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Kesselman & Kesselman	Tel-Aviv, Israel
Certified Public Accountants (Isr.)	June 12, 2020
A member firm of PricewaterhouseCoopers International Limited

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RDD PHARMA LTD.

CONSOLIDATED BALANCE SHEETS

		December 31
	Note	2019			2018
		U.S. dollars in thousands
Assets
CURRENT ASSETS:
Cash and cash equivalents		$	28		$	2,375
Prepaid expense and other receivable	9a	46			26
TOTAL CURRENT ASSETS		74			2,401
NON-CURRENT ASSETS -
Property and equipment, net	3	43			49
TOTAL ASSETS		$	117		$	2,450
Liabilities net of capital deficiency
CURRENT LIABILITIES -
Accounts payable:
Trade		217			107
Other	9b	610			223
TOTAL CURRENT LIABILITIES		827			330
NON-CURRENT LIABILITIES -
Warrants liabilities	6	505			653
Liability for employees rights upon retirement		36			36
		541			689
COMMITMENTS AND CONTINGENCIES	5
TOTAL LIABILITIES		1,368			1,019
REDEEMABLE CONVERTIBLE PREFERRED SHARES	8	26,437			16,656
CAPITAL DEFICIENCY
Ordinary shares, par value NIS 1 per share, 6,152 shares authorized; 489 shares issued and outstanding at December 31, 2019 and 2018		*			*
Additional paid in capital		—			447
Accumulated deficit		(27,688)			(15,672)
TOTAL CAPITAL DEFICIENCY		$	(27,688	)	$	(15,225	)
TOTAL LIABILITIES NET OF CAPITAL DEFICIENCY		$	117		$	2,450

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RDD PHARMA LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

		Year ended December 31
	Note	2019	2018
		U.S. dollars in thousands

OPERATING EXPENSES:
Research and development expenses, net	9c	$	1,154		$	1,929
General and administrative expenses	9d	1,697			632
OPERATING LOSS		2,851			2,561
FINANCIAL INCOME, net	9e	136			80
NET LOSS		2,715			2,481
ACCRETION OF REDEEMABLE CONVERTIBLE PREFERRED SHARES		9,781			—
NET LOSS ATTRIBUTABLE TO ORDINARY SHAREHOLDERS		$	12,496		$	2,481

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RDD PHARMA LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY

 

	Ordinary Shares		Additional paid-in capital	Accumulated Deficit	Total
	Number of shares	Amounts	Amounts
		U.S. dollars in thousands

BALANCE AT JANUARY 1, 2018	489		*		$	396		$	(13,191	)	$	(12,795	)
CHANGES DURING 2018:
Share-based compensation	—		—		51			—			51
Net loss	—		—		—			(2,481)			(2,481)
BALANCE AT DECEMBER 31, 2018	489		*		447			(15,672)			(15,225)
CHANGES DURING 2019:
Share-based compensation	—		—		33			—			33
Accretion of redeemable convertible preferred shares	—		—		(480)			(9,301)			(9,781)
Net loss	—		—		—			(2,715)			(2,715)
BALANCE AT DECEMBER 31, 2019	489		*		$	—		$	(27,688	)	$	(27,688	)

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RDD PHARMA LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31
	2019			2018
	U.S. dollars
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(2,715	)	$	(2,481	)
Adjustments required to reconcile net loss to net cash used in operating activities:
Share-based compensation	33			51
Fair value adjustment of warrants for preferred shares	(148		)	(77		)
Depreciation and amortization	6			5
	(2,824		)	(2,502		)
Changes in operating assets and liabilities:
Decrease (increase) in other receivables	(20		)	19
Increase in trade payables	110			51
Increase (decrease) in accounts payable – other	387			(502		)
	477			(432		)
Net cash used in operating activities	(2,347		)	(2,934		)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment	—			(35		)
Net cash used in investing activities	—			(35		)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Preferred B Shares	—			2,000
Net cash provided by financing activities	—			2,000
DECREASE IN CASH AND CASH EQUIVALENTS	(2,347		)	(969		)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE YEAR	2,375			3,344
CASH AND CASH EQUIVALENTS AT THE END
OF THE YEAR	$	28		$	2,375
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Accretion of redeemable convertible preferred shares	$	(9,781	)	$	—

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a.	RDD Pharma Ltd. (hereinafter- the Company) commenced operations on March 1, 2008.

b.	The Company is engaged in the medical field, developing treatments for ano-rectal diseases.

c.	In February 2013, the Company established a wholly owned subsidiary in Delaware, USA, named RDD Pharma Inc. (hereinafter - RDD Inc), which started its business activities in April 2017. In July 2015, the Company established a wholly owned subsidiary in United Kingdom, named RDD Pharma Ltd. UK (hereinafter - RDD UK). As of December 31, 2019, RDD UK has not yet started any business activities.

d.	On October 7, 2019, the Company entered into a Merger Agreement, as amended on December 17, 2019, with 9 Meters Biopharma, Inc. (formerly Innovate Biopharmaceuticals, Inc.), a publicly traded company (Nasdaq: NMTR) (“9 Meters Biopharma”) (the “Merger Agreement”), refer also to note 5e(1) and 12b.

e.	Liquidity

a.	Basis of preparation

b.	Principles of consolidation

c.	Use of estimates in the preparation of financial statements

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d.	Functional and presentation currency

e.	Cash and cash equivalents

f.	Property and equipment

1)	Property and equipment are stated at cost, net of accumulated depreciation.

2)	The Company’s property and equipment are depreciated by the straight-line method on the basis of their estimated useful lives.

g.	Impairment of long-lived assets

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h.	Financial instruments

i.	Share-based Compensation

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j.	Research and development expenses, net

k.	Income taxes:

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l.	Fair value measurement

m.	Concentration of credit risks

n.	Comprehensive loss

1)

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. The Company will adopt ASU 2016-13 effective January 1, 2023. The Company is currently evaluating the effect of the adoption of ASU 2016-13 on its consolidated financial statements.

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2)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 supersedes existing guidance in Leases (Topic 840). The revised standard requires lessees to recognize the assets and liabilities arising from leases with lease terms greater than twelve months on the balance sheet, including those currently classified as operating leases, and to disclose key information about leasing arrangements. Lessees will be required to recognize a lease liability and a right-of-use asset on their balance sheets, while lessor accounting will remain largely unchanged. The guidance is effective for annual periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU 2016-02 will have on its consolidated financial statements and related disclosures.

NOTE 3 - PROPERTY AND EQUIPMENT:

Composition of assets and the accumulated depreciation thereon, grouped by major classifications for 2019 and 2018 are as follows:

	December 31
	2019		2018
	U.S. dollars in thousands
Cost:
Computers	$	13			$	13
Electronic equipment	24				24
Office furniture	17				17
Leasehold improvements	23				23
	77				77
Accumulated depreciation:
Computers	(12			)	(12		)
Electronic equipment	(16			)	(13		)
Office furniture	(3			)	(2		)
Leasehold improvements	(3			)	(1		)
	(34			)	(28		)
Depreciated balance	$	43			$	49

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a.	Lease agreement

b.	Grants from the IIA

c.	Commercial License Agreement

d.	Grants from a US government agency

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e.	Mergers and acquisitions

1)

On October 7, 2019 the Company entered into a Merger Agreement, as amended on December 17, 2019, with 9 Meters Biopharma, Inc. (formerly Innovate Biopharmaceuticals, Inc.) (“9 Meters Biopharma”) a publicly traded company (Nasdaq: NMTR) (the “Merger Agreement”). Following the merger the Company’s stockholders will own, on a fully diluted basis, approximately 38% of 9 Meters Biopharma’s shares. The exact percentage and the closing of the merger was subject to financing and several conditions as mentioned in the Merger Agreement. The merger was completed on April 30, 2020, refer to note 12b. The Merger Agreement is considered a deemed liquidation event under the Company’s articles of association.

2)	On November 13, 2019 the Company entered into a Non-Binding Letter (the “Non-Binding Letter”) of intent to acquire Naia Rare Diseases (“Naia”), for an amount of $4.85 million combined of cash and shares and additional milestones payments as determined in the Non-Binding Letter. The acquisition was subject to the closing of the Merger Agreement. See also note 12e.

a.	Warrants for preferred shares:

1)	In July, 2012 the Company entered into a Series A Preferred Share Purchase Agreement (the “2012 SPA). As part of the 2012 SPA the Company issued warrants for preferred A shares (the “Preferred A warrants”) to a new investor (hereinafter - the Investor), refer also note 8d.

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2)	In 2017, as part of 2017 SPA, the Company issued warrants for Series B-1 preferred shares (the “Preferred B-1 Warrants”), see note 8f.

b.	The Company financial instruments measured in fair value and classified as Level 3

	Warrants liabilities
	December 31
	2019			2018
Balance at beginning of year	$	653		$	730
Changes in fair value	(148		)	(77		)
Balance at end of year	$	505		$	653

c.	As of December 31, 2019 and 2018 the fair value of all financial assets and liabilities, approximate their carrying amounts.

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b.	Share-based compensation:

	2019	2018
Value of ordinary shares	$433	$475
Dividend yield	0%	0%
Expected volatility	85.35%	87.51%
Risk-free interest rate	2.40-2.46%	2.90%
Expected term	3.28-3.33	5.54-5.57

2.	Options granted to consultants and other service providers

	2019	2018
Value of ordinary shares	—	$475
Dividend yield	—	0%
Expected volatility	—	87.51%
Risk-free interest rate	—	2.90%
Expected term	—	Contractual term

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RDD PHARMA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7 - SHARE CAPITAL (continued):

3.	The following table summarizes the number of options outstanding under the Plan for the years ended December 31, 2019 and 2018, and related information:

	Employees and directors					Consultants and service providers
	Number of options		Weighted average exercise price per share			Number of options		Weighted average exercise price per share
Outstanding at January 1, 2018	39,610		$	808		6,802		$	314
Granted	43,038		$	320		14,086		$	320
Forfeited	—		—			(10,488)		$	320
Outstanding at December 31, 2018	82,648		$	554		10,400		$	381
Granted	40,502		$	320		—		—
Forfeited	(19,307)		$	320		—		—
Outstanding at December 31, 2019	103,843		$	506		10,400		$	316

4.	The following tables summarize the outstanding and exercisable options as of December 31, 2019 for employees, directors, consultants and other service providers:

December 31, 2019
Options outstanding					Options exercisable
Exercise price per share			Number of options outstanding at end of year	Weighted average remaining contractual life	Number of options exercisable at end of year	Weighted average remaining contractual life
$	—		4,970	2.81	4,970	2.81
$	320.00		67,831	8.89	18,875	8.89
$	800.00		30,732	2.74	30,732	2.74
$	970.00		7,046	5.36	7,046	5.36
$	116.30		1,832	4.21	1,832	4.21
$	121.60		1,832	4.21	1,832	4.21
			114,243		65,287

5.	The following table illustrates the effect of share-based compensation on the statements of operations:

	Year ended December 31
	2019			2018
	U.S. dollars in thousands
Research and development expenses, net	$	18		$	26
General and administrative expenses	15			25
	$	33		$	51

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6.

In February 2019, the Company’s appointed new chief executive officer (the “New CEO”), replacing the prior chief executive officer (the “Prior CEO”) in this capacity. Concurrently, the New CEO was appointed as a member of the board of directors (the “Board”) and the Prior CEO resigned from the Board. In connection with the New CEO employment, he was granted 28,930 options exercisable into 289 ordinary shares of the Company at an exercise price of $320 per share. The options vest annually in 4 increments over 4 years, with the first increment vesting on February 2020, conditioned upon continuous employment through each date of vesting. The grant date fair value of these options is approximately $ 97 thousand.

7.

On March 15, 2019 (the “Effective Date”) the Prior CEO’s employment with the Company was terminated. As part of his separation agreement, he entitled to a redemption of any unused accumulated vacation days until the Effective Date in the total amount of approximately $28 thousand. In addition, all the fully vested options, as of the Effective Date, amounted to 15,822, exercisable into 158 ordinary shares of the Company, par value NIS 1 each, shall be exercisable for a period of two years from the Effective Date. The fair value of the extension period amounted to approximately $18 thousand and was recorded to the Statements of Operations. The unvested options, as of the Effective Date, granted to the Prior CEO were terminated and became null.

NOTE 8 - REDEEMABLE CONVERTIBLE PREFERRED SHARES:

a.	The Redeemable Convertible Preferred Shares as of December 31, 2019 and 2018 are composed as follows:

	Number of shares		Amount
	Authorized	Issued	Authorized	Issued
Ordinary A shares
NIS 0.01 par value	92,089	92,089	921	921
Preferred A shares
NIS 0.01 par value	238,470	198,725	2,385	1,987
Preferred A1 shares
NIS 0.01 par value	54,200	54,200	542	542
Preferred B shares
NIS 0.01 par value	1,000,000	253,952	10,000	2,540
Preferred B1 shares
NIS 0.01 par value	114,983	95,587	1,150	956
	1,499,742	694,553	14,998	6,946

b.	Changes in the Redeemable Convertible Preferred Shares:

	Number of shares		Amount
			U.S. dollars in thousands
BALANCE AS OF JANUARY 1, 2018	607,025		14,656
CHANGES DURING 2018:
Issuance of  Preferred B Shares	87,528		2,000
BALANCE AS OF DECEMBER 31, 2018	694,553		16,656
CHANGES DURING 2019:
Accretion of redeemable convertible preferred shares	—		9,781
BALANCE AS OF DECEMBER 31, 2019	694,553		26,437

18

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RDD PHARMA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 - REDEEMABLE CONVERTIBLE PREFERRED SHARES (continued):

c.

In 2008 the Company entered into a share purchase agreement (hereafter - SPA), according to which the Company issued 62,449 Ordinary A Shares of NIS 0.01 par value each, for total consideration of $844 thousand. In addition, in October 2010 the Company entered into a convertible loan agreement with existing shareholders (hereafter – the “Lenders”) (the - “2010 Convertible Loan”), under which the Company borrowed a total amount of $343 thousand. In July 2012, the convertible loan was converted into 29,640 Ordinary A Shares of NIS 0.01 par value each.

The Company analyzed the classification of the Ordinary A Share based, among others, the redemption obligation as agreed in the 2010 Convertible Loan. Based on ASC 480-10-S99-3A(f) the Company determined that since the redemption obligation is outside of its control, the Series Ordinary A Share is considered as contingently redeemable upon the occurrence of an event that is outside of its control and should be classified as a mezzanine equity. The Company concluded, as of December 31, 2018, that it is not probable the instrument will become redeemable (e.g., it is not probable a contingency that triggers redemption will be met). Therefore, an adjustment of the initial carrying amount is not necessary until it is probable that the security will become redeemable. Accordingly, the amounts of $1,187 thousand were classified as “Redeemable Convertible Ordinary A Share” in the Consolidated Balance Sheet. Upon the Merger Agreement as of December 31, 2019 the Company adjusted the carrying values of the Redeemable Convertible Shares see note 8g below.

d.	As mentioned in note 6a(1) above, in accordance with the 2012 SPA, the Company issued to the Investor 115,344 Preferred A Shares of NIS 0.01 par value at a price per share of $35.9793, in total consideration of $4,150 thousand.

The Company analyzed the classification of the Preferred A Shares based, among others, the redemption obligation as agreed in the 2012 SPA. Based on ASC 480-10-S99-3A(f) the Company determined that since the redemption obligation is outside of its control, the Series Preferred A Shares is considered as contingently redeemable upon the occurrence of an event that is outside of its control and should be classified as a mezzanine equity. As of December 2018, the Company concluded that it is not probable the instrument will become redeemable (e.g., it is not probable a contingency that triggers redemption will be met). Therefore, an adjustment of the initial carrying amount is not necessary until it is probable that the security will become redeemable. Accordingly, the amounts of $3,907 thousand were classified as “Redeemable Convertible Preferred A Shares” in the Consolidated Balance Sheet. Upon the Merger Agreement as of December 31, 2019 the Company adjusted the carrying values of the Redeemable Convertible Preferred Shares see note 8g below.

In addition, the Company granted the Investor warrants to purchase 39,745 Preferred A Shares, see also note 6a(1).

e.	In July 2015, the Company entered into a Series A-1 Preferred Share Purchase Agreement (hereafter – 2015 SPA), according to which the Company issued 54,200 Preferred A-1 Shares of NIS 0.01 par value each at a price of $55.35 per share for total gross consideration of $2,985 thousand.

The Company analyzed the classification of the Preferred A-1 Shares based, among others, the redemption obligation as agreed in the 2015 SPA. Based on ASC 480-10-S99-3A(f) the Company determined that since the redemption obligation is outside of its control, the Series Preferred A-1 Shares is considered as contingently redeemable upon the occurrence of an event that is outside of its control and should be classified as a mezzanine equity. As of December 2018, the company concluded that it is not probable the instrument will become redeemable (e.g., it is not probable a contingency that triggers redemption will be met). Therefore, an adjustment of the initial carrying amount is not necessary until it is probable that the security will become redeemable. Accordingly, the amounts of $2,985 thousand were classified as “Redeemable Convertible Preferred A-1 Shares” in the Consolidated Balance Sheet. Upon the Merger Agreement as of December 31, 2019 the Company adjusted the carrying values of the Redeemable Convertible Preferred Shares see note 8g below.

19

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RDD PHARMA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 - REDEEMABLE CONVERTIBLE PREFERRED SHARES (continued):

f.

In November 2017, the Company entered into an investment agreement with existing and new investors (hereafter – 2017 SPA), according to which the Company issued 147,899 Preferred B Shares of NIS 0.01 par value each, for total consideration of $ 4,020 thousand. In addition, all of the Convertible Loans were converted into 18,525 Preferred B Shares of NIS 0.01 par value each and 95,587 Preferred B-1 Shares of NIS 0.01 par value each.

The Company analyzed the classification of the Preferred B-1 Shares and Preferred B Shares based, among others, the redemption obligation as agreed in the 2017 SPA. Based on ASC 480-10-S99-3A(f) the Company determined that since the Redemption Obligation is outside of its control, the Series Preferred B Shares and Preferred B-1 shares is considered as contingently redeemable upon the occurrence of an event that is outside of its control and should be classified as a mezzanine equity. As of December 2018, the company concluded that it is not probable the instrument will become redeemable (e.g., it is not probable a contingency that triggers redemption will be met). Therefore, an adjustment of the initial carrying amount is not necessary until it is probable that the security will become redeemable. Accordingly, the amounts of$3,775 thousand and $2,083 thousand, were classified as “Redeemable Convertible Preferred B Shares” and “Redeemable Convertible Preferred B-1 Shares” in the Consolidated Balance Sheet, respectively.

In accordance with the 2017 SPA, the Company will receive a milestone payment of up to $2,000 thousand in consideration for issuance of 87,528 Preferred B Shares of NIS 0.01 par value each. In 2018 the milestone was achieved and the Company issued the additional Preferred B Shares. Accordingly, in 2018, at the payment date, the amount of $2,000 thousand was recorded as “Redeemable Convertible Preferred B Shares” in the consolidated balance sheet.

Upon the Merger Agreement as of December 31, 2019 the Company adjusted the carrying values of the Redeemable Convertible Preferred Shares see note 8g below.

In addition, the Company granted the Investor warrants to purchase 19,396 of the Preferred B-1 Shares of NIS 0.01 par value each, see also note 6a(2).

g.

Upon the Merger Agreement (refer to note 5e(1)) as of December 31, 2019 the Company adjusted the carrying values of the Redeemable Convertible Preferred Shares mentioned above to the deemed liquidation values of such shares since a deemed liquidation event has become probable. The difference between the initial carrying amount to the deemed liquidation values is being accreted using the effective interest method. The accreted amounts are recorded to “Additional paid-in capital” and to “Accumulated deficit”.

h.	The rights, preferences and privileges with respect to the preferred shares are stipulated in the Company’s articles of association and a summary of significant provisions are as follows:

i.	Right of First Refusal: Until an IPO (as defined in the Company’s articles), each Preferred and Ordinary A shareholder have a right of first refusal with respect to a transfer, sell, assign or otherwise of all or any of the shares or other securities of the Company by any shareholder with certain specified exceptions.

ii.	Liquidation Preference: Until a qualified IPO, in the event of any liquidation or deemed liquidation, the assets shall be distributed among the shareholders as follows:

i.

The holders of Preferred B and B-1 Shares are entitled to receive from the distributable proceeds an amount that equals to (i) one-time (1x) the applicable original issue price of such Preferred B Share (adjusted for recapitalization events); plus (ii) an 8% annual interest on the applicable original issue price for such Preferred B Share, accrued daily and compounded annually from the date of the issuance of such Preferred B Share up to the date of distribution; plus (iii) an amount that equals to the declared but unpaid dividends on such Preferred B Share.

20

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RDD PHARMA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 - REDEEMABLE CONVERTIBLE PREFERRED SHARES (continued):

ii.

Second, and after payment in full of the Preferred B Preference Amounts, the holders of Preferred A and A-1 Shares are entitled to receive from the remaining distributable proceeds (if any) an amount that equals to (i) one-time (1x) the applicable Original Issue Price of such Preferred A Share (adjusted for Recapitalization Events); plus (ii) an 8% annual interest on the applicable Original Issue Price for such Preferred A Share, accrued daily and compounded annually from the date of the issuance of such Preferred A Share up to the date of distribution; plus (iii) an amount that equals to the declared but unpaid Dividends on such Preferred A Share.

iii.

Third, and after payment in full of the Preferred B Preference Amount and the Preferred A Preference Amount, the holders of Ordinary A Shares are entitled to receive from the distributable proceeds an amount that equals to (i) one-time (1x) the Original Issue Price of such Ordinary A Share (adjusted for Recapitalization Events); plus (ii) an 8% annual interest on the Original Issue Price for such Ordinary A Share, accrued daily and compounded annually. From the date of the issuance of such Ordinary A Share up to the date of distribution; plus (iii) an amount equal to the declared but unpaid dividends on such Ordinary A Share.

iv.	Any remaining distributable proceeds available for distribution, if any, are to be distributed pro rata among all of the Company’s Shareholders based on their holdings of the Company’s issued share capital, calculated on an as-converted to Ordinary Shares basis.

iii.	Dividend preference: the preferred shareholders will be entitled to receive, at a dividend distribution, the amount calculated according to the order of preference and ratio specified in the liquidation reference section above.

iv.	Protective provisions: In addition, until a qualified IPO, the Preferred Majority will have certain protective provision in decisions with regard to the amendment of the Articles of Association of the Company, the recapitalization of its shares, effecting a liquidation event, declaring dividends, or performing a merger or IPO.

v.

Conversion and conversion price adjustment: Each holder of Preferred Shares and Ordinary A Shares has the right to convert any or all of its Preferred Shares or Ordinary A Shares, as applicable, into 100:1 Ordinary Shares at any time, at the conversion rate applicable to such Preferred Shares or Ordinary A Shares, respectively, at the time of conversion, without the payment of additional consideration by such holder, that takes into account the Share Consolidation, refer to note 7a. The Conversion Price of a Preferred Share or an Ordinary A Share upon the issuance thereof is the Original Issue Price thereof, and thereafter the respective conversion price and consequent conversion rate of any Preferred Share or Ordinary A Share are subject to adjustment from time to time.

vi.

Automatic conversion: The Preferred B Shares shall automatically be converted into 1:100 Ordinary Shares, at the then applicable conversion rate with respect to Preferred B Shares, that takes into account the Share Consolidation, refer to note 7a , upon the earlier of: (i) the election of the holders of the majority of the Preferred B Shares, or (ii) upon the closing of a firm commitment underwritten public offering of the Company’s Ordinary Shares with Company valuation of at least $75,000,000, resulting in aggregate proceeds to the Company (net of the underwriting discounts or commissions and offering expenses) of not less than $20,000,000 (a “QIPO”). The Preferred B-1 Shares shall automatically be converted into 100:1 Ordinary Shares, at the then applicable conversion rate with respect to Preferred B-1 Shares, that takes into account the Share Consolidation, refer to note 7a, , upon the earlier of: (i) the election of the holders of the majority of the Preferred B-1 Shares, or (ii) upon a QIPO. The Preferred A and Preferred A-1 Shares shall automatically be converted into 100:1 Ordinary Shares, at the then applicable conversion rate with respect to the Preferred A Shares and the Preferred A-1 Shares, respectively,

21

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RDD PHARMA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8 – REDEEMABLE CONVERTIBLE PREFERRED SHARES (continued):

that takes into account the Share Consolidation, refer to note 7a, upon the earlier of: (i) the election of the holders of the majority of the Preferred Shares, or (ii) upon the closing of a QIPO. The Ordinary A Shares shall automatically be converted into 100:1 Ordinary Shares, at the then applicable conversion rate with respect to Ordinary A Shares, that takes into account the Share Consolidation, refer to note 7a, upon the earlier of: (i) the election of a majority of the shareholders of the Company and the majority of the Preferred Shareholders, or (ii) immediately prior to the closing of an IPO, or (iii) upon the conversion of all the Preferred Shares.

Upon conversion as specified above, all outstanding Ordinary A Shares and/or Preferred Shares, as applicable, shall be deemed to have been converted into 100:1 Ordinary Shares and all additional rights, privileges and obligations attached to such shares (i.e., all such rights in excess to the rights attached to Ordinary Shares) will be abolished.

i.	Voting rights: each of the Ordinary Shares entitle the holder thereof to one vote per Ordinary Share. Each of the Preferred B-1 Shares, Preferred B Shares, Preferred A-1 Shares, Preferred A Shares and Ordinary A Shares entitle the holder thereof to a number of votes that equals the number of Ordinary Shares then issuable upon conversion into Ordinary Shares.

NOTE 9 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

Balance Sheet:	December 31
	2019	2018
	U.S. dollars in thousands
a.   Other receivable:
Prepaid expenses	28	20
Other	18	6
	46	26
b. Accounts payables - other:
Accrued expenses	502	53
Employees and employee institutions	108	170
	610	223

Statement of Operations:	Year ended December 31
	2019	2018
	U.S. dollars in thousands
c. Research and development expenses, net:
Payroll and related expenses	559	644
Subcontractors and materials	664	1,950
Other	128	227
	1,351	2,821
Less - grants	(197)	(892)
	1,154	1,929

22

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RDD PHARMA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

	Year ended December 31
	2019		2018
	U.S. dollars in thousands
d. General and administrative expenses:
Payroll and related expenses	569		53
Professional services	1,001		464
Registration of patents	43		104
Office, rent and maintenance	84		11
	1,697		632

e. Financial income, net:
Changes in fair value of warrants    liabilities	(148)	(77)
Other finance expenses (income)	12	(3)
	(136)	(80)

NOTE 10 - RELATED PARTIES - TRANSACTIONS AND BALANCES:

Related parties include the Chairman of the Board of Directors, the board members and the Chief Executive Officer of the Company.

	December 31
	2019	2018
a. Transactions with related parties:	U.S. dollars in thousands
Payroll and related expenses	389	252
Professional services	90	143
	479	395
b. Balances with related parties:
Employees and employees Institutions	15	17
Accrued expenses	20	—
	35	17

NOTE 11 - TAXES ON INCOME:

a.	Tax rates

The income and capital gains of the Company are subject to the normal corporate tax rates in Israel, which is 23% in 2019 and thereafter. The income of the U.S. subsidiary is subject to federal corporate tax rate, which is 21% in 2019.

b.	Tax assessments

All the tax assessments filed through 2013 are considered final.

c.	Carryforward losses

As of December 31, 2019, the Company had approximately $18.8 million of net carry forward tax losses available for reducing future taxable income without limitation of use.

23

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RDD PHARMA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 11 - TAXES ON INCOME (continued):

d.	Deferred income taxes:

	December 31
	2019		2018
	U.S. dollars in thousands
In respect of:
Net operating carry forward loss	4,321		3,250
Research and development expenses	312		430
Other	21		24
Less - valuation allowance	(4,654)		(3,704)
Net deferred tax assets	—		—

The change in valuation allowance for the years ended December 31, 2019 and 2018 was as follows:

	2019	2018
Balance at the beginning of the year	(3,704)	(2,867)
Changes during the year	(950)	(837)
Balance at the end of the year	(4,654)	(3,704)

The main reconciling item between the statutory tax rate of the Company and the effective rate is the share-based compensation and provision for full valuation allowance in respect of tax benefits from carry forward tax losses due to the uncertainty of the realization of such tax benefits.

NOTE 12 - SUBSEQUENT EVENTS:

a.	On February 3, 2020, the Company closed a financing round with certain of its shareholders, whereby $ 400 thousand have been invested in the Company (the “Internal Financing”).

In the framework of the Internal Financing, all existing share capital of the Company has been converted into Ordinary Shares, NIS 0.01 par value each, and the Company has consolidated its share capital on a 100:1 basis, whereby each 100 shares of the Company with NIS 0.01 par value have been consolidated into 1 share with NIS 1.00 par value, note 7a.

The investors in the Internal Financing have been issued new Preferred Shares NIS1.00 par value each (the “Preferred Shares”), and the Articles of Association of the Company have been amended such that in any sale or merger of the Company, if the proceeds to Company or its security holders are less than $ 40 million, then only holders of Preferred Shares will participate in the distribution of such proceeds.

b.

On April 30, 2020, the merger transaction with 9 Meters Biopharma (formerly Innovate Biopharmaceuticals, Inc.) was completed (the “Merger”). Following completion of the Merger, the Company is a wholly-owned subsidiary of 9 Meters Biopharma. The security holders of the Company prior to the Merger have received approximately 38.8 million shares of Common Stock of 9 Meters Biopharma, in consideration for all the securities of the Company, which have been transferred to 9 Meters Biopharma in the Merger. Immediately following the Merger the security holders of the Company held approximately 38% of 9 Meters Biopharma.

c.	On April 30, 2020, 9 Meters Biopharma entered into a merger agreement with Naia Rare Diseases, Inc. (“Naia”), whereby Naia is surviving as a wholly-owned subsidiary of 9 Meters Biopharma. The merger with Naia closed on May 6, 2020.

24

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RDD PHARMA LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 - SUBSEQUENT EVENTS (continued):

d.	COVID-19

The management of the Company continues to monitor the evolving situation with COVID-19, also known as coronavirus, which could directly or indirectly impact the Company’s operation. It is still too early to assess the full impact of the coronavirus outbreak and the extent to which the coronavirus impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the outbreak, and the actions that may be required to contain the coronavirus or treat its impact. In particular, the continued spread of the coronavirus globally could materially adversely impact our operations and workforce, including our research and development and our ability to raise capital, each of which in turn could have a material adverse impact on our business, financial condition and results of operation.

e.	Options to Preferred Shares

On January 26, 2020, the Company granted to the Chairman of the Board of Directors, CEO and certain of its shareholders, options exercisable for Preferred Shares of NIS 1 par value each (the “Options to Preferred Shares”), in a total amount equal to approximately 2.6% of the Merger consideration. All Options to Preferred Shares were fully vested upon their grant, and shall remain exercisable for a period of 5 years or until an M&A transaction as defined in the minutes of the meeting of shareholders of the Company.

25

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RDD PHARMA LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended March 31,
	2020					2019
	U.S. dollars in thousands
OPERATING EXPENSES:
Research and development expenses, net	$		344			$		424
General and administrative expenses	780					180
OPERATING LOSS	1,124					604
FINANCIAL EXPENSES (INCOME), NET	(56)					6
NET LOSS	$	1,068				$	610

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

4

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RDD PHARMA LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL DEFICIENCY

(Unaudited)

	Ordinary Shares					Additional Paid-in Capital			Accumulated Deficit			Total
	Number of Shares		Amounts			Amounts
	U.S. dollars in thousands
BALANCE AT JANUARY 1, 2019	489		$ *			447			$	(15,672	)	$	(15,225	)
CHANGES IN THE THREE-MONTH PERIOD ENDED MARCH 31, 2019:
Share-based compensation	—		—			4			—			4
Net loss	—		—			—			(610		)	(610		)
BALANCE AT MARCH 31, 2019	489		*			451			(16,282		)	(15,831		)
BALANCE AT JANUARY 1, 2020	489		*			—			(27,688		)	(27,688		)
CHANGES IN THE THREE-MONTH PERIOD ENDED MARCH 31, 2020:
Conversion of preferred shares and warrant liabilities to ordinary shares	325,007		326			26,602			—			26,928
Compensation to shareholder, net, refer to Note 6	—		—			(113		)	—			(113		)
Share-based compensation	—		—			12			—			12
Net loss	—		—			—			(1,068		)	(1,068		)
BALANCE AT MARCH 31, 2020	325,496		$	326		$	26,501		$	(28,756	)	$	(1,929	)

* Represents an amount of less than $1thousand

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

5

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RDD PHARMA LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended March 31,
	2020				2019
	U.S. dollars in thousands
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,068	)		$	(610	)
Adjustments required to reconcile net loss to net cash used in operating activities:
Share-based compensation	247				4
Change in fair value of warrants liability	(14		)		—
Change in fair value of preferred stock option liability	(41		)		—
Depreciation	2				2
Changes in operating assets and liabilities:
Decrease in prepaid expense and other receivables	34				1
Increase in trade payables	(59		)		(3		)
Increase (decrease) in accounts payable - other	559				(35		)
Net cash used in operating activities	(340		)		(641		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debt	200				—
Proceeds from issuance of redeemable convertible preferred shares	200				—
Proceeds from issuance of stock options	5				—
Net cash provided by financing activities	405				—
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	65				(641		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD	28				2,375
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD	$	93			$	1,734
SUPPLMENTAL DISCLOSURES OF NON-CASH FINANCING ACTIVITIES
Conversion of convertible debt to redeemable convertible preferred shares	$	200			$	—
Conversion of redeemable convertible preferred shares to ordinary shares	$	26,928			$	—
Compensation to shareholder, net	$	113			$	—

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

6

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RDD PHARMA LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - NATURE OF OPERATIONS:

a.	RDD Pharma Ltd. (hereinafter - the “Company”) commenced operations on March 1, 2008.

b.	The Company is engaged in the medical field, developing treatments for ano-rectal diseases.

c.	In February 2013, the Company established a wholly owned subsidiary in Delaware, United States, named RDD Pharma Inc. (“RDD Inc.”), which started its business activities in April 2017. In July 2015, the Company established a wholly owned subsidiary in the United Kingdom, named RDD Pharma Ltd. UK (“RDD UK”). As of March 31, 2020, RDD UK has not yet started any business activities.

d.

On October 7, 2019, the Company entered into a merger agreement, as amended on December 17, 2019, with 9 Meters Biopharma, Inc. (formerly Innovate Biopharmaceuticals, Inc.) (“9 Meters Biopharma”), a publicly traded company (the “Merger Agreement”). Upon the completion of the merger on April 30, 2020 (the “Merger”), the Company is a wholly-owned subsidiary of 9 Meters Biopharma (Nasdaq: NMTR), refer also to note 3a(1) and 10a.

e.	Liquidity

The Company has suffered recurring losses from operations and has a net capital deficiency and cash outflows from operating activities. Although the Company completed the Merger with Innovate Biopharmaceuticals in April 2020, further described in note 3a(1) and 10a, the Company expects to continue incurring losses and negative cash flows from operations until its products reach commercial profitability. As a result of these expected losses and negative cash flows from operations, along with the Company’s current cash position, the Company does not have sufficient cash to meet its liquidity requirements for the following 12 months. Consequently, there is substantial doubt about the Company’s ability to continue as a going concern. These unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.

Management’s plans are to raise additional funding from existing and new shareholders and to rely on funding from 9 Meters Biopharma (the “Parent Company” since April 30, 2020, refer also to note 10a), until profitable results are achieved. There are no assurances however, that the Company will be successful in obtaining the level of financing needed for its operations. If the Company is unsuccessful in commercializing its products and raising capital, it may need to reduce activities, curtail, or cease operations.

f.

The management of the Company continues to monitor the evolving situation with COVID-19, also known as coronavirus, which could directly or indirectly impact the Company's operations. It is still too early to assess the full impact of the coronavirus outbreak, and the extent to which the coronavirus impacts the Company operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the outbreak, and the actions that may be required to contain the coronavirus or treat its impact. In particular, the continued spread of the coronavirus globally could materially and adversely impact the Company operations and workforce, including the Company research and development, and the Company's ability to raise capital, each of which in turn could have a material adverse impact on the Company's business, financial condition, and results of operation.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The significant accounting policies applied on a consistent basis are as follows:

	7

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RDD PHARMA LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

a.	Basis of preparation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals and adjustments) necessary to state fairly the financial position, results of operations, and cash flows of the Company at the dates and for the periods indicated. Interim results are not necessarily indicative of results for the full fiscal year. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.

The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in the Company’s Annual Report for the year ended December 31, 2019. The comparative balance sheet at December 31, 2019 has been derived from the audited financial statements at that date.

b.	Principles of consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. Intercompany balances and transactions have been eliminated upon consolidation.

c.	Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting period. Actual results may differ from those estimates. As applicable to these financial statements, the most significant estimates and assumptions relate to the fair value of share-based compensation and fair value of the warrants for redeemable convertible preferred shares.

       

d.	Financial instruments

When the Company issues preferred shares, it considers the provisions of Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) in order to determine whether the preferred share should be classified as a liability. If the instrument is not within the scope of ASC 480, the Company further analyzes the instrument’s characteristics in order to determine whether it should be classified within temporary equity (mezzanine) or within permanent equity in accordance with the provisions of ASC 480-10-S99. The Company’s redeemable convertible preferred shares are not mandatorily or currently redeemable. However, they include a liquidation or deemed liquidation events that would constitute a redemption event that is outside of the Company’s control. As such, all shares of redeemable preferred shares have been presented outside of permanent equity.

As of March 31, 2020 and December 31, 2019, the Company adjusted the carrying values of the redeemable convertible preferred shares to the deemed liquidation values of such shares since a deemed liquidation event has become probable.

When the Company issues other freestanding instruments, the Company first analyzes the provisions of ASC 480 in order to determine whether the instrument should be classified as a liability, with subsequent changes in fair value recognized in the Statements of Operations in each period. If the instrument is not within the scope of ASC 480, the Company further analyzes the provisions of ASC 815-10 in order to determine whether the instrument should be classified within equity or classified as an asset or liability, with subsequent changes in fair value recognized in the Statements of Operations in each period. Refer also to notes 4 and 5.

	8

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RDD PHARMA LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):

e. Share-based compensation

The Company recognizes share-based compensation expense based on the grant-date fair value of the awards. Share-based compensation expense is generally recognized on a straight-line basis over the requisite service period for awards expected to vest.

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:

•	Expected dividend yield. The expected dividend yield is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on the Company’s common stock.

•

Expected stock-price volatility. Due to limited trading history as a public company, the expected volatility is derived from the average historical volatilities of publicly traded companies within the Company’s industry that the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term. In evaluating comparable companies, the Company considers factors such as industry, stage of life cycle, financial leverage, size, and risk profile.

•	Risk-free interest rate. The risk-free interest rate is based on the United States (“U.S.”) Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term.

•

Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. Due to limited history of stock option exercises, the Company estimates the expected term of employee stock options based on the simplified method, which calculates the expected term as the average of the time-to-vesting and the contractual life of the options. Pursuant to Accounting Standards Update (“ASU”)-2018-07 Improvements to Nonemployee Share-Based Payment Accounting, the Company has elected to use the contractual life of the option as the expected term for non-employee options. The Company also elected to use the contract life of the option as the expected term for the Preferred Options, refer to note 2f and note 5.

f.	Fair value measurement

Fair value is based on the price that would be received from the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, the guidance establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described as follows:

Level 1:	Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

Level 2:	Observable prices that are based on inputs not quoted on active markets but corroborated by market data.

Level 3:	Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and considers counterparty credit risk in its assessment of fair value. The fair value of the options exercisable for redeemable convertible preferred shares of NIS 1.00 par value each (the “Preferred Options”), refer also to note 5, was computed using a probability-weighted expected return model that also utilized the Black-Scholes option-pricing model.

	9

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RDD PHARMA LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded):

The following table summarizes the significant valuation inputs into the Black-Scholes option-pricing model for the liability associated with the Preferred Options:

	March 31, 2020	January 26, 2020
Expected dividend yield	0.0%	0.0%
Discount rate	0.4%	1.5%
Expected stock option volatility	72.5 - 83.6%	71.0 - 83.6%
Risk-free interest rate	0.4%	1.5%
Expected term (years)	5	5

The carrying amount of the cash and cash equivalents, accounts payable, and other liabilities approximates their fair value.

g.	Newly issued accounting pronouncements:

1) Accounting Pronouncements Adopted

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This standard no longer requires public companies to disclose transfers between Level 1 and 2 of the fair value hierarchy and adds additional disclosure requirements about the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The Company adopted this guidance effective January 1, 2020, and the adoption of ASU 2018-13 did not have a material impact on the Company’s financial statements.

2) Accounting Pronouncements being Evaluated

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

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 supersedes existing guidance in Leases (Topic 840). The revised standard requires lessees to recognize the assets and liabilities arising from leases with lease terms greater than twelve months on the balance sheet, including those currently classified as operating leases, and to disclose key information about leasing arrangements. Lessees will be required to recognize a lease liability and a right-of-use asset on their balance sheets, while lessor accounting will remain largely unchanged. The guidance is effective for annual periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of ASU 2016-02 will have on its consolidated financial statements and related disclosures.

	10

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RDD PHARMA LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 - COMMITMENTS AND CONTINGENCIES:

a.	Mergers and acquisitions

1)

On October 7, 2019, the Company entered into a Merger Agreement, as amended on December 17, 2019, with 9 Meters Biopharma (formerly, Innovate Biopharmaceuticals, Inc.). Following consummation of the Merger, the Company’s stockholders owned, on a fully diluted basis, approximately 38% of 9 Meters Biopharma’s shares. The exact percentage and the closing of the merger was subject to financing and several conditions, as mentioned in the Merger Agreement. The Merger was completed on April 30, 2020, refer to note 10a. The Merger Agreement is considered a deemed liquidation event under the Company’s articles of association.

2)

On November 13, 2019, the Company entered into a Non-Binding Letter (the “Non-Binding Letter”) of intent to acquire Naia Rare Diseases (“Naia”), for an amount of $4.85 million, combined of cash and shares and additional milestone payments as determined in the Non-Binding Letter. On April 30, 2020, 9 Meters Biopharma entered into a merger agreement with Naia, whereby Naia is surviving as a wholly owned subsidiary of 9 Meters Biopharma (the “Naia Merger”).

NOTE 4 - FINANCIAL LIABILITIES:

a.	Warrants for preferred shares:

1)	In July 2012, the Company entered into a Series A Preferred Share Purchase Agreement (the “2012 SPA”). As part of the 2012 SPA, the Company issued warrants for Series A Preferred shares (the “Preferred A warrants”) to a new investor (hereinafter - the “Investor”).

During February 2020, as part of the Internal Financing (refer to note 6), the Preferred A warrants were canceled, and the associated warrant liability of $14 thousand was extinguished and recorded as a gain on cancellation of warrants as part of financial (income) expense in the accompanying condensed consolidated statements of operations, refer to note 6.

2)	In 2017, as part of the 2017 SPA, the Company issued warrants for Series B-1 preferred shares (the “Preferred B-1 Warrants”).

During February 2020, the Preferred B-1 Warrants were converted into redeemable convertible preferred shares, and the associated warrant liability of $491 thousand was reclassified to redeemable convertible preferred shares. These preferred shares were subsequently converted to ordinary shares as part of the Internal Financing, refer to note 6.

b.	During January 2020, the Company entered into a convertible debt agreement (the “Convertible Note”) with a principal amount of $200 thousand. Under the terms of the Convertible Note, the outstanding principal balance and a nominal amount of accrued but unpaid interest were converted to New Preferred Shares during February 2020, refer to note 6.

	11

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RDD PHARMA LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 4 - FINANCIAL LIABILITIES (concluded):

The Company’s financial instruments measured in fair value and classified as Level 3

The table below sets forth a summary of the changes in the fair value of the warrants for preferred shares classified as Level 3:

	Warrants liabilities
	Three Months Ended March 31,
	2020			2019
Balance at beginning of period	$	505		$	653
Cancellation of warrants	(14		)	—
Conversion of warrants to B-1 preferred shares	(491		)	—
Balance at end of period	$	—		$	653

The table below sets forth a summary of the changes in the fair value of the preferred stock option liability classified as Level 3:

	Preferred stock option liability
	Three Months Ended March 31,
	2020			2019
Balance at beginning of period	$	—		$	—
Issuance of the Preferred Options	544			—
Change in fair value of preferred stock option liability	(232		)	—
Balance at end of period	$	312		$	—

b.	As of March 31, 2020 and December 31, 2019, the fair value of all financial assets and liabilities approximate their carrying amounts.

NOTE 5 - SHARE CAPITAL:

a.	The share capital as of March 31, 2020 and December 31, 2019, are composed as follows:

	Number of shares		Amount
	Authorized	Issued	Authorized			Issued
Ordinary shares NIS 1 par value	349,166	325,496	$	6,152		$	489

On February 3, 2020, the Company filed an amendment to the Company’s Amended and Restated Certificate of Incorporation to consolidate its share capital on a 100:1 basis, whereby each 100 shares of the Company with NIS 0.01 par value have been consolidated into one share with NIS 1.00 par value (the “Share Consolidation”).

All related shares and per-share data have been retroactively applied since 2019 to the consolidated financial statements and their related notes for all periods presented, refer to note 6.

	12

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RDD PHARMA LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 - SHARE CAPITAL (concluded):

b.	Share-based compensation:

In January 2020, the Company granted to the Chairman of the Board of Directors, CEO, and certain of its shareholders Preferred Options exercisable to redeemable convertible New Preferred Shares of 1.00 NIS par value each (the “Preferred Options”). The Company granted 644,811 Preferred Options with an exercise price of $1.00 per share, and 109,878 Preferred Options with an exercise price of NIS 0.01 per share. All Preferred Options were fully vested upon their grant, and remain exercisable for a period of five years or until an M&A transaction as defined in the minutes of the meeting of the shareholders of the Company. The fair value of the Preferred Options granted was $544 thousand. The fair value of the Preferred Options was computed using a probability-weighted, expected return model that also utilized the Black-Scholes option-pricing model, and was recorded as a liability, see note 4c.

The following table illustrates the effect of share-based compensation on the statements of operations:

	Three months ended March 31,
	2020			2019
	U.S. dollars in thousands
Research and development expenses	$	17		$	2
General and administrative expenses	230			2
	$	247		$	4

NOTE 6 - REDEEMABLE CONVERTIBLE PREFERRED SHARES:

a.	On February 3, 2020, the Company closed a financing round with certain of its shareholders, whereby $400 thousand were invested in the Company (the “Internal Financing”).

In the framework of the Internal Financing, all existing share capital of the Company has been converted into ordinary shares, NIS 0.01 par value each, and the Company has consolidated its share capital on a 100:1 basis, whereby each 100 shares of the Company with NIS 0.01 par value have been consolidated into one share with NIS 1.00 par value.

The investors in the Internal Financing have been issued preferred shares NIS 1.00 par value each (the “New Preferred Shares”), and the Articles of Association of the Company have been amended such that in any sale or merger of the Company, if the proceeds to the Company or its security holders are less than $40 million, then only holders of New Preferred Shares will participate in the distribution of such proceeds, refer to note 5a.

In respect to compensation for the waiver of their ordinary share rights, the Company issued to a certain shareholder 109,878 Preferred Options with an initial fair value of $113 thousand, refer to note 5b.

The Company analyzed the classification of the New Preferred Shares based, among others, on the redemption obligation in the Internal Financing. Based on ASC 480-10-S99-3A(f) Distinguishing Liabilities from Equity, the Company determined that since the redemption obligation is outside of its control, the New Preferred Shares are considered as contingently redeemable upon the occurrence of an event that is outside of its control, and should be classified as mezzanine equity. The difference between the carrying value of the New Preferred Shares and the contingently redeemable amount as of March 31, 2020, was immaterial and, as such, the carrying value was not adjusted.

The rights, preferences, and privileges with respect to the New Preferred Shares are stipulated in the Company’s amended and restated articles of association and a summary of the significant provisions are as follows:

i.	Right of First Refusal: Until an initial public offering (“IPO”) (as defined in the Company’s articles), each shareholder of New Preferred Shares have a right of first refusal with respect to a transfer, sale, assign, or otherwise of all or any of the shares or other securities of the Company by any shareholder with certain specified exceptions.

	13

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RDD PHARMA LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 - REDEEMABLE CONVERTIBLE PREFERRED SHARES (concluded):

Liquidation Preference: In the event of any liquidation or deemed liquidation, the assets shall be distributed (“Distributable Proceeds”) among the shareholders as follows:

i.

If the Distributable Proceeds are more than $40 million, then each holder of New Preferred Shares shall be entitled to receive an amount (in cash, cash equivalents, or, if applicable, securities) for each New Preferred Share held by holder equal to (i) one-time (1x) the applicable Original Issue Price ($0.29815) of such preferred share (adjusted for Recapitalization Events); plus (ii) an 8% annual interest on the applicable Original Issue Price for such New Preferred Share, accrued daily and compounded annually from the date of the issuance of such New Preferred Share up to the date of distribution; plus (iii) an amount equal to the declared but unpaid dividends on such New Preferred Share. Such distribution among the holders of New Preferred Shares shall be made in proportion to the aggregate respective preference amounts of the New Preferred Shares owned by each such shareholder on a pari passu basis.

Thereafter, all remaining assets, if any, shall be distributed pro rata among all of the Company’s shareholders based on their holdings of the Company’s issued share capital, calculated on an as-converted to Ordinary Shares basis.

ii.

In the event that the Distributable Proceeds are, in the aggregate, valued in an amount less than (or equal to) $40 million (and the value thereof shall be determined in accordance with the provisions of these Articles), then each holder of New Preferred Shares shall be entitled to receive an amount (in cash, cash equivalents, or, if applicable, securities), on a pari passu basis among all holders of New Preferred Shares, equal to such holder’s pro-rata share (calculated by dividing the New Preferred Shares held by such holder, by the aggregate New Preferred Shares held by all holders of New Preferred Shares) multiplied by the Distributable Proceeds.

iii.	Protective provisions: Certain shareholders will have certain protective provisions with regard to inter alia, the amendment of the Articles of Association of the Company, the recapitalization of its shares, effecting a liquidation event, declaring dividends, or performing a merger or IPO.

iv.

Conversion and conversion price adjustment: Each holder of New Preferred Shares has the right to convert any or all of its shares into Ordinary Shares at any time, at the conversion rate applicable at the time of conversion, without the payment of additional consideration by such holder. The conversion price of a New Preferred Share upon the issuance thereof is the Original Issue Price thereof, and thereafter, the respective conversion price and consequent conversion rate of any New Preferred Share is subject to adjustment from time to time.

v.

Automatic conversion: The New Preferred Shares shall automatically be converted into Ordinary Shares, at the then-applicable conversion rate with respect to the New Preferred Shares, upon the earlier of: (i) the election of the holders of the majority of the New Preferred Shares, or (ii) upon the closing of a firm commitment, underwritten public offering of the Company’s Ordinary Shares with a Company valuation of at least $75 million, resulting in aggregate proceeds to the Company (net of the underwriting discounts or commissions and offering expenses) of not less than $20 million. Upon conversion as specified above, all outstanding New Preferred Shares shall be deemed to have been converted into Ordinary Shares and all additional rights, privileges, and obligations attached to such shares (i.e., all such rights in excess to the rights attached to Ordinary Shares) shall be abolished.

vii.

Voting rights: Each of the Ordinary Shares shall entitle the holder thereof to one vote for each Ordinary Share. Each of the New Preferred Shares shall entitle the holder thereof to a number of votes equal to the number of Ordinary Shares then issuable upon its conversion into Ordinary Shares. With respect to such vote, each such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Ordinary Shares, and shall be entitled, notwithstanding any provision hereof, to notice of any shareholders’ meeting in accordance with the Company’s Articles, and shall be entitled to vote, with respect to any question upon which holders of shares in the Company have the right to vote. The holders of the Shares shall not vote as separate classes on any matter except where required by law or by the provisions of these Articles.

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RDD PHARMA LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 7 - TAXES ON INCOME:

The Company and its subsidiary are taxed under the domestic tax laws of the jurisdiction of incorporation of each entity (U.S. and Israel).

As of March 31, 2020, the Company continues to maintain a full valuation allowance against deferred tax assets for all jurisdictions since the realization of any future benefit from these net operating losses cannot be sufficiently assured at March 31, 2020.

NOTE 8 - RELATED PARTIES - TRANSACTIONS AND BALANCES:

Related parties include the Chairman of the Board, the Board members, and the CEO of the Company.

	March 31,
	2020			2019
	U.S. dollars in thousands
a. Transactions with related parties:
Payroll and related expenses	$	75		$	122
Share-based compensation expense	126			4
Professional services expenses	30			10
	231			136
b. Balances with related parties:
Accrued expenses	$	50		$	—

NOTE 9 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

    Balance Sheet

Other accounts payable consisted of the following:

	March 31, 2020			December 31, 2019
Employees and employee institutions	$	112		$	108
Accrued legal and professional fees	821			474
Accrued other	236			28
Total	$	1,169		$	610

NOTE 10 - SUBSEQUENT EVENTS:

The Company has evaluated subsequent events through June 12, 2020.

a.

On April 30, 2020, the merger transaction with 9 Meters Biopharma (formerly Innovate Biopharmaceuticals) was completed. Following completion of the Merger, the Company is a wholly owned subsidiary of 9 Meters Biopharma, Inc. The holders of the New Preferred Shares of the Company prior to the Merger have received approximately 38.8 million shares of Common Stock of 9 Meters Biopharma, in consideration for all the securities of the Company, which have been transferred to 9 Meters Biopharma in the Merger. Immediately following the Merger, the holders of the New Preferred Shares of the Company hold approximately 38% of 9 Meters Biopharma.

b.	On April 30, 2020, 9 Meters Biopharma entered into a merger agreement with Naia Rare Diseases, Inc. (“Naia”), whereby Naia is surviving as a wholly-owned subsidiary of 9 Meters Biopharma. The merger with Naia closed on May 6, 2020.

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