CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
1.
The Company and Summary of Significant Accounting
Policies
Business
In
1965, the corporate predecessor of GT Biopharma, Diagnostic Data,
Inc. was incorporated in the State of California. Diagnostic Data
changed its incorporation to the State of Delaware in 1972. and
changed its name to DDI Pharmaceuticals, Inc. in 1985. In 1994, DDI
Pharmaceuticals merged with International BioClinical, Inc. and
Bioxytech S.A. and changed its name to OXIS International, Inc. In
July 2017, the Company changed its name to GT Biopharma,
Inc.
We are
a clinical stage biopharmaceutical company focused on the
development and commercialization of novel immuno-oncology products
based off our proprietary Natural Killer (NK) cell engager
(Tri-specific Killer Engager (TriKE) & Tetra-specific Killer
Engager (TetraKE)) and bi-specific Antibody Drug Conjugate
(bispecific-ADC) technology platforms. Our TriKE and TetraKE
platforms generate proprietary moieties designed to harness and
enhance the cancer killing abilities of a patient’s own
natural killer, or NK, cells. Once bound to a NK cell, our moieties
are designed to stimulate the NK cell and precisely direct it to
one or more specifically-targeted proteins (tumor antigens)
expressed on a specific type of cancer, ultimately resulting in the
cancer cell’s death. TriKEs and TetraKEs are made up of
recombinant fusion proteins, can be designed to target tumor
antigens on hematologic malignancies, sarcomas or solid tumors and
do not require patient-specific customization. They are designed to
be dosed in an outpatient setting and are expected to have
reasonably low cost of goods. Our bispecific-ADC platform can
generate product candidates that are ligand-directed single-chain
fusion proteins that simultaneously target two tumor antigens. We
believe our bispecific-ADC moieties represents the next generation
of ADCs.
Going Concern
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.
The
financial statements of the Company have been prepared on a
goingconcern 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 and negative cash flows
from operations since its inception and has an accumulated deficit
of $566 million and cash of $313 thousand as of September 30, 2019.
The Company anticipates incurring additional losses until such
time, if ever, that it can generate significant sales 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. These factors raise
substantial doubt about the Company’s ability to continue as
a going concern.
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,
payments from potential strategic research and development, and
licensing and/or marketing arrangements with pharmaceutical
companies. If the Company is unable to secure adequate additional
funding, its business, operating results, financial condition and
cash flows may be materially and adversely affected.
GT BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Use of Estimates
The financial statements and notes are representations of the
Company's management, which is responsible for their integrity and
objectivity. These accounting policies conform to accounting
principles generally accepted in the United States of America, and
have been consistently applied in the preparation of the financial
statements. The preparation of financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets, liabilities revenues and expenses and
disclosures of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from those
estimates.
Basis of Consolidation and Comprehensive Income
The accompanying consolidated financial statements include the
accounts of GT Biopharma, Inc. and its subsidiaries. All
intercompany balances and transactions have been eliminated. The
Company's financial statements are prepared using the accrual
method of accounting.
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the U.S. (“U.S. GAAP”)
and the rules and regulations of the U.S. Securities and Exchange
Commission (“SEC”). Certain information and disclosures
required by U.S. GAAP for complete consolidated financial
statements have been condensed or omitted herein. The interim
condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Form 10-K for the year
ended December 31, 2018. The unaudited interim condensed
consolidated financial information presented herein reflects all
normal adjustments that are, in the opinion of management,
necessary for a fair statement of the financial position, results
of operations and cash flows for the periods presented. The Company
is responsible for the unaudited interim consolidated financial
statements included in this report. The results of operations of
any interim period are not necessarily indicative of the results
for the full year.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash
equivalents.
Concentrations of Credit Risk
The Company's cash and cash equivalents, marketable securities and
accounts receivable are monitored for exposure to concentrations of
credit risk. The Company maintains substantially all of its cash
balances in a limited number of financial institutions. The
balances are each insured by the Federal Deposit Insurance
Corporation up to $250,000. The Company had balances totaling
$63,000 in excess of this limit at September 30, 2019.
Stock Based Compensation to Employees
The
Company accounts for its stock-based compensation for employees in
accordance with Accounting Standards Codification
(“ASC”) 718. The Company recognizes in the
statement of operations the grant-date fair value of stock options
and other equity-based compensation issued to employees and
non-employees over the related vesting period.
The
Company granted no stock options during the nine months ended
September 30, 2019 and 2018, respectively
GT BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Long-Lived Assets
Our
long-lived assets include property, plant and equipment,
capitalized costs of filing patent applications and other
indefinite lived intangible assets. We evaluate our long-lived
assets for impairment, other than indefinite lived intangible
assets, in accordance with ASC 360, whenever events or changes in
circumstances indicate that the carrying amount of such assets may
not be recoverable. Estimates of future cash flows and timing of
events for evaluating long-lived assets for impairment are based
upon management’s judgment. If any of our intangible or
long-lived assets are considered to be impaired, the amount of
impairment to be recognized is the excess of the carrying amount of
the assets over its fair value.
Applicable
long-lived assets are amortized or depreciated over the shorter of
their estimated useful lives, the estimated period that the assets
will generate revenue, or the statutory or contractual term in the
case of patents. Estimates of useful lives and periods of expected
revenue generation are reviewed periodically for appropriateness
and are based upon management’s judgment.
Impairment of Long-Lived Assets
The Company's long-lived assets currently consist of indefinite
lived intangible assets associated with IPR&D
(“In-Process Research & Development”) projects and
related capitalized patents acquired in the acquisition of
Georgetown Translational Pharmaceuticals, Inc. as described in Note
2 below. Intangible
assets associated with IPR&D projects are not amortized until
approval by the Food and Drug Administration (FDA) is obtained in a
major market subject to certain specified conditions and management
judgment. The useful life of an amortizing asset generally is
determined by identifying the period in which substantially all of
the cash flows are expected to be generated.
The
Company evaluates indefinite lived intangible assets for impairment
at least annually and whenever impairment indicators are present in
accordance with ASC 350. When necessary, the Company records an
impairment loss for the amount by which the fair value is less than
the carrying value of these assets. The fair value of intangible assets other than
goodwill is typically determined using the “relief from
royalty method”, specifically the discounted cash flow
method utilizing Level 3 fair value
inputs. Some of the more significant estimates and
assumptions inherent in this approach include: the amount and
timing of the projected net cash flows, which includes the expected
impact of competitive, legal and/or regulatory forces on the
projections and the impact of technological risk associated with
IPR&D assets, as well as the selection of a long-term growth
rate; the discount rate, which seeks to reflect the various risks
inherent in the projected cash flows; and the tax rate, which seeks
to incorporate the geographic diversity of the projected cash
flows.
The
Company performs impairment testing for all other long-lived assets
whenever impairment indicators are present. When necessary, the
Company calculates the undiscounted value of the projected cash
flows associated with the asset, or asset group, and compares this
estimated amount to the carrying amount. If the carrying amount is
found to be greater, we record an impairment loss for the excess of
book value over fair value.
Income Taxes
The Company accounts for income taxes using the asset and liability
approach, whereby deferred income tax assets and liabilities are
recognized for the estimated future tax effects, based on current
enacted tax laws, of temporary differences between financial and
tax reporting for current and prior periods. Deferred tax assets
are reduced, if necessary, by a valuation allowance if the
corresponding future tax benefits may not be realized.
GT BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Net Income (Loss) per Share
Basic net income (loss) per share is computed by dividing the net
loss for the period by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share
is computed by dividing the net loss for the period by the weighted
average number of common shares outstanding during the period, plus
the potential dilutive effect of common shares issuable upon
exercise or conversion of outstanding stock options and warrants
during the period. The weighted average number of potentially
dilutive common shares excluded from the calculation of net income
(loss) per share totaled in 73,520,680 and 2,977,958 as of
September 30, 2019 and 2018, respectively.
Patents
Acquired patents are capitalized at their acquisition cost or fair
value. The legal costs, patent registration fees and models and
drawings required for filing patent applications are capitalized if
they relate to commercially viable technologies. Commercially
viable technologies are those technologies that are projected to
generate future positive cash flows in the near term. Legal costs
associated with patent applications that are not determined to be
commercially viable are expensed as incurred. All research and
development costs incurred in developing the patentable idea are
expensed as incurred. Legal fees from the costs incurred in
successful defense to the extent of an evident increase in the
value of the patents are capitalized.
Capitalized cost for pending patents are amortized on a
straight-line basis over the remaining twenty year legal life of
each patent after the costs have been incurred. Once each patent is
issued, capitalized costs are amortized on a straight-line basis
over the shorter of the patent's remaining statutory life,
estimated economic life or ten years.
Fixed Assets
Fixed assets is stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets,
which are 3 to 10 years for machinery and equipment and the
shorter of the lease term or estimated economic life for leasehold
improvements.
Fair Value
The carrying amounts reported in the balance sheets for receivables
and current liabilities each qualify as financial instruments and
are a reasonable estimate of fair value because of the short period
of time between the origination of such instruments and their
expected realization and their current market rate of
interest. The three levels are defined as
follows:
●
Level 1 inputs to
the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets. The
Company’s Level 1 assets include cash equivalents, primarily
institutional money market funds, whose carrying value represents
fair value because of their short-term maturities of the
investments held by these funds.
●
Level 2 inputs to
the valuation methodology include quoted prices for similar assets
and liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument. The
Company’s Level 2 valuation amounts consist of warrants and
beneficial conversion features arising from the issuance of
convertible securities and in accordance with ASC
815-40.
●
Level 3 inputs to
the valuation methodology are unobservable and significant to the
fair value measurement.
GT BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Research and Development
Research and development costs are expensed as incurred and
reported as research and development expense. Research and
development costs totaling $1.6 million and $7.8 million for the
nine months ended September 30, 2019 and 2018,
respectively.
Revenue Recognition
License Revenue
License
arrangements may consist of non-refundable upfront license fees,
exclusive licensed rights to patented or patent pending technology,
and various performance or sales milestones and future product
royalty payments. Some of these arrangements are multiple element
arrangements.
Non-refundable,
up-front fees that are not contingent on any future performance by
us, and require no consequential continuing involvement on our
part, are recognized as revenue when the license term commences and
the licensed data, technology and/or compound is
delivered. We defer recognition of non-refundable
upfront fees if we have continuing performance obligations without
which the technology, right, product or service conveyed in
conjunction with the non-refundable fee has no utility to the
licensee that is separate and independent of our performance under
the other elements of the arrangement. In addition, if we have
continuing involvement through research and development services
that are required because our know-how and expertise related to the
technology is proprietary to us, or can only be performed by us,
then such up-front fees are deferred and recognized over the period
of continuing involvement.
Payments
related to substantive, performance-based milestones in a research
and development arrangement are recognized as revenue upon the
achievement of the milestones as specified in the underlying
agreements when they represent the culmination of the earnings
process. As of September 30, 2019, the Company has not generated
any licensing revenue.
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board
(“FASB”) issued new guidance related to accounting for
leases, Accounting Standards codification Topic 842 (ASC 842). We
adopted the new guidance on January 1, 2019 using the modified
retrospective approach and the optional transition method. Under
this adoption method, comparative prior periods were not adjusted
and continue to be reported with our historical accounting policy.
The primary impact of adopting this standard was the recognition of
$173 thousand in operating lease liabilities and $165 thousand in
right of use assets.
On September 1, 2017, the Company entered into an Agreement and
Plan of Merger whereby it acquired 100% of the issued and
outstanding capital stock of Georgetown Translational
Pharmaceuticals, Inc. (GTP). In exchange for the ownership of GTP,
the Company issued a total of 16,927,878 shares of its common
stock, having a share price of $15.00 on the date of the
transaction, to the three prior owners of GTP which represented 33%
of the issued and outstanding capital stock of the Company on a
fully diluted basis. $253.8 million of the value of shares issued
was allocated to intangible assets consisting of a portfolio of
three CNS development candidates, which are classified as
IPR&D.
GT BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
As of September 30, 2018, the Company recorded an intangible asset
impairment charge of $228.5 million related to the portfolio of CNS
IPR&D assets within Operating Expenses, which represents the
excess carrying value compared to fair value. The impairment charge
was the result of both internal and external factors. In the
3rd
quarter of 2018, the Company
experienced changes in key senior management, led by the
appointment of a new CEO with extensive experience in oncology drug
development. These changes resulted in the prioritization of
immuno-oncology development candidates relative to CNS development
candidates. In conjunction with these strategic changes, limited
internal resources have delayed the development of the CNS
IPR&D assets. The limited resources, changes in senior
leadership, and favorable market conditions for immuno-oncology
development candidates have resulted in the Company choosing to
focus on development of its immuno-oncology portfolio. In light of
this shift in market strategy, the Company performed a commercial
assessment and a valuation of the CNS IPR&D assets, both to
assess fair value and support potential future licensing efforts.
The valuation indicated an excess carrying value over the fair
value of these assets, resulting in the impairment charge noted
above.
The fair value of the CNS IPR&D assets was determined
using the discounted cash flow method which utilized significant estimates and
assumptions surrounding the amount and timing of the
projected net cash flows, which includes the probability of commercialization, the assumption
that the assets would be out-licensed to third-parties for
continued development for upfront licensing fees and downstream
royalty payments based on net sales, and expected impact of
competitive, legal and/or regulatory forces on the projections, as
well as the selection of a long-term growth rate; the discount
rate, which seeks to reflect the various risks inherent in the
projected cash flows; and the tax rate, which seeks to incorporate
the geographic diversity of the projected cash flows.
On September 19, 2019, the Company entered into an Asset Purchase
Agreement (the “Agreement”), pursuant to which the
Company sold its rights, titles and interests, including associated
patents, to the pharmaceutical product designated by the Company as
GTB-004 (the “Product”). Under the Agreement, the
Product was purchased by DAS Therapeutics, Inc. who the Company
believes is well positioned to take over the clinical development
of the Product including obtaining timely approval by the
FDA.
The Company received $200,000 at closing. The Company will also
participate in the future commercial value of the Product by
receiving $6,000,000 upon the achievement of certain sales
objectives. In addition, the Company will receive a royalty equal
to 1.5% of U.S. sales until such time as the last of the patents
associated with the Product expires. The Company reflected a loss
in the quarter ended September 30, 2019 totaling
$20,463,000.
As a result of the loss reported on the sale of the Product, as
well as the response received on inquiries related to the other two
projects, the Company determined that the remaining value related
to these remaining projects should be impaired. During the quarter
ended September 30, 2019, the Company reported an impairment charge
for these projects totaling $4,599,000.
Convertible Notes
On January 22, 2018, the Company entered into a Securities Purchase
Agreement (“SPA”) with fourteen accredited investors
(individually, a “Buyer” and collectively, the
“Buyers”) pursuant to which the Company agreed to issue
to the Buyers senior convertible notes in an aggregate principal
amount of $7,760,510 (the “Notes”), which Notes shall
be convertible into the Company’s common stock, par value
$0.001 per share (the “Common Stock”) at a price of
$4.58 per share, and five-year warrants to purchase the
Company’s Common Stock representing the right to acquire an
aggregate of approximately 1,694,440 shares of Common Stock (the
“Warrants”).
GT BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Pursuant to the terms of SPA the Notes were subject to an original
issue discount of 10% resulting in proceeds to the Company of
$7,055,000 from the transaction.
Upon
the purchase of the Notes, the Buyers received Warrants to purchase
1,694,440 shares of Common
Stock. Such Warrants are exercisable for (5) years from the
date the shares underlying the Warrants are freely saleable. The
initial Exercise Price is $4.58. According to the terms
of the warrant agreement, the Warrants are subject to certain
adjustments depending upon the price and structure of a subsequent
financing, including a qualified financing with gross proceeds of
at least $20 million, as defined in the
agreements.
The issuance of the Notes and Warrants were made in reliance on the
exemption provided by Section 4(a)(2) of the Securities Act of
1933, as amended (the “Securities Act”) for the offer
and sale of securities not involving a public offering, and
Regulation D promulgated under the Securities Act.
Contemporaneously with the execution and delivery of the SPA, the
Company and the Buyers executed and delivered a Registration Rights
Agreement (the “Registration Rights Agreement”)
pursuant to which the Company has agreed to provide certain
registration rights with respect to the Registrable Securities
under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
Senior Convertible Debentures
On August 2, 2018, GT Biopharma, Inc. (the “Company”)
entered into a Securities Purchase Agreement with the purchasers
identified on the signature pages thereto (individually, a
“Purchaser,” and collectively, the
“Purchasers”) pursuant to which the Company issued to
the Purchasers one year 10% Senior Convertible Debentures in an
aggregate principal amount of $5,140,000 (the
“Debentures”), which Debentures shall be convertible
into the Company’s common stock, par value $0.001 per share
(the “Common Stock”), at a price of $2 per share. The
Company used a portion of these proceeds to repay $4.4 million of
the notes issued on January 22, 2018. Additionally, the remaining
$3.3 million of the notes issued on January 22, 2018 were converted
into the Debentures at the same terms discussed above.
On September 7, 2018, GT Biopharma, Inc. (the
“Company”) entered into a Securities Purchase Agreement
with the purchasers identified on the signature pages thereto
(individually, a “Purchaser,” and collectively, the
“Purchasers”) pursuant to which the Company has issued
to the Purchasers one year 10% Senior Convertible Debentures in an
aggregate principal amount of $2,050,000 (the
“Debentures”), which Debentures shall be convertible
into the Company’s common stock, par value $0.001 per share
(the “Common Stock”), at a price of $2 per
share.
On September 24, 2018, GT Biopharma, Inc. (the
“Company”) entered into a Securities Purchase Agreement
with the purchasers identified on the signature pages thereto
(individually, a “Purchaser,” and collectively, the
“Purchasers”) pursuant to which the Company has issued
to the Purchasers one year 10% Senior Convertible Debentures in an
aggregate principal amount of $800,000 (the
“Debentures”), which Debentures shall be convertible
into the Company’s common stock, par value $0.001 per share
(the “Common Stock”), at a price of $2 per
share.
On February 4, 2019, GT Biopharma, Inc. (the “Company”)
entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with the 15 purchasers (individually, a
“Purchaser,” and collectively, the
“Purchasers”), pursuant to which the Company issued to
the Purchasers, on February 4, 2019, Secured Convertible Notes in
an aggregate principal amount of $1,352,224 (the
“Notes”), consisting of gross proceeds of $1,052,224
and settlement of existing debt of $300,000, which Notes shall be
convertible at any time after issuance into shares (the
“Conversion Shares”) of the Company’s common
stock, par value $0.001 per share (the “Common Stock”),
at an initial conversion price of $0.60 per share (the
“Conversion Price”).
GT BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
The Notes accrue interest at the rate of 10% per annum and mature
on August 2, 2019. Interest on the Notes is payable in cash or, at
a Purchaser’s option, in shares of Common Stock at the
Conversion Price. Upon the occurrence of an event of default,
interest accrues at 18% per annum. The Notes contain customary
default provisions, including provisions for potential
acceleration, and covenants, including negative covenants regarding
additional indebtedness and dividends. The Conversion Price is
subject to adjustment due to certain events, including stock
dividends and stock splits, and is subject to reduction in certain
circumstances if the Company issues Common Stock or Common Stock
equivalents at an effective price per share that is lower than the
Conversion Price then in effect. The Company may only prepay the
Notes with the prior written consent of the respective Purchasers
thereof.
Contemporaneously with the execution and delivery of the Purchase
Agreement, on February 4, 2019, the Company and certain of its
wholly-owned subsidiaries entered into a Security Agreement (the
“Security Agreement”) with Alpha Capital Anstalt, as
collateral agent on behalf of the Purchasers, and with the
Purchasers, pursuant to which the Purchasers have been granted a
first-priority security interest in substantially all of the assets
of the Company and such subsidiaries securing (i) an aggregate
principal amount of $1,352,224 of Notes and (ii) an aggregate
principal amount of $9,058,962 of the Company’s 10% Senior
Convertible Debentures issued on August 2, 2018, September 7, 2018
and September 24, 2018 held by such Purchasers.
The Purchase Agreement contains customary representations,
warranties and covenants, including covenants, subject to certain
exceptions, that the Company, until the date on which less than 10%
of the Notes are outstanding, shall not effect any Variable Rate
Transaction (as defined in the Purchase Agreement) and that, for as
long as a Purchaser holds any Notes or Conversion Shares, the
Company shall amend the terms and conditions of the Purchase
Agreement and the transactions contemplated thereby with respect to
such Purchaser to give such Purchaser the benefit of any terms or
conditions under which the Company agrees to issue or sell any
Common Stock or Common Stock equivalents that are more favorable to
an investor than the terms and conditions granted to such Purchaser
under the Purchase Agreement and the transactions contemplated
thereby.
In addition, the Company entered into a registration rights
agreement (the “Registration Rights Agreement”) with
the Purchasers, pursuant to which the Company has agreed to file,
within 14 days after February 4, 2019, one or more registration
statements on Form S-3 (or, if Form S-3 is not then available to
the Company, such form of registration that is then available to
effect a registration for resale of the subject securities)
covering the resale of all Conversion Shares, subject to certain
penalties set forth in the Registration Rights Agreement. The Form
S-3 was filed by the Company on February 14, 2019 and became
effective on March 11, 2019
On May 22, 2019, GT Biopharma, Inc. (the “Company”)
entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with the ten purchasers (individually, a
“Purchaser,” and collectively, the
“Purchasers”), pursuant to which the Company issued to
the Purchasers, on May 22, 2019, Secured Convertible Notes in an
aggregate principal amount of $1,300,000 (the “Notes”),
which Notes shall be convertible at any time after issuance into
shares (the “Conversion Shares”) of the Company’s
common stock, par value $0.001 per share (the “Common
Stock”), at an initial conversion price of $0.35 per share
(the “Conversion Price”).
The Notes accrue interest at the rate of 10% per annum and mature
on November 22, 2019. Interest on the Notes is payable in cash or,
at a Purchaser’s option, in shares of Common Stock at the
Conversion Price. Upon the occurrence of an event of default,
interest accrues at 18% per annum. The Notes contain customary
default provisions, including provisions for potential
acceleration, and covenants, including negative covenants regarding
additional indebtedness and dividends. The Conversion Price is
subject to adjustment due to certain events, including stock
dividends and stock splits, and is subject to reduction in certain
circumstances if the Company issues Common Stock or Common Stock
equivalents at an effective price per share that is lower than the
Conversion Price then in effect. The Company may only prepay the
Notes with the prior written consent of the respective Purchasers
thereof.
GT BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
The Purchase Agreement contains customary representations,
warranties and covenants, including covenants, subject to certain
exceptions, that the Company, until the date on which less than 10%
of the Notes are outstanding, shall not effect any Variable Rate
Transaction (as defined in the Purchase Agreement) and that, for as
long as a Purchaser holds any Notes or Conversion Shares, the
Company shall amend the terms and conditions of the Purchase
Agreement and the transactions contemplated thereby with respect to
such Purchaser to give such Purchaser the benefit of any terms or
conditions under which the Company agrees to issue or sell any
Common Stock or Common Stock equivalents that are more favorable to
an investor than the terms and conditions granted to such Purchaser
under the Purchase Agreement and the transactions contemplated
thereby.
In addition, the Company entered into a registration rights
agreement (the “Registration Rights Agreement”) with
the Purchasers, pursuant to which the Company has agreed to file,
within 30 days after May 22, 2019, one or more registration
statements on Form S-3 (or, if Form S-3 is not then available to
the Company, such form of registration that is then available to
effect a registration for resale of the subject securities)
covering the resale of all Conversion Shares, subject to certain
penalties set forth in the Registration Rights Agreement. The Form
S-1 was filed by the Company on June 21, 2019 and became effective
on July 12, 2019.
Between July 31 and August 28, 2019, GT Biopharma, Inc. (the
“Company”) entered into a Securities Purchase Agreement
(the “Purchase Agreement”) with the eleven purchasers
(individually, a “Purchaser,” and collectively, the
“Purchasers”), pursuant to which the Company issued to
the Purchasers, Secured Convertible Notes in an aggregate principal
amount of $975,000 (the “Notes”), which Notes shall be
convertible at any time after issuance into shares (the
“Conversion Shares”) of the Company’s common
stock, par value $0.001 per share (the “Common Stock”),
at an initial conversion price of $0.20 per share (the
“Conversion Price”).
The Notes accrue interest at the rate of 10% per annum and mature
between January 31 and February 28, 2020. Interest on the Notes is
payable in cash or, at a Purchaser’s option, in shares of
Common Stock at the Conversion Price. Upon the occurrence of an
event of default, interest accrues at 18% per annum. The Notes
contain customary default provisions, including provisions for
potential acceleration, and covenants, including negative covenants
regarding additional indebtedness and dividends. The Conversion
Price is subject to adjustment due to certain events, including
stock dividends and stock splits, and is subject to reduction in
certain circumstances if the Company issues Common Stock or Common
Stock equivalents at an effective price per share that is lower
than the Conversion Price then in effect. The Company may only
prepay the Notes with the prior written consent of the respective
Purchasers thereof.
The Purchase Agreement contains customary representations,
warranties and covenants, including covenants, subject to certain
exceptions, that the Company, until the date on which less than 10%
of the Notes are outstanding, shall not effect any Variable Rate
Transaction (as defined in the Purchase Agreement) and that, for as
long as a Purchaser holds any Notes or Conversion Shares, the
Company shall amend the terms and conditions of the Purchase
Agreement and the transactions contemplated thereby with respect to
such Purchaser to give such Purchaser the benefit of any terms or
conditions under which the Company agrees to issue or sell any
Common Stock or Common Stock equivalents that are more favorable to
an investor than the terms and conditions granted to such Purchaser
under the Purchase Agreement and the transactions contemplated
thereby.
In addition, the Company entered into a registration rights
agreement (the “Registration Rights Agreement”) with
the Purchasers, pursuant to which the Company has agreed to file,
within 30 days, one or more registration statements on Form S-3
(or, if Form S-3 is not then available to the Company, such form of
registration that is then available to effect a registration for
resale of the subject securities) covering the resale of all
Conversion Shares, subject to certain penalties set forth in the
Registration Rights Agreement. The Form S-1 was filed by the
Company on September 13, 2019 and became effective in October 2,
2019.
GT BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
Financing
Agreement
On
November 8, 2010, the Company entered into a financing arrangement
with Gemini Pharmaceuticals, Inc., a product development and
manufacturing partner of the Company, pursuant to which Gemini
Pharmaceuticals made a $250,000 strategic equity investment in the
Company and agreed to make a $750,000 purchase order line of credit
facility available to the Company. The outstanding principal of all
Advances under the Line of Credit will bear interest at the rate of
interest of prime plus 2 percent per annum. There is $31,000 due on
this credit line at September 30, 2019.
Common Stock
In the first nine months of 2019, the Company issued 2,591,152
shares of common stock upon conversion of $1,162,374 in principal
and interest on senior convertible notes.
On August 14, 2019, the
Company’s CEO Anthony Cataldo received as
compensation a restricted stock award of 7,000,000 common shares
and the Company’s CFO Steven Weldon received as compensation
a restricted stock award of 4,500,000 common shares. Also, two
Company consultants were paid as compensation a restricted stock
award of 1,000,000 common shares each.
On September 1, 2017, the Company designated 2,000,000 shares of
Series J Preferred Stock. Shares of Series J Preferred Stock
will have the same voting rights as shares of common stock with
each share of Series J Preferred Stock entitled to one vote at a
meeting of the shareholders of the Corporation. Shares of Series J
Preferred Stock will not be entitled to receive any dividends,
unless and until specifically declared by our board of directors.
The holders of the Series J Preferred Stock will participate, on an
as-if-converted-to-common stock basis, in any dividends to the
holders of common stock. Each share of the Series J Preferred Stock
is convertible into one share of our common stock at any time at
the option of the holder.
On the same day, the Board issued 1,513, 548 of those shares in
exchange for the cancellation of debt. In the first quarter
of 2019, it was discovered that a certificate of designation with
respect to the Series J Preferred Stock had never been filed with
the Office of the Secretary of State for the State of
Delaware. Legal research determined that despite the fact the
Company had issued shares of Series J Preferred Stock, those shares
had, in fact, never existed.
To remedy the situation, on April 4, 2019, the Company filed a
certificate of designation with the Office of the Secretary State
for the State of Delaware designating a series of preferred stock
as Series J-1 Preferred Stock. On April 19, 2019, the Company
issued 2,353,548 of those shares. The issuance was in lieu of
the preferred stock that should have been issued on September 1,
2017, and in settlement for not receiving preferred stock until 20
months after the debt for which the stock was issued was cancelled.
The Company reflected an expense in general and administrative
costs in the quarter ended June 30, 2019 totaling
$1,140,000.
The Shares are convertible into shares of common stock of the
Registrant at the rate of $0.60 per share. The issuance was
exempt from the registration requirements of Section 5 of the
Securities Act of 1933 pursuant to Section 4(2) of the same Act
since the issuance of the Shares did not involve any public
offering.
350,000 of the Series J shares of preferred stock had been
previously converted into 350,000 shares of common stock in
December 2017.
GT BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
5.
Stock Options and Warrants
Stock Options
The
following table summarizes stock option transactions for the nine
months ended September 30, 2019:
|
|
Weighted Average
Exercise Price
|
Outstanding,
December 31, 2018
|
1,133
|
$1,320.00
|
Granted
|
-
|
-
|
Exercised
|
-
|
-
|
Expired
|
(1,133)
|
1,320.00
|
Outstanding,
September 30, 2019
|
-
|
$-
|
Exercisable,
September 30, 2019
|
-
|
$-
|
Common Stock Warrants
Warrant
transactions for the nine months ended September 30, 2019 are as
follows:
|
|
Weighted Average
Exercise Price
|
Outstanding at
December 31, 2018:
|
1,813,053
|
$0.35
|
Granted
|
-
|
-
|
Forfeited
|
-
|
-
|
Exercised
|
-
|
-
|
Outstanding at
September 30, 2019
|
1,813,053
|
$0.35
|
Exercisable at
September 30, 2019
|
1,813,053
|
$0.35
|
6.
Commitments and Contingencies
Leases
As described in Note 1. Nature of Operations
and Summary of Significant Accounting Policies, we adopted new lease accounting guidance
effective January 1, 2019.
We determine if a contractual arrangement is a lease at inception.
Our lease arrangements provide the Company the right to utilize
certain specified tangible assets for a period of time in exchange
for consideration. Our leases primarily relate to building office
space. Our leases currently consist solely of operating leases.
Leases with an initial term of 12 months or less are not recorded
on the balance sheet.
We recognize a lease liability and a right of use asset at the
lease commencement date based on the present value of the future
lease payments over the lease term discounted using our incremental
borrowing rate. Implicit interest rates within our lease
arrangements are rarely determinable. Right of use assets also
include, if applicable, prepaid lease payments and initial direct
costs, less incentives received.
GT BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2019
(UNAUDITED)
We recognize operating lease expense on a straight-line basis over
the term of the lease within selling general and administrative
expenses.
Our leases do not contain any material residual value guarantees or
material restrictive covenants. Some of our leases include optional
renewal periods or termination provisions which we assess at
inception to determine the term of the lease, subject to
reassessment in certain circumstances.
The
following table summarizes the Company’s future minimum lease
commitments as of September 30, 2019:
Year ending
December 31:
|
|
2019
|
17,000
|
2020
|
71,000
|
2021
|
61,000
|
Total minimum lease
payments
|
$149,000
|
Rent
expense for the nine months ended September 30,
2019 and 2018 was $52,000 and $61,000,
respectively.
Employment Agreements
On October 18, 2018, the Company entered into a Consultant
Agreement with Anthony Cataldo. The term of the Consultant
Agreement shall remain in effect until September 30, 2019. This
Agreement supersedes the Consultant Agreement dated February 14,
2018 and will pay Mr. Cataldo $25,000 per month during the term of
the Agreement.
On October 19, 2018, the Company entered into an Executive
Employment Agreement with Dr. Urbanski, reflecting his current
position as Chief Executive Officer of the Company. Under the terms
of this agreement, Dr. Urbanski’s annual salary is
essentially unchanged from his previous positions. Dr. Urbanski is
also entitled to participate in the Company’s bonus plans.
Under the Executive Employment Agreement, the Company has agreed
that upon shareholder approval of a Stock Option Plan, it will
recommend to the Board that the Company grant Dr. Urbanski a
Non-Qualified stock option to purchase 2,971,102 shares of the
Company’s common stock having an exercise equal to the fair
market value of the shares on the date of the Agreement. The stock
option grant would vest according to the following schedule: (i)
1,250,000 fully vested shares upon signing of the agreement, (ii)
1,250,000 shares on January 1, 2019, and (iii) 471,102 shares on
January 1, 2020. On March 15, 2019, Dr, Urbanski resigned his
position as Chief Executive Officer, President and Chairman of the
Board.
On April 3, 2019, the Company entered into the Separation Agreement
with Dr. Urbanski in connection with his resignation as the
Company’s Chief Executive Officer. Pursuant to the terms of
the Separation Agreement Dr. Urbanski will receive six
months’ salary of $212,500 paid in two installments and the
Company will reimburse the premiums associated with
Dr. Urbanski’s continuation health coverage for six
months following his resignation. The Settlement Agreement also
contains a release by Mr. Urbanski of any claims against the
Company arising from or relating to his employment and customary
confidentiality, non-disparagement and cooperation
covenants.
In the fourth quarter of 2019, the Company issued 540,569 shares of
common stock upon conversion of $108,144 in principal and interest
on senior convertible notes.