considered a smaller reporting company at such time as we cease to be an emerging growth company, the disclosure we will be required to provide in our filings with the Securities and Exchange Commission, or SEC, will increase, but will still be less than it would be if we were not considered either an emerging growth company or a smaller reporting company. Specifically, similar to emerging growth companies, smaller reporting companies are able to provide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requiring that independent registered public accounting firms provide an attestation report on the effectiveness of their internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in their annual reports.

 

Corporate Information

 

We were formed as a Nevada limited liability company on March 29, 2004 under the name Ritter Natural Sciences, LLC. On September 16, 2008, we converted into a Delaware corporation under the name Ritter Pharmaceuticals, Inc. Our principal executive offices are located at 1880 Century Park East, #1000, Los Angeles, CA 90067, and our telephone number is (310) 203-1000. Our website address is www.ritterpharmaceuticals.com. The information contained on, or that can be accessed through, our website is not part of this prospectus.

 

We previously marketed a product under the Lactagen trademark. This prospectus may contain references to our trademark and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other company. 

 

 

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THE OFFERING  

 
  Common Stock being Offered by the Selling Stockholder  

1,577,699 shares.

 
         
  Common Stock Outstanding    

8,582,009 shares

 

 
  Common Stock Outstanding After the Offering   9,470,844 shares  
         
  Use of Proceeds     The selling stockholder will receive all of the proceeds from the sale of the shares offered for sale by it under this prospectus. We will not receive proceeds from the sale of the shares by the selling stockholder. However, we have received proceeds of $1.0 million, and may receive up to $9.0 million additional proceeds, for an aggregate of $10.0 million from the sale of our common stock to the selling stockholder under the common stock purchase agreement described below. Any proceeds from the selling stockholder that we receive under the purchase agreement are expected be used for working capital and general corporate purposes, including research and development activities.  
         
  NASDAQ Capital Market Symbol     RTTR  
         
  Risk Factors  

 

 

 

 

Investing in our securities involves a high degree of risk. You should carefully review and consider the “Risk Factors” section of this prospectus for a discussion of factors to consider before deciding to invest in shares of our common stock.  
         

 

The number of shares of our common stock to be outstanding following this offering is based on an aggregate of 8,582,009 shares outstanding as of December 30, 2015 and includes the 500,000 Initial Purchase Shares and 188,864 Commitment Shares described below, but excludes:

 

  1,904,532 shares of common stock issuable upon exercise of outstanding options as of December 30, 2015, at a weighted average exercise price of  $2.73 per share, of which 659,975 shares are vested as of such date;  
       
  206,448 shares of common stock reserved for future issuance under the 2015 Equity Incentive Plan; and  
       
  578,321 shares of common stock issuable upon exercise of warrants outstanding as of December 30, 2015.  

 

The information in this prospectus gives effect to the 1-for-7.15 reverse stock split of our common stock which was effected on June 17, 2015.

 

Common Stock Issued and Issuable to the Selling Stockholder

 

On December 18, 2015, we entered into a common stock purchase agreement, or the Purchase Agreement, with Aspire Capital Fund, LLC, an Illinois limited liability company, or Aspire Capital or the selling stockholder, which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of our shares of common stock over the approximately 30-month term of the Purchase Agreement. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, we issued to Aspire Capital 188,864 shares of our common stock as a commitment fee, or the Commitment Shares. Upon execution of the Purchase Agreement, the Company agreed to sell to Aspire Capital 500,000 shares of common stock, or the Initial Purchase Shares, at $2.00 per share for proceeds of $1.0 million. Concurrently with entering into the Purchase Agreement, we also entered into a registration rights agreement with Aspire Capital, or the Registration Rights Agreement, in which we agreed to file one or more registration statements, including the registration statement of which this prospectus is a part, as permissible and necessary to register under the Securities Act of 1933, as amended, or the Securities Act, the sale of the shares of our common stock that have been and may be issued to Aspire Capital under the Purchase Agreement.

 

 

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As of December 30, 2015 there were 8,582,009 shares of our common stock outstanding (of which 5,317,454 shares were held by non-affiliates including Aspire Capital) which includes the 500,000 Initial Purchase Shares and the 188,864 Commitment Shares that have already been issued to Aspire Capital, but excludes the 888,835 shares of common stock that we may issue to Aspire Capital in the future under the terms of the Purchase Agreement. If all of such 1,577,699 shares of our common stock offered hereby were issued and outstanding as of the date hereof, such shares would represent 16.7% of the total common stock outstanding or 25.4% of the non-affiliate shares of common stock outstanding as of December 30, 2015.

 

The aggregate number of shares that we may issue to Aspire Capital under the Purchase Agreement may in no case exceed 1,577,699 shares of our common stock (which is equal to approximately 19.99% of the common stock outstanding on the date of the Purchase Agreement), unless (i) stockholder approval is obtained to issue more, in which case this 1,577,699 share limitation will not apply, or (ii) stockholder approval has not been obtained and at any time the 1,577,699 share limitation is reached and at all times thereafter the average price paid for all shares issued under the Purchase Agreement (including the Commitment Shares and the Initial Purchase Shares) is equal to or greater than $1.75, the Minimum Price, a price equal to the closing sale price of our common stock on the business date of the execution of the Purchase Agreement; provided that at no point in time shall Aspire Capital (together with its affiliates) beneficially own more than 19.99% of our common stock.

 

Pursuant to the Purchase Agreement and the Registration Rights Agreement, we have registered 1,577,699 shares of our common stock under the Securities Act, which includes the Commitment Shares and the Initial Purchase Shares that have already been issued to Aspire Capital, and 888,835 shares of common stock that we may issue to Aspire Capital in the future under the terms of the Purchase Agreement. All 1,577,699 shares of common stock are being offered pursuant to this prospectus.

 

On February 24, the conditions necessary for purchases under the Purchase Agreement to commence were satisfied. On any trading day on which the closing sale price of our common stock exceeds $0.50, we have the right, in our sole discretion, to present Aspire Capital with a purchase notice, or each a Purchase Notice, directing Aspire Capital (as principal) to purchase up to 100,000 shares of our common stock per trading day, up to $9.0 million of our common stock in the aggregate at a per share price, or the Purchase Price, calculated by reference to the prevailing market price of our common stock (as more specifically described below).

 

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

 

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

 

  

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, including our financial statements and related notes, before deciding whether to invest in shares of our common stock. The occurrence of any of the adverse developments described in the following risk factors could materially and adversely harm our business, financial condition, results of operations or prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

Risks Relating to Our Financial Position and Need for Additional Capital

 

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

 

We have incurred net losses in each year since our inception. The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. For the years ended December 31, 2014 and 2013, we had net losses of approximately $2.5 million and $2.1 million, respectively, and had net cash used in operating activities of approximately $1.2 million and $2.0 million, respectively. For the nine months ended September 30, 2015 and 2014, we had net losses of approximately $6.6 million and $944,000, respectively, and had net cash used in operating activities of approximately $4.3 million and $887,000, respectively.

 

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

 

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

 

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

 

We are currently advancing RP-G28 through clinical development. Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. As of September 30, 2015, we have a total of approximately $16.2 million in cash.

 

On June 29, 2015, we closed our initial public offering of 4,000,000 shares of common stock at a public offering price of $5.00 per share. Total gross proceeds from our initial public offering were $20.0 million before deducting underwriting discounts and commissions and other offering expenses payable by us, resulting in net proceeds of $17.4 million. We expect our existing cash and cash equivalents, together with interest, and the net proceeds from our sale of shares to Aspire Capital pursuant to the Purchase Agreement will be sufficient to fund our current operations through the first quarter of 2017. However, this period could be shortened if there are any significant increases in planned spending on development programs or more rapid progress of development programs than anticipated. For example, our clinical trials may encounter technical, enrollment or other difficulties that could increase our development costs more than we expect.

 

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

 

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

 

The extent to which we utilize the Purchase Agreement with Aspire Capital as a source of funding will depend on a number of factors, including the prevailing market price of our common stock, the volume of trading in our common stock and the extent to which we are able to secure funds from other sources. The number of shares that we may sell to Aspire Capital under the Purchase Agreement on any given day and during the term of the agreement is limited. See “The Aspire Capital Transaction” section of this prospectus for additional information. Additionally, we and Aspire Capital may not effect any sales of shares of our common stock under the Purchase Agreement during the continuance of an event of default or on any trading day that the closing sale price of our common stock is less than $0.50 per share. Even if we are able to access the full $10.0 million under the Purchase Agreement, we will still need additional capital to fully implement our business, operating and development plans.

 

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

 

We may seek additional funding through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. Additional funding may not be available to us on acceptable terms or at all. To the extent that the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business. If the Company is not able to raise additional capital when required or on acceptable terms, the Company may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that the Company would otherwise seek to develop or commercialize. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional shares by us, or the possibility of such issuance, may cause the market price of our shares to decline.

 

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

 

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

 

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

 

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  market acceptance of our product candidates;
     
  our ability to establish an effective sales and marketing infrastructure directly or through collaborations with third parties;
     
  competition from existing products or new products that may emerge;
     
  the ability of patients or healthcare providers to obtain coverage or sufficient reimbursement for our products;
     
  our ability to adhere to clinical study requirements directly or with third parties such as contract research organizations, or CROs;
     
  our dependency on third-party manufacturers to manufacture our products and key ingredients;
     
  our ability to establish or maintain collaborations, licensing or other arrangements;
     
  the costs to us, and our ability and our third-party collaborators’ ability to obtain, maintain and protect our intellectual property rights;
     
  costs related to and outcomes of potential intellectual property litigation;
     
  our ability to adequately support future growth;
     
  our ability to attract and retain key personnel to manage our business effectively; and
     
  potential product liability claims.

 

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

 

Risks Relating to Regulatory Review and Approval of Our Product Candidates

 

We are substantially dependent on the success of our current product candidate, RP-G28.

 

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

 

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

 

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

 

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

 

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

 

Neither the FDA nor any other comparable governmental agency has considered this Phase 2b/3 study or our current development plan for RP-G28, and we do not intend to request a meeting with the FDA to discuss these matters. Regulatory authorities in the United States and Europe have both published guidance documents on the use and implementation of adaptive design trials. These documents include description of adaptive trials and include a requirement for prospectively written standard operating procedures and working processes for executing adaptive trials and a recommendation that sponsor companies engage with CROs that have the necessary experience in running such trials. In addition, the regulations governing INDs are extensive and involve numerous notification requirements including that, generally, an IND supplement must be submitted to and cleared by the FDA before a sponsor or an investigator may make any change to the investigational plan that may affect its scientific soundness or the rights, safety or welfare of human subjects. We intend to comply with these requirements and believe we will need to submit an IND supplement containing amended protocols for the Phase 2b/3 adaptive trial. There can be no assurance that the FDA will provide clearance for an amended IND for a Phase 2b/3 trial in a timely manner, if at all, and that this trial and other trials will not be delayed or disrupted as a result.

 

In addition, guidelines adopted by the FDA and established by the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) require nonclinical studies that specifically address female fertility to be completed before the inclusion of women of child bearing potential in large-scale or long-duration clinical trials (e.g., Phase 3 trials). In the United States, such assessments of embryo-fetal development can be deferred until before Phase 3 using precautions to prevent pregnancy in clinical trials. As the FDA recommended in their June 28, 2010 advice letter, we will continue to evaluate females of child-bearing potential who are willing to use appropriate contraception throughout the duration of any study. To support any Phase 3 study, we plan to perform ICH-compliant embryo-fetal developmental toxicology studies (in two species) and the ICH-recommended standard battery of genotoxicity tests using RP-G28. We also intend to perform work on the characterization of compounds and analytical specifications for RP-G28. The design of our Phase 2b/3 trial will need to account for these FDA and ICH requirements, and we may need to complete all nonclinical studies that specifically address female fertility before we complete a Phase 2b/3 clinical trial. We cannot predict whether our future trials and studies will be successful or whether regulators will agree with our conclusions regarding the preclinical studies and clinical trials we have conducted to date.

 

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

 

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

 

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

 

During our Type C Meeting with the FDA in February 2013, we had proposed that future studies with RP-G28 in subjects with lactose intolerance would utilize a total lactose intolerance symptom score, measured by a patient reporting instrument that we were going to develop, as the primary, stand-alone endpoint. However, based on RP-G28’s mechanism of action, data from the Phase 2a clinical study, further research conducted after the Type C Meeting with the FDA along with FDA guidance and products under the review of the Division of Gastroenterology and Inborn Errors Products, we now intend to use abdominal pain, measured by an 11-point validated scale, as the primary endpoint for the Phase 2b/Phase 3 study that assesses RP-G28 for the management of lactose intolerant patients with moderate to severe abdominal pain associated with lactose intake. We believe that evaluation of abdominal pain is a reliable clinical assessment of treatment response and treatment benefit in a lactose intolerant patient. Although no FDA-approved product exists for lactose intolerance, the use of a pain scale as a primary endpoint has been used as a validated primary measurement in many approved products, including other gastrointestinal products used to treat diseases such as Irritable Bowel Syndrome (IBS). We have not consulted with the FDA about our intent to use abdominal pain as a primary endpoint or our plan to convert our Phase 2b clinical trial into an adaptive design Phase 2b/3 pivotal clinical trial.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The results of future clinical trials may show that RP-G28 causes undesirable or unacceptable side effects, which could interrupt, delay or halt clinical trials, and result in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities, or result in marketing approval from the FDA and other regulatory authorities with restrictive label warnings.

 

If RP-G28, or any other product candidate we develop in the future, receives marketing approval and we or others later identify undesirable or unacceptable side effects caused by such product:

 

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

 

Any of these events could prevent us or our potential future collaborators from achieving or maintaining market acceptance of the affected product or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from the sale of our products.

 

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

 

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

 

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

 

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

 

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In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or, collectively, the ACA, became law in the United States. The goal of the ACA is to reduce the cost of health care and substantially change the way health care is financed by both governmental and private insurers. While we cannot predict what impact on federal reimbursement policies this legislation will have in general or on our business specifically, the ACA may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of RP-G28 or any other product candidates that we may develop. In addition, some members of the U.S. Congress have been seeking to overturn at least portions of the legislation and we expect they will continue to review and assess this legislation and alternative health care reform proposals. We cannot predict whether new proposals will be made or adopted, when they may be adopted or what impact they may have on us if they are adopted.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We do not intend to manufacture the pharmaceutical products that we plan to sell. We currently have agreements with contract manufacturers for the production of the active pharmaceutical ingredients and the formulation of sufficient quantities of drug product for our Phase 2b/3 and any Phase 3 trials of RP-G28 and the other trials and nonclinical studies that we believe we will need to conduct prior to seeking regulatory approval. However, we do not have agreements for commercial supplies of RP-G28 and we may not be able to reach agreements with these or other contract manufacturers for sufficient supplies to commercialize RP-G28 if it is approved.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

  issue warning letters;
     
  mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
     
  require us or our potential future collaborators to enter into a consent decree or permanent injunction, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;
     
  impose other administrative or judicial civil or criminal penalties;
     
  withdraw regulatory approval;
     
  refuse to approve pending applications or supplements to approved applications filed by us or our potential future collaborators;
     
  impose restrictions on operations, including costly new manufacturing requirements; or
     
  detain, seize and/or condemn and destroy products.

 

Risks Relating to the Commercialization of Our Products

 

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

 

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

 

  limitations or warnings contained in our product candidates’ FDA-approved labeling;
     
  changes in the standard of care or availability of alternative therapies at similar or lower costs for the targeted indications for such product candidates;
     
  limitations in the approved clinical indications for such product candidates;
     
  demonstrated clinical safety and efficacy compared to other products;
     
  lack of significant adverse side effects;
     
  sales, marketing and distribution support;
     
  availability of reimbursement from managed care plans and other third-party payors;
     
  timing of market introduction and perceived effectiveness of competitive products;
     
  the degree of cost-effectiveness;
     
  availability of alternative therapies at similar or lower cost, including generics and over-the-counter products;
     
  enforcement by the FDA and EMA of laws and rulings that prohibit the illegal sale of RP-G28 (or any other product candidate) as a dietary supplement;
     
  the extent to which our product candidates are approved for inclusion on formularies of hospitals and managed care organizations;

 

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  whether our product candidates are designated under physician treatment guidelines for the treatment of or reduction of symptoms associated with the indications for which we have received regulatory approval;
     
  adverse publicity about our product candidates or favorable publicity about competitive products;
     
  convenience and ease of administration of our product candidates; and
     
  potential product liability claims.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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The Company’s pipeline of product candidates beyond RP-G28 is limited.

 

We intend to develop and commercialize drug candidates in addition to RP-G28 through our research program. Even if we are successful in completing preclinical and clinical development and receiving regulatory approval for one commercially viable drug for the treatment of one disease, we cannot be certain that we will be able to develop and receive regulatory approval for other drug candidates for the treatment of other forms of that disease or other diseases. If we fail to develop and commercialize RP-G28 for the reduction of symptoms associated with lactose intolerance, we will not be successful in developing a pipeline of potential drug candidates to follow RP-G28, and our business prospects could be significantly limited.

 

Risks Relating to Our Business and Strategy

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

A variety of risks associated with our possible international business relationships could materially adversely affect our business.

 

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

 

  differing regulatory requirements for drug approvals internationally;
     
  potentially reduced protection for intellectual property rights;
     
  potential third-party patent rights in the United States and/or in countries outside of the United States;
     
  the potential for so-called “parallel importing,” which is what occurs when a local seller, faced with relatively high local prices, opts to import goods from another jurisdiction with relatively low prices, rather than buying them locally;
     
  unexpected changes in tariffs, trade barriers and regulatory requirements;
     
  economic weakness, including inflation, or political instability, particularly in non-U.S. economies and markets, including several countries in Europe;
     
  compliance with tax, employment, immigration and labor laws for employees traveling abroad;
     
  taxes in other countries;
     
  foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country;

 

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  workforce uncertainty in countries where labor unrest is more common than in the United States;
     
  production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
     
  business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Failure to build our finance infrastructure and improve our accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.

 

As a public company, we operate in an increasingly demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley Act, and the related rules and regulations of the SEC, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud.

 

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We have begun implementing our system of internal controls over financial reporting and preparing the documentation necessary to perform the evaluation needed to comply with Section 404(a) of the Sarbanes-Oxley Act. However, we anticipate that we will need to retain additional finance capabilities and build our financial infrastructure as we transition to operating as a public company, including complying with the requirements of Section 404 of the Sarbanes-Oxley Act. As we continue to operate as a public company, we will continue improving our financial infrastructure with the retention of additional financial and accounting capabilities, the enhancement of internal controls and additional training for our financial and accounting staff.

 

Section 404(a) of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the SEC. However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an emerging growth company until the earlier of  (i) the last day of the fiscal year (a) following the fifth anniversary of the date we completed our initial public offering, which was June 29, 2015, (b) in which we have total annual gross revenue of at least $1.0 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeded $700.0 million as of the prior June 30th, and (ii) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period.

 

Until we are able to expand our finance and administrative capabilities and establish necessary financial reporting infrastructure, we may not be able to prepare and disclose, in a timely manner, our financial statements and other required disclosures or comply with the Sarbanes-Oxley Act or existing or new reporting requirements. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.

 

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

 

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

 

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

 

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

 

  withdrawal of clinical trial participants;
     
  termination of clinical trial sites or entire trial programs;
     
  costs of related litigation;
     
  substantial monetary awards to patients or other claimants;
     
  decreased demand for our product candidates and loss of revenues;

 

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  impairment of our business reputation;
     
  diversion of management and scientific resources from our business operations; and
     
  the inability to commercialize our product candidates.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Risks Relating to Our Intellectual Property

 

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

 

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

 

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

 

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

 

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

 

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

 

others may be able to develop a platform similar to, or better than, ours in a way that is not covered by the claims of our patents;
   
others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of our patents;
   
others may be able to manufacture compounds that are similar or identical to our product candidates using processes that are not covered by the claims of our method of making patents;
   
others may obtain regulatory approval for uses of compounds, similar or identical to our product, that are not covered by the claims of our method of use patents;
   
we may not be able to obtain licenses for patents that are essential to the process of making the product;
   
we might not have been the first to make the inventions covered by our pending patent applications;
   
we might not have been the first to file patent applications for these inventions;
   
others may independently develop similar or alternative technologies or duplicate any of our technologies;
   
any patents that we obtain may not provide us with any competitive advantages;
   
we may not develop additional proprietary technologies that are patentable; or
   
the patents of others may have an adverse effect on our business.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Failure to secure trademark registrations could adversely affect our business.

 

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

 

Risks Relating to Our Common Stock and this Offering

 

An active trading market may not develop or be sustained.

 

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

 

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

 

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

 

  results of our clinical trials;
     
  results of clinical trials of our competitors’ products;
     
  regulatory actions with respect to our products or our competitors’ products;
     
  actual or anticipated fluctuations in our financial condition and operating results;
     
  actual or anticipated changes in our growth rate relative to our competitors;
     
  actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate;

 

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  competition from existing products or new products that may emerge;
     
  announcements by us, our potential future collaborators or our competitors of significant acquisitions, strategic collaborations, joint ventures, or capital commitments;
     
  issuance of new or updated research or reports by securities analysts;
     
  fluctuations in the valuation of companies perceived by investors to be comparable to us;
     
  share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
     
  additions or departures of key management or scientific personnel;
     
  disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
     
  announcement or expectation of additional financing efforts;
     
  sales of our common stock by us, our insiders or our other stockholders;
     
  market conditions for biopharmaceutical stocks in general; and
     
  general economic and market conditions.

 

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

 

We have three significant stockholders, which will limit your ability to influence corporate matters and may give rise to conflicts of interest.

 

Javelin Venture Partners I SPV I, LLC, or Javelin SPV, Javelin Venture Partners, L.P., or Javelin, and Stonehenge Partners LLC, or Stonehenge, are our largest stockholders. Javelin SPV beneficially owns shares representing approximately 3.8% of our common stock outstanding, Javelin beneficially owns shares representing approximately 23.9% of our outstanding common stock, and Stonehenge beneficially owns shares representing 9.5% of our common stock. Further, Noah Doyle, one of our directors, is a managing director of Javelin SPV and Javelin, and Andrew Ritter and Ira Ritter, members of management and directors on our board of directors, are managing partners of Stonehenge. Accordingly, Javelin SPV, Javelin and Stonehenge may exert significant influence over us and any action requiring the approval of the holders of our common stock, including the election of directors and the approval of significant corporate transactions. This concentration of voting power makes it less likely that any other holder of our common stock will be able to affect the way we are managed and could delay or prevent an acquisition of us on terms that other stockholders may desire. Furthermore, the interests of Javelin SPV, Javelin and Stonehenge may not always coincide with your interests or the interests of other stockholders and Javelin SPV, Javelin and Stonehenge may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.

 

Being a public company has increased our expenses and administrative burden.

 

As a public company, we have incurred and will continue to incur significant legal, insurance, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff is required to perform tasks they did not perform when we were a private company. For example, as a public company, we must bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws. In addition, laws, regulations and standards applicable to public companies relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and related regulations implemented by the SEC and NASDAQ, create uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We have invested and will continue to invest resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert management’s time and attention from product development activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. In the future, it may become more expensive for us to maintain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

 

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

 

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

 

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

 

The sale of our common stock to Aspire Capital may cause substantial dilution to our existing stockholders and the sale of the shares of common stock acquired by Aspire Capital could cause the price of our common stock to decline.

 

We have registered for sale the Commitment Shares and Initial Purchase Shares that we have issued to Aspire Capital and an additional 888,835 shares that we may issue to Aspire Capital in the future under the terms of the Purchase Agreement. It is anticipated that shares registered in this offering will be sold over a period of up to approximately 30 months from the date of this prospectus. The number of shares ultimately offered for sale by Aspire Capital under this prospectus is dependent upon the number of shares we elect to sell to Aspire Capital under the Purchase Agreement. Depending on a variety of factors, including market liquidity of our common stock, the sale of shares under the Purchase Agreement may cause the trading price of our common stock to decline.

 

Aspire Capital may ultimately purchase all, some or none of the $9.0 million of common stock that, together with the $1.0 million Initial Purchase Shares and the Commitment Shares, are the subject of this prospectus. Aspire Capital may sell all, some or none of our shares that it holds or comes to hold under the Purchase Agreement. Sales by Aspire Capital of shares acquired pursuant to the Purchase Agreement under the registration statement, of which this prospectus is a part, may result in dilution to the interests of other holders of our common stock. The sale of a substantial number of shares of our common stock by Aspire Capital in this offering, or anticipation of such sales, could cause the trading price of our common stock to decline or make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise desire. However, we have the right under the Purchase Agreement to control the timing and amount of sales of our shares to Aspire Capital, and the Purchase Agreement may be terminated by us at any time at our discretion without any penalty or cost to us.

 

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

 

Sales of a substantial number of shares of our common stock in the public market could occur in the future. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. We had 8,582,009 outstanding shares of common stock as of December 30, 2015, which includes the 500,000 Initial Purchase Shares and 188,864 Commitment Shares that have been issued to Aspire Capital, but excludes the 888,835 shares which we may issue to Aspire Capital in the future under the terms of the Purchase Agreement. Of these shares, a total of 5,865,861 shares may be resold in the public market at any time (including the shares registered in this offering) and the remaining 2,716,148 shares are currently restricted under securities laws. We have also registered 2,111,682 shares of common stock that we may issue under our equity compensation plans. These shares can be sold in the public market upon issuance and once vested.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of December 31, 2014, we had federal net operating loss carryforwards, or NOLs, of approximately $9.7 million which begin to expire in 2028. Our ability to utilize our NOLs may be limited under Section 382 and 383 of the Internal Revenue Code. The limitations apply if an ownership change, as defined by Section 382, occurs. Generally, an ownership change occurs when certain shareholders increase their aggregate ownership by more than 50 percentage points over their lowest ownership percentage in a testing period (typically three years). Although we have not undergone a Section 382 analysis, it is possible that the utilization of the NOLs, could be substantially limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be utilized against future taxes. As a result, we may not be able to take full advantage of these carryforwards for federal and state tax purposes. Future changes in stock ownership may also trigger an ownership change and, consequently, a Section 382 limitation.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

 

This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.. All statements other than statements of historical facts contained in this prospectus, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

 

The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

 

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

 

These forward-looking statements are only predictions and we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, so you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that could cause actual future results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

This prospectus contains estimates made, and other statistical data published, by independent parties and by us relating to market size and growth and other data about our industry. We obtained the industry and market data in this prospectus from our own research as well as from industry and general publications, surveys and studies conducted by third parties. This data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the industries in which we operate that are subject to a high degree of uncertainty. We caution you not to give undue weight to such projections, assumptions and estimates.

 

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THE ASPIRE CAPITAL TRANSACTION

 

General

 

On December 18, 2015, we entered into the Purchase Agreement which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $10.0 million of our shares of common stock over the term of the Purchase Agreement. Upon execution of the Purchase Agreement, the Company agreed to sell to Aspire Capital 500,000 Initial Purchase Shares for proceeds of $1.0 million. In consideration for entering into the Purchase Agreement, concurrently with the execution of the Purchase Agreement, we issued to Aspire Capital 188,864 Commitment Shares. Concurrently with entering into the Purchase Agreement, we also entered into the Registration Rights Agreement, in which we agreed to file one or more registration statements as permissible and necessary to register under the Securities Act, the sale of the shares of our common stock that have been and may be issued to Aspire Capital under the Purchase Agreement.

 

As of December 30, 2015 there were 8,582,009 shares of our common stock outstanding (of which 5,317,454 shares were held by non-affiliates including Aspire Capital), which includes the 500,000 Initial Purchase Shares and 188,864 Commitment Shares that have already been issued to Aspire Capital, but excludes the 888,835 shares which we may issue to Aspire Capital in the future under the terms of the Purchase Agreement. If all 1,577,699 shares of our common stock issuable to Aspire Capital had been issued and outstanding as of December 30, 2015, such shares would have represented 16.7% of the total common stock outstanding, or 25.4% of the non-affiliate shares of common stock outstanding, as of December 30, 2015. The number of shares of our common stock ultimately offered for sale by Aspire Capital is dependent upon the number of shares purchased by Aspire Capital under the Purchase Agreement.

 

The aggregate number of shares that we may issue to Aspire Capital under the Purchase Agreement may in no case exceed 1,577,699 shares of our common stock (which is equal to approximately 19.99% of the common stock outstanding on the date of the Purchase Agreement), unless (i) shareholder approval is obtained to issue more, in which case this 1,577,699 share limitation, will not apply, or (ii) shareholder approval has not been obtained and at any time the 1,577,699 share limitation is reached and at all times thereafter the average price paid for all shares issued under the Purchase Agreement (including the Commitment Shares) is equal to or greater than $1.75, the Minimum Price, a price equal to the closing sale price of our common stock on the business date of the execution of the Purchase Agreement; provided that at no one point in time shall Aspire Capital (together with its affiliates) beneficially own more than 19.99% of our common stock.

 

Pursuant to the Purchase Agreement and the Registration Rights Agreement, we have registered 1,577,699 shares of our common stock under the Securities Act, which includes the Initial Purchase Shares and the Commitment Shares that have already been issued to Aspire Capital and 888,835 shares of common stock that we may issue to Aspire Capital in the future under the terms of the Purchase Agreement. All 1,577,699 shares of common stock are being offered pursuant to this prospectus. Under the Purchase Agreement, we have the right but not the obligation to issue more than the 1,577,699 shares of common stock included in this prospectus to Aspire Capital. As of the date hereof, we do not have any plans or intent to issue to Aspire Capital any shares of common stock in addition to the 1,577,699 shares of common stock offered hereby.

 

On February 24, 2016, the conditions necessary for purchases under the Purchase Agreement to commence were satisfied. On any trading day on which the closing sale price of our common stock is not less than $0.50 per share, or the Floor Price, we have the right, in our sole discretion, to present Aspire Capital with a Purchase Notice, directing Aspire Capital (as principal) to purchase up to 100,000 shares of our common stock per business day, up to $9.0 million of our common stock in the aggregate over the term of the Purchase Agreement, at a Purchase Price calculated by reference to the prevailing market price of our common stock over the preceding 12-business day period (as more specifically described below); however, no sale pursuant to a Purchase Notice may exceed $500,000 per trading day.

 

In addition, on any date on which we submit a Purchase Notice to Aspire Capital for 100,000 shares and the closing price of our common stock is not less than the Floor Price per share, we also have the right, in our sole discretion, to present Aspire Capital with a VWAP Purchase Notice directing Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of the Company’s common stock traded on the Nasdaq Capital Market on the next trading day, subject to the VWAP Purchase Share Volume Maximum and the VWAP Minimum Price Threshold. The VWAP Purchase Price is calculated by reference to the prevailing market price of our common stock (as more specifically described below).

 

The Purchase Agreement provides that neither we nor Aspire Capital will effect any sales under the Purchase Agreement on any purchase date where the closing sale price of our common stock is less than the Floor Price. There are no trading volume requirements or restrictions under the Purchase Agreement, and we will control the timing and amount of any sales of our common stock to Aspire Capital. Aspire Capital has no right to require any sales by us, but is obligated to make purchases from us as we direct in accordance with the Purchase Agreement. There are no limitations on use of proceeds, financial or business covenants, restrictions on future financings, rights of first refusal, participation rights, penalties or liquidated damages in the Purchase Agreement. Aspire Capital may not assign its rights or obligations under the Purchase Agreement. The Purchase Agreement may be terminated by us at any time, at our discretion, without any penalty or cost to us.

 

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Purchase Of Shares Under The Common Stock Purchase Agreement

 

Under the terms of the Purchase Agreement, on any trading day selected by us on which the closing sale price of our common stock exceeds the Floor Price, we may direct Aspire Capital to purchase up to 100,000 shares of our common stock per trading day. The Purchase Price of such shares is equal to the lesser of:

 

  the lowest sale price of our common stock on the purchase date; or
     
  the arithmetic average of the three lowest closing sale prices for our common stock during the ten consecutive trading days ending on the trading day immediately preceding the purchase date.

 

In addition, on any date on which we submit a Purchase Notice to Aspire Capital for purchase of 100,000 shares and on which the closing price of our common stock exceeds the Floor Price, we also have the right to direct Aspire Capital to purchase an amount of stock equal to up to 30% of the aggregate shares of our common stock traded on the Nasdaq Capital Market on the next trading day, subject to the VWAP Purchase Share Volume Maximum and the VWAP Minimum Price Threshold, which is equal to the greater of (a) 80% of the closing price of the Company’s common stock on the business day immediately preceding the VWAP Purchase Date or (b) such higher price as set forth by the Company in the VWAP Purchase Notice. The VWAP Purchase Price of such shares is the lower of:

 

  the Closing Sale Price on the VWAP Purchase Date; or
     
  97% of the volume-weighted average price for our common stock traded on the Nasdaq Capital Market:

 

  on the VWAP Purchase Date, if the aggregate shares to be purchased on that date have not exceeded the VWAP Purchase Share Volume Maximum; or
     
  during that portion of the VWAP Purchase Date until such time as the sooner to occur of (i) the time at which the aggregate shares traded on the Nasdaq Capital Market exceed the VWAP Purchase Share Volume Maximum or (ii) the time at which the sale price of the Company’s common stock falls below the VWAP Minimum Price Threshold.

 

The Purchase Price will be adjusted for any reorganization, recapitalization, non-cash dividend, stock split, or other similar transaction occurring during the trading day(s) used to compute the Purchase Price. We may deliver multiple Purchase Notices and VWAP Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long as the most recent purchase has been completed.

 

Minimum Share Price

 

Under the Purchase Agreement, we and Aspire Capital may not effect any sales of shares of our common stock under the Purchase Agreement on any trading day that the closing sale price of our common stock is less than the Floor Price.

 

Events of Default

 

Generally, Aspire Capital may terminate the Purchase Agreement upon the occurrence of any of the following, among other, events of default:

 

  the effectiveness of any registration statement that is required to be maintained effective pursuant to the terms of the Registration Rights Agreement between us and Aspire Capital lapses for any reason (including, without limitation, the issuance of a stop order) or is unavailable to Aspire Capital for sale of our shares of common stock, and such lapse or unavailability continues for a period of ten consecutive business days or for more than an aggregate of thirty business days in any 365-day period, which is not in connection with a post-effective amendment to any such registration statement; in connection with any post-effective amendment to such registration statement that is required to be declared effective by the SEC such lapse or unavailability may continue for a period of no more than 40 consecutive business days;
     
  the suspension from trading or failure of our common stock to be listed on our principal market for a period of three consecutive business days;

 

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  the delisting of our common stock from our principal market, provided our common stock is not immediately thereafter trading on the New York Stock Exchange, the NYSE MKT, the Nasdaq Capital Market, the Nasdaq Global Select Market, the Nasdaq Global Market, the OTB Bulletin Board or the OTCQB marketplace or OTCQX marketplace of the OTC Markets Group;
     
  our transfer agent’s failure to issue to Aspire Capital shares of our common stock which Aspire Capital is entitled to receive under the Purchase Agreement within five business days after an applicable purchase date;
     
  any breach by us of the representations or warranties or covenants contained in the Purchase Agreement or any related agreements which could have a material adverse effect on us, subject to a cure period of five business days;
     
  if we become insolvent or are generally unable to pay our debts as they become due; or
     
  any participation or threatened participation in insolvency or bankruptcy proceedings by or against us.

 

Our Termination Rights

 

The Purchase Agreement may be terminated by us at any time, at our discretion, without any penalty or cost to us.

 

No Short-Selling or Hedging by Aspire Capital

 

Aspire Capital has agreed that neither it nor any of its agents, representatives and affiliates shall engage in any direct or indirect short-selling or hedging of our common stock during any time prior to the termination of the Purchase Agreement.

 

Effect of Performance of the Purchase Agreement on Our Stockholders

 

The Purchase Agreement does not limit the ability of Aspire Capital to sell any or all of the 1,577,699 shares registered in this offering. It is anticipated that shares registered in this offering will be sold over a period of up to approximately 30 months from the date of this prospectus. The sale by Aspire Capital of a significant amount of shares registered in this offering at any given time could cause the market price of our common stock to decline and/or to be highly volatile. Aspire Capital may ultimately purchase all, some or none of the 888,835 shares of common stock not yet issued but registered in this offering, and it may sell all, some or none of the shares issued to it by us (including the Initial Purchase Shares, the Commitment Shares and any shares issued to it in the future). Therefore, sales to Aspire Capital by us pursuant to the Purchase Agreement also may result in substantial dilution to the interests of other holders of our common stock. However, we have the right to control the timing and amount of any sales of our shares to Aspire Capital and the Purchase Agreement may be terminated by us at any time at our discretion without any penalty or cost to us.

 

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Percentage of Outstanding Shares After Giving Effect to the Purchased Shares Issued to Aspire Capital

 

In connection with entering into the Purchase Agreement, we authorized the sale to Aspire Capital of up to $10.0 million of our shares of common stock, $1.0 million of which were issued to Aspire Capital upon the signing of the Purchase Agreement. The remaining $9.0 million shares may be sold by us to Aspire Capital over a period of approximately 30 months from the date of this prospectus. We estimate that we will sell no more than 888,835 additional shares to Aspire Capital under the Purchase Agreement (exclusive of the 188,864 Commitment Shares and the 500,000 Initial Purchase Shares), all of which are included in this offering. Subject to any required approval by our board of directors, we have the right but not the obligation to issue more than the 1,577,699 shares included in this prospectus to Aspire Capital under the Purchase Agreement. In the event we elect to issue more than 1,577,699 shares under the Purchase Agreement, we will be required to file a new registration statement and have it declared effective by the SEC. The number of shares ultimately offered for sale by Aspire Capital in this offering is dependent upon the number of shares purchased by Aspire Capital under the Purchase Agreement. The following table sets forth the number and percentage of outstanding shares to be held by Aspire Capital after giving effect to the sale of shares of common stock issued to Aspire Capital at varying purchase prices:

 

Assumed Average
Purchase Price
   Proceeds from the
Sale of Additional
Shares to
Aspire Capital Under
the Purchase
Agreement
Registered in this
Offering
   Number of Additional
Shares to be
Issued in this Offering at
the Assumed Average
Purchase Price (1)
   Percentage of
Outstanding Shares
After Giving Effect to the
Purchased Shares Issued
to Aspire Capital (2)
 
$1.50   $1,333,253    888,835    16.7%
$2.00   $1,777,670    888,835    16.7%
$2.50   $2,222,088    888,835    16.7%
$3.00   $2,666,505    888,835    16.7%
$5.00   $4,444,175    888,835    16.7%
$10.00   $8,888,350    888,835    16.7%
$10.13   $9,000,000    888,450    16.7%
$11.00   $9,000,000    818,181    16.0%
$15.00   $9,000,000    600,000    14.0%

 

(1) Excludes 188,864 Commitment Shares and 500,000 Initial Purchase Shares issued under the Purchase Agreement between the Company and Aspire Capital.
   
(2) The denominator is based on 8,582,009 shares outstanding as of December 30, 2015, which includes the 500,000 Initial Purchase Shares and 188,864 Commitment Shares previously issued to Aspire Capital plus the potential number of shares we may issue to Aspire Capital in the future under the Purchase Agreement.

 

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USE OF PROCEEDS

 

This prospectus relates to shares of our common stock that may be offered and sold from time to time by Aspire Capital. We will not receive any proceeds upon the sale of shares by Aspire Capital. However, we have received proceeds of $1.0 million, and may receive additional proceeds up to $9.0 million, for an aggregate of $10.0 million gross proceeds, under the Purchase Agreement with Aspire Capital. The proceeds received from the sale of the shares under the Purchase Agreement will be used for working capital and general corporate purposes, including research and development activities. This anticipated use of net proceeds from the sale of our common stock to Aspire Capital under the Purchase Agreement represents our intentions based upon our current plans and business conditions.

 

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PRICE RANGE OF COMMON STOCK

 

Our common stock began trading on the NASDAQ Capital Market under the ticker symbol “RTTR” on June 24, 2015. Prior to that date, there was no public market for our common stock. Our initial public offering was priced at $5.00 per share on June 24, 2015. The table sets forth, for the periods indicated below, the high and low intra-day sales prices per share of our common stock as reported on the New York Stock Exchange since June 24, 2015.

 

   High   Low 
2015          
Second Quarter (beginning June 24, 2015)  $5.50   $3.80 
Third Quarter  $4.70   $2.00 
Fourth Quarter (through December 30, 2015)  $2.63    $1.61  
2016          
First Quarter (through January 15, 2016)  $1.76   $1.12 

 

On January 15, 2016, the closing price for our common stock as reported on the NASDAQ Capital Market was $1.33 per share.

 

As of January 15, 2015, we had 47 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. The number of record holders also does not include stockholders whose shares may be held in trust by other entities.

 

DIVIDEND POLICY

 

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

 

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DILUTION

 

The sale of our common stock to Aspire Capital pursuant to the Purchase Agreement will have a dilutive impact on our stockholders. As a result, our net income/(loss) per share would decrease/increase in future periods and the market price of our common stock could decline. In addition, the lower our stock price is at the time we exercise our right to sell shares to Aspire Capital, the more shares of our common stock we will have to issue to Aspire Capital pursuant to the Purchase Agreement and our existing stockholders would experience greater dilution.

 

After giving effect to (i) the issuance of the 500,000 Initial Purchase Shares for gross proceeds of $1.0 million, (ii) the issuance of the 188,864 Commitment Shares, and (iii) the sale of 888,835 shares of common stock (the approximate number of additional shares that can be sold so as not to exceed 19.99%) at an assumed offering price of $1.75 per share (the closing price of our common stock on December 18, 2015), and after deducting estimated offering expenses of $100,000 payable by us, our pro forma net tangible book value as of September 30, 2015 would have been $17.9 million, or $1.91 per share of common stock. This represents an immediate decrease in pro forma net tangible book value of $0.07 per share to our existing shareholders and an immediate dilution in pro forma net tangible book value of $0.07 per share to investors participating in this offering.

 

The following table illustrates this dilution on a per share basis:

 

Assumed public offering price per share        $1.75 
Net tangible book value per share as of September 30, 2015   $1.98    
Decrease in net tangible book value per share attributable to this offering   $(0.07 )
Pro forma net tangible book value per share after this offering        $1.91 
Dilution per share to investors participating in this offering        $0.07 

 

The shares sold in this offering, if any, in addition to the 188,864 Commitment Shares and 500,000 Initial Purchase Shares, may be sold from time to time at various prices.

 

Each $1.00 increase in the per share price at which we sell shares to Aspire Capital under the Purchase Agreement from the assumed offering price of $1.75 per share would increase our pro forma net tangible book value by $0.9 million, our pro forma net tangible book value per share by $0.095 and dilution per share to new investors purchasing shares of common stock in this offering by $0.095, assuming that the number of shares of common stock offered, as set forth on the cover page of this prospectus, remains the same and after deducting estimated aggregate offering expenses payable by us. This information is supplied for illustrative purposes only.

 

The table and calculations set forth above are based on the number of shares of common stock outstanding as of September 30, 2015 and assumes no exercise of any outstanding options or warrants. To the extent that options or warrants are exercised, there will be further dilution to new investors.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Financial Data” and our financial statements and the related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Cautionary Statements Regarding Forward-Looking Statements and Industry Data” for a discussion of the uncertainties and assumptions associated with these statements. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus. All common share amounts and per share amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operation have been adjusted to reflect the 1-for-7.15 reverse stock split of our common stock effected on June 17, 2015.

 

Overview

 

Ritter Pharmaceuticals, Inc. develops novel therapeutic products that modulate the human gut microbiome to treat gastrointestinal diseases. We are advancing human gut health research by exploring the metabolic capacity of the gut microbiota and translating the functionality of prebiotic-based therapeutics into applications intended to have a meaningful impact on a patient’s health. We have completed a Phase 2a clinical trial of our leading product candidate, RP-G28, an orally administered, high purity oligosaccharide.

 

We have devoted substantially all of our resources to development efforts relating to RP-G28, including conducting clinical trials of RP-G28, providing general and administrative support for these operations and protecting our intellectual property. We currently do not have any products approved for sale and we have not generated any revenue from product sales since our inception. From our inception through June 28, 2015, we funded our operations primarily through the private placement of preferred stock, common stock and promissory notes.

 

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

 

We paid to the underwriters underwriting discounts and commissions of approximately $1.6 million in connection with the offering. In addition, we incurred expenses of approximately $1.0 million in connection with the offering. Thus, the net offering proceeds to us, after deducting underwriting discounts and commissions and offering expenses, were approximately $17.4 million.

 

We have incurred net losses in each year since our inception, including net losses of approximately $6.6 million for the nine months ended September 30, 2015. We had an accumulated deficit of approximately $24.9 million as of September 30, 2015. Substantially all our net losses resulted from costs incurred in connection with our research and development programs, stock-based compensation, and from general and administrative costs associated with our operations.

 

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

 

  complete the development of our lead product candidate, RP-G28, for the reduction of symptoms associated with lactose intolerance in patients;
     
  seek to obtain regulatory approvals for RP-G28;
     
  outsource the commercial manufacturing of RP-G28 for any indications for which we receive regulatory approval;
     
  contract with third parties for the sales, marketing and distribution of RP-G28 for any indications for which we receive regulatory approval;
     
  maintain, expand and protect our intellectual property portfolio;
     
  continue our research and development efforts;
     
  add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts; and
     
  operate as a public company.

 

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

 

Financial Overview

 

Revenue

 

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

 

Research and Development Expenses

 

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

 

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

 

From inception through September 30, 2015, we have incurred approximately $5.3 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we continue the development of RP-G28 for the reduction of symptoms associated with lactose intolerance in patients and other indications, subject to the availability of additional funding.

 

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

 

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

 

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

 

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RP-G28

 

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

 

  conduct our Phase 2b/3 clinical trials as an adaptive design Phase 2b/3 clinical trials;
     
  working with our CRO to prepare for launch of the Phase 2b/3 and Phase 3 trials; and
     
  working with our third-party drug formulator to produce sufficient drug product for the adaptive design Phase 2b/3 clinical trials and other contemplated trials.

 

Patent Costs

 

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

 

General and Administrative Expenses

 

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

 

We expect that our general and administrative expenses will increase as we operate as a public company and due to the potential commercialization of RP-G28. We believe that these increases will likely include increased costs for director and officer liability insurance, and increased fees for outside consultants, lawyers and accountants. We also expect to incur increased costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.

 

Interest Income and Interest Expense

 

Interest income consists of interest earned on our cash. We expect our interest income to increase due to the receipt of net proceeds from our initial public offering as we invest the net proceeds from the offering pending their use in our operations.

 

Interest expense pertains to interest accrued on our promissory notes.

 

Critical Accounting Policies and Estimates

 

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

 

While our significant accounting policies are more fully described in Note 3 to our financial statements appearing elsewhere in this prospectus, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.

 

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Fair Value of Financial Instruments

 

FASB ASC 820 — Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 requires disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. The estimates presented in these financial statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments.

 

FASB ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).

 

The three levels of the fair value hierarchy are as follows:

 

  Level 1 — Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.
     
  Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models consider various assumptions, including volatility factors, current market prices and contractual prices for the underlying financial instruments. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
     
  Level 3 — Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.

 

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

 

Research and Development Costs

 

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

 

The successful development of RP-G28 is uncertain. At this time, other than as discussed below, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of RP-G28 or the period, if any, in which material net cash inflows from the sale of RP-G28 may commence. This is due to the numerous risks and uncertainties associated with developing product candidates, including those described in “Risk Factors” in this prospectus. Development timelines, probability of success and development costs vary widely. As a result of these risks and uncertainties, we cannot currently estimate with any degree of certainty the amount of time or money that will be required to expend in the future on the research and development of RP-G28.

 

Accrued Expenses

 

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

 

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

 

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Stock-based Compensation

 

In June 2015, we adopted a new equity incentive plan, or the 2015 Equity Incentive Plan, to replace our prior 2008 Stock Plan and 2009 Stock Plan. Terms of our share-based compensation are governed by the 2015 Equity Incentive Plan, 2009 Stock Plan and 2008 Stock Plan, or collectively the Plans. The Plans permit us to grant non-statutory stock options, incentive stock options and other equity awards to our employees, outside directors and consultants; however, incentive stock options may only be granted to our employees. Beginning June 29, 2015, no further awards may be granted under the 2009 Stock Plan or 2008 Stock Plan. As of September 30, 2015, the aggregate number of shares of common stock available for issuance under the 2015 Equity Incentive Plan was 206,448. However, to the extent awards under the 2008 Plan or 2009 Plan are forfeited or lapse unexercised or are settled in cash, the common stock subject to such awards will be available for future issuance under the 2015 Equity Incentive Plan.

 

The exercise price for options issued under the Plans is determined by our Board of Directors, but will be (i) in the case of an incentive stock option (A) granted to an employee who, at the time of grant of such option, is a 10% stockholder, no less than 110% of the fair market value per share on the date of grant; or (B) granted to any other employee, no less than 100% of the fair market value per share on the date of grant; and (ii) in the case of a nonstatutory stock option, no less than 100% of the fair market value per share on the date of grant. The options awarded under the Plans shall vest as determined by our Board of Directors but shall not exceed a ten-year period.

 

Options Issued to Directors and Employees as Compensation

 

We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of stock-based awards is expensed on a straight-line basis over the vesting period of the respective award. Performance-based awards vest and are expensed over the performance period when the related performance goal is probable of being achieved.

 

Pursuant to the terms of the Plans, from inception to December 31, 2013, we issued options to purchase an aggregate of 206,172 shares to our executive officers and employees. The exercise prices of these option grants, as determined by our Board of Directors, range from $0.79 to $1.27 per share, and a portion of these vest subject to certain performance conditions. In addition, we granted additional non-qualified 10-year term options to our executive officers to purchase an aggregate of 1,790,540 shares of our common stock in December 2014. As of December 31, 2014, an aggregate of 82,107 options were expired or exercised, and an aggregate of 1,914,605 issued to executive officers and employees options remained outstanding.

 

During the nine months ended September 30, 2015, no additional options were granted and an aggregate of 41,958 options to purchase our common stock were automatically terminated due to certain performance conditions not being met. As of September 30, 2015, we had a total of 1,872,647 options issued to our executive officers and employees outstanding.

 

We recognized stock based compensation expense for these services within general and administrative expense of approximately $2.4 million and $2,500 for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, there was approximately $2.4 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 1.6 years.

 

In addition to annual cash compensation payable to certain non-employee directors for their services on the Board and its committees, the Board of Directors determined to award certain non-employee directors an option to acquire 10,000 shares of our common stock to vest 25% upon the first anniversary of the nonemployee director’s approximate date of joining the Board of Directors with the remaining options vesting monthly in equal amounts over 36 months. As of September 30, 2015, no stock based compensation had been granted to the nonemployee directors.

 

Options Issued to Non-Employees for Service Received

 

We account for stock-based compensation arrangements with non-employees using a fair value approach. The fair value of these options is measured using the Black-Scholes option-pricing model reflecting the same assumptions as applied to employee options in each of the reported periods, other than the expected life, which is assumed to be the remaining contractual life of the option. The compensation costs of these arrangements are subject to re-measurement over the vesting terms as earned.

 

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From inception to September 30, 2015, we had issued options to our consultants to purchase an aggregate of 106,573 shares of our common stock under the Plans. Of these, 73,985 options were forfeited or exercised, and 32,588 options remain outstanding as of September 30, 2015. The exercise prices of the outstanding options, as determined by our board of directors, range from $0.72 to $1.14 per share. These outstanding options, with the exception of an option to purchase an aggregate of 7,271 shares granted to a consultant, vest 25% upon the first anniversary of the vesting commencement date with the remaining options vesting monthly in equal amounts over 36 months. In March 2011, we granted an option to a consultant to purchase an aggregate of 7,271 shares with an exercise price of $1.00 which vests 25% on the date of grant with the remaining options vesting monthly in equal amounts over 36 months. We recognized stock based compensation expense for these services of approximately $700 and $1,000 for the nine months ended September 30, 2015 and 2014, respectively, within research and development expense.

 

Option Valuation

 

We calculate the fair value of stock-based compensation awards granted to employees and nonemployees using the Black-Scholes option-pricing method. If we determine that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by regulators, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected lives would result in an increase to stock-based compensation expense to non-employees determined at the date of grant. Stock-based compensation expense to non-employees affects our general and administrative expenses and research and development expenses.

 

The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, which determine the fair value of stock-based awards. The assumptions used in the Black-Scholes option-pricing method for the nine months ended September 30, 2015 and 2014 are set forth below:

 

   Nine months ended September 30, 
   2015   2014 
Expected dividend yield   0.00    0.00 
Expected stock-price volatility   51.45% - 67.08%   55.32% - 64.24%
Risk-free interest rate   0.77% - 2.07%   0.94% - 3.04%
Expected term of options   10    10 
Stock price  $5.86   $1.17 - $5.86 

 

  Expected dividend. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock.
     
  Expected volatility. As our common stock only recently became publicly traded, the expected volatility is derived from the average historical volatilities of publicly traded companies within our industry that we consider to be comparable to our business over a period approximately equal to the expected term.
     
  Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term.
     
  Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. Our historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore we estimate the expected term by using the simplified method provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options.

 

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

 

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Significant factors, assumptions and methodologies used in determining the estimated fair value of the Company’s common stock

 

We are also required to estimate the fair value of the common stock underlying our stock-based awards when performing the fair value calculations using the Black-Scholes option-pricing model. Our Board of Directors, with the assistance of management, determined the fair value of our common stock on each grant date. Option grants are based on the estimated fair value of our common stock on the date of grant, which is determined by taking into account several factors, including the following:

 

  the prices at which we sold our convertible preferred stock and the rights, preferences, and privileges of the convertible preferred stock relative to those of our common stock, including the liquidation preferences of the convertible preferred stock;
     
  important developments in our operations;
     
  our actual operating results and financial performance;
     
  conditions in our industry and the economy in general;
     
  stock price performance of comparable public companies;
     
  the estimated likelihood of achieving a liquidity event, such as an IPO or an acquisition, given prevailing market conditions; and
     
  the illiquidity of the common stock underlying stock options.

 

The table below presents the prices received from sales to third parties of our common stock and various classes of our preferred stock from inception to date:

 

Year  Share Class  Price per Share 
2005  Common Stock(a)   $1.79 
2006  Series A-2 Preferred Stock(a)(b)   $0.40 
2008 – 2009  Series A-3 Preferred Stock(b)   $0.62 
2010 – 2013  Series B Preferred Stock(b)   $1.19 
2014  Series C Preferred Stock(b)   $1.30 

 

 

(a) After giving effect to our conversion from an LLC to a corporation.
   
(b) Each share of preferred stock is convertible into shares of our common stock on a 7.15-for-1 basis, after giving effect to the reverse stock split effected June 17, 2015.

 

For options issued from inception to November 7, 2013, in determining the estimated fair value of our common stock, our Board of Directors, with the assistance of management, used the market approach to estimate the enterprise value of the Company in accordance with the American Institute of Certified Public Accountants (“AICPA”) Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation (the “AICPA Guide”) for the three valuation dates of November 7, 2013, July 31, 2012, and December 31, 2010. The Market Approach is one of the three approaches (along with the Income Approach and Asset Approach) used to estimate enterprise and equity value. The market approach employs analysis using comparable companies in determining the value of the entity. Both public and private companies, if publicly available information exists, are considered in the market approach. Two information points commonly available – company valuation and transaction value — are used for their respective methodologies. There are a number of different methods within the Market Approach that may be used: the three main methods utilized are: the Guideline Pubic Companies Method; the Guideline Transactions Method; and the Backsolve Method.

 

Given the early stage of our company, the Backsolve Method was used to estimate the fair value of our securities. This method derives an implied market value of invested capital from a transaction involving a company’s own securities. The price of a company’s security that was involved in a recent arms-length transaction is used as a reference point in an allocation of value. We first raised additional capital through the sales of our LLC units. These units later converted into common shares and preferred shares upon our conversion to a corporation. Subsequent to our corporation conversion, we raised additional capital through the sales of our Series A-1, Series A-2, Series A-3, Series B, and Series C preferred shares at the price of  $0.07, $0.40, $0.62, $1.19, and $1.30, respectively.

 

We valued LLC units and common stock (after converting to a corporation) from inception through 2009 by reference to our sales of units and/or common stock and preferred stock over the period. Beginning in 2010, we valued our common stock using the Backsolve Method. The Backsolve Method requires considering the rights and preferences of each class of equity and solving for the total market value of invested capital that is consistent with a recent transaction in our own securities, considering the rights and preferences of each class of equity. However, our management has decided that the liquidation preferences between our preferred shares and common shares are immaterial for a pre-revenue company.

 

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Per the AICPA Guide, the Backsolve Method is generally the most reliable indicator of value of early-stage enterprises with no product revenue or cash flow, if relevant and reliable transactions have occurred in the company’s equity securities. This methodology is also prescribed by the AICPA when a valuation is conducted in close proximity to the date of a financing transaction, and when other methodologies are deemed less reliable.

 

The stage of development of our compound was reflected in our selection of the term and volatility estimates used in the analysis. The estimate of the term considers our existing cash runway and the time to the next potential financing or liquidity event, while the volatility estimate reflects the relative riskiness of our equity securities (or asset base) relative to the general stock market.

 

Our management estimated the implied market value of invested capital of our company by backsolving for the purchase price of our preferred shares for one common share through the option-pricing method. The premise of this method is that the transaction implied a market price for a share which in turn implied values for the other classes of equity based on relative claims on equity value, such as liquidation preferences and conversion rights. The application of the backsolve method considering our capital structure yielded a total market value of invested capital of approximately $15.5 million, $14.4 million, and $8.9 million, of which approximately $819,000, $870,000, and $670,000 were allocated to the total value of common stock as of our three valuation dates of November 7, 2013, July 31, 2012, and December 31, 2010, respectively.

 

On the three valuation dates of November 7, 2013, July 31, 2012, and December 31, 2010, after estimating the market value of invested capital, we allocated it to the various equity classes comprising our capitalization table. This process ultimately results in creating a final estimate of value for our underlying equity interests. While there are many different value allocation methods, these various methods can be grouped into three general categories as defined by the AICPA Guide, one of which is the Option-Pricing Method (OPM).

 

We used the OPM to allocate market value of invested capital to the various equity classes and debt comprising our capitalization structure. We chose the OPM over other acceptable methods due to the complex capital structure of our company, the uncertainty related to market conditions, and the lack of visibility on an imminent exit event. Under the OPM, each equity class is modeled as a call option with a distinct claim on the equity of our company. The option’s exercise price is based on our company’s total equity value available for each participating equity holder. The characteristics of each equity class determine the equity class’ claim on the total equity value. By constructing a series of options in which the exercise price is set at incremental levels of value, which correspond to the equity value necessary for each level of equity to participate, we determined the incremental option value of each series. When multiplied by the percentage of ownership of each equity class participating under that series, the result is the incremental value allocated to each class under that series.

 

The OPM relies on the Black-Scholes option-pricing model to value the call options on our invested capital. The following inputs were applied in the Black-Scholes calculations of the OPM:

 

   Valuation Date 
   November 7, 2013   July 31, 2012   December 31, 2010 
Risk-free rate   0.55%   0.57%   2.01%
Maturity (years)   3.00    4.00    5.00 
Volatility   58.00%   61.00%   61.00%

 

Discounts ranging from 35.8% to 40% were applied for lack of control and lack of marketability for the common stock. The calculation resulted in a fair value for the common stock of  $1.17, $1.19, and $1.03 per share as of our three valuation dates of November 7, 2013, July 31, 2012, and December 31, 2010, respectively.

 

For options issued in 2014, given our distinct possible exit scenarios of an initial public offering, we used the probability weighted expected return method (PWERM) to estimate the fair value of our common equity. Under this method, an analysis of future values of a company is performed for several likely liquidity scenarios. The value of the common stock is determined for each scenario at the time of each future liquidity event and discounted back to the present using a risk-adjusted discount rate. The present values of the common stock under each scenario are then weighted based on the probability of each scenario occurring to determine the value for the common stock. Our management determined the probability weighting of potential liquidity events to be 45% for an initial public offering and 55% for other scenarios, which represents all other likely outcomes for our company.

 

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Management estimated the implied market value of invested capital of our company by backsolving for the purchase price of our preferred shares for one common share through the use of OPM. The application of the backsolve method considering our capital structure yielded a total market value of invested capital of approximately $25.2 million, of which approximately $1.4 million was allocated to the total value of common stock as of our valuation date of October 31, 2014.

 

Given the lack of marketability for the common stock, we applied a discount of 21.4% for using the average strike put option approach. This resulted in a probability weighted common share value, after adjustment, of  $5.86 per share as of valuation date of October 31, 2014.

 

Stock-based Compensation Summary Tables

 

Information regarding our stock option grants to our employees and non-employees, along with the estimated fair value per share of the underlying common stock, for stock options granted since 2005 is summarized as follows:

 

Grant Date  Number of Common
Shares Underlying
Options Granted
   Exercise Price
per Common Share
   Estimated Fair Value
per Share of
Common Stock
  

Intrinsic Value
Option

 
2005   58,321   $0.07   $1.79   $1.72 
2009   60,559   $0.72 – $0.79   $4.43   $3.71 – $3.64 
2011   33,846   $1.00   $1.00   $0.00 
2012   60,019   $1.14   $1.14   $0.00 
2013   100,000   $1.14 – $1.30   $1.14   $0.00 
2014   1,626,740   $5.86 – $13.23   $5.86   $0.00 

 

The following represents a summary of the options granted to employees and non-employees outstanding at September 30, 2015 and changes during the period then ended:

 

   Options   Weighted Average Exercise Price 
Outstanding at December 31, 2014   1,952,516   $7.022 
Granted        
Exercised/Expired/Forfeited   (47,281)   (1.249)
Outstanding at September 30, 2015   1,905,235   $7.165 
Exercisable at September 30, 2015   584,960   $5.202 
Expected to be vested   1,320,275   $8.034 

 

JOBS Act

 

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

 

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

 

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Results of Operations

 

Comparison of the Nine Months Ended September 30, 2015 and 2014

 

The following table summarizes our results of operations for the nine months ended September 30, 2015 and 2014, together with the changes in those items in dollars and as a percentage:

 

   For the Nine Months Ended
September 30,
   Dollar   Percentage 
   2015   2014   Change   Change 
Statement of Operations Data:                    
Operating costs and expenses                    
Research and development  $1,584,086   $69,161   $1,514,925    2,190%
Patent costs   160,033    94,055    65,978    70%
General and administrative   4,860,676    763,388    4,097,288    537%
Total operating costs and expenses   6,604,795    926,604    5,678,191    613%
Loss from operations   (6,604,795)   (926,604)   (5,678,191)   613%
Other income (expense)                    
Interest income (expense), net   23,157    (17,210)   40,367    235%
Other income   16,682        16,682      
Total other income (expense)   39,839    (17,210)   57,049    331%
Net Loss  $(6,564,956)  $(943,814)  $(5,621,142)   596%

 

Research and Development Expenses

 

Research and development expenses were approximately $1.6 million and $70,000 for the nine months ended September 30, 2015 and 2014, respectively. The increase in research and development expenses of approximately $1.5 million, or 2,190%, primarily reflects our manufacturing ramp-up costs to prepare product for clinical trials.

 

Patent Costs

 

Patent costs were approximately in $160,000 and $94,000 for the nine months ended September 30, 2015 and 2014, respectively, representing an increase of $66,000, or 70%. This increase was primarily due to our transition to a new service provider.

 

General and Administrative Expenses

 

General and administrative expenses were approximately $4.9 million and $800,000 for the nine months ended September 30, 2015 and 2014, respectively. The increase in general and administrative expenses is $4.1 million, or 537%. This increase in general and administrative expenses was primarily due to the increase in stock based compensation related to the options granted to our executives and employees in December 2014, increase in headcount and in salary for our officers in 2015, and the increase in expenses related to the closing of our initial public offering.

 

Other Income

 

The increase in net interest income was approximately $40,000, or 235%. Net interest income for the nine months ended September 30, 2015 was approximately $23,000, which was primarily a result of increased cash resulting from the net proceeds of our initial public offering. Net interest expense for the nine months ended September 30, 2014 was approximately $17,000, which primarily represented interest costs associated with our outstanding promissory notes.

 

Other income was $16,682 and $0 for the nine months ended September 30, 2015 and 2014, respectively. The increase of $16,682 was a result of a gain on the settlement of accounts payable.

 

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Comparison of the Year Ended December 31, 2014 and the Year Ended December 31, 2013

 

The following table summarizes our results of operations for the years ended December 31, 2014 and 2013, together with the changes in those items in dollars and as a percentage:

 

   For the Year Ended
December 31,
   Dollar   Percentage 
   2014   2013   Change   Change 
Statement of Operations Data:                    
Operating costs and expenses                    
Research and development  $113,931   $461,551   $(347,620)   (75)%
Patent costs   197,731    292,358    (94,627)   (32)%
General and administrative   1,969,960    1,356,888    613,072    45%
Total operating expenses   2,281,622    2,110,797    170,825    8%
Loss from operations   (2,281,622)   (2,110,797)   (170,825)   8%
Other expense (income):                    
Interest income   (525)   (1,677)   1,152    (69)%
Interest expense   213,516    6,076    207,440    3,414%
Other income   (21,148)   (19,365)   (1,783)   9%
Total other expense (income)   191,843    (14,966)   206,809    (1,382)%
Net Loss  $(2,473,465)  $(2,095,831)  $(377,634)   18%

 

Research and Development Expenses

 

Research and development expenses were approximately $114,000 and $462,000 for the years ended December 31, 2014 and 2013, respectively. The decrease in research and development expenses of approximately $348,000, or 75%, primarily reflects our preparation work for our Type C meeting with the FDA in 2013, including the assistance of clinical, medical and biostatistician consultants in data analyses. This work was largely completed in 2013, and therefore the observed decrease in research and development expense reflects the discontinuation of their services.

 

Patent Costs

 

Patent costs were approximately in $198,000 and $292,000 for the years ended December 31, 2014 and 2013, respectively, representing a decrease of  $95,000, or 32%. This decrease was primarily due to Patent Cooperation Treaty, or PCT, filings, which took place in 2013. We incurred no significant PCT costs in 2014.

 

General and Administrative Expenses

 

General and administrative expenses were approximately $2.0 million and $1.4 million for the years ended December 31, 2014 and 2013, respectively. The increase in general and administrative expenses is $613,000 or 45%. This increase in general and administrative expenses was primarily due to the salary for our new Chief Executive Officer starting in October 2014, and the increase in stock based compensation related to the options granted to our executives and employees in 2014, partially offset by a reduction in our staffing of independent contractors and public relations effort in 2014.

 

Other Income (Expense)

 

Interest expense, net of interest income was approximately $213,000 and $4,000 for the years ended December 31, 2014 and 2013, respectively. The increase of approximately $209,000 in net interest expense was primarily a result of a non-cash charge of approximately $184,000 related to the conversion of convertible promissory notes in December 2014 and interest costs associated with convertible promissory notes used to finance our operations in 2014.

 

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Liquidity and Capital Resources

 

Sources of Liquidity

 

Since our inception, we have incurred net losses and negative cash flows from operations, and, as of September 30, 2015, we had an accumulated deficit of approximately $24.9 million. Substantially all our net losses resulted from costs incurred in connection with our research and development programs, stock-based compensation, and from general and administrative costs associated with our operations.

 

At September 30, 2015, after consummation of our initial public offering, we had working capital of $15.4 million, and cash of $16.2 million. We have not generated any product revenues and have not achieved profitable operations.

 

Cash Flows

 

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

 

   For the Year Ended
December 31,
   For the Nine Months Ended
September 30,
 
   2014   2013   2015   2014 
Net cash used in:                    
Operating activities  $(1,157,385)  $(1,956,914)  $(4,302,569)  $(886,543)
Investing activities   (1,166)   (8,692)   (10,100)   (1,166)
Financing activities   3,457,573)   643,995)   17,810,162    439,483 
Net decrease in cash  $2,299,022   $(1,321,611)  $13,497,493   $(448,226)

 

Operating Activities

 

Net cash used in operating activities of approximately $4.3 million during the nine months ended September 30, 2015 was primarily a result of our net loss of approximately $6.6 million, offset by stock based compensation of approximately $2.4 million and an increase in prepaid and other assets of approximately $251,000 and a decrease in accounts payable and accrued expenses of approximately $343,000.

 

Net cash used in operating activities of approximately $887,000 during the nine months ended September 30, 2014 was primarily a result of our net loss of approximately $944,000 and an increase of approximately $50,000 in prepaid and other assets, offset by an increase in accounts payable and accrued expenses of approximately $95,000.

 

Net cash used in operating activities of approximately $1.2 million during the year ended December 31, 2014 was primarily a result of our net loss of approximately $2.5 million offset by stock based compensation of approximately $707,000 and a non-cash charge of approximately $184,000 to interest expense related to the conversion of convertible promissory notes and an increase of approximately $249,000 in accounts payable and an increase in accrued expenses of approximately $160,000.

 

Net cash used in operating activities of approximately $2.0 million during the year ended December 31, 2013 was primarily a result of our net loss of approximately $2.1 million, offset by an increase of approximately $120,000 in accounts payable.

 

Investing Activities

 

Net cash used in investing activities of approximately $10,000 during the nine months ended September 30, 2015 was primarily a result of our purchasing office furniture and equipment.

 

Net cash used in investing activities of approximately $1,000 during the year ended December 31, 2014 primarily reflected our use of cash to purchase equipment, offset partially by our proceeds from the disposal of property and equipment. Net cash used in investing activities during the year ended December 31, 2013 of approximately $9,000 primarily reflected our use of cash to purchase equipment.

 

Financing Activities

 

Net cash provided by financing activities of approximately $17.8 million during the nine months ended September 30, 2015 resulted from net proceeds received upon closing of our initial public offering, selling 4,000,000 shares of our common stock offset partially by commissions and issuance costs of approximately $2.2 million.

 

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Net cash provided by financing activities during the nine months ended September 30, 2014 of $455,000 resulted from proceeds borrowed under notes payable, partially offset by repayment of a note payable of $27,000.

 

Net cash provided by financing activities of approximately $3.5 million in the year ended December 31, 2014 mainly resulted from approximately $3.0 million in net proceeds received on sales of preferred stock subject to redemption and warrants to purchase common stock and approximately $605,000 in net proceeds from the sale of convertible notes offset partially by deferred offering costs of approximately $143,000.

 

Net cash provided by financing activities in the year ended December 31, 2013 of approximately $644,000 resulted from net proceeds from the issuance of shares of Series B preferred stock and issuance of a prepaid forward sale contract on shares of Series B preferred stock.

 

Future Funding Requirements

 

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

 

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

 

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

 

  the progress, costs, results of and timing of implementing a Phase 2b/3 clinical trials for the reduction of symptoms associated with lactose intolerance in patients;
     
  the willingness of the EMA or other regulatory agencies outside the United States to accept our Phase 2b/3 and any Phase 3 trials of RP-G28, as well as our other completed and planned clinical and nonclinical studies and other work, as the basis for review and approval of RP-G28 in the European Union for the reduction of symptoms associated with lactose intolerance in patients;
     
  the outcome, costs and timing of seeking and obtaining FDA, EMA and any other regulatory approvals;
     
  the number and characteristics of product candidates that we pursue, including our product candidates in preclinical development;
     
  the ability of our product candidates to progress through clinical development successfully;
     
  our need to expand our research and development activities;
     
  the costs associated with securing and establishing commercialization and manufacturing capabilities;
     
  market acceptance of our product candidates;
     
  the costs of acquiring, licensing or investing in businesses, products, product candidates and technologies;
     
  our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;

 

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

 

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

 

Contractual Obligations and Commitments

 

Lease Agreement

 

Until September 30, 2015, we leased office and storage space for our headquarters in California pursuant to a two-year agreement which called for a minimum monthly rent of approximately $5,000 and an annual increase of 3%. Rent expense, recognized on a straight-line basis, was approximately $45,000 in each of the nine months ended September 30, 2015 and 2014 and approximately $60,000 and $79,000 for each of the years ended December 31, 2015 and 2014, respectively. Rent expense is recorded in salaries, general and administrative expenses in the Unaudited Condensed Statements of Operations.

 

On July 9, 2015, we entered into a new lease with Century Park, pursuant to which we are leasing approximately 2,780 square feet of office space in Los Angeles, California for our headquarters. The lease provides for a term of sixty-one (61) months, which commenced October 1, 2015. We paid no rent for the first month of the term and will pay base rent of $9,174 per month for months 2 through 13 of the term, with increasing base rent for each twelve month period thereafter under the term of the lease to a maximum of $10,325 per month for months 50 through 61. We have the option to extend the term of the lease for one five-year term, provided that the rent would be subject to market adjustment at the beginning of the renewal term.

 

Employment Agreements

 

Michael Step

 

On December 2, 2014, Michael Step accepted an offer letter from us setting forth the terms of his employment as Chief Executive Officer. The offer letter provides that Michael Step is entitled to an annual base salary of $360,000 and a total of three grants of options to purchase our common stock.

 

The first two options entitle Michael Step to purchase 646,537 and 73,777 of our shares, respectively, for an exercise price of $5.86 per share. Each of these options was immediately exercisable in full as of the date of the grant, with 44/48ths of the total number of shares covered by each option subject to a right of repurchase by us upon termination of Michael Step’s employment with us for any reason. This right of repurchase lapses over a period of 44 months, with 1/44th of the total number of shares subject to the right of repurchase lapsing on January 1, 2015 and on the first day of each month thereafter. In addition, the right of repurchase will lapse in its entirety upon a termination of the employment under certain circumstances.

 

The third option became exercisable upon the closing of our initial public offering on June 29, 2015. The option is for a total of 163,799 shares of our common stock, which, together with the shares subject to the first option, represents 7.5% of the shares of common stock deemed to be outstanding at June 29, 2015 on a fully-diluted basis after giving effect to the number of shares subject to the third option. Seventy-five percent (75%) of the shares subject to the third option are subject to a right of repurchase by us upon termination of Michael Step’s employment for any reason. This right of repurchase lapses with respect to 1/36th of the total number of shares subject to the right of repurchase on the first day of each month following the date on which the third option became exercisable. In addition, the right of repurchase will lapse in its entirety upon Michael Step’s termination of employment under certain circumstances.

 

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Additionally, under the terms of his Executive Severance and Change in Control Agreement, also effective on December 2, 2014, Michael Step is entitled to receive certain payments in the event his employment is terminated under certain scenarios.

 

Andrew Ritter and Ira Ritter

 

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

 

Their respective offer letters provide that that Andrew Ritter is entitled to an annual base salary of $310,000 and Ira Ritter is entitled to an annual base salary of $295,000. In accordance with his offer letter, Andrew Ritter also became entitled to receive up to $180,000 payable over a three-year period for tuition reimbursement. As of September 30, 2015, we paid an aggregate of $60,000 and accrued $92,500 in tuition reimbursement for Andrew Ritter and recognized such amount in general and administrative expenses in the accompanying Unaudited Condensed Statements of Operations in the three and nine month periods ending September 30, 2015.

 

Additionally, under the terms of their Executive Severance and Change in Control Agreements, also effective on June 29, 2015, Andrew Ritter and Ira Ritter are entitled to receive certain payments in the event their employment is terminated under certain scenarios.

 

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

 

Pursuant to the Compensation Plan, as in effect prior to entering into their offer letters, Andrew Ritter and Ira Ritter had bonus opportunities to, upon the satisfaction of the events described below, each potentially receive the following cash payments and each potentially receive the following options to purchase up to 48,951 shares of our common stock, or the Executive Options:

 

  FDA Meeting Bonus Opportunities. Each executive was entitled to receive, and in April 2013 each executive received, a one-time cash bonus of $10,000 for a milestone associated with meeting with the FDA regarding RP-G28’s path to FDA approval. In addition, upon satisfaction of this milestone, the executives became entitled to 3,496 of the Executive Options. 2,360 shares of the Executive Options vested and became exercisable as of the grant date of September 25, 2013, with the balance of the 1,136 shares vesting ratably in 36 equal monthly installment beginning on September 30, 2013.
     
  Clinical Trial Funding Commitment Bonus Opportunities. Each executive was entitled to receive a one-time cash bonus of  $75,000 upon our receipt of a commitment by a third party to fund a Phase 2 or later clinical trial; provided, however, that no such bonus would be paid at any time we had less than $2,000,000 in available cash. In addition, upon the satisfaction of this milestone, 35% of 10,489 shares of the Executive Options would vest and become exercisable, with the balance of the 10,489 shares vesting in 36 equal monthly installments beginning on the last day of the following month. The Board of Directors determined that this milestone was satisfied; accordingly, each executive received a bonus of $75,000, which has been recognized in general and administrative expenses in the accompanying Unaudited Condensed Statements of Operations in the nine month periods ending September 30, 2015. In addition, 3,671 shares of the Executive Options vested and became exercisable as of June 29, 2015, with the balance of 6,818 shares vesting ratably on a monthly basis beginning July 31, 2015.
     
  Fundraising Bonus Opportunities. Each executive was entitled to receive (i) a one-time cash bonus of  $50,000 upon the sale of additional equity capital for cash, in one or more closings after July 17, 2012, and/or the actual deployment of funds by a third party for a clinical trial in an aggregate amount in excess of  $2,000,000 and (ii) a one-time cash bonus of  $150,000 upon the sale of additional equity capital for cash, in one or more closings after July 17, 2012 and/or the actual deployment of funds by a third party for a clinical trial in an aggregate amount in excess of $10,000,000 (which such bonus would be reduced by any cash bonus paid under subsection (i)); provided, however, that no bonus under subsection (i) or (ii) would be paid at any time we had less than $2,000,000 in available cash. In addition, upon the satisfaction of the milestone described in subsection (i), 35% of 6,993 shares of the Executive Options would vest and become exercisable, with the balance of the 6,993 shares vesting in 36 equal monthly installments beginning on the last day of the following month, and, upon satisfaction of the milestone described in subsection (ii), 35% of 13,986 shares of the Executive Options would vest and become exercisable, with the balance of the 13,986 shares vesting in 36 monthly installments beginning on the last day of the following month. The Board of Directors determined that this milestone as described in subsection (ii) above was satisfied upon the closing of our initial public offering on June 29, 2015 raising approximately $17.4 million, net of offering costs; accordingly, each executive received a bonus of $150,000 which has been recognized in general and administrative expenses in the accompanying Unaudited Condensed Statements of Operations in the nine month periods ending September 30, 2015. In addition, 4,895 shares of the Executive Options vested and became exercisable as of June 29, 2015, with the balance of 9,091 shares vesting ratably on a monthly basis beginning July 31, 2015.

 

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  License Event Bonus Opportunities. Each executive was entitled to receive the following bonus payments in connection with the closing of an exclusive license of RP-G28 and/or any future product candidate developed by the Company from time to time during the term of the Compensation Plan by and/or any option to exclusively license such product candidate to a third party (referred to under the Compensation Plan as a “License Event”) with a minimum upfront payment to the Company of  $2,000,000:

 

  A graduated cash bonus equal to (i) 5% of the Initial Period License Payment (as defined in the Compensation Plan) up to $5,000,000; (ii) 4% of the Initial Period License Payment in excess of $5,000,000 up to $10,000,000; and (iii) 3% of the Initial Period License Payment in excess of $10,000,000. In addition, upon our receipt of an Initial Period License Payment of more than $2,000,000, 35% of 45,454 shares of their Executive Options will vest and become exercisable, with the balance of the 45,454 shares vesting in 36 monthly installments beginning on the last day of the following month.
     
  A cash bonus equal to 3% of any Annual Excess Milestone Payments (as defined in the Compensation Plan); provided, however that no such bonus may be paid at any time the Company has less than $1,000,000 in available cash. In addition, upon our receipt of an Annual Excess Milestone Payment, 35% of 6,993 shares of their Executive Options will vest and become exercisable, with the balance of the 6,993 shares vesting in 36 monthly installments beginning on the last day of the following month.

 

As of September 30, 2015, 27,972 of the maximum 48,951 Executive Options potentially issuable to each executive had been issued to each executive subject to the vesting conditions described above.

 

Research and Development Arrangements

 

Clinical Supply and Cooperation Agreement with Ricerche Sperimentali Montale and Inalco SpA

 

Effective July 24, 2015, we entered into a second amendment to the Clinical Supply and Cooperation Agreement, or the Supply Agreement, with Ricerche Sperimentali Montale SpA, or RSM, and Inalco SpA, or Inalco, dated December 16, 2009, and amended September 25, 2010.

 

Under the Supply Agreement, RSM granted us an exclusive worldwide option in a specified field and territory to assignment of all right, title and interest to a purified Galacto-oligosaccharides product, or Improved GOS, the composition of matter of the Improved GOS and any information relating to the Improved GOS, including certain specified technical information and other intellectual property rights, or the Improved GOS IP. Pursuant to the second amendment to the Supply Agreement, we could exercise the option by paying RSM $800,000 within ten days after the effective date of the amendment. We exercised the option on July 30, 2015 and RSM transferred the Improved GOS IP to us. Under the terms of the Supply Agreement, if a further option payment due in the future is not made, we may be required to return the Improved GOS IP to RSM.

 

The second amendment to the Supply Agreement also provides that we must pay RSM $400,000 within 10 days following FDA approval of a new drug application for the first product owned or controlled by us using Improved GOS as its active pharmaceutical ingredient. In addition, we agreed to purchase 350 kilos of Improved GOS for the sum of $250 per kilo for clinical supply of Improved GOS instead of $2,000 per kilo as under the Supply Agreement.

 

Under the terms of, and in consideration for RSM entering into, the second amendment to the Supply Agreement, we were to issue 100,000 shares of our common stock, or the RSM Shares, to RSM. The RSM Shares were issued pursuant to a stock purchase agreement, dated as of November 30, 2015. The stock purchase agreement includes a lock-up agreement by RSM in favor of us pursuant to which RSM will not be able to sell the RSM Shares for a period ending on the earlier of (i) the public release by us of the final results of our Phase 2b/3 clinical trial of RP-G28 and (ii) the filing of our Form 10-Q with the Securities and Exchange Commission for the fiscal quarter in which we receive the results of our Phase 2b/3 clinical trial of RP-G28.

 

We recognized the agreement for 100,000 shares issuance to RSM as a fully prepaid forward sale contract on our common stock. The fully prepaid forward sale contract is a hybrid instrument comprising (1) a debt host instrument and (2) an embedded forward sale contract, requiring us to issue 100,000 shares of our common stock for no further consideration. Fair value of these shares as of effective date of the agreement totaling $416,000 was recognized in stockholders’ equity in the Condensed Balance Sheet as of September 30, 2015.

 

Master Service Agreement with Covance Inc.

 

On December 30, 2015, we entered into a Master Service Agreement with Covance Inc., or Covance, with an effective date of December 29, 2015. Pursuant to the terms of the Master Service Agreement, Covance (or one or more of its affiliates) will provide Phase I/II/II/IV clinical services for a clinical study or studies to us, and, at our request, assist us with the design of such studies, in accordance with the terms of separate individual project agreements to be entered into by the parties. The term of the agreement is for three years and will renew automatically for successive one year periods unless Covance is no longer providing services under the agreement or either party has terminated the agreement upon written notice. 

 

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Off-Balance Sheet Arrangements

 

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

 

Recent Accounting Pronouncements

 

In June 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. This ASU removes the definition of a development stage entity from the ASC, thereby removing the financial reporting distinction between development stage entities and other reporting entities from U.S. GAAP. In addition, the ASU eliminates the requirements for development stage entities to (1) present inception-to-date information in the statements of operations, cash flows, and stockholders’ equity, (2) label the financial statements as those of a development stage entity, (3) disclose a description of the development stage activities in which the entity is engaged, and (4) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage. In addition, ASU 2014-10 requires an entity that has not commenced principal operations to provide disclosures about the risks and uncertainties related to the activities in which the entity is currently engaged and an understanding of what those activities are being directed toward. This ASU is effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. Early adoption is permitted. The Company has elected to adopt this ASU and its adoption resulted in the removal of previously required development stage disclosures. Adoption of this ASU enabled the Company to eliminate the cumulative statements of operations and statements of cash flows information, which did not impact the Company’s financial position, operations, or cash flows.

 

In August 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40) — Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which provides guidance regarding management’s responsibility to assess whether substantial doubt exists regarding the ability to continue as a going concern and requires related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). This ASU is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Management is currently evaluating the new guidance and has not determined the impact this standard may have on our financial statements.

 

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BUSINESS

 

Our Business

 

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

 

Our first novel microbiome modulator, RP-G28, an orally administered, high purity galacto-oligosaccharide, is currently under development for the reduction of symptoms associated with lactose intolerance. RP-G28 is designed to stimulate the growth of lactose-metabolizing bacteria in the colon, thereby effectively adapting the gut microbiome to assist in digesting the lactose that reaches the large intestine. RP-G28 has the potential to become the first FDA-approved drug for the reduction of symptoms associated with lactose intolerance. RP-G28 has been studied in a Phase 2a clinical trial and is a first-in-class compound.

 

The Gut Microbiome

 

The human gut is a relatively under-explored ecosystem but provides a great opportunity for using dietary intervention strategies to reduce the impact of gastrointestinal disease. The human body carries about 100 trillion microorganisms in the intestines, which is 10 times greater than the number of cells in the human body. This microbial population is responsible for a number of beneficial activities such as fermentation, strengthening the immune system, preventing growth of pathogenic bacteria, providing nutrients, and providing hormones. Recent major initiatives such as the Human Microbiome Project (HMP) by the National Institutes of Health have further validated the significance of the microbial population that exists in our bodies. Publications on the gut microbiome have increased from less than 50 papers annually in 2004 to more than 1,300 today [PubMed Search “Gut Microbiome” (2013)]. The increasing knowledge of how these microbial populations impact human health provides opportunities for novel therapies to treat an assortment of diseases such as neurological disease, cardiovascular disease, obesity, irritable bowel syndrome, inflammatory bowel disease, colon cancer, allergies, autism and depression.

 

Platform Approach

 

Our platform is based on selectively colonizing microbiota (increasing beneficial bacteria) in the colon, and thus changing the colon’s composition of microbiota. The process has been shown to stimulate the growth of endogenous bifidobacteria, which after a short feeding period become predominant in the colon [Gibson. Dietary Modulation of the Human Colonie Microbiota: Introducing the Concept of Prebiotics. J. Nutr. 125: 1401-1412, 1995]. The result is believed to reduce inflammation and improve digestion, thereby potentially reducing digestive symptoms.

 

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

 

Lactose Intolerance

 

Lactose intolerance is a widespread condition affecting over one billion people worldwide and over 40 million people in the United States (or 15% of the U.S. population), with an estimated nine million of those individuals demonstrating moderate to severe symptoms [NIH Consensus Statement, LIH, Vol. 27, #2 (February 2010); Objective Insights, “Market Research Analysis and Forecasts on Lactose Intolerance and RP-G28,” p. 4 and 7 (June 2012)].

 

Current annual spending on over-the-counter lactose intolerance aids in the United States has been estimated at approximately $2.45 billion [Zpryme Research & Consulting, “The Digestive Health Prescription Drug Market,” (May 2009)]. However, these options are limited and there is no long-term treatment available.

 

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

 

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In lactose maldigesters, unhydrolyzed lactose passes into the large intestine, where it is fermented by the indigenous microflora into gases and short chain fatty acids. The excessive gas production and the osmotic effects of excessive undigested lactose cause the symptoms of lactose intolerance [Jiang T, Mastapha A, Savaiano DA, Improvement of lactose digestion in humans by ingestion of unfermented milk containing Biofidobacterium longum, J Dairy Sci. 1996; 79:750-757]. Symptoms begin about 30 minutes to two hours after eating or drinking foods containing lactose. The severity of symptoms depends on many factors, including the amount of lactose a person can tolerate and a person’s age, ethnicity, and digestion rate [Lomer MC, Parkes GC, Sanderson JD, Review article: lactose intolerance in clinical practice — myths and realities, Aliment Pharmacol Ther. 2008; 27(2):93-103; National Digestive Diseases Information Clearinghouse (NDDIC), Lactose intolerance, http://digestive.niddk.nih.gov/ddiseases/pubs/lactoseintolerance/]. The symptoms of lactose intolerance are caused by gases and toxins produced by anaerobic bacteria in the large intestine. The problem of lactose intolerance has been exacerbated because many foods and drinks contain traces of lactose without lactose being clearly stated on the product’s label [Jiang T, Mastapha A, Savaiano DA, Improvement of lactose digestion in humans by ingestion of unfermented milk containing Biofidobacterium longum, J Dairy Sci. 1996; 79:750-757]. According to the American Academy of Pediatrics Committee on Nutrition (2006), “the symptoms of lactose intolerance can lead to significant discomfort, disruption of the quality of life, and loss of school attendance, leisure and sports activities, and work time, all at a cost to individuals, families and society.”

 

Diagnosis

 

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

 

Health Consequences

 

Substantial evidence indicates that lactose intolerance is a major factor in limiting calcium intake in the diet of individuals who are lactose intolerant. These individuals avoid milk and dairy products, resulting in an inadequate intake of calcium and significant nutritional and health risks [Alaimo K., McDowell M.A., Briefel R.R., et al., Dietary intake of vitamins, minerals, and fiber of persons ages 2 months and over in the United States: Third National Health and Nutrition Examination Survey, Phase 1, 1988-91, Adv. Data, 1994;(258):1-28; and Kranz S., Lin P.J., Wagstaff D.A., Children’s dairy intake in the United States: too little, too fat?, J Pediatr. 2007; 151(6):642-6.]

 

Dairy foods account for 73% of the calcium available in the U.S. food supply and 51% of the total intake [Gerrior S, Bente L., Nutrient content of the U.S. food supply, 1909-94, Washington DC: U.S. Department of Agriculture, Center for Nutrition Policy and Promotion; 1997, Home Economics Research Report No. 53; and Weinberg L.G., Berber L.A., Groves J.E., Nutrient contributions of dairy foods in the United States, Continuing Survey of Food Intakes by Individuals, 1994-1996, 1998., J Am Diet Assoc., 2004; 104(6):895-902.]

 

Research shows that lactose intolerant individuals have a higher prevalence and risk for osteoporosis, hypertension, decreased bone mineral density and several cancers, including colon and breast cancer from the lack of milk consumption [McCarron D.A., Heaney, R.P., Estimated healthcare savings associated with adequate dairy food intake, Am J Hypertens. 2004; 17 (1):88-97; Szilagyi A, Nathwani U, Vinokuroff C., et al., The effect of lactose maldigestion on the relationship between dairy food intake and colorectal cancer: a systematic review, Nutr Cancer. 2006; 55(2):141-150; and Suarez F.L., Adshead J., Furne J.K. and Levitt M.D., Amer. J Clin. Nutrition. 1998; 68:1118-22].

 

Decreased Calcium Intake Increases the Risk for Hypertension

 

Over 30 published reports show that chronic calcium depletion may lead to increased arterial blood pressure. Many additional papers have corroborated this relationship between hypertension and a low calcium intake [Millen BE, Quatromoni PA, Nam BH, et al. Framingham Nutrition Studies. Dietary Patterns, Smoking, and Subclinical Heart Disease in Women: Opportunities for Primary Prevention from the Framingham Nutrition Studies. J Amer Dietetic Assoc. 2004; 104:208-214].

 

A growing body of evidence indicates that a nutritionally sound diet rich in fruits, vegetables and a generous component of low-fat dairy foods, or DASH diet, is optimal for reducing the risk of hypertension [Conlin, P. R., Chow, D., Miller, E. R., 3rd, Svetkey, L. P., Lin, P. H., Harsha, D. W., et al. (2000), The effect of dietary patterns on blood pressure control in hypertensive patients: results from the Dietary Approaches to Stop Hypertension (DASH) trial. Am J Hypertens, 13(9), 949-955]. Several recent reports have confirmed this finding in middle-aged and elderly women [Wang, L, Manson, J, Buring, J, Lee, I-M, Sesso, D. Dietary Intake of Dairy Products, Calcium, and Vitamin D and the Risk of Hypertension in Middle-Aged and Older Women Hypertension 2008; 51:1073]. Further, it appears that the DASH diet with generous low-fat dairy is associated with low prevalence of metabolic syndrome. The levels of dairy foods (three-four servings per day) required to achieve these effects are well above current U.S. averages and even further above that of lactose intolerant individuals who are avoiding dairy due to symptoms [Lovelace, H.Y. and Barr, S.I., Diagnosis, symptoms, and calcium intakes of individuals with self-reported lactose intolerance, Journal of the American College of Nutrition, 24(1), 51-57, 2005; Carroccio, A., Montalto, G., et al., Lactose intolerance and self-reported milk intolerance: relationship with lactose maldigestion and nutrient intake, Journal of the American College of Nutrition, 17, 631-636, 1998; and Mainguet, P., Faille, I., et al., Lactose intolerance, calcium intake and osteopenia, Lancet, 338, 1156-1157, 1991.

 

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Decreased Calcium Intake Increases the Risk for Colon and Breast Cancers

 

A national symposium as long ago as 1993 reported that there was a relationship between dietary calcium and both colon and breast cancer. Clearly, several other factors are involved, and the role of calcium has not yet been fully elucidated from the others. Nonetheless, there is evidence of a relationship [Barger-Lux, M.J. and Heaney, R.P., The role of calcium intake in preventing bone fragility, hypertension and certain cancers, Journal of Nutrition, 124, 1406S-1411S, 1994].

 

Our History

 

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

 

The following four years were devoted to operations, launching marketing efforts in various distribution channels, developing an online storefront (www.Lactagen.com) and establishing production and fulfillment partners. Our focus was on testing the market potential for an alternative lactose intolerance treatment method. Extensive efforts were established to track and evaluate customer experiences with email, direct mail and telecommunication programs. Marketing funds were used to launch radio and television ads, as well as expand online marketing outreach.

 

In 2008, we expanded our focus by developing a prescription drug development program. We initiated the program by developing RP-G28, a second generation edition of Lactagen. We believe that RP-G28 enables us to state stronger claims, garner more medical community support and reach a wider market in the effort to treat lactose intolerance. Extensive efforts during this period focused on assembling highly regarded regulatory, clinical, medical and manufacturing personnel, as well as conducting technical, regulatory and market analysis to prepare for the FDA approval process.

 

To help fund the development of RP-G28, we were awarded a grant from the United States government’s Health Care Bill program, the Qualifying Therapeutic Discovery Project, or QTDP, in 2008. The grant program provides support for innovative projects that are determined by the U.S. Department of Health and Human Services to have reasonable potential to result in new therapies that treat areas of unmet medical need and/or prevent, detect or treat chronic or acute diseases and conditions.

 

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

 

By 2009, over 15,000 customers had purchased Lactagen and we had accumulated a database of the names of over 75,000 sufferers.

 

By the end of 2009, we successfully secured a GMP compliant manufacturer and produced RP-G28 drug supplies. We successfully filed our Investigational New Drug, or IND, Application for RP-G28 to be able to move into Phase 2 studies in June 2010. In December 2010, we took Lactagen off the market to solely focus on our drug development efforts.

 

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

 

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Our Leading Product Candidate — RP-G28

 

Overview

 

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

 

Galacto-oligosaccharides (GOS)

 

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

 

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

 

Figure 2

 

 

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Mechanism of Action

 

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

 

 

Safety & Toxicology of GOS

 

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

 

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

 

RP-G28 Clinical Safety

 

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

 

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

 

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Our Market Opportunity

 

Unmet Medical Needs

 

Lactose intolerance is a challenging condition to manage. Not only can symptoms be painful and embarrassing, they can also dramatically affect one’s quality of life, social activities, and health. Currently there are few reliable, or effective, treatments available that provide consistent or satisfactory relief. According to a market research study conducted by Objective Insights in April 2012, approximately 60% of lactose intolerant sufferers reported experiencing symptoms daily, or bi-weekly [Objective Insights, “Market Research Analysis and Forecasts on Lactose Intolerance and RP-G28,” June 2012.]

 

Over 75% of patients modify their diets, and 80% of patients have reported altering their daily activities, to better manage their lactose intolerance symptoms [Objective Insights, “Market Research Analysis and Forecasts on Lactose Intolerance and RP-G28,” June 2012]. According to the American Academy of Pediatrics Committee on Nutrition (2006), “the symptoms of lactose intolerance can lead to significant discomfort, disruption of the quality of life, and loss of school attendance, leisure and sports activities, and work time, all at a cost to individuals, families and society.”

 

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

 

At the 2010 National Institute of Health, or NIH, Consensus Development Conference: Lactose Intolerance and Health, the NIH highlighted numerous health risks tied to lactose intolerance such as: osteoporosis; hypertension; and low bone density [Such F., Brannon P., Varpenter T., et al. NIH Consensus Development Conference Statement: Lactose Intolerance and Health, 2010: 1-27]. There is substantial evidence indicating that lactose intolerance is a major factor in limiting calcium and nutrient intake in the diet of people who are lactose intolerant. Adequate calcium intake is essential to reducing the risks of osteoporosis and hypertension [McCarron and Heaney (2004)]. In addition, chronic calcium depletion has been linked to increased arterial blood pressure, thereby establishing a relationship between hypertension and a low calcium intake [Karania et al. (1994)]. Moreover, there is evidence of a correlation between calcium intake and both colon and breast cancer [Objective Insights, “Market Research Analysis and Forecasts on Lactose Intolerance and RP-G28,” June 2012].

 

Over 50% of lactose intolerant patients are very concerned that they may be susceptible to one of these health risks, as a result of their lactose intolerance [Objective Insights, “Market Research Analysis and Forecasts on Lactose Intolerance and RP-G28,” (June 2012)].

 

Treatment Options

 

Doctors generally recommend the following treatments for the management of lactose intolerance: (1) dairy avoidance; (2) lactase supplements; (3) probiotics/dietary supplements; and (4) dairy substitutes/lactose free products. Despite educating their patients on all viable treatment options, physicians tend to advise their patients to refrain from consuming any dairy products whatsoever. However, 47% of lactose intolerance sufferers report that this method is not effective. Further, only 30% of lactose intolerance sufferers report lactase supplements are effective in managing their lactose intolerance [Survey conducted by Engage Health in May – June 2008]. These statistics suggest that the majority of lactose intolerance patients are dissatisfied with current treatment options.

 

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Patients Unsatisfied with Current Management Options

 

 

 

Dairy Avoidance

 

Lactose intolerance has had a dramatic effect on peoples’ lifestyles. Although the most utilized approach to date has been the avoidance of dairy products, this approach fails to realize that it is not always easy to discern the foods that contain milk, milk products, or other dairy ingredients. Despite closely monitoring everything they eat, lactose intolerance sufferers are still at risk of symptoms due to hidden dairy products in ingredients. To avoid any possible embarrassing or physically painful episode, lactose intolerance sufferers may choose to avoid restaurants, going out, traveling, and limit their social interactions.

 

Lactase Supplements

 

A wide variety of nutritional supplements are sold to reduce symptoms of lactose intolerance, but there is few rigorous clinical data to substantiate their benefit. Lactase supplements are taken to aid in the digestion of dairy products. The supplements act as an enzyme replacement, supplying consumers with lactase, the enzyme necessary to break down lactose. These supplements must be taken prior to ingestion of dairy products. Consequently, consumers are forced to carry lactase supplements with them. These pills do not work consistently and dosages can be difficult to determine because dairy foods have varying amounts of lactose. For example, the most widely used supplement in the United States is Lactaid®, which has been marketed for over 30 years to people with symptoms of lactose intolerance. Lactaid® is commonly used in conjunction with dairy avoidance or lactose-free products. Depending on the amount of lactose consumed, patients may need to ingest five or more pills a day to manage their symptoms of lactose intolerance. As a result, enzyme supplementation is an adjunct to, not a substitute for, dietary dairy restriction. In 2008, 32% of lactose intolerant sufferers reported often or occasional use of lactase supplements, compared to only 22% reporting usage of these supplements five years ago. These findings suggest that there is a need for a tolerable and convenient medical treatment that allows for normal intake of milk and dairy product consumption in people with lactose intolerance.

 

Probiotics/Dietary Supplements

 

There are many complementary products that can be taken to help reduce gastrointestinal symptoms, and/or promote digestive health in general. Included in this category are probiotics and digestive enzymes. These products are not specifically marketed for lactose intolerance; rather they are directed towards general gastrointestinal symptoms.

 

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Probiotics help to increase “friendly flora” in the digestive tract by aiding in proper bowel function, easing digestion, and reducing overall digestive distress. Probiotic consumption over the past ten years has dramatically increased as many yogurt manufacturers are starting to promote and market its benefits.

 

Digestive enzymes are considered indirect options because lactose intolerant sufferers may opt to consume such products in place of lactase supplements. Digestive supplements mainly aid and support one’s digestive system, helping break down general foods consumed, but don’t directly help with lactose intolerance.

 

Dairy Substitutes/Lactose-Free Products

 

Dairy-free and lactose-free dairy products allow lactose intolerant sufferers the ability to enjoy the benefits of dairy without suffering symptoms. Dairy substitutes are items that do not contain lactose, but instead contain a substitute such as soy or rice. Lactose-free and dairy-free products are easier for lactose intolerant individuals to digest because lactose sugar is taken out of the product or lactase enzymes are added enabling easier digestion.

 

Most dairy products can now be found in a “dairy-free” alternative, including milk, ice cream, cheese, butter, creams, yogurt and milk chocolate. Although these products are available in stores, they are rarely found in restaurants, and are hard to find while traveling. Moreover, the taste tends to be different than their original counterparts, and they tend to be more expensive.

 

Growing Awareness

 

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

 

At least 75% of lactose intolerance patients would like to see a treatment, and believe that it is “very important” to find an adequate and satisfactory treatment [Objective Insights, “Market Research Analysis and Forecasts on Lactose Intolerance and RP-G28” (June 2012)]. Results from a recent market survey study indicate that 54% of respondents suffering from moderate symptoms would likely ask their physician for a prescription [Engage Health Inc., “Market Potential for an Rx and Nutritional Supplement Product for Lactose Intolerance in the US” (June 2008)]. Additionally, 61% of individuals suffering from severe lactose intolerance symptoms would be likely to ask their physician for treatment [Engage Health Inc., “Market Potential for an Rx and Nutritional Supplement Product for Lactose Intolerance in the US” (June 2008)]. These results suggest that the need for treatment increases with the severity of a patient’s symptoms.

 

Physician Awareness

 

Doctors report that there is an unmet need in the current reduction of symptoms associated with lactose intolerance, especially for those patients with moderate to severe symptoms [Objective Insights, “Market Research Analysis and Forecasts on Lactose Intolerance and RP-G28” (June 2012)]. Patients with moderate to severe symptoms have a challenging time completely avoiding dairy foods all together. Physicians experience a steady stream of lactose intolerance cases. It is estimated that gastroenterologists see approximately 15 new patients with lactose intolerance each month [Objective Insights, “Market Research Analysis and Forecasts on Lactose Intolerance and RP-G28” (June 2012)].

 

Doctors tend to diagnose lactose intolerance in a patient before the patient is able to self-diagnose it [Objective Insights, “Market Research Analysis and Forecasts on Lactose Intolerance and RP-G28” (June 2012)]. However, patients tend to initiate discussion about lactose intolerance with their doctors. This is indicative of broad public awareness of lactose intolerance. Doctors often administer two tests for diagnosing lactose intolerance: (i) a symptom history test and (ii) a hydrogen breath test. Approximately 50% of people diagnosed with lactose intolerance undergo a symptom history test [Objective Insights, “Market Research Analysis and Forecasts on Lactose Intolerance and RP-G28” (June 2012)]. A symptom history test is the foundation for diagnosis of lactose intolerance reported by all physicians interviewed [Objective Insights, “Market Research Analysis and Forecasts on Lactose Intolerance and RP-G28” (June 2012)].

 

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Our Competitive Strengths

 

Market Opportunity

 

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

 

Renowned Scientific Team and Management Team

 

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

 

Substantial Patent Portfolio and Product Exclusivity

 

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

 

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

 

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

 

Our Growth Strategy

 

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

 

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

 

Clinical and Regulatory

 

IND Application/Phase 1

 

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

 

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

 

Phase 2a Study

 

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

 

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

 

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

 

Key findings of the Phase 2a study include:

 

  RP-G28 was well tolerated with no significant study-drug related adverse effects. The benign adverse event safety profile of RP-G28 with dose levels up to 15 gm/day observed in this study is consistent with the known safety of GOS products administered up to 20 gm/day reported in literature.
     
  Subjects in the RP-G28 group reported a reduction in total symptoms after treatment. Reported symptom improvement continued 30 days post-treatment. Improvement in symptoms was assessed in the study using several different measures, including a pain Likert scale and a patient global assessment. Subjects receiving RP-G28 had greater improvement in most of their symptoms (cramps, bloating and gas) following lactose challenge compared to placebo, but the differences were not statistically significant given the small cohort size. However, a clinically meaningful reduction in abdominal pain was seen in subjects receiving RP-G28 compared to placebo.
     
  An analysis of  “responders” for abdominal pain (defined as subjects who reported a score of zero in abdominal pain severity following a lactose challenge at Day 36/Hour 6 and Day 66/Hour 6) was performed. In the 55 subjects who noted abdominal pain following the baseline (Day 0) lactose challenge, 50% of RP-G28-treated subjects reported no abdominal pain compared to 17% of the placebo-treated subjects. This difference was statistically significant (p = 0.0190). See Figure 3 below.
     
  Further, an analysis of  “responders” for abdominal pain (defined as subjects who reported a greater than 50% decrease in abdominal pain severity following lactose challenge between Day 0/Hour 6 and Day 36/Hour 6) was performed. In the 55 subjects who noted abdominal pain following the baseline (Day 0) lactose challenge, 72.2% of RP-G28-treated subjects reported a >50% reduction in abdominal pain severity compared to 42.1% of the placebo-treated subjects. This difference was also statistically significant (p=0.0288).

 

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  To better explore a meaningful benefit to patients, a global assessment was explored. Six times as many patients in the treatment group versus the placebo group described themselves as lactose tolerant and did not report symptoms associated with lactose intolerance on Day 66. After completion of study treatment at Day 36, subjects were encouraged to re-introduce dairy foods into their diet. Thirty days later (Day 66), subjects were asked to provide an assessment of their symptom status, i.e., whether they considered themselves still lactose intolerant compared with subjects receiving placebo (Yes/No). As seen below in Figure 3 below, in the 58 subjects providing responses, a significantly larger percentage of subjects receiving RP-G28 (30%) considered themselves no longer lactose intolerant compared with subjects receiving placebo (5.6%); this result was statistically significant (p=0.0389).
     
  The reduction in total symptoms following a post-treatment lactose challenge was consistent with the improvement in post-treatment hydrogen breath test results as compared to baseline (pre-treatment) results. Although rarely used in clinical practice and primarily used to identify lactase deficiency, hydrogen measurements were used as an eligibility criterion as well as an outcome measure in our Phase 2a proof-of-concept study. Our intent was to better understand how lactose intolerant symptoms and hydrogen values correlated and whether a treatment effect could be detected by hydrogen production. In the RP-G28 group, the median peak hydrogen production was 113 ppm on Day 0 and 110 ppm on Day 36. In the placebo group, the median peak hydrogen production was 94 ppm at Day 0 and 113 on day 36. At Day 0 and Day 36, the median total hydrogen production was 385 ppm and 367 ppm, respectively, for the RP-G28 group and 347 and 436 ppm, respectively, for the placebo group. Comparison of the hydrogen breath test results between RP-G28 and placebo shows that median hydrogen production was generally similar between the two treatment groups at Day 0 while at Day 36, median hydrogen production was lower in the RP-G28 group compared to placebo at the peak time points of 2 to 4 hours. While the differences were not large, the RP-G28 group had consistently lower levels of breath hydrogen production from Hours 2 to 6 following lactose challenge, but the results did not correlate with clinical symptoms. In the Placebo group, differences in hydrogen production following lactose challenge were not apparent.

 

Figure 1

 

 

 

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

 

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Figure 2

 

 

 

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

 

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

 

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

 

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

 

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

 

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