(EDGAR Online via COMTEX) -- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We are a clinical stage biopharmaceutical company focused on the development and commercialization of novel immuno-oncology products based off our proprietary Tri-specific Killer Engager (TriKE(R)) technology platform. Our TriKE(R)platform generates proprietary therapeutics designed to harness and enhance the cancer killing abilities of a patient's own natural killer cells, or NK cells. Once bound to an NK cell, our moieties are designed to enhance the NK cell, and precisely direct it to one or more specifically-targeted proteins expressed on a specific type of cancer cell or virus infected cell, ultimately resulting in the targeted cell's death. TriKE(R) is composed of recombinant fusion proteins and interleukin 15 (IL-15), can be designed to target any number of tumor antigens on hematologic malignancies, sarcomas or solid tumors and do not require patient-specific customization.
As shown in the accompanying consolidated financial statements, the Company has incurred an accumulated deficit of $653.6 million through December 31, 2021. On a consolidated basis, the Company had cash and cash equivalents of $9.0 million and short-term investments of $23.0 million at December 31, 2021. We anticipate we will have to raise additional capital to fund our selling, general and administrative, and research and development expenses until we have a marketable product. There are no assurances that we will be able to raise the funds necessary to maintain our operations or to implement our business plan. The consolidated financial statements included in this Annual Report on Form 10-K do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event we cannot continue our operations.
In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many businesses. This outbreak could decrease spending, adversely affect demand for the Company's products, and harm the Company's business and results of operations.
During the year ended December 31, 2021, the Company believes the COVID-19 pandemic did impact its operating results. However, the Company has not observed any impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic. At this time, it is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company's business or results of operations, financial condition, or liquidity.
The Company has been following the recommendations of health authorities to minimize exposure risk for its team members, including the temporary closure of its corporate office and having team members work remotely. Most vendors have transitioned to electronic submission of invoices and payments.
On February 16, 2021, as a result of the completion of the public offering and the successful listing of our shares of common stock on the Nasdaq Capital Market, 2,353,548 shares of Series J-1 Preferred Stock mandatorily converted at a conversion rate of $3.40 per share into 692,220 shares of our common stock.
As part of employment agreements with Anthony Cataldo, our former Chief Executive Officer (former CEO) and Michael Handelman, our former Chief Financial Officer (former CFO), these officers received a fully vested stock grant of shares of common stock equal to aggregate of 10% and 1.5% of the fully diluted shares of our common stock (calculated with the inclusion of the current stock holdings of Mr. Cataldo, and Mr. Handelman, upon conversion of options, warrants and convertible notes in association with a national markets qualified financing as consideration for entering into the Agreement (with such stock to vest and be delivered within 30 days after the national markets qualified financing). In addition, we also granted similar equity compensation to members of our Board of Directors wherein these directors received stock grants equal to 1% and 1.25% of the fully diluted shares of our common stock. Pursuant to these agreements, the common stock issued vested over a period of two years. On February 16, 2021, we completed a qualified equity offering and listing. As a result, we granted these two employees 3,197,662 shares and an additional 1,181,745 shares to directors for a total of 4,379,407 shares of common stock.
On April 23, 2021, our Compensation Committee approved amendments to the compensation terms of Anthony Cataldo, our former CEO and Michael Handelman, our former CFO to increase their base salary and bonus compensation.
On April 23, 2021, Dr. Gregory Berk resigned as a director and accepted employment as our Chief Medical Officer. In connection with his appointment as Chief Medical Officer, the Compensation Committee approved a four-year employment agreement for Dr. Berk.
On August 23, 2021, Dr. Gregory Berk was promoted to the position of President of Research & Development and Chief Medical Officer. Dr. Berk assumed additional responsibilities including discovery, non-clinical development, clinical development, and manufacturing.
On November 5, 2021 the Company terminated the employment of Anthony Cataldo as Chief Executive Officer and Michael Handelman as Chief Financial Officer. On November 8, 2021, the Board appointed Dr. Greg Berk as Interim Chief Executive Officer.
On November 8, 2021, the Board also appointed Michael Breen as Executive Chairman of the Board.
On November 8, 2021, the Board appointed Dr. Gavin Choy as Acting Chief Financial Officer.
On December 15, 2021, Anthony Cataldo resigned as a member of the Company's Board of Directors.
On February 14, 2022, the Company appointed Manu Ohri as the Chief Financial Officer and Dr. Gavin Choy ceased serving as the Acting Chief Financial Officer.
Effective March 2, 2022, the Company appointed Michael Breen as Interim Chief Executive Officer. Dr. Berk ceased serving as the Company's Interim Chief Executive Officer, but continues to serve as its President of Research & Development and Chief Medical Officer.
Issuance of Common Stock in public offering
On February 16, 2021, the Company completed a public offering of 4,945,000 shares of common stock for net proceeds of $24.7 million, after deducting underwriting discounts, commissions and other direct offering expenses. As part of the offering, the Company also granted the investors, warrants to purchase 5,192,250 shares of common stock. The warrants are fully vested, exercisable at $5.50 per share and have a term of five years .(see Note 8 of our Consolidated Financial Statements).
As a result of the completion of the public offering and the listing of its shares of common stock on the Nasdaq Capital Market, convertible notes payable and accrued interest with an aggregate amount of $38.8 million were mandatorily converted at its stated conversion rate of $3.40 per share into 11,413,322 shares of the Company's common stock (see Note 5 of our Consolidated Financial Statements).
Issuance of Common Stock for services - consultants
As part of consulting agreements with certain consultants, the Company agreed to grant these consultants common stock equal to 1% and 3% of the fully diluted shares of common stock of the Company upon conversion of options, warrants and Convertible Notes in association with a national markets qualified financing as consideration for entering into the agreement (with such stock to vest and be delivered within 30 days after the national markets qualified financing).
On February 16, 2021, we completed a qualified equity offering and listing. As a result, we granted these consultants 2,850,090 shares of common stock with a fair value of $10,701,394, of which 1,934,817 shares of common stock fully vested immediately while the remaining 915,273 shares of common stock vest over two years. During the year ended December 31, 2021, pursuant to the vesting terms of the consulting agreements, we recorded the corresponding stock compensation expense of $8,981,869. We also issued 1,060,853 shares of common stock with a fair value of $6,836,400 to other consultants for services rendered that will vest over a period of 24 months. In addition, on December 31, 2021, the Company cancelled 278,058 shares of common stock granted to a consultant in February 2021.
At December 31, 2021, there were 550,479 unvested shares of common stock with a grant date fair value of $2,203,126, which will be recognized as stock compensation in future periods based upon the remaining vesting term of the applicable grants.
Issuance of Common Stock for research and development agreement
During the year ended December 31, 2021, the Company issued 189,753 shares of common stock for a research and development agreement valued at $1.3 million. The common shares were valued at the market price at the date of grant.
Issuance of Common Stock upon exercise of warrants
During the year ended December 31, 2021, the Company issued 3,076,017 shares of common stock upon the exercise of warrants resulting in cash proceeds of $16.4 million.
In June 2017, we entered into a co-development partnership agreement with Altor BioScience Corporation in which we will collaborate exclusively in the clinical development of a novel 161533 (GTB-3550) TriKE(R) fusion protein for cancer therapies using our TriKE(R) technology. The GTB-3550 Phase 1 clinical trial for treatment of patients with CD33-expressing, high risk myelodysplastic syndromes and refractory/relapsed acute myeloid leukemia opened for patient enrollment September 2019 and completed enrollment in September 2021. The results of our first generation GTB-3550 Phase 1 clinical trial support our plans to advance the next generation camelid nanobody into the clinic, and as such, no further clinical development will ensue with GTB-3550.
University of Minnesota Scientific Research Agreement
We are a party to a scientific research agreement with the Regents of the University of Minnesota, effective June 16, 2021. This scientific research agreement aims to work with the Company with three major goals in mind: (1) support the Company's TriKE(R) product development and GMP manufacturing efforts;
The University of Minnesota shall use reasonable efforts to complete the project for a fixed sum of $2.1 million. We paid an initial payment of $541,527 on December 2, 2021, which is to be followed by seven quarterly equal payments of $191,527, the first of which was paid on December 29, 2021. The second quarterly payment was recorded in accounts payable at December 31, 2021. A final payment of $192,470 will be paid within thirty (30) days of receipt of the final report.
Subcontract Manufacturing Agreement
On October 5, 2020, GT Biopharma entered into a Master Services Agreement with a third-party product manufacturer to perform biologic development and manufacturing services on behalf of the Company. At December 31, 2021, the Company's commitments in relation to this agreement totaled approximately $13.0 million, of which $7.5 million was incurred at that date and an additional $5.5 million is in process.
Clinical Trial Agreement
In September 2019, we executed clinical trial agreement with the Regents of the University of Minnesota, to commence enrollment in its first-in-human GTB-3550 TriKE(R) (CD16/IL-15/CD33) Phase 1, open-label, dose escalation clinical trial for the treatment of CD33-expressing, high risk myelodysplastic syndromes, refractory/relapsed acute myeloid leukemia or advanced systemic mastocytosis. The clinical trial was conducted at the University of Minnesota's Masonic Cancer Center in Minneapolis, Minnesota under the direction of Dr. Erica Warlick and Dr. Mark Juckett. The primary objective of the trial was to determine safety and tolerability as well as the maximum tolerated dose of GTB-3550 TriKE(R). The hypothesis was that GTB-3550 TriKE(R) would induce natural killer cell function by targeting malignant cells as well as CD33+ myeloid derived suppressor cells (MDSC) which contribute to tumor induced immunosuppression. Because CD16 is a potent activating receptor on NK cells, this single agent GTB-3550 investigational agent may induce a targeted anti-CD33+ tumor response. The phase 1 trial was completed and closed to accrual in September 2021.
See discussion of Patents and Licenses above under Item 1: Business
Results of Operations
Comparison of the Years Ended December 31, 2021 and 2020
Research and Development Expenses
During the years ended December 31, 2021 and 2020, we incurred $9.6 million and $485,000 of research and development expenses, respectively. Research and development expenses increased due to $1.3 million in stock compensation to consultants, and the initiation of the Phase 1 clinical trial of our most advanced TriKE(R) product candidate, GTB-3550 along with progression on other promising product candidates. We anticipate our direct clinical and preclinical expenses to increase significantly in 2022, totaling approximately $12 million to $14 million, as we have completed the Phase 1 clinical trial of our most advanced TriKE(R) product candidate GTB-3550, and have plans to advance the next generation camelid nanobody into the clinic.
Selling, general and administrative expenses
During the year ended December 31, 2021 and 2020, we incurred $47.9 million and $6.3 million of selling, general and administrative expenses, respectively. The increase in selling, general and administrative expenses is primarily attributable to stock compensation expenses of $32.6 million during the year ended December 31, 2021 as compared to none in the prior year. The remaining increase is due to expenses in support of our planned growth and new public company compliance initiatives in fiscal year 2021. We have incurred additional expenses that consist primarily of personnel costs from our executive, legal, finance, and information technology organizations and related expenditures, as well as third party professional fees and insurance.
Interest expense was $0.7 million and $3.0 million for the years ended December 31, 2021 and 2020 respectively. The decrease is primarily due to the conversion of all outstanding interest on convertible notes on February 16, 2021. No promissory notes were outstanding as of December 31, 2021.
Change in fair value of derivative liability
Change in fair value of derivative liability resulted in a gain of $0.21 million for the year ended December 31, 2021 compared to a loss of $0.23 million for the year ended December 31, 2020.
Loss on legal settlements
No loss from legal settlements was recorded for the year ended December 31, 2021 while a $5.4 million loss from legal settlements was recorded for the year ended December 31, 2020. Loss from legal settlements resulted due to the Company settling legal claims during the year ended December 31, 2020.
Loss on forbearance agreement
Loss on forbearance settlement were $0 and $12.6 million for the years ended December 31, 2021 and 2020 respectively. Loss on extinguishment resulting from the change in fair value of debt and equity instruments modified due to the forbearance settlement the Company entered into during the year ended December 31, 2020.
Amortization of debt discount
Amortization of debt discount was $0 and $0.32 million for the years ended December 31, 2021 and 2020 respectively. The decrease is due to the adoption of ASU 2020-06 on January 1, 2021 which extinguished the debt discount recorded in 2020 of $4.7 million.
Liquidity and Capital Resources
The Company's current operations have focused on business planning, raising capital, establishing an intellectual property portfolio, hiring, and conducting preclinical studies and clinical trials. The Company does not have any product candidates approved for sale and has not generated any revenue from product sales. The Company has sustained operating losses since inception and expects such losses to continue over the foreseeable future. During the year ended December 31, 2021, the Company raised $24.7 million through issuance of common stock, raised $16.4 million through the exercise of warrants and raised $1.2 million from a series of issuances of convertible notes, as compared to $12.5 million raised in the year ended December 31, 2020 through a series of issuances of convertible notes. We anticipate that cash utilized for selling, general and administrative expenses will range between $2 and $4 million in the coming quarters, while research and development expenses will vary depending on clinical activities. The Company reported $32.0 million of cash and short-term investments at December 31, 2021 and anticipates that will be sufficient to fund operations for the following 12 months, and anticipates raising additional funds during the fiscal year 2022.
The consolidated financial statements of the Company have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the financial statements do not include any adjustments that might be necessary should the Company be unable to continue in existence.
The Company has incurred substantial losses as of December 31, 2021. The Company anticipates incurring additional losses until such time, it can generate significant sales or revenue from out-licensing of its products currently in development. Substantial additional financing will be needed by the Company to fund its operations and to commercially develop its product candidates.
Management is currently evaluating different strategies to obtain the required funding for future operations. These strategies may include but are not limited to: public offerings of equity and/or debt securities; and payments from potential strategic research and development, licensing and/or marketing arrangements with pharmaceutical companies.
Critical Accounting Policies
We consider the following accounting policies to be critical given they involve estimates and judgments made by management and are important for our investors' understanding of our operating results and financial condition.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Oxis Biotech, Inc. and Georgetown Translational Pharmaceuticals, Inc. Intercompany transactions and balances have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles ("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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include accruals for potential liabilities, valuation of notes payable, assumptions used in deriving the fair value of derivative liabilities, share-based compensation and beneficial conversion feature of notes payable, and valuation of deferred tax assets. Actual results could differ from those estimates.
The Company accounts for share-based awards to employees and nonemployees and consultants in accordance with the provisions of Accounting Standards Codification ("ASC") 718, Compensation-Stock Compensation. Stock-based compensation cost is measured at fair value on the grant date and that fair value is recognized as expense over the requisite service, or vesting period.
The Company values its equity awards using the Black-Scholes option pricing model, and accounts for forfeitures when they occur. Use of the Black-Scholes option pricing model requires the input of subjective assumptions including expected volatility, expected term, and a risk-free interest rate. The Company estimates volatility using its own historical stock price volatility. The expected term of the instrument is estimated by using the simplified method to estimate expected term. The risk-free interest rate is estimated using comparable published federal funds rates.
We believe that inflation has not had a material adverse impact on our business or operating results during the periods presented.
Off-balance Sheet Arrangements
We have no off-balance sheet arrangements as of December 31, 2021.
Mar 28, 2022
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