As described9 Meters Biopharma, Inc. (the “Company”) is a clinical-stage biopharmaceutical company focused on rare and unmet needs in Note 8—Subsequent Events, Innovate Biopharmaceuticals, Inc.gastroenterology. The Company’s pipeline includes drug candidates NM-002, a proprietary long-acting GLP-1 agonist for short bowel syndrome (SBS), an orphan designated disease, larazotide, a Phase 3 tight junction regulator being evaluated for celiac disease and three early-stage candidates for undisclosed rare and/or orphan diseases.

On April 30, 2020, the Company completed its merger with privately-held RDD Pharma, Ltd., an Israel corporation (“RDD”) on April 30, 2020 (the “RDD Merger”). Following the completion of the RDD Merger, and changed its name from Innovate Biopharmaceuticals, Inc. was renamedto 9 Meters Biopharma, Inc. (the “Company” or “9 Meters”). The financial statements presented in this report cover periods that ended prior to the completion of the acquisition, and therefore only include the results of Innovate Biopharmaceuticals, Inc.

 

Except as noted below under the section entitled “Recently Issued Accounting Standards—Accounting Pronouncements Adopted,” there have been no material changes to the Company’s significant accounting policies during the three months ended March 31, 2020,2021, as compared to the significant accounting policies disclosed in Note 1 of the Company’s financial statements for the years ended December 31, 20192020 and 20182019 included in the Company’s Annual Report on Form 10-K. However, the following accounting policies are the most critical in fully understanding the Company’s financial condition and results of operations.

On July 22, 2020, the Company filed a prospectus supplement and associated sales agreement related to an aggregate of $40 million could be sold in an “at-the-market” offering as defined in Rule 415 of the Securities Act; the use of this facility was terminated effective March 19, 2020). In addition, the selling stockholders included in the shelf registration statement may from time to time sell up to an aggregate amount of 13,990,403 shares of the Company’s common stock (including up to 2,051,771 shares issuable upon exercise of warrants) in one or more offerings.

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

 

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

 

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

The Company recognizes share-based compensation expense for grants of stock options based on the grant-date fair value of those awards using the Black-Scholes option-pricing model. Share-based compensation expense is generally recognized on a straight-line basis over the requisite service period for awards with service conditions and graded vesting features. For awards with performance conditions, compensation cost is recognized from the time achievement of the performance criteria is probable over the expected to vest.term.

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

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

    

The fair value of the embedded derivative issued in connection with the Unsecured Convertible Note and the Additional Note, further described in Note 3—4—Debt, was determined by using a Monte Carlo simulation technique (“MCS”) to value the embedded derivative associated with each note. As part of the MCS valuation, a discounted cash flow (“DCF”) model iswas used to value the debt on a stand-alone basis and determine the discount rate to utilize in both the DCF and MCS models. The significant estimates used in the DCF model include the time to maturity of the convertible debt and calculated discount rate, which includes an estimate of the Company’s specific risk premium. The MCS methodology calculates the theoretical value of an option based on certain parameters, including: (i) the threshold of exercising the option, (ii) the price of the underlying security, (iii) the time to expiration, or expected term, (iv) the expected volatility of the underlying security, (v) the risk-free rate and (vi) the number of paths.

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

The following table summarizes the fair valuesvalue hierarchy of the warrantsfinancial liabilities measured at their respective datesfair value as of issuance further described above in the sections entitled “March 2019 Offering,” “Additional Issuance of Warrants,” and “April 2019 Offering” were determined through the use of an MCS model. The MCS methodology calculates the theoretical value of an option based on certain parameters, including (i) the threshold of exercising the option, (ii) the price of the underlying security, (iii) the time to expiration, or expected term, (iv) the expected volatility of the underlying security, (v) the risk-free interest rate and (vi) the number of paths. Given the high level of the selected volatilities, the methodology selected simulates the Company’s market value of invested capital (“MVIC”) through the maturity date of the respective warrants (ranging from one year to five-and-a-half years). Further, the estimated future stock price of the Company is calculated by subtracting the debt plus accrued interest from the MVIC. The significant estimates used in the MCS model include management’s estimated probability of future financing and liquidation events.December 31, 2020.

The unrealized gain relating to the change in accordance withfair value of the terms and usingderivative liability of $7,000 for the assumptions specifiedthree months ended March 31, 2021 is included in other income (expense) in the applicable warrant agreement. Due to the RDD Merger, the Company entered into the Exchange Agreements with the holdersaccompanying condensed consolidated statements of the Exchange Warrants, pursuant to which the Company agreed to issue the purchasers an aggregate of 5,441,023 shares in exchange for the cancellationoperations and termination of the Exchange Warrants. On December 26, 2019, an aggregate of 2,994,762 warrants were exchanged for 3,593,714 shares of the Company’s common stock. comprehensive loss.

During the three months ended March 31, 2020, 1,539,424 warrants were exchanged for 1,847,309 shares of the Company’s common stock. In addition, the Company amended the Short-Term Warrants and Long-Term Warrants in the Offer to Amend in Exercise on February 12, 2020. Immediately prior to the Offer to Amend and Exercise, the Company determined the fair value of the Short-Term Warrants and Long-Term Warrants as of February 11, 2020 and at period end on March 31, 2020. The Company recognized a gain in fair value of the Short-Term Warrants and Long-Term Warrantswarrant liabilities of approximately $1.2$1.6 million in the accompanying condensed statementconsolidated statements of operations and comprehensive loss. There were no warrant liabilities outstanding as of March 31, 2021 or December 31, 2020, and as such, there was 0 gain or loss in fair value of warrant liabilities during the three months ended March 31, 2020.2021. During the three months ended March 31, 2020, the Company recognized warrant inducement expense of approximately $0.7 million. There was no0 warrant inducement expense recognized during the three months ended March 31, 2019.2021. The warrant inducement expense represents the accounting fair value of consideration issued to induce conversion of the Exchange Warrants at a ratio of 1.2 Exchange Shares for each purchaser warrant.Warrants.

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

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

The accompanying financial statements have been prepared assuming thatAs of March 31, 2021, the Company will continue as a going concern, which contemplates the realizationhad cash and cash equivalents of assets and the satisfaction of liabilities and commitments in the normal course of business. Although,approximately $38.5 million. In addition, the Company received grossnet proceeds of approximately $22.6$31.5 million upon completion offrom the RDD Merger Financing, furtherApril 2021 Offering described in Note 8—9—Subsequent Events,Events. Based on current projections, the Company believes it has available resources to provide sufficient cash to satisfy its operational needs for at least one year from the date these financial statements are issued.

The Company expects to incur substantial losses in the future as it conducts planned operating activities. Based on the Company’s limited operating history, recurring negative cash flows from operations, current plans and available resources, the Company will need substantial additional funding to support its planned and future operating activities, including progression of research and development programs. The Company has concluded that the prevailing conditions and ongoing liquidity risks faced by the Company raise substantial doubt about the Company’s ability to continue as a going concern for at least 1 year following the date these financial statements are issued.

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

On March 8, 2019, the Company entered into a Securities Purchase Agreementsecurities purchase agreement (the “Note Purchase Agreement”) with a purchaser (the “Convertible Noteholder”). Pursuant to the Note Purchase Agreement, the Company issued the Convertible Noteholder an unsecured Convertible Promissory Noteconvertible promissory note (the “Unsecured Convertible Note”) in the principal amount of $5.5 million. The Convertible Noteholder mayhad the right to elect to convert all or a portion of the Unsecured Convertible Note at any time and from time to time into the Company’s common stock at a conversion price of $3.25 per share, subject to adjustment for stock splits, dividends, combinations and similar events. The Company may prepay all or a portion of the Unsecured Convertible Note at any time for an amount equal to 115% of then outstanding obligations or the portion of the obligations the Company is prepaying. The purchase price of the Unsecured Convertible Note was $5.0 million, and the Unsecured Convertible Note carriescarried an original issuance discount (“OID”) of $0.5 million, which iswas included in the principal amount of the Unsecured Convertible Note. In addition, the Company agreed to pay $20,000 of transaction expenses, which were netted out of the purchase price of the Unsecured Convertible Note. The Company also incurred additional transaction costs of approximately $37,000, which were recorded as debt issuance costs.

As a result of the redemption features of the Unsecured Convertible Note, further described below, the Company is amortizingamortized the debt issuance costs and accretingaccreted the OID to interest expense over the estimated redemption period of 15 months, using the effective interest method.

The Unsecured Convertible Note bearsbore interest at the rate of 10% (which will increase to 18% upon and during the continuance of an event of default) per annum, compounding on a daily basis. All principal and accrued interest on the Unsecured Convertible Note is due on the second-year anniversary of the Unsecured Convertible Note’s issuance. During the three months ended March 31, 2020, the Company made principal payments in cash of $1.5 million on the Unsecured Convertible Note. There were no principal payments made on themillion. The Unsecured Convertible Note during the three months ended Marchwas paid in full as of December 31, 2019.2020.

On April 3, 2020, the Company may generally require that the Unsecured Convertible Note convertentered into shares of its common stock at the $3.25 (as adjusted) conversion price, and (ii)a standstill agreement with the Convertible Noteholder may elect(the “Standstill Agreement”). Pursuant to require all or athe Standstill Agreement, the Convertible Noteholder would not seek to redeem any portion of the Unsecured Convertible Note be redeemed by the Company. If the Convertible Noteholder requires a redemption, the Company, at its discretion, may pay the redeemed portionbetween April 1, 2020 and May 31, 2020. The outstanding balance of the Unsecured Convertible Note in cash or in the Company’s common stock at a conversion rate equal to the lesser of (i) the $3.25 (as adjusted) conversion rate or (ii) 80% of the average of the five lowest volume weighted average price of the Company’s Common Stock over the preceding twenty trading days. The Convertible Noteholder may not redeem more than $500,000 per calendar month during the period between the six-month anniversary of the date of issuance until the first-year anniversary of the date of issuance and $750,000 per calendar month thereafter. See Note 8—Subsequent Events regarding a standstill agreement entered intowas increased by $150,000 on April 3, 2020 that temporarily suspends redemption payments. The obligation or right of the Company to deliver its shares upon the conversion or redemption of the Unsecured Convertible Note is subject to a 19.99% cap and subject to a floor price trading price of $3.25 (unless waived by the Company). Any amounts redeemed once the cap is reached or if the market price is less than the $3.25 floor price must be paid in cash.

On January 10, 2020, the Company entered into an additional securities purchase agreement and unsecured convertible promissory note with the Convertible Noteholder in the principal amount of $2,750,000 (the “Additional Note”). The Convertible Noteholder maycould elect to convert all or a portion of the Additional Note, at any time from time to time into the Company’s common stock at a conversion price of $3.25 per share, subject to adjustment for stock splits, dividends, combinations and similar events. The Company may prepay all or a portion of the Additional Note at any time for an amount equal to 115% of then outstanding obligations or the portion of the obligations we are prepaying. The purchase price of the Additional Note was $2.5 million$2,500,000 and carries an original issuance discount of $250,000, which is included in the principal amount of the Additional Note.

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

The Additional Note bearsbore interest at the rate of 10% (which will increase to 18% upon and during the continuance of an event of default) per annum, compounding on a daily basis. AllDuring the three months ended March 31, 2021, the Company paid the remaining balance of principal and accrued interest on the Additional Note is due on the second anniversary of the date of the Additional Note’s issuance.approximately $59,000 in cash. There were no0 principal payments made on the Additional Note during the three months ended March 31, 2020.

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

 

Upon execution of the Alba License, the Company paid Alba a non-refundable license fee of $0.5 million. In addition, the Company is required to make milestone payments to Alba upon the achievement of certain clinical and regulatory milestones totaling up to $1.5 million and payments upon regulatory approval and commercial sales of a licensed product totaling up to $150 million, which is based on sales ranging from $100 million to $1.5 billion.

 

 

During 2014, the Company entered into an Asset Purchase Agreement with Repligen Corporation (“Repligen”) to acquire Repligen’s RG-1068 program for the development of Secretin for the Pancreatic Imaging Market and Magnetic Resonance Cholangiopancreatography. As consideration for the Asset Purchase Agreement, the Company agreed to make a non-refundable cash payment on the date of the agreement and future royalty payments consisting of a percentage between five5 and fifteen15 of annual net sales, with the royalty payment percentage increasing as annual net sales increase. The

As consideration under the Amunix License for GLP-1, we agreed to pay Amunix certain royalty payments are made on a product-by-product and country-by-country basis(i) $70.4 million in milestone payments upon achievement of future development and the obligation to make the payments expires with respect to each country upon the later of (i) the expiration of regulatory exclusivity for the product in that country or (ii) 10 years after the first commercial sale in that country. The royalty amount is subject to reduction in certain situations, such as the entry of generic competitionsales milestones in the market.U.S. and major EU countries, (ii) $20.5 million in milestone payments upon achievement of future development and sales milestones in China and certain related territories, and (iii) $20.5 million in milestone payments upon achievement of future development and sales milestones in South Korean and certain other east Asian countries. As consideration under the Amunix License for GLP-2, we

There were no0 milestone or royalty fees incurred during the three months ended March 31, 20202021 and 2019.2020.

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

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

There were no0 shares of preferred stock issued and outstanding as of March 31, 2020 and2021 or December 31, 2019.2020.

 

The holders of the Company’s common stock (i) have equal ratable rights to dividends from funds legally available therefore, when, as and if declared by the Board; (ii) are entitled to share in all the Company’s assets available for distribution to holders of common stock upon liquidation, dissolution or winding up of the Company’s affairs; (iii) do not have preemptive, subscription or

There were 41,324,976216,324,896 and 39,477,667204,629,064 shares of common stock outstanding as of March 31, 20202021 and December 31, 2019,2020, respectively. The Company had reserved shares of common stock for future issuance as follows:

As of March 31, 2020,2021, there were 6,028,7816,000,518 stock options outstanding under the Private Innovate Plan. Since 2018, the Company has not issued, and does not intend to issue, any additional awards from the Private Innovate Plan.

 

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

There were no0 options granted under the Private Innovate Plan during the three months ended March 31, 20202021 and 2019.2020.

The total fair value of stock option awards vested during the three months ended March 31, 20202021 under the Private Innovate Plan was approximately $137,000.$49,000. As of March 31, 2020,2021, there was approximately $0.3 million of total0 unrecognized compensation cost related to unvested stock-based compensation arrangements under the Private Innovate Plan which is expected to be recognized over a weighted average periodas all of 1.2 years.the outstanding options are fully vested as of March 31, 2021.

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

As of March 31, 2020,2021, there were options to purchase 2,717,87013,601,796 shares of the Company’s common stock outstanding under the Omnibus Plan and 3,076,6226,562,377 shares available for future grants under the Omnibus Plan.  

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