10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQuarterly Report PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

or

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

For the transition period from                          to

Commission File Number:  001-36351

DIPEXIUM PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware	46-4995704
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

14 Wall St, Suite 3D New York, NY	10005
(Address of Principal Executive Offices)	(Zip Code)

(212) 269-2834

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes  No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x
(Do not check if a smaller reporting company)

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  o Yes  o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 9, 2016:  10,401,122

Dipexium Pharmaceuticals, Inc.

FORM 10-Q

For period ended September 30, 2016

INDEX

PART I— FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
PART II— OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
SIGNATURES		23

2

PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

The accompanying interim condensed consolidated financial statements have been prepared by the Company and are unaudited.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2016, the results of operations for the three and nine months ended September 30, 2016 and 2015, the changes in shareholders’ equity for the nine months ended September 30, 2016, and cash flows for the nine months ended September  30, 2016 and 2015, have been made.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed consolidated financial statements be read in conjunction with the audited annual financial statements and notes thereto included in the Company’s Annual Report for the year ended December 31, 2015 on Form 10-K, filed with the United States Securities and Exchange Commission on March 22, 2016.  The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the operating results for the full year.

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DIPEXIUM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2016			2015
	(unaudited)			(Note 1)
ASSETS
CURRENT ASSETS
Cash	$	7,838,962		$	5,234,953
Short-term Investments	10,995,395			26,977,362
Prepaid Expenses	169,685			146,145
TOTAL CURRENT ASSETS	19,004,042			32,358,460
OTHER ASSETS
Security Deposit	56,630			49,385
TOTAL OTHER ASSETS	56,630			49,385
TOTAL ASSETS	$	19,060,672		$	32,407,845
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses	$	890,506		$	1,606,307
TOTAL LIABILITIES	890,506			1,606,307
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY
Common Stock: $.001 par value, 30,000,000 shares authorized, 10,399,642 and 10,301,114 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively	10,399			10,301
Additional paid-in capital	75,077,642			71,852,692
Accumulated deficit	(56,917,875		)	(41,061,455		)
TOTAL SHAREHOLDERS’ EQUITY	18,170,166			30,801,538
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	19,060,672		$	32,407,845

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

4

DIPEXIUM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
REVENUES	$	—		$	—		$	—		$	—
EXPENSES
OPERATING EXPENSES
Research and Development Expenses	3,113,919			3,457,165			10,398,499			7,456,829
Selling, General and Administrative Expenses	1,530,340			1,571,511			5,499,778			5,794,195
TOTAL OPERATING EXPENSES	4,644,259			5,028,676			15,898,277			13,251,024
LOSS FROM OPERATIONS	(4,644,259		)	(5,028,676		)	(15,898,277		)	(13,251,024		)
Interest Income	12,829			9,359			41,857			12,567
NET LOSS	$	(4,631,430	)	$	(5,019,317	)	$	(15,856,420	)	$	(13,238,457	)
LOSS PER SHARE
Basic and diluted net loss per common share	$	(0.45	)	$	(0.49	)	$	(1.53	)	$	(1.45	)
Weighted average common shares outstanding basic and diluted	10,359,493			10,274,718			10,338,378			9,139,310

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

5

DIPEXIUM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

	Common Stock						Accumulated			Total
	Shares	Amount		Additional Paid-In Capital			Deficit			Shareholders’ Equity
Balance at December 31, 2015	10,301,114	$	10,301	$	71,852,692		$	(41,061,455	)	$	30,801,538
Share-Based Payment to Vendor	82,964	83		629,132						629,215
Share-Based Compensation	14,000	14		2,595,819						2,595,833
Cashless Exercise of Warrants	1,564	1		(1		)				—
Net Loss							(15,856,420		)	(15,856,420		)
Balance at September 30, 2016 (unaudited)	10,399,642	$	10,399	$	75,077,642		$	(56,917,875	)	$	18,170,166

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

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DIPEXIUM PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2016			2015
Operating Activities:
Net Loss	$	(15,856,420	)	$	(13,238,457	)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-Based Compensation	2,595,833			2,731,842
Share-Based Payments to Vendors	629,215			385,647
Amortization of short-term investment interest income	(41,469		)	(11,319		)
Change In:
Prepaid Expenses	(23,540		)	(34,703		)
Security Deposit	(7,245		)	—
Accounts Payable and Accrued Expenses	(715,801		)	(454,833		)
Net Cash Used In Operating Activities	(13,419,427		)	(10,621,823		)
Investing Activities:
Proceeds from Short-term Investments	29,000,000			—
Purchase of Short-term Investments	(12,976,564		)	(26,968,686		)
Net Cash Provided By (Used In) Investing Activities	16,023,436			(26,968,686		)
Financing Activities:
Proceeds from issuance of Common Stock, net of issuance costs	—			19,743,885
Net Cash Provided By Financing Activities	—			19,743,885
Net Increase (Decrease) In Cash	2,604,009			(17,846,624		)
Cash at Beginning of Period	5,234,953			27,040,325
Cash at End of Period	$	7,838,962		$	9,193,701
SUPPLEMENTAL DISCLOSURE:
NONCASH OPERATING ACTIVITY
Accrued financing issuance costs	$	—		$	156,051

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

7

DIPEXIUM PHARMACEUTICALS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF OPERATIONS and SIGNIFICANT ACCOUNTING POLICIES

Business

Dipexium Pharmaceuticals, Inc. (the “Company”), a Delaware corporation, formerly Dipexium Pharmaceuticals, LLC, is a late stage pharmaceutical company focused on the development and commercialization of Locilex® (pexiganan cream 0.8%).  The Company was formed on January 14, 2010.  On October 25, 2016, the Company announced that its lead and sole product candidate, Locilex, failed to meet the primary clinical endpoint or secondary endpoints in its OneStep-1 and OneStep-2 Phase 3 clinical trials.  The Company’s scientific team is continuing to evaluate the data from the OneStep clinical trials and in that process may identify other possible clinical indications for Locilex, but there can be no assurance that the Company will successfully identify a regulatory pathway forward for Locilex.  In addition, there can be no assurance that the Company’s research and development will be successfully completed or that the Company’s current product candidate, or any future product candidate(s) the Company could acquire, will be approved or commercially viable.

The Company has experienced net losses and negative cash flows from operations since inception and expects these conditions to continue for the foreseeable future.  The Company has needed to raise capital from sales of its securities to sustain operations.  In March 2014, the Company completed an initial public offering (“IPO”) of common stock with proceeds, net of issuance costs, of approximately $34.5 million.  In June 2015, the Company completed an additional public offering of common stock with net proceeds of approximately $19.7 million.  As of September 30, 2016, the Company had cash and short-term investments totaling approximately $18.8 million.  Based on the Company’s projected expenditures for 2016 and 2017, management currently believes that its current cash and short-term investment balances should be sufficient to fund the Company’s operations through 2017.  However, if the Company’s assumptions underlying its estimated expenses prove to be wrong, it may have to raise additional capital sooner than anticipated.

The Company is subject to risks common to companies in the biopharmaceutical industry including, but not limited to, dependence on collaborative arrangements, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, development of sales and marketing infrastructure and compliance with Food and Drug Administration (“FDA”) and other governmental regulations and approval requirements.

Unaudited Condensed Consolidated Interim Financial Data

The accompanying interim condensed consolidated financial statements are unaudited.  These unaudited interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information.  Accordingly, they do not include all the information and footnotes required by Generally Accepted Accounting Principles (“GAAP”) for complete financial statements.  These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended December 31, 2015.  The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements included in the Company’s Annual Report for the year ended December 31, 2015, and, in the opinion of management, reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2016, the results of operations for the three and nine months ended September 30, 2016 and 2015, the changes in shareholders’ equity for the nine months ended September 30, 2016, and cash flows for the nine months ended September 30, 2016 and 2015.  The December 31, 2015 balance sheet included herein was derived from the audited financial statements, but may not include all disclosures required by GAAP for complete financial statements.

Basis of Consolidation

The Company’s condensed consolidated financial statements include the accounts of the parent, Dipexium Pharmaceuticals, Inc., and Dipexium Pharmaceuticals Ireland, Limited, a wholly owned subsidiary.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.  Actual results could differ from those estimates.

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Cash, Cash Equivalents, and Short-Term Investments

The Company considers all highly-liquid instruments purchased with a maturity of three months or less to be cash equivalents.  Instruments with maturities greater than three months, but less than twelve months are included in short-term investments.  The Company purchases United States Treasury bills with maturities ranging from six to twelve months which are classified as being held to maturity and are carried at amortized cost.  Securities classified as held to maturity securities are those securities that management has the intent and ability to hold to maturity.

The Company maintains its cash balance in one financial institution.  The balance is insured up to the maximum allowable by the Federal Deposit Insurance Company (“FDIC”).  The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk of loss on cash.  At times, the cash balance may exceed the maximum limit of the FDIC.

Research and Development

In accordance with Accounting Standards Codification (“ASC”) 730, Accounting for Research and Development Costs, the Company expenses research and development costs when incurred.  At times, the Company may make cash advances for research and development services.  These amounts are capitalized and expensed in the period the service is provided.  The Company incurred net research and development expenses in the amounts of $3,113,919 and $3,457,165 for the three months ended September 30, 2016 and 2015, respectively, and $10,398,499 and $7,456,829 for the nine months ended September 30, 2016 and 2015, repsectively.

Although the Company manages the conduct of its clinical trials, it relies on third parties to conduct its clinical and preclinical studies and to provide services, including data management, statistical analysis and electronic compilation for clinical trials, as well as for the manufacture of clinical trial supplies. At the end of each reporting period, the Company compares the payments made to each service provider to the estimated progress towards completion of the related project. Factors that are considered in preparing these estimates include the number of subjects enrolled in studies, milestones achieved and other criteria related to the efforts of the vendors. These estimates are subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, the Company records net prepaid or accrued expenses related to these costs.

Share-Based Compensation

The Company accounts for the cost of services performed by officers and directors received in exchange for an award of Company membership interests, common stock, or stock options, based on the grant-date fair value of the award.  In accordance with ASC 718, Stock Compensation, the Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the service period.

Share-Based Payments to Vendors

The Company accounts for the cost of services performed by vendors in exchange for an award of common stock of the Company based on the grant-date fair value of the award or fair value of the services rendered, whichever is more readily determinable and adjusted to fair value at each reporting date.  Such fair value is measured as of the earlier of the date the other party becomes committed to provide goods or services or the date performance by the other party is complete.  The Company recognizes the expense in the same period and in the same manner as if the Company had paid cash for the services.

Foreign Currency Translation and Transactions

The condensed consolidated financial statements are presented in U.S. Dollars (“USD”), the reporting currency of the Company.  The functional currency for the Company’s subsidiary located in Ireland is the USD. Transactions denominated in Euro were translated to USD at rates which approximate those in effect on transaction dates. Monetary assets and liabilities denominated in foreign currencies at September 30, 2016 were translated at the exchange rate in effect as of those dates. Nonmonetary assets, liabilities, and shareholders’ equity are translated at the appropriate historical rates.

The Company has intercompany loans between the parent company, Dipexium Pharmaceuticals, Inc., based in New York, NY, and its wholly owned subsidiary, Dipexium Pharmaceuticals Ireland, Limited, based in Ireland.  The intercompany loans outstanding are not expected to be repaid in the foreseeable future.

9

Income Taxes

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities and the expected benefits of net operating loss carryforwards. The impact of changes in tax rates and laws on deferred taxes, if any, applied during the years in which temporary differences are expected to be settled, is reflected in the financial statements in the period of enactment. The measurement of deferred tax assets is reduced, if necessary, if, based on weight of the evidence, it is more likely than not that some, or all, of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The Company had no material amounts recorded for uncertain tax positions, interest or penalties in the accompanying financial statements. The Company currently estimates an annual effective tax rate of 0% as the Company incurred losses for the year ended December 31, 2015 and for the three and nine months ended September 30, 2016, respectively, for both financial statement and tax purposes.  Therefore, no Federal or state income tax expense has been recorded in the financial statements for the year ended December 31, 2015 and for the three and nine months ended September 30, 2016, respectively.

Based on the Company’s history of generating operating losses and its anticipation of operating losses continuing in the foreseeable future, the Company has determined that it is more likely than not that the tax benefits from these net operating losses would not be realized and a full valuation allowance against all deferred tax assets has been recorded at September 30, 2016 and December 31, 2015, respectively.  In the event the Company becomes profitable for a period of two or more years, with future expectations at that time of profitability for future years prior to any significant change in its equity capitalization, the Company would have an opportunity to realize benefit from the deferred tax asset at such time in the future.

10

Recent Accounting Pronouncements

In August 2016,  the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, in an effort to reduce the diversity of how certain cash receipts and cash payments are presented and classified in the statement of cash flows.   The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, in an effort to simplify accounting for certain aspects of income tax accounting and accounting for forfeitures.  The amendments of this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which includes amendments that require lessees to recognize a lease liability for all long-term leases (lease terms more than 12 months) at the commencement date. The lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis.  The amendments also require lessees to recognize a right-of-use asset for all long-term leases. The right-of-use asset is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities.  If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.  The amendments in this ASU require qualitative disclosures along with specific quantitative disclosures.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.  The Company is currently evaluating the provisions of this ASU.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), which requires that all deferred income tax assets and liabilities be presented as noncurrent in the statement of financial position. The pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018 with early application permitted.  The adoption of this guidance is not expected to have a material impact on our financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern, which requires management of an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. This update will become effective beginning January 1, 2017, with early adoption permitted. The Company is currently evaluating the provisions of this ASU.

NOTE 2 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of certain of the Company’s financial instruments, including cash and accounts payable, is shown at cost, which approximates fair value.  Short-term investments with maturities ranging from six to twelve months are classified as being held to maturity and are carried at amortized cost.  The cost, gross unrealized gains, and the fair value of related securities at September 30, 2016 and December 31, 2015 were as follows:

	Total (maturities within 12 months)
	Cost		Unrealized Gain		Fair Value
Held to Maturity:
Debt Securities:
U.S. Government sponsored bonds at September 30, 2016	$	10,982,363	$	15,417	$	10,997,780
U.S. Government sponsored bonds at December 31, 2015	$	26,958,214	$	4,646	$	26,962,860

The Company had total amortized interest income for the three month periods ended September 30, 2016 and 2015 of $12,648 and $9,050, respectively and $41,469 and $11,319 for the nine month periods ended September 30, 2016 and 2015, respectively.  The carrying values of $10,995,395 and $26,977,362 as of September 30, 2016 and December 31, 2015 are equal to the cost of the securities plus the accumulated amortized interest income of $13,032 and $19,148 on the remaining bonds held at September 30, 2016 and December 31, 2015, respectively.

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NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses at September 30, 2016 and December 31, 2015 are as follows:

	September 30, 2016		December 31, 2015
Accrued compensation expense	$	252,313	$	663,404
Accrued research and development	567,544		859,053
Accrued professional fees	39,049		55,787
Other accounts payable and accrued expenses	31,600		28,063
Totals	$	890,506	$	1,606,307

NOTE 4 — SHARE-BASED COMPENSATION and STOCK OPTIONS

Prior to the Company’s IPO, the Company granted awards of restricted Class A Membership Interests to board members in exchange for services.  These membership interests awards, which were converted to restricted common shares (7:1 ratio) at the time of the corporate conversion in March 2014, were originally scheduled to vest over a period of either three or four years with the first year beginning on the date the member joined the board.  In each case, the restricted common shares involved accelerated vesting upon a change of control or other business combination.  The fair value of the membership interests, at the time they were granted, was equal to the per-membership interest value of the most recent private placement ($50 per membership interest on a pre-conversion basis).  Total compensation expense in the amount of $25,000 has been recognized as director fees for the three months ended September 30, 2016 and 2015, respectively, and $75,000 for each of the nine month periods ended September 30, 2016 and 2015.

The following table summarizes the restricted common stock at September 30, 2016:

	Restricted Common Stock
Nonvested at January 1, 2016	28,000
Granted	—
Forfeited	—
Vested	(14,000	)
Nonvested at September 30, 2016	14,000

As of September 30, 2016, there was $45,833 of total unrecognized compensation expense related to these awards. That expense is expected to be recognized over a weighted average period of 0.50 years.

In November 2013, the board of directors adopted the 2013 Equity Incentive Plan.  The plan became effective as of the completion of the corporate conversion and the closing of the IPO.  The 2013 Equity Incentive Plan currently reserves 2,141,169 common shares, of which 696,156 are still available for issuance.  The purpose of the plan is to attract and retain directors, officers, and employees whose services are considered valuable to the Company.

In January 2015, the Company granted stock options to purchase 251,000 common shares to its five employees, outside directors, and certain non-employee consultants.  The options were issued pursuant to the 2013 Equity Incentive Plan at an exercise price of $11.35, with one-half of the options vesting upon issuance and the balance vesting evenly over the subsequent 24 months. A portion of the January stock option grant, 35,000 fully vested options, were granted to non-employees for services rendered.  As such, the Company expensed $353,150, the entire portion of those non-employee grants, at the grant date.

In January 2016, the Company granted stock options to purchase 287,500 common shares to its employees, outside directors, and certain non-employee consultants.  The options were issued pursuant to the 2013 Equity Incentive Plan at an exercise price of $10.16, with one-half of the options vesting upon issuance and the balance vesting evenly over the subsequent 24 months. A portion of the January stock option grant, 27,500 fully vested options, were granted to non-employees for services rendered.  As such, the Company expensed $181,775, the entire portion of those non-employee grants, at the grant date.

In the third quarter of 2016, the Company granted stock options to purchase 45,226 common shares to an outside director and non-employee consultant.  The options were issued pursuant to the 2013 Equity Incentive Plan at respective exercise prices ranging from $11.42 to $12.59, with vesting periods consistent with the services rendered.

Compensation expense associated with these awards is recognized over the vesting period based on the fair value of the option at the grant date determined based on the Black-Scholes model. Option valuation models require the input of highly subjective assumptions including the expected price volatility.  The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.

12

Because there is no public market for the Company’s stock options and very little historical experience with the Company’s stock, similar public companies were used for comparison and expectations as to the price volatility assumptions required for fair value computation using the Black-Scholes methodology.

The Company determined the fair value of the option awards using the Black-Scholes option pricing model and the following weighted average assumptions for options issued during the respective periods:

	Nine Months Ended		Nine Months Ended
	September 30, 2016		September 30, 2015
Expected term	5.60 years		5.65 years
Volatility	63.2	%	62.1	%
Dividend yield	0	%	0	%
Risk free interest rate	1.52	%	1.58	%

ASC 718 requires stock compensation expense to be recorded net of estimated forfeitures.  The Company currently estimates there will be no forfeitures of options.

A summary of the Company’s stock option activity is as follows:

		Weighted Average
	Number of Options	Exercise Price
Outstanding at the beginning of the period	1,112,287	$	13.32
Granted	332,726	$	10.35
Forfeited	—
Outstanding and expected to vest at September 30, 2016	1,445,013	$	12.64

Compensation expense relating to options for the three months ended September 30, 2016 and 2015 was $601,302 and $519,066, respectively, and $2,520,833 and $2,656,842 for the nine months ended September 30, 2016 and 2015, respectively.  The total compensation expense not yet recognized as of September 30, 2016 was $1,617,267.  The weighted average vesting period over which the total compensation expense will be recorded related to unvested options not yet recognized as of September 30, 2016 was approximately 1.0 years. The weighted average grant date fair value of options granted during the nine month period was $5.02 and $7.61 as of September 30, 2016 and 2015, respectively. The intrinsic value of the stock options was $2,688,540 and $751,465 as of September 30, 2016 and 2015, respectively, with a remaining weighted average contractual life of 5.49 years.  Total options excercisable at September 30, 2016 were 1,138,239.

NOTE 5 — SHARE-BASED PAYMENTS TO VENDORS

In the ordinary course of business, the Company may issue restricted stock for services rendered by a vendor.  The vesting of restricted stock and the associated expense for the services rendered are recorded over the term of the related contract.  Research and development expenses resulting from vendor equity issuances for the three months ended September 30, 2016 and 2015 were $286,482 and $227,150, respectively, and $629,215 and $385,647 for the nine months ended September 30, 2016 and 2015, respectively

NOTE 6— LEASE OF OFFICE SPACE

In January 2016, the Company entered into a lease for office space commencing in March 2016.  The term of the lease is for five years and five months with total minimum lease payments of approximately $1.28 million.  The future minimum lease payments under this lease are as follows:

Year ending December 31:
2016	$	56,571
2017	231,534
2018	238,004
2019	244,658
2020	251,522
2021	150,347
Total	$	1,172,636

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NOTE 7 — LEGAL MATTERS

The Company and its two original executives were three of some 30 defendants in a lawsuit filed by a former stockholder of Genaera Corporation, which was the predecessor of the Genaera Liquidating Trust, the party from which the Company purchased the worldwide rights to pexiganan, the active pharmaceutical ingredient of the Locilex®, on April 8, 2010. The complaint was filed on June 8, 2012 in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 12-3265) by Alan W. Schmidt, individually and on behalf of former Genaera Corporation shareholders. Among others, the suit was filed against the Company, as well as John A. Skolas and Argyce, LLC, who were responsible for the administration of the Trust and who sold pexiganan to the Company via a public auction. The defendants listed in the complaint included several individuals and companies formerly associated with Genaera Corporation, the Trust and/or Argyce, LLC. Also included in the defendant group were several other pharmaceutical companies that were involved in acquiring the former drug-related assets of Genaera Corporation.

The complaint alleged, among other things, that the Company and its two executives aided and abetted a breach of fiduciary duty alleged to have been committed by the former directors and officers of Genaera Corporation before it was approved for dissolution by its shareholders and also Argyce, LLC, the trustee of the Liquidating Trust. Plaintiff claims that the Company, and its executives, aided and abetted a breach of the duties of the board of directors and the trustee under common law and under a certain trust agreement allegedly signed between Argyce, LLC, as the trustee, and the Liquidating Trust. With regard to the claims made against the Company and its two executives, the plaintiff alleged, in pertinent part, that the Company’s acquisition of the pexiganan rights was for alleged inadequate consideration, and that the Company and its management aided and abetted a breach of fiduciary duty by the Genaera Corporation defendants who were formerly associated with Genaera Corporation and/or the Trust.

The Company and its two executives filed a motion to dismiss the complaint within the prescribed time period. All of the other defendants in this litigation also filed motions to dismiss, and a court order by the Federal District Court granted each and every motion to dismiss, with prejudice, without leave to refile, on August 12, 2013 based on the argument that plaintiff’s claims were time barred. A subsequent motion to reconsider such dismissal was denied by the Federal District Court.  Plaintiff appealed the dismissal to the United States Third Circuit Court of Appeals seeking reversal of the dismissal and the Third Circuit Court granted plaintiff’s appeal.  On October 17, 2014, the Third Circuit Appellate Court, in a 2-1 decision with a strong dissenting opinion, reversed the trial court’s dismissal of Plaintiff’s claims based on the expiration of the applicable statutes of limitation. In a 2-1 decision, the Third Circuit held that more information was necessary to determine when plaintiff should have been on notice of his claims to determine the applicability of the discovery rule, which could serve to extend the time frame in which plaintiff could bring his claims. Due to the strong dissent, all Defendants filed the necessary documents requesting a petition for rehearing en banc, by the majority of the Third Circuit justices who are in active service. The Third Circuit denied the request for en banc hearing and remanded this case to District Court.

Upon remand to the Federal District Court, all Defendants moved to dismiss the complaint for reasons other than being time barred.  The Company and its two executives moved for dismissal based on plaintiff’s inability to make a case for aiding and abetting a breach of fiduciary duty because there was no underlying breach and such an aiding and abetting claim requires an element of knowing participation in the fiduciary breach which cannot be established by plaintiff.

The District Court held a hearing on this in September 2015 and the District Court delivered an Order on November 10, 2015 pursuant to which the District Court granted the Motion to Dismiss filed by each and every defendant including the Company and its two executives.  In December 2015, plaintiff appealed the Federal District Court’s decision to the Third Circuit Appellate Court and the Company anticipates a decision on whether to grant plaintiff’s appeal by the Third Circuit Appellate Court in the fourth quarter of 2016.  The Company will continue to vigorously defend against plaintiff’s claims on the factual record, which it believes will prove that neither the Company nor its executives is liable to the plaintiff in any regard.

NOTE 8 — RELATED PARTY TRANSACTIONS

The Company engaged the consulting services of Drug Development Advisors (“DDA”) pursuant to which DDA performed detailed analysis on a number of the Company’s preclinical studies in connection with the NDA process.  DDA is owned and operated by a member of the Company’s board of directors.  The Company incurred expenses for services provided by DDA in the amounts of $6,938 and $5,250 for the three months ended September 30, 2016 and 2015, respectively, and $14,166 and $19,487 for the nine months ended September 30, 2016 and 2015, respectively, all of which were recorded in research and development expenses.

NOTE 9 — NET LOSS PER SHARE

Basic and diluted net loss per common share for the three and nine months ended September 30, 2016 and 2015 was determined by dividing net loss by the weighted average common shares outstanding during the period.  The Company’s potentially dilutive shares, which include 1,445,013 stock options, 37,233 unvested common shares, and 16,100 warrants, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive.

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

FORWARD-LOOKING STATEMENT NOTICE

This Form 10-Q contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements.  Without limiting the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate” or “continue” or comparable terminology are intended to identify forward-looking statements.  These statements by their nature involve substantial risks and uncertainties, and actual results may differ materially depending on a variety of factors, many of which are not within our control.  These factors include but are not limited to economic conditions generally and in the industries in which we may participate; competition within our chosen industry, including competition from much larger competitors; technological advances and failure to successfully develop business relationships.  Unless the context indicates otherwise, as used in this report, the terms “Dipexium,” “we,” “us,” “our,” “our company” and “our business” refer, prior to the corporate conversion discussed herein, to Dipexium Pharmaceuticals, LLC, and after the corporate conversion to Dipexium Pharmaceuticals, Inc.

Description of Business

Dipexium Pharmaceuticals, LLC (“Dipexium LLC”) was incorporated under the laws of the State of Delaware in January 2010. In March 2014, we effected a corporate conversion pursuant to which we succeeded to the business of Dipexium LLC and the holders of membership interests of Dipexium LLC became our stockholders.  On October 25, 2016, we announced that our lead and sole product candidate, Locilex, failed to meet the primary clinical endpoint or secondary endpoints in its OneStep-1 and OneStep-2 Phase 3 clinical trials.  Our scientific team is continuing to evaluate the data from the OneStep clinical trials and in that process may identify other possible clinical indications for Locilex, but there can be no assurance that we will successfully identify a regulatory pathway forward for Locilex.  In addition, there can be no assurance that our research and development will be successfully completed or that our current product candidate, or any future product candidate(s) the Company could acquire, will be approved or commercially viable.

Plan of Operation

Our primary objective is to identify an appropriate regulatory pathway for Locilex in light of the recent failure to meet the endpoints in the OneStep clinical studies.  Review and analysis of all relevant data from the OneStep clinical trials is ongoing by our scientific team.  Upon completion of a full review of the comprehensive data, we hope to either identify and develop a regulatory pathway forward within a subset of diabetic foot infection or, alternatively, identify a different clinical indication within which the data may support further development.  We will rely on our strong management team, board of directors and scientific advisors to execute our strategy.

Opportunities, Challenges and Risks

Our business and ability to execute our business strategy are subject to a number of risks and challenges including, without limitation, the following:

· We are heavily dependent on attaining regulatory approval for and, if approved, successfully commercializing Locilex®. Locilex® is our only product candidate. As such, all of our resources and efforts have been and are expected for the foreseeable future to be dedicated to the development and commercialization of Locilex® which recently failed to meet the primary and secondary endpoints in our OneStep-1 and OneStep-2 clinical trials.  If our efforts fail to develop an appropriate regulatory strategy for Locilex, this will have a negative and substantial impact on the Company’s viability unless we are able to develop or acquire other product candidates.

· The regulatory pathway for Locilex, if any, has yet to be identified.  Review of the comprehensive data from the OneStep clinical trials is ongoing.  The Company has no clear clinical or regulatory pathway forward for Locilex®, the sole product of the Company, and no assurance can be given that an appropriate clinical and regulatory pathway exists.  This process is inherently unpredictable, and if we are ultimately unable to identify an appropriate regulatory pathway forward for Locilex®, our business will be substantially harmed.

· Manufacturing issues may prevent Locilex® from receiving regulatory approval.  Although we believe that we have successfully resolved the manufacturing issues encountered by Locilex®’s prior sponsor and previously identified by the FDA, to the extent that such issues are not resolved or to the extent new issues arise, regulatory approval for Locilex® may be delayed or withheld, and we may not be able to meet the developmental milestones necessary to continue our business.

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Results of Operations

Three Months Ended September 30, 2016 Compared to the Three Months Ended September 30, 2015

Summary Table

The following table presents a summary of the changes in our results of operations for the three months ended September 30, 2016 compared with the three months ended September 30, 2015:

	Three Months Ended September 30,				Percentage
	2016		2015		Increase (Decrease)
	(in thousands)
Research and Development Expenses	$	3,114	$	3,457	(10	)%
Selling, General and Administrative Expenses	$	1,530	$	1,571	(3	)%
Total Operating Expenses	$	4,644	$	5,028	(8	)%
Interest Income	$	13	$	9	44	%
Net Loss	$	4,631	$	5,019	(8	)%

Research and Development Expenses

Research and development expenses were $3.1 million for the three months ended September 30, 2016, and $3.5 million for the three months ended September 30, 2015, a decrease of $0.4 million. The decrease was due to $0.5 million of decreased manufacturing costs due to the timing of manufacturing scale-up activities in the prior year, offset by $0.1 million increase in clinical trial related expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $1.5 million for the three months ended September 30, 2016, and $1.6 million for the three months ended September 30, 2015.

Net Loss

Net loss was $4.6 million for the three months ended September 30, 2016, and $5.0 million for the three months ended September 30, 2015, a decrease of $0.4 million, primarily due to a decrease in research and development expenses due to the reasons stated above.

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Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

Summary Table

The following table presents a summary of the changes in our results of operations for the nine months ended September 30, 2016 compared with the nine months ended September 30, 2015:

	Nine Months Ended September 30,				Percentage
	2016		2015		Increase (Decrease)
	(in thousands)
Research and Development Expenses	$	10,398	$	7,457	39	%
Selling, General and Administrative Expenses	$	5,500	$	5,794	(5	)%
Total Operating Expenses	$	15,898	$	13,251	20	%
Interest Income	$	42	$	13	223	%
Net Loss	$	15,856	$	13,238	20	%

Research and Development Expenses

Research and development expenses were $10.4 million for the nine months ended September 30, 2016, and $7.5 million for the nine months ended September 30, 2015, an increase of $2.9 million. The increase in research and development expenses were due primarily to increased Phase 3 clinical trial enrollment and related clinical trial expenses.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $5.5 million for the nine months ended September 30, 2016, and $5.8 million for the nine months ended September 30, 2015, a decrease of $0.3 million. The decrease in selling, general and administrative expenses is primarily attributable to a $0.1 million decrease in stock-based non-cash compensation related expenses and a $0.2 million decrease in marketing related costs.

Net Loss

Net loss was $15.9 million for the nine months ended September 30, 2016, and $13.2 million for the nine months ended September 30, 2015, an increase of $2.7 million, primarily due to a $2.9 million increase in research and development expenses partially offset by a $0.2 million decrease in selling, general, and administrative expenses due to the reasons stated above.

Liquidity and Capital Resources

Overview

We have generated no revenue from operations and we have incurred cumulative losses of approximately $56.9 million since inception. We have funded our operations primarily from equity issuances.  On March 18, 2014, we closed an initial public offering of 3,162,500 shares of our common stock at a public offering price of $12.00 per share. Gross proceeds raised by us in the offering were approximately $38.0 million, and net proceeds to us were approximately $34.5 million.

On June 30, 2015, we completed a stock offering issuing 1,702,000 shares of common stock at a price of $12.50 per share, resulting in gross proceeds of $21.3 million and net proceeds of $19.7 million after deducting underwriting discounts of $1.3 million and offering costs of approximately $0.3 million.

We believe that we have sufficient cash and short-term investments to fund our operations through 2017.

As of September 30, 2016, we had working capital of approximately $18.1 million, consisting primarily of $18.8 million of cash and short-term investments, offset by $0.9 million of accounts payable and accrued expenses.

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The following tables sets forth selected cash flow information for the periods indicated:

	For the nine months ended September 30,
	2016			2015
	(in thousands)
Net cash used in operating activities	$	(13,419	)	$	(10,622	)
Net cash provided by (used in) investing activities	16,023			(26,969		)
Net cash provided by financing activities	—			19,744
Net increase (decrease) in cash	$	2,604		$	(17,847	)

Net Cash Used in Operating Activities

Net cash used in operating activities was $13.4 million for the nine months ended September 30, 2016.  The net loss for this period was greater than the net cash used in operating activities by $2.4 million, which was primarily attributable to $3.2 million of share-based compensation offset by a $0.7 million decrease in accounts payable and accrued expenses.

Net cash used in operating activities was $10.6 million for the nine months ended September 30, 2015. The net loss for this period was greater than the net cash used in operating activities by $2.6 million, which was primarily attributable to $3.1 million of share-based compensation offset by a $0.5 million decrease in accounts payable and accrued expenses.

Net Cash Provided by Investing Activities

Net cash provided by investing activities for the nine months ended September 30, 2016 was $16.0 million, which was attributable to the Company’s net investments and maturities of United States Treasury Bills.

Net cash used in investing activities for the nine months ended September 30, 2015 was $26.9 million, which was attributable to the Company’s net investments and maturities of United States Treasury Bills.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2015 was $19.7 million, which was attributable to the net proceeds from the Company’s June 2015 public offering.

Contractual Obligations

In January 2016, the Company entered into a lease for office space commencing in March 2016.  The term of the lease is for five years and five months with total minimum lease payments of approximately $1.28 million.

Recent Accounting Pronouncements

In August 2016,  the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, in an effort to reduce the diversity of how certain cash receipts and cash payments are presented and classified in the statement of cash flows.   The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, in an effort to simplify accounting for certain aspects of income tax accounting and accounting for forfeitures.  The amendments of this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which includes amendments that require lessees to recognize a lease liability for all long-term leases (lease terms more than 12 months), at the commencement date. The lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis.  The amendments also require lessees to recognize a right-of-use asset for all long-term leases. The right-of-use asset is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities.  If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.  The amendments in this ASU require qualitative disclosures along with specific quantitative disclosures.   The amendments in this ASU are effective for

18

fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases), must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.  The Company is currently evaluating the provisions of this ASU.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), which requires that all deferred income tax assets and liabilities be presented as noncurrent in the statement of financial position. The pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018 with early application permitted.  The adoption of this guidance is not expected to have a material impact on our financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern, which requires management of an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. This update will become effective beginning January 1, 2017, with early adoption permitted. The Company is currently evaluating the provisions of this ASU.

Critical Accounting Policies and Estimates

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we may, under Section 7(a)(2)(B) of the Securities Act of 1933 (or Securities Act), delay adoption of new or revised accounting standards applicable to public companies until such standards would otherwise apply to private companies. We may take advantage of this extended transition period until the first to occur of the date that we (i) are no longer an “emerging growth company” or (ii) affirmatively and irrevocably opt out of this extended transition period. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Until the date that we are no longer an “emerging growth company” or affirmatively and irrevocably opt out of the exemption provided by Securities Act Section 7(a)(2)(B), upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which adoption is required for non-emerging growth companies and the date on which we will adopt the recently issued accounting standard. Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. On an ongoing basis, we evaluate these estimates and judgments, including those described below. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and experiences may differ materially from these estimates.

Share-Based Compensation

We account for the cost of services performed by employees and directors received in exchange for common stock, or stock options, based upon the grant date fair value of the award. In accordance with the Accounting Standards Codification, we recognize compensation expense, net of estimated forfeitures, on a straight-line basis over the vesting period.

We account for the cost of services performed by vendors in exchange for an award of membership interests or common stock based upon the grant date fair value of the award or fair value of the services rendered, whichever is more readily determinable. In accordance with the Accounting Standards Codification, we recognize the expense in the same period and in the same manner as if we had paid cash for the services.

Research and Development Expenses

Although we manage the conduct of our own clinical trials, we rely on third parties to conduct our preclinical studies and to provide services, including data management, statistical analysis and electronic compilation for our clinical trials, as well as for the manufacture of our clinical trial supplies. At the end of each reporting period, we compare the payments made to each service provider to the estimated progress towards completion of the related project. Factors that are considered in preparing these estimates include the number of subjects enrolled in studies, milestones achieved and other criteria related to the efforts of our vendors. These estimates are subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, we record net prepaid or accrued expenses related to these costs.

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Off-Balance Sheet Arrangements

We did not have, during the periods presented, and we are currently not party to, any off-balance sheet arrangements.

Seasonality

We do not have a seasonal business cycle. Our operating results are generally derived evenly throughout the calendar year.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not required by smaller reporting companies.

ITEM 4.  CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures.  We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer, and principal financial and accounting officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive, and principal financial and accounting officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon our evaluation, our principal executive officer, and principal financial and accounting officer concluded that our disclosure controls and procedures are effective as of September 30, 2016, in ensuring that material information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

Changes in Internal Control over Financial Reporting.  There were no changes in our system of internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

The Company and its two original executives were three of some 30 defendants in a lawsuit filed by a former stockholder of Genaera Corporation, which was the predecessor of the Genaera Liquidating Trust, the party from which the Company purchased the worldwide rights to pexiganan, the active pharmaceutical ingredient of the Locilex® on April 8, 2010. The complaint was filed on June 8, 2012 in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 12-3265) by Alan W. Schmidt, individually and on behalf of former Genaera Corporation shareholders. Among others, the suit was filed against the Company, as well as John A. Skolas and Argyce, LLC, who were responsible for the administration of the Trust and who sold pexiganan to the Company via a public auction. The defendants listed in the complaint included several individuals and companies formerly associated with Genaera Corporation, the Trust and/or Argyce, LLC. Also included in the defendant group were several other pharmaceutical companies that were involved in acquiring the former drug-related assets of Genaera Corporation.

The complaint alleged, among other things, that the Company and its two executives aided and abetted a breach of fiduciary duty alleged to have been committed by the former directors and officers of Genaera Corporation before it was approved for dissolution by its shareholders and also Argyce, LLC, the trustee of the Liquidating Trust. Plaintiff claims that the Company, and its executives, aided and abetted a breach of the duties of the board of directors and the trustee under common law and under a certain trust agreement allegedly signed between Argyce, LLC, as the trustee, and the Liquidating Trust. With regard to the claims made against the Company and its two executives, the plaintiff alleged, in pertinent part, that the Company’s acquisition of the pexiganan rights was for alleged inadequate consideration, and that the Company and its management aided and abetted a breach of fiduciary duty by the Genaera Corporation defendants who were formerly associated with Genaera Corporation and/or the Trust.

The Company and its two executives filed a motion to dismiss the complaint within the prescribed time period. All of the other defendants in this litigation also filed motions to dismiss, and a court order by the Federal District Court granted each and every motion to dismiss, with prejudice, without leave to refile, on August 12, 2013 based on the argument that plaintiff’s claims were time barred. A subsequent motion to reconsider such dismissal was denied by the Federal District Court.  Plaintiff appealed the dismissal to the United States Third Circuit Court of Appeals seeking reversal of the dismissal and the Third Circuit Court granted plaintiff’s appeal.  On October 17, 2014, the Third Circuit Appellate Court, in a 2-1 decision with a strong dissenting opinion, reversed the trial court’s dismissal of plaintiff’s claims based on the expiration of the applicable statutes of limitation. In a 2-1 decision, the Third Circuit held that more information was necessary to determine when plaintiff should have been on notice of his claims to determine the applicability of the discovery rule, which could serve to extend the time frame in which plaintiff could bring his claims. Due to the strong dissent, all Defendants filed the necessary documents requesting a petition for rehearing en banc, by the majority of the Third Circuit justices who are in active service. The Third Circuit denied the request for en banc hearing and remanded this case to District Court.

Upon remand to the Federal District Court, all Defendants moved to dismiss the complaint for reasons other than being time barred.  The Company and its two executives moved for dismissal based on plaintiff’s inability to make a case for aiding and abetting a breach of fiduciary duty because there was no underlying breach and such an aiding and abetting claim requires an element of knowing participation in the fiduciary breach which cannot be established by plaintiff.

The District Court held a hearing on this in September 2015 and the District Court delivered an Order on November 10, 2015 pursuant to which the District Court granted the Motion to Dismiss filed by each and every defendant including the Company and its two executives.  In December 2015, plaintiff appealed the Federal District Court’s decision to the Third Circuit Appellate Court and we anticipate a decision on whether to grant plaintiff’s appeal by the Third Circuit Appellate Court in the fourth quarter of 2016.  The Company will continue to vigorously defend plaintiff’s claims on the factual record, which it believes will prove that neither the Company nor its executives is liable to the plaintiff in any regard.

ITEM 1A.  RISK FACTORS

Not Applicable to a smaller reporting company.

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

None

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.

Exhibit No.	Title of Document	Location
31.1	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Attached
31.2	Certification of the Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Attached
32.1	Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*	Attached
32.2	Certification of the Principal Financial and Accounting Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*	Attached
101.INS	X XBRL Instance Document	Attached
101.SCH	X XBRL Taxonomy Extension Schema Document	Attached
101.CAL	X XBRL Taxonomy Calculation Linkbase Document	Attached
101.DEF	X XBRL Taxonomy Extension Definition Linkbase Document	Attached
101.LAB	X XBRL Taxonomy Label Linkbase Document	Attached
101.PRE	X XBRL Taxonomy Presentation Linkbase Document	Attached

* The Exhibit attached to this Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.

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SIGNATURES

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

	DIPEXIUM PHARMACEUTICALS, INC.
Date: November 9, 2016
	By:	/s/ David P. Luci
		David P. Luci
		President and Chief Executive Officer (Duly Authorized Officer and Principal Executive Officer)
	By:	/s/ Robert G. Shawah
		Robert G. Shawah
		Chief Accounting Officer and Treasurer (Duly Authorized Officer and Principal Financial and Accounting Officer)

23

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, David P. Luci, certify that:

1.I have reviewed this Form 10-Q of Dipexium Pharmaceuticals, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report;

4.The registrant’s other certifying officer (s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financing reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dipexium Pharmaceuticals, Inc.
By:	/s/ David P. Luci
	David P. Luci
	President and Chief Executive Officer (Principal Executive Officer)

November 9, 2016

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

I, Robert G. Shawah, certify that:

1.I have reviewed this Form 10-Q of Dipexium Pharmaceuticals, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods present in this report;

4.The registrant’s other certifying officer (s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financing reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer (s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involved management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dipexium Pharmaceutical, Inc.
By:	/s/ Robert G. Shawah
	Robert G. Shawah
	Chief Accounting Officer and Treasurer (Principal Financial and Accounting Officer)

November 9, 2016

EX-32.1

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dipexium Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David P. Luci, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Dipexium Pharmaceuticals, Inc.
By:	/s/ David P. Luci
	David P. Luci
	President and Chief Executive Officer
	(Principal Executive Officer)

November 9, 2016

EX-32.2

Exhibit 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Dipexium Pharmaceuticals, Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert G. Shawah, Chief Accounting Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2.The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Dipexium Pharmaceuticals, Inc.
By:	/s/ Robert G. Shawah
	Robert G. Shawah
	Chief Accounting Officer and Treasurer
	(Principal Financial and Accounting Officer)

November 9, 2016

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Nov. 09, 2016
Document and Entity Information
Entity Registrant Name	Dipexium Pharmaceuticals, Inc.
Entity Central Index Key	0001497504
Document Type	10-Q
Document Period End Date	Sep. 30, 2016
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		10,401,122
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3

XML

CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)	Sep. 30, 2016	Dec. 31, 2015
CURRENT ASSETS
Cash	$ 7,838,962	$ 5,234,953
Short-term Investments	10,995,395	26,977,362
Prepaid Expenses	169,685	146,145
TOTAL CURRENT ASSETS	19,004,042	32,358,460
OTHER ASSETS
Security Deposit	56,630	49,385
TOTAL OTHER ASSETS	56,630	49,385
TOTAL ASSETS	19,060,672	32,407,845
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses	890,506	1,606,307
TOTAL LIABILITIES	890,506	1,606,307
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock: $.001 par value, 30,000,000 shares authorized, 10,399,642 and 10,301,114 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively	10,399	10,301
Additional paid-in capital	75,077,642	71,852,692
Accumulated deficit	(56,917,875)	(41,061,455)
TOTAL SHAREHOLDERS' EQUITY	18,170,166	30,801,538
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$ 19,060,672	$ 32,407,845

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Sep. 30, 2016	Dec. 31, 2015
CONDENSED CONSOLIDATED BALANCE SHEETS
Common Stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common Stock, shares authorized	30,000,000	30,000,000
Common Stock, shares issued	10,399,642	10,301,114
Common Stock, shares outstanding	10,399,642	10,301,114

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
OPERATING EXPENSES
Research and Development Expenses	$ 3,113,919	$ 3,457,165	$ 10,398,499	$ 7,456,829
Selling, General and Administrative Expenses	1,530,340	1,571,511	5,499,778	5,794,195
TOTAL OPERATING EXPENSES	4,644,259	5,028,676	15,898,277	13,251,024
LOSS FROM OPERATIONS	(4,644,259)	(5,028,676)	(15,898,277)	(13,251,024)
Interest Income	12,829	9,359	41,857	12,567
NET LOSS	$ (4,631,430)	$ (5,019,317)	$ (15,856,420)	$ (13,238,457)
LOSS PER SHARE
Basic and diluted net loss per common share (in dollars per share)	$ (0.45)	$ (0.49)	$ (1.53)	$ (1.45)
Weighted average common shares outstanding basic and diluted	10,359,493	10,274,718	10,338,378	9,139,310

XML

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - 9 months ended Sep. 30, 2016 - USD ($)	Common Stock	Additional Paid-in Capital	Accumulated Deficit	Total
Balance at Dec. 31, 2015	$ 10,301	$ 71,852,692	$ (41,061,455)	$ 30,801,538
Balance (in shares) at Dec. 31, 2015	10,301,114			10,301,114
Increase (Decrease) in Stockholders' Equity
Share-Based Payment to Vendor	$ 83	629,132		$ 629,215
Share-Based Payment to Vendor (in shares)	82,964
Share-Based Compensation	$ 14	2,595,819		2,595,833
Share-Based Compensation (in shares)	14,000
Cashless Exercise of Warrants	$ 1	(1)
Cashless Exercise of Warrants (in shares)	1,564
Net Loss			(15,856,420)	(15,856,420)
Balance at Sep. 30, 2016	$ 10,399	$ 75,077,642	$ (56,917,875)	$ 18,170,166
Balance (in shares) at Sep. 30, 2016	10,399,642			10,399,642

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Operating Activities:
Net Loss	$ (4,631,430)	$ (5,019,317)	$ (15,856,420)	$ (13,238,457)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-Based Compensation			2,595,833	2,731,842
Share-Based Payments to Vendors			629,215	385,647
Amortization of short-term investment interest income	(12,648)	(9,050)	(41,469)	(11,319)
Change In:
Prepaid Expenses			(23,540)	(34,703)
Security Deposit			(7,245)
Accounts Payable and Accrued Expenses			(715,801)	(454,833)
Net Cash Used In Operating Activities			(13,419,427)	(10,621,823)
Investing Activities:
Proceeds from Short-term Investments			29,000,000
Purchase of Short -term Investments			(12,976,564)	(26,968,686)
Net Cash Provided by (Used in) Investing Activities			16,023,436	(26,968,686)
Financing Activities:
Proceeds from Issuance of Common Stock, net of issuance costs				19,743,885
Net Cash Provided By Financing Activities				19,743,885
Net Increase (Decrease) In Cash			2,604,009	(17,846,624)
Cash at Beginning of Period			5,234,953	27,040,325
Cash at End of Period	$ 7,838,962	$ 9,193,701	$ 7,838,962	9,193,701
SUPPLEMENTAL DISCLOSURE: NONCASH OPERATING ACTIVITY
Accrued financing issuance costs				$ 156,051

XML

NATURE OF OPERATIONS and SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2016

NATURE OF OPERATIONS and SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS and SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 — NATURE OF OPERATIONS and SIGNIFICANT ACCOUNTING POLICIES

Business

Dipexium Pharmaceuticals, Inc. (the “Company”), a Delaware corporation, formerly Dipexium Pharmaceuticals, LLC, is a late stage pharmaceutical company focused on the development and commercialization of Locilex® (pexiganan cream 0.8%).  The Company was formed on January 14, 2010.  On October 25, 2016, the Company announced that its lead and sole product candidate, Locilex, failed to meet the primary clinical endpoint or secondary endpoints in its OneStep-1 and OneStep-2 Phase 3 clinical trials.  The Company’s scientific team is continuing to evaluate the data from the OneStep clinical trials and in that process may identify other possible clinical indications for Locilex, but there can be no assurance that the Company will successfully identify a regulatory pathway forward for Locilex.  In addition, there can be no assurance that the Company’s research and development will be successfully completed or that the Company’s current product candidate, or any future product candidate(s) the Company could acquire, will be approved or commercially viable.

The Company has experienced net losses and negative cash flows from operations since inception and expects these conditions to continue for the foreseeable future.  The Company has needed to raise capital from sales of its securities to sustain operations.  In March 2014, the Company completed an initial public offering (“IPO”) of common stock with proceeds, net of issuance costs, of approximately $34.5 million.  In June 2015, the Company completed an additional public offering of common stock with net proceeds of approximately $19.7 million.  As of September 30, 2016, the Company had cash and short-term investments totaling approximately $18.8 million.  Based on the Company’s projected expenditures for 2016 and 2017, management currently believes that its current cash and short-term investment balances should be sufficient to fund the Company’s operations through 2017.  However, if the Company’s assumptions underlying its estimated expenses prove to be wrong, it may have to raise additional capital sooner than anticipated.

The Company is subject to risks common to companies in the biopharmaceutical industry including, but not limited to, dependence on collaborative arrangements, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, development of sales and marketing infrastructure and compliance with Food and Drug Administration (“FDA”) and other governmental regulations and approval requirements.

Unaudited Condensed Consolidated Interim Financial Data

The accompanying interim condensed consolidated financial statements are unaudited.  These unaudited interim condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information.  Accordingly, they do not include all the information and footnotes required by Generally Accepted Accounting Principles (“GAAP”) for complete financial statements.  These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended December 31, 2015.  The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements included in the Company’s Annual Report for the year ended December 31, 2015, and, in the opinion of management, reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2016, the results of operations for the three and nine months ended September 30, 2016 and 2015, the changes in shareholders’ equity for the nine months ended September 30, 2016, and cash flows for the nine months ended September 30, 2016 and 2015.  The December 31, 2015 balance sheet included herein was derived from the audited financial statements, but may not include all disclosures required by GAAP for complete financial statements.

Basis of Consolidation

The Company’s condensed consolidated financial statements include the accounts of the parent, Dipexium Pharmaceuticals, Inc., and Dipexium Pharmaceuticals Ireland, Limited, a wholly owned subsidiary.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.  Actual results could differ from those estimates.

Cash, Cash Equivalents, and Short-Term Investments

The Company considers all highly-liquid instruments purchased with a maturity of three months or less to be cash equivalents.  Instruments with maturities greater than three months, but less than twelve months are included in short-term investments.  The Company purchases United States Treasury bills with maturities ranging from six to twelve months which are classified as being held to maturity and are carried at amortized cost.  Securities classified as held to maturity securities are those securities that management has the intent and ability to hold to maturity.

The Company maintains its cash balance in one financial institution.  The balance is insured up to the maximum allowable by the Federal Deposit Insurance Company (“FDIC”).  The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk of loss on cash.  At times, the cash balance may exceed the maximum limit of the FDIC.

Research and Development

In accordance with Accounting Standards Codification (“ASC”) 730, Accounting for Research and Development Costs, the Company expenses research and development costs when incurred.  At times, the Company may make cash advances for research and development services.  These amounts are capitalized and expensed in the period the service is provided.  The Company incurred net research and development expenses in the amounts of $3,113,919 and $3,457,165 for the three months ended September 30, 2016 and 2015, respectively, and $10,398,499 and $7,456,829 for the nine months ended September 30, 2016 and 2015, repsectively.

Although the Company manages the conduct of its clinical trials, it relies on third parties to conduct its clinical and preclinical studies and to provide services, including data management, statistical analysis and electronic compilation for clinical trials, as well as for the manufacture of clinical trial supplies. At the end of each reporting period, the Company compares the payments made to each service provider to the estimated progress towards completion of the related project. Factors that are considered in preparing these estimates include the number of subjects enrolled in studies, milestones achieved and other criteria related to the efforts of the vendors. These estimates are subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, the Company records net prepaid or accrued expenses related to these costs.

Share-Based Compensation

The Company accounts for the cost of services performed by officers and directors received in exchange for an award of Company membership interests, common stock, or stock options, based on the grant-date fair value of the award.  In accordance with ASC 718, Stock Compensation, the Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the service period.

Share-Based Payments to Vendors

The Company accounts for the cost of services performed by vendors in exchange for an award of common stock of the Company based on the grant-date fair value of the award or fair value of the services rendered, whichever is more readily determinable and adjusted to fair value at each reporting date.  Such fair value is measured as of the earlier of the date the other party becomes committed to provide goods or services or the date performance by the other party is complete.  The Company recognizes the expense in the same period and in the same manner as if the Company had paid cash for the services.

Foreign Currency Translation and Transactions

The condensed consolidated financial statements are presented in U.S. Dollars (“USD”), the reporting currency of the Company.  The functional currency for the Company’s subsidiary located in Ireland is the USD. Transactions denominated in Euro were translated to USD at rates which approximate those in effect on transaction dates. Monetary assets and liabilities denominated in foreign currencies at September 30, 2016 were translated at the exchange rate in effect as of those dates. Nonmonetary assets, liabilities, and shareholders’ equity are translated at the appropriate historical rates.

The Company has intercompany loans between the parent company, Dipexium Pharmaceuticals, Inc., based in New York, NY, and its wholly owned subsidiary, Dipexium Pharmaceuticals Ireland, Limited, based in Ireland.  The intercompany loans outstanding are not expected to be repaid in the foreseeable future.

Income Taxes

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities and the expected benefits of net operating loss carryforwards. The impact of changes in tax rates and laws on deferred taxes, if any, applied during the years in which temporary differences are expected to be settled, is reflected in the financial statements in the period of enactment. The measurement of deferred tax assets is reduced, if necessary, if, based on weight of the evidence, it is more likely than not that some, or all, of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The Company had no material amounts recorded for uncertain tax positions, interest or penalties in the accompanying financial statements. The Company currently estimates an annual effective tax rate of 0% as the Company incurred losses for the year ended December 31, 2015 and for the three and nine months ended September 30, 2016, respectively, for both financial statement and tax purposes.  Therefore, no Federal or state income tax expense has been recorded in the financial statements for the year ended December 31, 2015 and for the three and nine months ended September 30, 2016, respectively.

Based on the Company’s history of generating operating losses and its anticipation of operating losses continuing in the foreseeable future, the Company has determined that it is more likely than not that the tax benefits from these net operating losses would not be realized and a full valuation allowance against all deferred tax assets has been recorded at September 30, 2016 and December 31, 2015, respectively.  In the event the Company becomes profitable for a period of two or more years, with future expectations at that time of profitability for future years prior to any significant change in its equity capitalization, the Company would have an opportunity to realize benefit from the deferred tax asset at such time in the future.

Recent Accounting Pronouncements

In August 2016,  the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, in an effort to reduce the diversity of how certain cash receipts and cash payments are presented and classified in the statement of cash flows.   The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, in an effort to simplify accounting for certain aspects of income tax accounting and accounting for forfeitures.  The amendments of this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which includes amendments that require lessees to recognize a lease liability for all long-term leases (lease terms more than 12 months) at the commencement date. The lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis.  The amendments also require lessees to recognize a right-of-use asset for all long-term leases. The right-of-use asset is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities.  If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.  The amendments in this ASU require qualitative disclosures along with specific quantitative disclosures.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.  The Company is currently evaluating the provisions of this ASU.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), which requires that all deferred income tax assets and liabilities be presented as noncurrent in the statement of financial position. The pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018 with early application permitted.  The adoption of this guidance is not expected to have a material impact on our financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern, which requires management of an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. This update will become effective beginning January 1, 2017, with early adoption permitted. The Company is currently evaluating the provisions of this ASU.

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FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2016

FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 2 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of certain of the Company’s financial instruments, including cash and accounts payable, is shown at cost, which approximates fair value.  Short-term investments with maturities ranging from six to twelve months are classified as being held to maturity and are carried at amortized cost.  The cost, gross unrealized gains, and the fair value of related securities at September 30, 2016 and December 31, 2015 were as follows:

	Total (maturities within 12 months)
	Cost		Unrealized Gain		Fair Value
Held to Maturity:
Debt Securities:
U.S. Government sponsored bonds at September 30, 2016	$	10,982,363	$	15,417	$	10,997,780
U.S. Government sponsored bonds at December 31, 2015	$	26,958,214	$	4,646	$	26,962,860

The Company had total amortized interest income for the three month periods ended September 30, 2016 and 2015 of $12,648 and $9,050, respectively and $41,469 and $11,319 for the nine month periods ended September 30, 2016 and 2015, respectively.  The carrying values of $10,995,395 and $26,977,362 as of September 30, 2016 and December 31, 2015 are equal to the cost of the securities plus the accumulated amortized interest income of $13,032 and $19,148 on the remaining bonds held at September 30, 2016 and December 31, 2015, respectively.

XML

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

9 Months Ended

Sep. 30, 2016

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses at September 30, 2016 and December 31, 2015 are as follows:

	September 30, 2016		December 31, 2015
Accrued compensation expense	$	252,313	$	663,404
Accrued research and development	567,544		859,053
Accrued professional fees	39,049		55,787
Other accounts payable and accrued expenses	31,600		28,063
Totals	$	890,506	$	1,606,307

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SHARE-BASED COMPENSATION and STOCK OPTIONS

9 Months Ended

Sep. 30, 2016

SHARE-BASED COMPENSATION and STOCK OPTIONS

SHARE-BASED COMPENSATION and STOCK OPTIONS

NOTE 4 — SHARE-BASED COMPENSATION and STOCK OPTIONS

Prior to the Company’s IPO, the Company granted awards of restricted Class A Membership Interests to board members in exchange for services.  These membership interests awards, which were converted to restricted common shares (7:1 ratio) at the time of the corporate conversion in March 2014, were originally scheduled to vest over a period of either three or four years with the first year beginning on the date the member joined the board.  In each case, the restricted common shares involved accelerated vesting upon a change of control or other business combination.  The fair value of the membership interests, at the time they were granted, was equal to the per-membership interest value of the most recent private placement ($50 per membership interest on a pre-conversion basis).  Total compensation expense in the amount of $25,000 has been recognized as director fees for the three months ended September 30, 2016 and 2015, respectively, and $75,000 for each of the nine month periods ended September 30, 2016 and 2015.

The following table summarizes the restricted common stock at September 30, 2016:

	Restricted Common Stock
Nonvested at January 1, 2016	28,000
Granted	—
Forfeited	—
Vested	(14,000	)
Nonvested at September 30, 2016	14,000

As of September 30, 2016, there was $45,833 of total unrecognized compensation expense related to these awards. That expense is expected to be recognized over a weighted average period of 0.50 years.

In November 2013, the board of directors adopted the 2013 Equity Incentive Plan.  The plan became effective as of the completion of the corporate conversion and the closing of the IPO.  The 2013 Equity Incentive Plan currently reserves 2,141,169 common shares, of which 696,156 are still available for issuance.  The purpose of the plan is to attract and retain directors, officers, and employees whose services are considered valuable to the Company.

In January 2015, the Company granted stock options to purchase 251,000 common shares to its five employees, outside directors, and certain non-employee consultants.  The options were issued pursuant to the 2013 Equity Incentive Plan at an exercise price of $11.35, with one-half of the options vesting upon issuance and the balance vesting evenly over the subsequent 24 months. A portion of the January stock option grant, 35,000 fully vested options, were granted to non-employees for services rendered.  As such, the Company expensed $353,150, the entire portion of those non-employee grants, at the grant date.

In January 2016, the Company granted stock options to purchase 287,500 common shares to its employees, outside directors, and certain non-employee consultants.  The options were issued pursuant to the 2013 Equity Incentive Plan at an exercise price of $10.16, with one-half of the options vesting upon issuance and the balance vesting evenly over the subsequent 24 months. A portion of the January stock option grant, 27,500 fully vested options, were granted to non-employees for services rendered.  As such, the Company expensed $181,775, the entire portion of those non-employee grants, at the grant date.

In the third quarter of 2016, the Company granted stock options to purchase 45,226 common shares to an outside director and non-employee consultant.  The options were issued pursuant to the 2013 Equity Incentive Plan at respective exercise prices ranging from $11.42 to $12.59, with vesting periods consistent with the services rendered.

Compensation expense associated with these awards is recognized over the vesting period based on the fair value of the option at the grant date determined based on the Black-Scholes model. Option valuation models require the input of highly subjective assumptions including the expected price volatility.  The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.

Because there is no public market for the Company’s stock options and very little historical experience with the Company’s stock, similar public companies were used for comparison and expectations as to the price volatility assumptions required for fair value computation using the Black-Scholes methodology.

The Company determined the fair value of the option awards using the Black-Scholes option pricing model and the following weighted average assumptions for options issued during the respective periods:

	Nine Months Ended		Nine Months Ended
	September 30, 2016		September 30, 2015
Expected term	5.60 years		5.65 years
Volatility	63.2	%	62.1	%
Dividend yield	0	%	0	%
Risk free interest rate	1.52	%	1.58	%

ASC 718 requires stock compensation expense to be recorded net of estimated forfeitures.  The Company currently estimates there will be no forfeitures of options.

A summary of the Company’s stock option activity is as follows:

		Weighted Average
	Number of Options	Exercise Price
Outstanding at the beginning of the period	1,112,287	$	13.32
Granted	332,726	$	10.35
Forfeited	—
Outstanding and expected to vest at September 30, 2016	1,445,013	$	12.64

Compensation expense relating to options for the three months ended September 30, 2016 and 2015 was $601,302 and $519,066, respectively, and $2,520,833 and $2,656,842 for the nine months ended September 30, 2016 and 2015, respectively.  The total compensation expense not yet recognized as of September 30, 2016 was $1,617,267.  The weighted average vesting period over which the total compensation expense will be recorded related to unvested options not yet recognized as of September 30, 2016 was approximately 1.0 years. The weighted average grant date fair value of options granted during the nine month period was $5.02 and $7.61 as of September 30, 2016 and 2015, respectively. The intrinsic value of the stock options was $2,688,540 and $751,465 as of September 30, 2016 and 2015, respectively, with a remaining weighted average contractual life of 5.49 years.  Total options excercisable at September 30, 2016 were 1,138,239.

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SHARE-BASED PAYMENTS TO VENDORS

9 Months Ended

Sep. 30, 2016

SHARE-BASED PAYMENTS TO VENDORS

SHARE-BASED PAYMENTS TO VENDORS

NOTE 5 — SHARE-BASED PAYMENTS TO VENDORS

In the ordinary course of business, the Company may issue restricted stock for services rendered by a vendor.  The vesting of restricted stock and the associated expense for the services rendered are recorded over the term of the related contract.  Research and development expenses resulting from vendor equity issuances for the three months ended September 30, 2016 and 2015 were $286,482 and $227,150, respectively, and $629,215 and $385,647 for the nine months ended September 30, 2016 and 2015, respectively

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LEASE OF OFFICE SPACE

9 Months Ended

Sep. 30, 2016

LEASE OF OFFICE SPACE

LEASE OF OFFICE SPACE

NOTE 6— LEASE OF OFFICE SPACE

In January 2016, the Company entered into a lease for office space commencing in March 2016.  The term of the lease is for five years and five months with total minimum lease payments of approximately $1.28 million.  The future minimum lease payments under this lease are as follows:

Year ending December 31:
2016	$	56,571
2017	231,534
2018	238,004
2019	244,658
2020	251,522
2021	150,347
Total	$	1,172,636

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LEGAL MATTERS

9 Months Ended

Sep. 30, 2016

LEGAL MATTERS

LEGAL MATTERS

NOTE 7 — LEGAL MATTERS

The Company and its two original executives were three of some 30 defendants in a lawsuit filed by a former stockholder of Genaera Corporation, which was the predecessor of the Genaera Liquidating Trust, the party from which the Company purchased the worldwide rights to pexiganan, the active pharmaceutical ingredient of the Locilex®, on April 8, 2010. The complaint was filed on June 8, 2012 in the United States District Court for the Eastern District of Pennsylvania (Civil Action No. 12-3265) by Alan W. Schmidt, individually and on behalf of former Genaera Corporation shareholders. Among others, the suit was filed against the Company, as well as John A. Skolas and Argyce, LLC, who were responsible for the administration of the Trust and who sold pexiganan to the Company via a public auction. The defendants listed in the complaint included several individuals and companies formerly associated with Genaera Corporation, the Trust and/or Argyce, LLC. Also included in the defendant group were several other pharmaceutical companies that were involved in acquiring the former drug-related assets of Genaera Corporation.

The complaint alleged, among other things, that the Company and its two executives aided and abetted a breach of fiduciary duty alleged to have been committed by the former directors and officers of Genaera Corporation before it was approved for dissolution by its shareholders and also Argyce, LLC, the trustee of the Liquidating Trust. Plaintiff claims that the Company, and its executives, aided and abetted a breach of the duties of the board of directors and the trustee under common law and under a certain trust agreement allegedly signed between Argyce, LLC, as the trustee, and the Liquidating Trust. With regard to the claims made against the Company and its two executives, the plaintiff alleged, in pertinent part, that the Company’s acquisition of the pexiganan rights was for alleged inadequate consideration, and that the Company and its management aided and abetted a breach of fiduciary duty by the Genaera Corporation defendants who were formerly associated with Genaera Corporation and/or the Trust.

The Company and its two executives filed a motion to dismiss the complaint within the prescribed time period. All of the other defendants in this litigation also filed motions to dismiss, and a court order by the Federal District Court granted each and every motion to dismiss, with prejudice, without leave to refile, on August 12, 2013 based on the argument that plaintiff’s claims were time barred. A subsequent motion to reconsider such dismissal was denied by the Federal District Court.  Plaintiff appealed the dismissal to the United States Third Circuit Court of Appeals seeking reversal of the dismissal and the Third Circuit Court granted plaintiff’s appeal.  On October 17, 2014, the Third Circuit Appellate Court, in a 2-1 decision with a strong dissenting opinion, reversed the trial court’s dismissal of Plaintiff’s claims based on the expiration of the applicable statutes of limitation. In a 2-1 decision, the Third Circuit held that more information was necessary to determine when plaintiff should have been on notice of his claims to determine the applicability of the discovery rule, which could serve to extend the time frame in which plaintiff could bring his claims. Due to the strong dissent, all Defendants filed the necessary documents requesting a petition for rehearing en banc, by the majority of the Third Circuit justices who are in active service. The Third Circuit denied the request for en banc hearing and remanded this case to District Court.

Upon remand to the Federal District Court, all Defendants moved to dismiss the complaint for reasons other than being time barred.  The Company and its two executives moved for dismissal based on plaintiff’s inability to make a case for aiding and abetting a breach of fiduciary duty because there was no underlying breach and such an aiding and abetting claim requires an element of knowing participation in the fiduciary breach which cannot be established by plaintiff.

The District Court held a hearing on this in September 2015 and the District Court delivered an Order on November 10, 2015 pursuant to which the District Court granted the Motion to Dismiss filed by each and every defendant including the Company and its two executives.  In December 2015, plaintiff appealed the Federal District Court’s decision to the Third Circuit Appellate Court and the Company anticipates a decision on whether to grant plaintiff’s appeal by the Third Circuit Appellate Court in the fourth quarter of 2016.  The Company will continue to vigorously defend against plaintiff’s claims on the factual record, which it believes will prove that neither the Company nor its executives is liable to the plaintiff in any regard.

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RELATED PARTY TRANSACTIONS

9 Months Ended

Sep. 30, 2016

RELATED PARTY TRANSACTIONS

RELATED PARTY TRANSACTIONS

NOTE 8 — RELATED PARTY TRANSACTIONS

The Company engaged the consulting services of Drug Development Advisors (“DDA”) pursuant to which DDA performed detailed analysis on a number of the Company’s preclinical studies in connection with the NDA process.  DDA is owned and operated by a member of the Company’s board of directors.  The Company incurred expenses for services provided by DDA in the amounts of $6,938 and $5,250 for the three months ended September 30, 2016 and 2015, respectively, and $14,166 and $19,487 for the nine months ended September 30, 2016 and 2015, respectively, all of which were recorded in research and development expenses.

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NET LOSS PER SHARE

9 Months Ended

Sep. 30, 2016

NET LOSS PER SHARE

NET LOSS PER SHARE

NOTE 9 — NET LOSS PER SHARE

Basic and diluted net loss per common share for the three and nine months ended September 30, 2016 and 2015 was determined by dividing net loss by the weighted average common shares outstanding during the period.  The Company’s potentially dilutive shares, which include 1,445,013 stock options, 37,233 unvested common shares, and 16,100 warrants, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive.

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NATURE OF OPERATIONS and SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2016

NATURE OF OPERATIONS and SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

Basis of Consolidation

The Company’s condensed consolidated financial statements include the accounts of the parent, Dipexium Pharmaceuticals, Inc., and Dipexium Pharmaceuticals Ireland, Limited, a wholly owned subsidiary.  All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period.  Actual results could differ from those estimates.

Cash, Cash Equivalents, and Short-Term Investments

Cash, Cash Equivalents, and Short-Term Investments

The Company considers all highly-liquid instruments purchased with a maturity of three months or less to be cash equivalents.  Instruments with maturities greater than three months, but less than twelve months are included in short-term investments.  The Company purchases United States Treasury bills with maturities ranging from six to twelve months which are classified as being held to maturity and are carried at amortized cost.  Securities classified as held to maturity securities are those securities that management has the intent and ability to hold to maturity.

The Company maintains its cash balance in one financial institution.  The balance is insured up to the maximum allowable by the Federal Deposit Insurance Company (“FDIC”).  The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk of loss on cash.  At times, the cash balance may exceed the maximum limit of the FDIC.

Research and Development

Research and Development

In accordance with Accounting Standards Codification (“ASC”) 730, Accounting for Research and Development Costs, the Company expenses research and development costs when incurred.  At times, the Company may make cash advances for research and development services.  These amounts are capitalized and expensed in the period the service is provided.  The Company incurred net research and development expenses in the amounts of $3,113,919 and $3,457,165 for the three months ended September 30, 2016 and 2015, respectively, and $10,398,499 and $7,456,829 for the nine months ended September 30, 2016 and 2015, repsectively.

Although the Company manages the conduct of its clinical trials, it relies on third parties to conduct its clinical and preclinical studies and to provide services, including data management, statistical analysis and electronic compilation for clinical trials, as well as for the manufacture of clinical trial supplies. At the end of each reporting period, the Company compares the payments made to each service provider to the estimated progress towards completion of the related project. Factors that are considered in preparing these estimates include the number of subjects enrolled in studies, milestones achieved and other criteria related to the efforts of the vendors. These estimates are subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, the Company records net prepaid or accrued expenses related to these costs.

Share-Based Compensation

Share-Based Compensation

The Company accounts for the cost of services performed by officers and directors received in exchange for an award of Company membership interests, common stock, or stock options, based on the grant-date fair value of the award.  In accordance with ASC 718, Stock Compensation, the Company recognizes compensation expense, net of estimated forfeitures, on a straight-line basis over the service period.

Share-Based Payments to Vendors

Share-Based Payments to Vendors

The Company accounts for the cost of services performed by vendors in exchange for an award of common stock of the Company based on the grant-date fair value of the award or fair value of the services rendered, whichever is more readily determinable and adjusted to fair value at each reporting date.  Such fair value is measured as of the earlier of the date the other party becomes committed to provide goods or services or the date performance by the other party is complete.  The Company recognizes the expense in the same period and in the same manner as if the Company had paid cash for the services.

Foreign Currency Translation and Transactions

Foreign Currency Translation and Transactions

The condensed consolidated financial statements are presented in U.S. Dollars (“USD”), the reporting currency of the Company.  The functional currency for the Company’s subsidiary located in Ireland is the USD. Transactions denominated in Euro were translated to USD at rates which approximate those in effect on transaction dates. Monetary assets and liabilities denominated in foreign currencies at September 30, 2016 were translated at the exchange rate in effect as of those dates. Nonmonetary assets, liabilities, and shareholders’ equity are translated at the appropriate historical rates.

The Company has intercompany loans between the parent company, Dipexium Pharmaceuticals, Inc., based in New York, NY, and its wholly owned subsidiary, Dipexium Pharmaceuticals Ireland, Limited, based in Ireland.  The intercompany loans outstanding are not expected to be repaid in the foreseeable future.

Income Taxes

Income Taxes

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities and the expected benefits of net operating loss carryforwards. The impact of changes in tax rates and laws on deferred taxes, if any, applied during the years in which temporary differences are expected to be settled, is reflected in the financial statements in the period of enactment. The measurement of deferred tax assets is reduced, if necessary, if, based on weight of the evidence, it is more likely than not that some, or all, of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. The Company had no material amounts recorded for uncertain tax positions, interest or penalties in the accompanying financial statements. The Company currently estimates an annual effective tax rate of 0% as the Company incurred losses for the year ended December 31, 2015 and for the three and nine months ended September 30, 2016, respectively, for both financial statement and tax purposes.  Therefore, no Federal or state income tax expense has been recorded in the financial statements for the year ended December 31, 2015 and for the three and nine months ended September 30, 2016, respectively.

Based on the Company’s history of generating operating losses and its anticipation of operating losses continuing in the foreseeable future, the Company has determined that it is more likely than not that the tax benefits from these net operating losses would not be realized and a full valuation allowance against all deferred tax assets has been recorded at September 30, 2016 and December 31, 2015, respectively.  In the event the Company becomes profitable for a period of two or more years, with future expectations at that time of profitability for future years prior to any significant change in its equity capitalization, the Company would have an opportunity to realize benefit from the deferred tax asset at such time in the future.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In August 2016,  the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, in an effort to reduce the diversity of how certain cash receipts and cash payments are presented and classified in the statement of cash flows.   The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, in an effort to simplify accounting for certain aspects of income tax accounting and accounting for forfeitures.  The amendments of this ASU are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.  Early adoption is permitted.  The Company is currently assessing the potential impact this ASU will have on the financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which includes amendments that require lessees to recognize a lease liability for all long-term leases (lease terms more than 12 months) at the commencement date. The lease liability is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis.  The amendments also require lessees to recognize a right-of-use asset for all long-term leases. The right-of-use asset is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset to not recognize lease assets and lease liabilities.  If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term.  The amendments in this ASU require qualitative disclosures along with specific quantitative disclosures.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted.  Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.  The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.  The Company is currently evaluating the provisions of this ASU.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), which requires that all deferred income tax assets and liabilities be presented as noncurrent in the statement of financial position. The pronouncement is effective for financial statements issued for annual periods beginning after December 15, 2018 with early application permitted.  The adoption of this guidance is not expected to have a material impact on our financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern, which requires management of an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. This update will become effective beginning January 1, 2017, with early adoption permitted. The Company is currently evaluating the provisions of this ASU.

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

9 Months Ended

Sep. 30, 2016

FAIR VALUE OF FINANCIAL INSTRUMENTS

Gross unrealized gains and fair value of related securities

	Total (maturities within 12 months)
	Cost		Unrealized Gain		Fair Value
Held to Maturity:
Debt Securities:
U.S. Government sponsored bonds at September 30, 2016	$	10,982,363	$	15,417	$	10,997,780
U.S. Government sponsored bonds at December 31, 2015	$	26,958,214	$	4,646	$	26,962,860

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ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Tables)

9 Months Ended

Sep. 30, 2016

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Schedule of accounts payable and accrued expenses

	September 30, 2016		December 31, 2015
Accrued compensation expense	$	252,313	$	663,404
Accrued research and development	567,544		859,053
Accrued professional fees	39,049		55,787
Other accounts payable and accrued expenses	31,600		28,063
Totals	$	890,506	$	1,606,307

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SHARE-BASED COMPENSATION and STOCK OPTIONS (Tables)

9 Months Ended

Sep. 30, 2016

SHARE-BASED COMPENSATION and STOCK OPTIONS

Summary of restricted common stock

	Restricted Common Stock
Nonvested at January 1, 2016	28,000
Granted	—
Forfeited	—
Vested	(14,000	)
Nonvested at September 30, 2016	14,000

Schedule of weighted average assumptions for options used in determining the fair value of the option awards using the Black-Scholes option pricing model

	Nine Months Ended		Nine Months Ended
	September 30, 2016		September 30, 2015
Expected term	5.60 years		5.65 years
Volatility	63.2	%	62.1	%
Dividend yield	0	%	0	%
Risk free interest rate	1.52	%	1.58	%

Summary of stock option activity

		Weighted Average
	Number of Options	Exercise Price
Outstanding at the beginning of the period	1,112,287	$	13.32
Granted	332,726	$	10.35
Forfeited	—
Outstanding and expected to vest at September 30, 2016	1,445,013	$	12.64

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LEASE OF OFFICE SPACE (Tables)

9 Months Ended

Sep. 30, 2016

LEASE OF OFFICE SPACE

Future minimum lease payments

Year ending December 31:
2016	$	56,571
2017	231,534
2018	238,004
2019	244,658
2020	251,522
2021	150,347
Total	$	1,172,636

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NATURE OF OPERATIONS and SIGNIFICANT ACCOUNTING POLICIES - NATURE OF OPERATIONS (Details) - USD ($) $ in Millions	1 Months Ended
	Jun. 30, 2015	Mar. 31, 2014	Sep. 30, 2016
NATURE OF OPERATIONS and SIGNIFICANT ACCOUNTING POLICIES
Net proceeds from IPO	$ 19.7	$ 34.5
Cash, Cash Equivalents, and Short-term Investments			$ 18.8

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NATURE OF OPERATIONS and SIGNIFICANT ACCOUNTING POLICIES - SIGNIFICANT ACCOUNTING POLICIES (Details)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2016 USD ($) item	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($) item	Sep. 30, 2015 USD ($)	Dec. 31, 2015 USD ($)
Concentration of Credit Risk
Number of financial institutions in which the entity maintains its cash balance | item | item	1		1
Research and Development
Net research and development expenses	$ 3,113,919	$ 3,457,165	$ 10,398,499	$ 7,456,829
Income Taxes
Estimated annual effective tax rate (as a percent)	0.00%		0.00%		0.00%
Current federal income tax expense	$ 0		$ 0		$ 0
Current state income tax expense			$ 0		$ 0
Minimum
Concentration of Credit Risk
Maturity period treasury bills			6 months
Maximum
Concentration of Credit Risk
Maturity period treasury bills			12 months

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FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) - USD ($)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Fair Value of Financial Instruments
Interest income amortized	$ 12,648	$ 9,050	$ 41,469	$ 11,319
Carrying value	10,995,395		10,995,395		$ 26,977,362
Accumulated interest income amortized on remaining bonds			13,032		19,148
U.S. Government sponsored bonds
Fair Value of Financial Instruments
Amortized Cost	10,982,363		10,982,363		26,958,214
Unrealized Gains			15,417		4,646
Fair Value	$ 10,997,780		$ 10,997,780		$ 26,962,860

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ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accrued compensation expense	$ 252,313	$ 663,404
Accrued research and development	567,544	859,053
Accrued professional fees	39,049	55,787
Other accounts payable and accrued expenses	31,600	28,063
Totals	$ 890,506	$ 1,606,307

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SHARE-BASED COMPENSATION and STOCK OPTIONS - RESTRICTED COMMON SHARES (Details)	1 Months Ended			3 Months Ended		9 Months Ended
	Jan. 31, 2016 shares	Jan. 31, 2015	Mar. 31, 2014	Sep. 30, 2016 USD ($) shares	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($) $ / shares shares	Sep. 30, 2015 USD ($)	Nov. 30, 2013 shares
Share-based compensation and stock options
Vesting period	24 months	24 months
Additional disclosures
Common shares reserved for issuance under Equity Incentive Plan								2,141,169
Common shares available for issuance under Equity Incentive Plan				696,156		696,156
Restricted Class A Membership Interests
Share-based compensation and stock options
Fair value of the membership interests granted (in dollars per share) | $ / shares						$ 50
Restricted Common Stock
Share-based compensation and stock options
Conversion ratio used to convert membership interests to restricted common shares			7
Total compensation expense recorded as director fees | $				$ 25,000	$ 25,000	$ 75,000	$ 75,000
Summary of restricted common stock
Nonvested at the beginning of the period (in shares)	28,000					28,000
Vested (in shares)						(14,000)
Nonvested at the end of the period (in shares)				14,000		14,000
Additional disclosures
Total unrecognized compensation cost | $				$ 45,833		$ 45,833
Weighted average period over which total unrecognized compensation cost is expected to be recognized						6 months
Restricted Common Stock | Minimum
Share-based compensation and stock options
Vesting period						3 years
Restricted Common Stock | Maximum
Share-based compensation and stock options
Vesting period						4 years

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SHARE-BASED COMPENSATION and STOCK OPTIONS - STOCK OPTIONS (Details)	1 Months Ended		3 Months Ended		9 Months Ended
	Jan. 31, 2016 USD ($) $ / shares shares	Jan. 31, 2015 USD ($) employee $ / shares shares	Sep. 30, 2016 USD ($) $ / shares shares	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($) $ / shares shares	Sep. 30, 2015 USD ($) $ / shares	Dec. 31, 2015 $ / shares
Company's stock option activity
Granted (in shares) | shares	287,500	251,000	45,226
Number of Employees Total | employee		5
Grant price (in dollars per share) | $ / shares	$ 10.16	$ 11.35
Vesting percentage upon issuance	50.00%	50.00%
Vesting period	24 months	24 months
Minimum
Company's stock option activity
Grant price (in dollars per share) | $ / shares			$ 11.42
Maximum
Company's stock option activity
Grant price (in dollars per share) | $ / shares			$ 12.59
Non Employee Member
Company's stock option activity
Granted (in shares) | shares	27,500	35,000
Compensation expense | $	$ 181,775	$ 353,150
Stock Options.
Weighted average assumptions used in determining the fair value of the option awards using the Black-Scholes option pricing model
Expected term					5 years 7 months 6 days	5 years 7 months 24 days
Volatility (as a percent)					63.20%	62.10%
Dividend yield (as a percent)					0.00%	0.00%
Risk free interest rate (as a percent)					1.52%	1.58%
Weighted average grant date fair value of options granted (in dollars per share) | $ / shares					$ 5.02	$ 7.61
Company's stock option activity
Outstanding at the beginning of the period (in shares) | shares	1,112,287				1,112,287
Granted (in shares) | shares					332,726
Outstanding at the end of the period (in shares) | shares			1,445,013		1,445,013
Compensation expense | $			$ 601,302	$ 519,066	$ 2,520,833	$ 2,656,842
Total compensation expense not yet recognized | $			1,617,267		$ 1,617,267
Weighted average vesting period over which the total compensation expense will be recorded					1 year
Intrinsic value | $			$ 2,688,540	$ 751,465	$ 2,688,540	$ 751,465
Remaining weighted average contractual life					5 years 5 months 27 days
Exercise price (in dollars per share) | $ / shares			$ 12.64		$ 12.64		$ 13.32
Grant price (in dollars per share) | $ / shares					$ 10.35
Options exercisable (in shares) | shares			1,138,239		1,138,239

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SHARE-BASED PAYMENTS TO VENDORS (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
SHARE-BASED PAYMENTS TO VENDORS
Research and development costs relates to vendor equity issuances	$ 286,482	$ 227,150	$ 629,215	$ 385,647

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LEASE OF OFFICE SPACE (Details) - USD ($)	1 Months Ended
	Jan. 31, 2016	Dec. 31, 2015
LEASE OF OFFICE SPACE
Term of lease agreement	5 years 5 months
Operating Leases, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]
2016		$ 56,571
2017		231,534
2018		238,004
2019		244,658
2020		251,522
2021		150,347
Total future minimum lease payments		$ 1,172,636

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LEGAL MATTERS (Details) - Genaera Lawsuit	Jun. 08, 2012 item
Legal matters
Number of defendants represented by original executives	2
Number of defendants represented by executives and the Company	3
Number of defendants in a lawsuit	30

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RELATED PARTY TRANSACTIONS (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
DDA
Related party transactions
Fees for services rendered by the related party	$ 6,938	$ 5,250	$ 14,166	$ 19,487

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NET LOSS PER SHARE (Details)	9 Months Ended
	Sep. 30, 2016 shares
Stock Options
Proforma net loss per share
Potentially dilutive shares not been included in the computation of diluted net loss per share as the result would be antidilutive	1,445,013
Unvested Common Shares
Proforma net loss per share
Potentially dilutive shares not been included in the computation of diluted net loss per share as the result would be antidilutive	37,233
Warrants
Proforma net loss per share
Potentially dilutive shares not been included in the computation of diluted net loss per share as the result would be antidilutive	16,100