NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the Three Months Ended March 31,
2021 and 2020
Note
1 – Organization and Operations
In 1965, the
corporate predecessor of GT Biopharma Inc. (Company), 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.
The Company is 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™), Tetra-specific Killer Engager (Dual Targeting
TriKEDual Targeting TriKE) platforms. The Company’s TriKE and
Dual Targeting TriKE platforms generate proprietary therapeutics
designed to harness and enhance the cancer killing abilities of a
patient’s own natural killer cells, or NK cells.
The accompanying
condensed consolidated financial statements are unaudited. These
unaudited interim condensed consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and
applicable rules and regulations of the Securities and Exchange
Commission (“SEC”) regarding interim financial
reporting. Certain information and note disclosures normally
included in the financial statements prepared in accordance with
GAAP have been condensed or omitted pursuant to such rules and
regulations. Accordingly, these interim condensed consolidated
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in
the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2020 filed with the SEC on April 16, 2021 (the
“2020 Annual Report”). The consolidated balance sheet
as of December 31, 2020 included herein was derived from the
audited consolidated financial statements as of that
date.
In the opinion of
management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to fairly
present the Company’s financial position and results of
operations for the interim periods reflected. Except as noted, all
adjustments contained herein are of a normal recurring nature.
Results of operations for the fiscal periods presented herein are
not necessarily indicative of fiscal year-end results.
Note
2 –Going Concern
The accompanying
consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of
business. As reflected in the accompanying consolidated financial
statements, for the three months ended March 31, 2021, the Company
incurred a net loss of $29.7 million and used cash in operating
activities of $3.7 million. These factors raise substantial doubt
about the Company’s ability to continue as a going concern
within one year of the date that these financial statements are
issued. The consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to
continue as a going concern.
During the three months ended March 31,
2021, the Company received net cash of $24.7 million from
the sale of 4,945,000 shares of its common stock pursuant to a
public offering. At March 31, 2021, the Company had cash on hand in
the amount of $27.6 million. 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. 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.
Management estimates that the current funds on hand will be
sufficient to continue operations through the next six
months. The Company’s
ability to continue as a going concern is dependent upon its
ability to continue to implement its business plan.
Note
3 – Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying
condensed 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.
In
March 2011, the Company agreed to form a joint venture with
engage:BDR, Inc., an on-line marketing company that offers both
premium and placement-specific display marketing solutions and the
ability to distribute campaigns through its own display platforms
and channels. The first product to be marketed and sold through the
Joint Venture was to be ErgoFlex™ product. In 2014 management
of the Company decided to end the sale of any ErgoFlex product. The
entity has been discontinued since 2014.
Reverse Stock Split
On February 10,
2021, the Company completed a 1:17 reverse stock split of the
Company's issued and outstanding shares of common stock and
all fractional shares were rounded
up. All share and per share amounts in the accompanying
financial statements have been adjusted retroactively to reflect
the reverse stock split as if it had occurred at the beginning of
the earliest period presented.
COVID-19
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 three
months ended March 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.
Accounting Estimates
The preparation of
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, valuation of equity instruments
issued for services and realization of deferred tax assets. Actual
results could differ from those estimates.
Stock-Based Compensation
The
Company accounts for share-based awards to employees and
nonemployees and consultants in accordance with the provisions of
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.
Fair Value of Financial Instruments
FASB
Accounting Standards Codification ("ASC") 820-10 requires entities
to disclose the fair value of financial instruments, both assets
and liabilities recognized and not recognized on the balance sheet
for which it is practicable to estimate fair value. ASC 820-10
defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction
between willing parties.
The
three levels of the fair value hierarchy are as
follows:
Level
1
|
Valuations
based on unadjusted quoted prices in active markets for identical
assets or liabilities that the entity has the ability to
access.
|
Level
2
|
Valuations
based on quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable data for
substantially the full term of the assets or
liabilities.
|
Level
3
|
Valuations
based on inputs that are unobservable, supported by little or no
market activity and that are significant to the fair value of the
assets or liabilities.
|
The carrying amount
of the Company’s derivative liability of $362,000 at March
31, 2021 and $383,000 at December 31, 2020 was based on Level 2
measurements.
The carrying
amounts of the Company’s other financial assets and
liabilities, such as cash, prepaid expense, accounts payable and
accrued expenses approximate their fair values because of the short
maturity of these instruments.
Derivative Financial Instruments
The Company
evaluates its financial instruments to determine if such
instruments are derivatives or contain features that qualify as
embedded derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
consolidated statements of operations. The classification of
derivative instruments, including whether such instruments should
be recorded as liabilities or as equity, is evaluated at the end of
each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on
whether or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
The fair value of the embedded
derivatives are determined using a Binomial valuation method at
inception and on subsequent valuation dates.
Net Loss Per Share
Basic earnings
(loss) per share is computed using the weighted-average number of
common shares outstanding during the period. Common stock issuable
is included in our calculation as of the date of the underlying
agreement. Diluted earnings (loss) per share is computed using the
weighted-average number of common shares and the dilutive effect of
contingent shares outstanding during the period. Potentially
dilutive contingent shares, which primarily consist of convertible
notes, stock issuable to the exercise of stock options and warrants
have been excluded from the diluted loss per share calculation
because their effect is anti-dilutive.
These following
common stock equivalents were excluded in the computation of the
net loss per share because their effect is
anti-dilutive.
|
|
|
|
|
|
A. Options to
purchase common stock
|
-
|
3
|
B. Warrants to
purchase common stock
|
5,318,867
|
106,650
|
C. Convertible
notes payable
|
-
|
4,678,823
|
D. Convertible
Series J Preferred stock
|
-
|
692,220
|
E. Convertible
Series C Preferred stock
|
7
|
7
|
|
5,318,874
|
5,477,703
|
Segments
The Company
determined its reporting units in accordance with ASC 280,
“Segment Reporting” (“ASC 280”). Management
evaluates a reporting unit by first identifying its’
operating segments under ASC 280. The Company then evaluates each
operating segment to determine if it includes one or more
components that constitute a business. If there are components
within an operating segment that meet the definition of a business,
the Company evaluates those components to determine if they must be
aggregated into one or more reporting units. If applicable, when
determining if it is appropriate to aggregate different operating
segments, the Company determines if the segments are economically
similar and, if so, the operating segments are
aggregated.
Management has
determined that the Company has one consolidated operating segment.
The Company’s reporting segment reflects the manner in which
its chief operating decision maker reviews results and allocates
resources. The Company’s reporting segment meets the
definition of an operating segment and does not include the
aggregation of multiple operating segments.
Recent Accounting Pronouncements
In August 2020, the
Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2020-06,
Debt—Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging—Contracts in Entity’s Own
Equity (Subtopic 815-40): Accounting for Convertible Instruments
and Contracts in an Entity’s Own Equity. Under ASU 2020-06,
the embedded conversion features are no longer separated from the
host contract for convertible instruments with conversion features
that are not required to be accounted for as derivatives under
Topic 815, or that do not result in substantial premiums accounted
for as paid-in capital. Consequently, a convertible debt instrument
will be accounted for as a single liability measured at its
amortized cost, as long as no other features require bifurcation
and recognition as derivatives. The new guidance also requires the
if-converted method to be applied for all convertible instruments.
ASU 2020-06 is effective for fiscal years beginning after December
15, 2021, with early adoption permitted. Adoption of the standard
requires using either a modified retrospective or a full
retrospective approach. Effective January 1, 2021, we early
adopted ASU 2020-06 using the modified retrospective approach.
Adoption of the new standard resulted in a decrease to additional
paid-in capital of $4,519,000 (see Note 4).
Other
recent accounting pronouncements issued by the FASB, including its
Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission (the
“SEC”) did not or are not believed by management to
have a material impact on the Company’s present or future
consolidated financial statements.
Note
4 – Convertible Notes Payable
Convertible notes
payable consisted of the following:
|
|
|
|
|
|
A. Notes
payable issued for cash
|
$-
|
$24,085,000
|
B. Notes
payable issued for settlement agreements
|
-
|
2,528,000
|
C. Notes
payable issued for forbearance agreements
|
-
|
3,849,000
|
D. Notes
payable issued for consulting services
|
-
|
360,000
|
|
-
|
30,822,000
|
Less unamortized
debt discount
|
-
|
(4,519,000)
|
Convertible
notes, net of discount
|
$-
|
$26,303,000
|
A.
Notes Payable Issued for Cash
As part of the Company’s financing
activities, the Company issued convertible notes payable in
exchange for cash. These notes payable were unsecured, bear
interest at a rate of 10% per annum, mature in six months up to one
year from the date of issuance, and are convertible to common stock
at an average conversion rate of $3.40 per share,
subject to certain
beneficial ownership limitations (with a maximum ownership
limit of 4.99%) and standard anti-dilution provisions. As of December 31, 2020, the outstanding balance
of these notes amounted to $24,085,000.
In January 2021, the Company issued
similar notes payable in exchange for cash of $1,205,000.
On February 16, 2021 in accordance
with the note agreements upon completion of the equity offering
discussed in Note 7, these notes were mandatorily converted at a
conversion rate of $3.40 per share into 7,438,235 shares of the
Company’s common stock.
B.
Notes Payable Issued for Settlement Agreements
In fiscal 2019 and 2020, the Company issued its
convertible notes payable to resolve claims and disputes pertaining
to certain debt and equity instruments issued by the Company in
prior years. The notes were unsecured, bear interest at a rate of
10%, mature in six months up to one year from the date of issuance,
and are convertible to common stock at a conversion rate of $3.40
per share, as adjusted, subject to certain beneficial ownership
limitations (with a maximum ownership limit of 4.99%) and
standard anti-dilution provisions. As of December 31, 2020, outstanding balance of
these notes payable for settlement agreements amounted to
$2,528,000.
On
February 16, 2021 in accordance with the note agreements upon
completion of the equity offering discussed in Note 7, these notes
were mandatorily converted at a conversion rate of $3.40 per share
into 743,529 shares of the Company’s common
stock.
C.
Notes Payable Issued for Forbearance Agreements
On June 23, 2020, the Company entered into Standstill and
Forbearance Agreements (collectively, the “Forbearance
Agreements”) with the holders of $13.2 million aggregate
principal amount of the Convertible Notes (the “Default
Notes”), which were in default. Pursuant to the Forbearance
Agreements, the holders of the Default Notes agreed to forbear from
exercising their rights and remedies under the Default Notes
(including declaring such Default Notes (together with any default
amounts and accrued and unpaid interest) immediately due and
payable) until the earlier of (i) the date that the Company
completes a future financing in the amount of $15 million and, in
connection therewith, commences listing on NASDAQ (collectively,
the “New Financing”) or (ii) January 31, 2021 (the
“Termination Date”). As of December 31, 2020,
outstanding balance of the notes payable amounted to
$3,849,000.
On
February 16, 2021 in accordance with the note agreements upon
completion of the equity offering discussed in Note 7, these notes
were mandatorily converted at a conversion rate of $3.40 per share
into 1,132,059 shares of the Company’s common
stock.
D.
Notes Payable issued for Consulting Agreements
In prior years, the Company issued its
convertible notes payable in exchange for consulting
services. These notes payable
are unsecured, bear interest at a rate of 10% per annum, mature in
six months up to one year from the date of issuance, and are
convertible to common stock at an average conversion rate of $3.40
per share, subject
to certain beneficial ownership limitations (with a maximum
ownership limit of 4.99%) and standard anti-dilution
provisions. As of December
31, 2020, outstanding balance of these notes payable amounted to
$360,000
In
January 2021, the Company issued similar notes payable of $720,000
in exchange for consulting services. In addition, the Company also
issued a note payable of $525,000 in exchange for the cancellation
of an unpaid consulting fees that was recorded as part of accrued
expenses as of December 31, 2020.
On
February 16, 2021 in accordance with the note agreements upon
completion of the equity offering discussed in Note 7, these notes
in the aggregate amount of $1,605,000 were mandatorily converted at
a conversion rate of $3.40 per share into 472,059 shares of the
Company’s common stock.
As
of December 31, 2020, the Company accrued interest of $4,838,000
related to these convertible notes payable. During the period ended
March 31, 2021, the Company accrued interest of $696,000. As a
result of the mandatory conversion of the Company’s notes
payable, on February 16, 2021, total accrued interest amounted to
$5,534,000 were converted to 1,627,647 shares of common
stock.
As
a result, total notes payable of $33,272,000 and accrued interest
of $5,534,000 for a total of $38,806,000 were mandatorily converted
to 11,413,322 shares of common stock.
Adoption of ASU 2020-06
At
December 31, 2020, the Company had recorded a note discount of
$4,519,000 to account for beneficial conversion feature that
existed on the date of issuance for the above notes.
On January 1, 2021 the Company chose to
adopt Accounting Standards Update (“ASU”)
2020-06, Debt—Debt with Conversion and Other Options
(Subtopic 470-20) and Derivatives and Hedging—Contracts in
Entity’s Own Equity (Subtopic 815-40): Accounting for
Convertible Instruments and Contracts in an Entity’s Own
Equity. Under ASU 2020-06, the embedded conversion features are no
longer required to be separated from the host contract for
convertible instruments with conversion features that are not
required to be accounted for as derivatives under Topic 815, or
that do not result in substantial premiums accounted for as paid-in
capital. The Company accounted for the adoption of this standard by
charging opening additional paid in capital at January 1, 2021. In
addition, pursuant to ASU 2020-06, the Company also adjusted
accumulated deficit and additional paid in capital by $226,000 to
account the derecognition of the $226,000 interest expense recorded
in fiscal 2020.
Note
5 – Line of Credit
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% per annum.
As of March 31,
2021 and December 31, 2020, outstanding balance of this credit line
amounted to $31,000, respectively.
Note
6 – Derivative Liability
During the year ended December 31, 2020, the
Company issued certain warrants that
contained a fundamental
transaction provision that could give rise to an obligation to pay
cash to the warrant holder upon occurrence of certain change in
control type events.
In
accordance with ASC 480, the fair value of these warrants are
classified as a liability in the Consolidated Balance Sheet and
will be re-measured at the end of every reporting period with the
change in value reported in the statement of
operations.
The
derivative liabilities were valued using a Binomial pricing model
with the following average assumptions:
|
|
|
|
|
|
Stock
Price
|
$6.84
|
$7.21
|
Risk-free interest
rate
|
0.92%
|
0.36%
|
Expected
volatility
|
136%
|
135%
|
Expected life (in
years)
|
|
|
Expected dividend
yield
|
-
|
-
|
|
|
|
Fair
Value:
|
|
|
Warrants
|
$362,000
|
$383,000
|
The risk-free
interest rate was based on rates established by the Federal Reserve
Bank. The Company uses the historical volatility of its common
stock to estimate the future volatility for its common stock. The
expected life of the derivative securities was determined by the
remaining contractual life of the derivative instrument. For
derivative instruments that already matured, the Company used the
estimated life. The expected dividend yield was based on the fact
that the Company has not paid dividends to its common stockholders
in the past and does not expect to pay dividends to its common
stockholders in the future.
During the three months ended March 31, 2021, the
Company recognized a gain of $21,000 to account the change in fair
value of the derivative liability in accordance with ASC
842.
Note
7 – Stockholders’ Equity (Deficit)
Common Stock Issuable
As
a result, of the mandatory conversion of the notes payable and
accrued interest in the aggregate of $38,806,000 on February 16,
2021, the Company is obligated to issue a total of 11,413,322
shares of common stock to the respective noteholders.
As
of March 31, 2021, the Company was only able to issue 3,779,322
shares of common stock or approximately 33% or $12,850,000 of the
converted notes payable and accrued interest to the respective
noteholders. With regards to the remaining 7,634,000 unissued
shares of common stock, the Company is in the process of obtaining
the necessary supporting documentation from the respective
noteholders which will then be provided to the Company’s
stock transfer agent as a requirement for the issuance of the
common stock certificate.
For
financial reporting purposes, the Company reported $25,956,000 as
common stock issuable in the accompanying statements of
stockholders equity to account for the estimated balance of the
converted notes payable and accrued interest that the Company has
not yet issued the corresponding common stock.
Subsequent
to March 31, 2021, the Company issued a total of 5,336,191 shares
of common stock to these noteholders upon submission of the
required documentation to the Company’s stock transfer
agent.
The following were transactions during the three months ended March
31, 2021:
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 $24,679,000,
after deducting underwriting discounts, commissions and other
direct offering expenses. As part of the offering, the Company also
granted these investors, warrants to purchase 5,192,250 shares of
common stock. The warrants are fully vested, exercisable at $5.50
per share and will expire in five years.
As
a result of the completion of the public offering and the
successful listing of its shares of common stock on the Nasdaq
Capital Markets, convertible notes with an aggregate principal
amount of $33,272,000 and accrued interest of $5,534,000
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 4).
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). Pursuant
to the agreement, approximately 75% of the common stock to be
issued will vest immediately while the remaining 25% will vest over
a period of two years.
On February 16,
2021, the Company completed its equity offering and listed its shares of common stock on the Nasdaq
Capital Markets (see Note 7). As a result, the Company
issued to these consultants 2,502,518 shares of common stock with a
fair value of $9,679,000. Pursuant to current accounting
guidelines, as the grant of the common stock is subject to
milestone or performance condition, the Company measured the fair
value of the common stock on the respective date of the agreement,
and then such award was recorded as compensation expense as the
milestone or performance condition was met and in accordance with
its vesting term of the grant.
During the period
ended March 31, 2021, pursuant to the vesting terms of the
agreements, the Company issued 1,807,374 shares of common stock to
these consultants and recorded the corresponding stock compensation
expense of $7,239,000. In addition, the Company also issued 150,000
shares of common stock with a fair value of $1,213,000 to other
consultants for service rendered.
As of March 31,
2021, the fair value of 695,144 unvested shares to be recognized as
compensation in future periods amounted to $2,440,000.
Issuance of Common Stock for research and development
agreement
During the three months ended March 31, 2021, the
Company issued 189,753 shares of common stock for a research
and development agreement valued at $1,355,000. The common shares
were valued on the market price at the date of grant.
Issuance of Common Stock upon exercise of warrants
During the three months ended March 31, 2021, the
Company issued 94,824 shares of common stock upon the
exercise of warrants resulting in cash proceeds of
$58,000.
Common Stock Issuable
As a result of the mandatory conversion of the notes payable and
accrued interest in the aggregate of $38,806,000 on February 16,
2021, the Company is obligated to issue a total of 11,413,322
shares of common stock to the respective noteholders.
As of March 31, 2021, the Company was only able to issue 3,779,322
shares of common stock or approximately 33% or $12,850,000 of the
converted notes payable and accrued interest to the respective
noteholders. With regards to the remaining 7,634,000 unissued
shares of common stock, the Company is in the process of obtaining
the necessary supporting documentation from the respective
noteholders which will then be provided to the Company’s
stock transfer agent as a requirement for the issuance of the
common stock certificate.
For financial reporting purposes, the Company reported $25,956,000
as common stock issuable in the accompanying statements of
stockholders equity to account for the estimated balance of the
converted notes payable and accrued interest that the Company has
not yet issued the corresponding common stock.
Subsequent to March 31, 2021, the Company issued a total of
5,336,191 shares of common stock to these noteholders upon
submission of the required documentation to the Company’s
stock transfer agent.
A.
Series J Preferred Stock
On September 1, 2017, the Board designated
2,000,000 shares of Series J
preferred stock (the “Series J Preferred
Stock”). On the same day,
the Board issued
1,513,548 shares of Series J Preferred Stock
in exchange for the cancellation
of certain
indebtedness.
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. Despite the
fact the Company had issued shares of Series J Preferred Stock, the issuance of those
shares was not valid and was of no legal
effect.
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 the Series J-1 preferred stock, par value $0.01 per share (the
“Series J-1 Preferred Stock”). On April 19, 2019,
the Company issued 840,000 shares of Series J-1 Preferred
Stock. The issuance was in lieu of the Series J 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.
Shares of the Series
J-1 Preferred Stock are convertible at any time, at the option of
the holders, into shares of the Company’s common stock at an
effective conversion price of $3.40 per share, subject to
adjustment for, among other things, stock dividends, stock splits,
combinations, reclassifications of our capital stock and mergers or
consolidations, and subject to a beneficial ownership limitation
which prohibits conversion if such conversion would result in the
holder (together with its affiliates) being the beneficial owner of
in excess of 9.99% of the Company’s common stock or 692,220
shares of common stock. Shares of the Series J-1 Preferred Stock
have the same voting rights a shares of the Company’s common
stock, with the holders of the Series J-1 Preferred Stock entitled
to vote on an as-converted-to-common stock basis, subject to the
beneficial ownership limitation described above, together with the
holders of the Company’s common stock on all matters
presented to the Company’s stockholders. The Series J-1
Preferred Stock are not entitled to any dividends (unless
specifically declared by the Board), but will participate on an
as-converted-to-common-stock basis in any dividends to the holders
of the Company’s common stock. In the event of the
Company’s dissolution, liquidation or winding up, the holders
of the Series J-1 Preferred Stock will be on parity with the
holders of the Company’s common stock and will participate,
on a on an as-converted-to-common stock basis, in any distribution
to holders of the Company’s common stock. .
On
February 16, 2021, as a result of the completion of the public
offering and the successful listing of its shares of common stock
on the Nasdaq Capital Markets, 2,353,548 shares of Series J
Preferred stock mandatorily converted at a conversion rate of $3.40
per share into 692,220 shares of the Company’s common
stock.
B.
Series C Preferred Stock
The 96,230 shares of Series C preferred stock, par value $0.01 per
share (the “Series C Preferred Stock”), are convertible
into 7 shares of the Company’s common stock at the option of the holders at any
time. The conversion ratio is based on the average closing bid
price of the common stock for
the fifteen consecutive trading days ending on the date immediately
preceding the date notice of conversion is given, but cannot be
less than $3.40 or more
than $4.9113 common shares for
each share of Series C Preferred Stock. The conversion ratio may be
adjusted under certain circumstances such as stock splits or stock
dividends. The Company has the right to automatically convert
the Series C Preferred Stock
into common stock if the
Company lists its shares of common stock on the Nasdaq National Market and the average closing bid
price of the Company’s common stock on the Nasdaq National Market for 15 consecutive trading
days exceeds $3,000.00. Each share of Series C Preferred Stock is entitled to the number
of votes equal to 0.26 divided
by the average closing bid price of the Company’s common stock during the fifteen consecutive
trading days immediately prior to the date such shares of
Series C Preferred Stock were
purchased. In the event of liquidation, the holders of the
Series C Preferred Stock shall
participate on an equal basis with the holders of the
common stock (as if the
Series C Preferred Stock had converted
into common stock) in any
distribution of any of the assets or surplus funds of the Company.
The holders of Series C
Preferred Stock are entitled to noncumulative dividends if and when
declared by the Company’s
board of directors (the “Board”). No dividends to
holders of the Series C Preferred Stock were issued or unpaid
through March 31, 2021.
C.
Series K Preferred Stock
On February 16, 2021, the Board designated 115,000
shares of Series K preferred
stock, par value $.01. (the “Series K Preferred
Stock”).
Shares of the Series K Preferred Stock are convertible at any time,
at the option of the holders, into shares of the Company’s
common stock at an effective conversion rate of 100 shares of
common stock for each share of Series K Preferred. Shares of the
Series K Preferred Stock have the same voting rights a shares of
the Company’s common stock, with the holders of the Series K
Preferred Stock entitled to vote on an as-converted-to-common stock
basis, subject to the beneficial ownership limitation, together
with the holders of the Company’s common stock on all matters
presented to the Company’s stockholders. The Series K
Preferred Stock are not entitled to any dividends (unless
specifically declared by the Board), but will participate on an
as-converted-to-common-stock basis in any dividends to the holders
of the Company’s common stock. In the event of the
Company’s dissolution, liquidation or winding up, the holders
of the Series K Preferred Stock will be on parity with the holders
of the Company’s common stock and will participate, on a on
an as-converted-to-common stock basis, in any distribution to
holders of the Company’s common stock.
As of March 31, 2021, there were no Series K Preferred stock issued
and outstanding.
Stock Warrants
Stock warrant
transactions for the three months ended March 31,
2021:
|
|
Weighted Average
Exercise Price
|
Outstanding at
December 31, 2020:
|
221,041
|
$3.40
|
Granted
|
5,192,250
|
5.50
|
Forfeited/canceled
|
-
|
-
|
Exercised
|
(94,424)
|
3.23
|
Outstanding at
March 31, 2021
|
5,318,867
|
$5.44
|
Exercisable at
March 31, 2021
|
5,318,867
|
$5.44
|
As of March 31.
2021, all issued and outstanding warrants are fully vested and the
intrinsic value of these warrants amounted to
$7,415,000.
The following were transactions during the three months ended March
31, 2021:
On February 16, 2021, as part of the
Company’s public offering, the Company issued warrants to
investors to purchase up to an aggregate of 5,192,250 shares of
common stock. The warrants have an exercise price of $5.50 per
share, subject to adjustment in certain circumstances and
will expire in five years.
During the three
months ended March 31, 2021, the Company issued 94,424 shares of
common stock upon exercise of warrants which also resulted cash
proceeds of $58,000.
Note
8 – Related Party
During
the period ended March 31, 2021, the Company recorded consulting
expense of $250,000 for services rendered by a consultant who is
also an owner of approximately 10% of the Company’s issued
and outstanding common stock. In addition, the Company also issued
a note payable to this consultant of $525,000 in exchange for the
cancellation of unpaid consulting fees of $525,000 that was
recorded as part of accrued expenses at December 31, 2020. There
was no similar consulting expense incurred during the period ended
March 31, 2020.
Note
9 – Equity Compensation to Officers and Board of
Directors
As part of
employment agreements with its CEO and its CFO, these officers were
to receive a fully vested stock grant equal to aggregate of 10% and
1.5% of the fully diluted shares of common stock of the Company
(calculated with the inclusion of the current stock holdings of Mr.
Cataldo) 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, the Company also granted similar
equity compensation to members of the Company’s Board of
Directors wherein these directors were to receive stock grant equal
to 1% and 1.25% of the fully diluted shares of common stock of the
Company. Pursuant to the agreement, approximately 75% of the common
stock to be issued vested immediately while the remaining 25% will
vest over a period of two years.
On February 16,
2021, the Company completed its equity offering and listed its shares of common stock on the Nasdaq
Capital Markets (see Note 7). As such, 4,379,407 shares of its
common stock were granted to these officers and directors which had
a fair value of $18,621,000. Pursuant to current accounting
guidelines, as the grant of the common stock is subject to
milestone or performance condition, the Company measured the fair
value of the common stock on the respective date of the agreement,
and then such award was recorded as compensation expense as the
milestone or performance condition is met and in accordance with
its vesting term of the grant.
During
the period ended March 31, 2021, the Company recognized stock
compensation of $14,296,000 to account equity compensation to
officers and directors of the 3,640,816 shares that
vested.
As
of March 31, 2021, the fair value of the 738,591 unvested shares
that will be recognized as compensation in future periods amounted
to $4,325,000.
Note
10 – Commitments and Contingencies
We are involved in
certain legal proceedings that arise from time to time in the
ordinary course of our business. Except for income tax
contingencies, we record accruals for contingencies to the extent
that our management concludes that the occurrence is probable and
that the related amounts of loss can be reasonably estimated. Legal
expenses associated with the contingency are expensed as incurred.
There is no current or pending litigation of any significance with
the exception of the matters that have arisen under, and are being
handled in, the normal course of business.
a.
On August 28, 2019,
a complaint was filed in the Superior Court of California, County
of Los Angeles, West Judicial District, Santa Monica Courthouse,
Unlimited Civil Division by Jeffrey Lion, an individual
(“Lion”), and by Daniel Vallera, an individual
(“Vallera”). Lion and Vallera are referred to jointly
as the “Plaintiffs”. The complaint was filed against GT
Biopharma, Inc. and its subsidiary Oxis Biotech, Inc. (either of
them or jointly, the “Company”). The Plaintiffs allege
breach of a license agreement between the Plaintiffs and the
Company entered into on or about September 3, 2015. Lion alleges
breach of a consulting agreement between Lion and the Company
entered into on or about September 1, 2015. Vallera alleges breach
of a consulting agreement between Vallera and the Company entered
into in or around October, 2018. The Complaint seeks actual damages
of $1,670,000, for the fair market value of the number of shares of
GT Biopharma, Inc. that at the time of judgment represent 882,353
shares of such stock as of September 1, 2015, and that GT
Biopharma, Inc. issue Lion the number of common shares of GT
Biopharma, Inc. that at the time of judgment represent 882,353 such
shares as of September 1, 2015.The Company filed an answer to the
complaint denying many allegations and asserting affirmative
defenses. Discovery has commenced and trial is scheduled for May,
2022. The Company believes the case is without merit and will
defend it vigorously.
b.
On March 3, 2021 a
complaint was filed by Sheffield Properties in the superior Court
of California. County of Ventura. The litigation arises from a
commercial lease entered into by GT Biopharma for office space in
Westlake Village. GT Biopharma has been served but has not yet
answered the complaint. Sheffield Properties seeks damages in
excess of $250,000. We intend to vigorously defend against these
claims. We believe we have made adequate provision in our financial
statements to provide for any potential settlement.
2.
Research and
Development Agreement:
We are party to an
exclusive worldwide license agreement with the Regents of the
University of Minnesota, to further develop and commercialize
cancer therapies using TriKE technology developed by researchers at
the university to target NK cells to cancer. Under the terms of the
agreement, we receive exclusive rights to conduct research and to
develop, make, use, sell, and import TriKE technology worldwide for
the treatment of any disease, state or condition in humans. We are
responsible for obtaining all permits, licenses, authorizations,
registrations and regulatory approvals required or granted by any
governmental authority anywhere in the world that is responsible
for the regulation of products such as the TriKE technology,
including without limitation the FDA in the United States and the
European Agency for the Evaluation of Medicinal Products in the
European Union. We are presently evaluating GTB-3550, our lead
TriKE therapeutic product candidate in a Phase I/II clinical trial.
Under the agreement, the University of Minnesota will receive an
upfront license fee, royalty fees ranging from 4% to 6%, minimum
annual royalty payments of $0.25 million beginning in 2022, $2.0
million in 2025, and $5.0 million in 2027 and certain milestone
payments totaling $3.1 million.
During the period
ended March 31, 2021, the Company recorded research and development
expenses of $224,000 pursuant to this agreement.
Note
11- Subsequent Events
Subsequent to March
31, 2021, the Company issued 1,274,096 shares of common stock upon
exercise of warrants for cash proceeds of $7,008,000.
Subsequent
to March 31, 2021, the Company issued a total of 5,336,191 shares
of common stock to noteholders whose notes payable and accrued
interest were mandatorily converted to common stock on February 16,
2021 (see Note 4)