UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the Quarterly Period Ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from _________ to _________
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Mateon Therapeutics, Inc.
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
| N/A |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” a “smaller reporting company” and an “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of August 10, 2021, there were shares of the registrant’s common stock outstanding.
ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES
(Formerly Mateon Therapeutics, Inc.)
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2021
TABLE OF CONTENTS
| 2 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable | ||||||||
| Prepaid & other current assets | ||||||||
| Total current assets | ||||||||
| Development equipment, net of depreciation of $ | ||||||||
| Intangibles, net of accumulated amortization of $ | ||||||||
| In process R&D | ||||||||
| Goodwill | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Accounts payable to related party | ||||||||
| Contingent Consideration | ||||||||
| Derivative liability on Notes | ||||||||
| Convertible debt for clinical trial | ||||||||
| Convertible debt, net of costs | ||||||||
| Convertible debt, related party, net of costs | ||||||||
| Private Placement convertible note, net of costs | ||||||||
| Private Placement convertible note, related party, net of costs | ||||||||
| Payroll Protection Plan loan | ||||||||
| Total current liabilities | ||||||||
| Commitments and contingencies (Note 12) | ||||||||
| Stockholders’ equity: | ||||||||
| Convertible Preferred stock, $ par value, shares authorized; and shares issued and outstanding | - | |||||||
| Common stock, $ par value; shares authorized; and issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Oncotelic Therapeutics, Inc. stockholders’ equity | ||||||||
| Non-controlling interests | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements.
| 3 |
ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three MONTHS AND SIX MONTHS ended JUNE 30, 2021 and 2020
(Unaudited)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Service Revenue | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | $ | $ | $ | ||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Other expense: | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative on debt | ||||||||||||||||
| Loss on debt conversion | - | ( | ) | ( | ) | ( | ) | |||||||||
| Total other expense | ( | ) | ( | ) | ||||||||||||
| Net loss before non-controlling interests | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss attributable to non-controlling interests | ( | ) | - | ( | ) | - | ||||||||||
| Net income (loss) attributable to Oncotelic Therapeutics, Inc. | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Basic net loss per share attributable to common stock | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Basic weighted average common stock outstanding | ||||||||||||||||
| Diluted net loss per share attributable to common stock | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
| Diluted weighted average common stock outstanding | ||||||||||||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements.
| 4 |
ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES
Consolidated STATEMENT of STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021
(Unaudited)
| Additional | Non | |||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | controlling | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interests | Equity | |||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
| Common shares issued upon conversion of Preferred Stock | ( | ) | ( | ) | ( | ) | - | - | - | |||||||||||||||||||||||
| Common shares issued upon conversion of debt | - | - | - | |||||||||||||||||||||||||||||
| Beneficial Conversion Feature on convertible debt | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Warrants issued in connection with private placement | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Increase in non-controlling interest from issuance of additional Edgepoint stock | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance at March 31, 2021 | - | ( | ) | |||||||||||||||||||||||||||||
| Warrants issued in connection with private placement | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Common shares issued in lieu of services | - | - | - | |||||||||||||||||||||||||||||
| Common shares issued for cash | ||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance as of June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements.
| 5 |
ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020
| Additional | Non | |||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | controlling | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interests | Equity | |||||||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | |||||||||||||||||||||||||||
| Common shares issued upon partial conversion of debt | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at March 31, 2020 | ( | ) | ||||||||||||||||||||||||||||||
| Common shares issued upon partial conversion of debt | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | |||||||||||||||||||||||||||
| Balance as of June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||||
The accompanying footnotes are an integral part of these unaudited consolidated financial statements.
| 6 |
ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES
Consolidated STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020
(Unaudited)
| For the Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Amortization of debt discount and deferred finance costs | ||||||||
| Amortization of intangible assets | ||||||||
| Stock-based compensation | ||||||||
| Depreciation on development equipment | ||||||||
| Change in fair value of derivative | ( | ) | ( | ) | ||||
| Loss on debt conversion | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Accounts payable to related party | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from private placement | - | |||||||
| Proceeds from sales of common stock | - | |||||||
| Proceeds from convertible debt | ||||||||
| Proceeds from short term loans, others | - | |||||||
| Repaid to note holder | ( | ) | - | |||||
| Repaid to others | ( | ) | - | |||||
| Proceeds from Payroll Protection Plan | - | |||||||
| Proceeds from short term loan, related party | - | |||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash and restricted cash - beginning of period | ||||||||
| Cash and restricted cash - end of period | $ | $ | ||||||
| Supplemental cash flow information: | ||||||||
| Cash paid for: | ||||||||
| Interest paid | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Warrants issued in connection with private placement | $ | $ | ||||||
| Common shares issued upon partial conversion of debt | $ | $ | ||||||
| Common shares issued in lieu of services | $ | $ | ||||||
| Non-cash cost upon sale of common stock | $ | |||||||
| Beneficial Conversion Feature on convertible debt and restricted common shares | $ | $ | ||||||
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
ONCOTELIC THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Oncotelic Therapeutics, Inc. (also d/b/a Mateon Therapeutics, Inc.) (“Oncotelic”), was formed in the State of New York in 1988 as OXiGENE, Inc., was reincorporated in the State of Delaware in 1992, changed its name to Mateon Therapeutics, Inc. in 2016, and then Oncotelic Therapeutics, Inc. in November 2020. Oncotelic conducts business activities through Oncotelic and its wholly-owned subsidiaries, Oncotelic, Inc., a Delaware corporation (“Oncotelic, Inc.”), PointR Data, Inc. (“PointR”), a Delaware corporation, and EdgePoint AI, Inc. (“Edgepoint”), a Delaware Corporation for which there are non-controlling interests, (Oncotelic, Oncotelic Inc., PointR and Edgepoint are collectively called the “Company”).
In February 2020, the Company formed a subsidiary, Edgepoint. Edgepoint is a start-up company that plans to develop technologies and IP related to various unmet issues within the pharma and medical device industries. The Company may spin off Edgepoint into a separate public company.
The Company is a cancer immunotherapy company dedicated to the development of first in class self-immunization protocol (“SIP™”) candidates for difficult to treat cancers. The Company’s proprietary SIP™ candidates offer advantages over other immunotherapies because they do not require extraction of the tumor or isolation of the antigens, and they have the potential for broad-spectrum applicability for multiple cancer types. The Company’s proprietary product candidates have shown promising clinical activity in phase 2 trials for the treatment of gliomas and pancreatic cancers. The Company aims to translate its unique insights, which span more than three decades of original work using RNA therapeutics, into the deployment of antisense as a RNA therapeutic for diseases which are caused by TGF-β overexpression, starting with cancer and expanding to Duchenne Muscular Dystrophy (“DMD”) and others. Oncotelic Inc.’s lead product candidate, OT-101, is being developed as a broad-spectrum anti-cancer drug that can also be used in combination with other standard cancer therapies to establish an effective multi-modality treatment strategy for difficult-to-treat cancers. Together, the Company plans to initiate phase 3 clinical trials for OT-101 in both high-grade glioma and pancreatic cancer, and any other indications that may evolve. The Company is evaluating the further development of its product candidates OXi4503 as a treatment for acute myeloid leukemia and myelodysplastic syndromes and CA4P in combination with a checkpoint inhibitor for the treatment of advanced metastatic melanoma.
The
Company is also developing OT-101 for the various epidemics and pandemics, similar to the current corona virus (“COVID-19”)
pandemic. In this connection, the Company entered into an agreement and supplemental agreement with Golden Mountain Partners (“GMP”)
for a total of $
In addition, the Company is developing Artemisinin. Artemisinin, purified from a plant Artemisia annua, is able to inhibit TGF-β activity and is able to neutralize SARS-CoV-2 (COVID-19). The Company’s test results during an in vitro study at Utah State University showed Artemisinin having an EC50 of 0.45 ug/ml, and a Safety Index of 140. Artemisinin can target multiple viral threats including COVID-19 by suppressing both viral replication and clinical symptoms that arise from viral infection. Viral replication cannot occur without TGF-β. Artemisinin also has been reported to have antiviral activities against hepatitis B and C viruses, human herpes viruses, HIV-1, influenza virus A, and bovine viral diarrhea virus in the low micromolar range. TGF-β surge and cytokine storm cannot occur without TGF-β. Clinical consequences related to the TGF-β surge, including ARDS and cytokine storm, are suppressed by targeting TGF-β with Artemisinin. This was a global study, with India to contribute at least 120 patients upto the total potential aggregate of 3000 patients. ARTI-19 in India was conducted by Windlas Biotech Private Limited (“Windlas”), business partner in India, as part of the plan for the Company’s global effort at deploying PulmohealTM across India, Africa, and Latin America. We continue to evaluate to seek approval, and subsequently launch PulmohealTM, with or without local partners, in various countries within the regions planned. PulmohealTM is a combination of ARTIVedaTM, our artificial intelligence (“AI”) cough application and our AI post marketing survey (“PMS”).
In January 2021 and subsequently in February 2021, the Company announced preliminary results for ARTIVeda™, or PulmoHeal™, which is the Company’s lead Ayurvedic drug against COVID-19 in India and being developed by the Company in partnership with Windlas. These interim results were based on 120 randomized patients across 3 sites in India. The ARTI-19 India trial completed enrollment of 120 randomized individuals, we reported positive topline results in April 2021 and we expect final data as soon as available. Upon completion of the trial results and obtaining regulatory approval for the use in India, it is the Company’s objective to file for Emergency Use Authorization (“EUA”) with regulatory authorities around the world, including India, the United States, the United Kingdom, countries in Africa and Latin America; discussions regarding EUA with several of these authorities have commenced.
Recent Developments
Equity Purchase Agreement
On
May 3, 2021, the Company entered into an Equity Purchase Agreement (the “EPL”) and Registration Rights Agreement (the
“Registration Rights Agreement”) with Peak One Opportunity Fund, L.P. (“Peak One”), pursuant to
which the Company shall have the right, but not the obligation, to direct Peak One, to purchase up to $
| 8 |
Geneva Roth Remark Notes
On
May 25, 2021, the Company consummated the closing of a private placement transaction whereby, pursuant to a Securities Purchase Agreement
(the “Geneva Agreement”) entered into with Geneva Roth Remark (“Geneva”), the Company issued a
convertible promissory note in the aggregate principal amount of $
Extension of Maturity Date for J.H. Darbie Financing Notes & Issuance of Oncotelic Warrants
The
Company issued and sold a total of units (“Units”), with each Unit consisting of (i) shares of Edgepoint
common stock, par value $0.01 per share (“Edgepoint Common Stock”), for a price of $ per share of Edgepoint Common
Stock; (ii) one convertible promissory note issued by the Company (the “Unit Note”), convertible into up to
shares of EdgePoint Common Stock at a conversion price of $
In
June 2021, the Company and the Investors agreed to extend the maturity date of the Notes from June 30, 2021, to
Consent Solicitation
In June 2020, the Company commenced a solicitation of various shareholder consents (the “Consent Solicitation”), pursuant to a consent solicitation statement (the “Consent Solicitation Statement”), to the holders (the “Stockholders”) of its Common Stock and Preferred Stock, to approve the following actions:
(1) changing the name of the Company and changing the Company’s ticker symbol (the “Name Change”);
(2) amending the Company’s Amended and Restated 2015 Equity Incentive Plan (the “2015 Plan”) to increase the number of shares of common stock (“Common Stock”) available for issuance from million shares to million shares, and increasing the maximum number of stock awards that may be issued in any fiscal year from to shares (the “Plan Amendment”);
(3)
increasing the authorized number of shares of Common Stock from
(4) amending and restating the certificate of incorporation for the Company (the “Amended and Restated Certificate”) to give effect to the Name Change, Capital Increase and forum selection provision.
The
Stockholders approved the Name Change, the Plan Amendment, the Capital Increase, and the Amended and Restated Certificate. In November
2020, the Company filed an amendment to its Certificate of Incorporation with the Secretary of State for the State of Delaware changing
its name from “Mateon Therapeutics, Inc.” to “Oncotelic Therapeutics, Inc.” Further, in February 2021, the Company
filed an amendment to its Certificate of Incorporation to increase the number of authorized shares of Common Stock from
| 9 |
The
Company registered an additional total of
A notice of corporate action was filed with the Financial Industry Regulatory Authority (“FINRA”), requesting approval to change its name and ticker symbol. On March 29, 2021, the Company received approval from FINRA on its notice of corporate action, and effective March 30, 2021, the Company’s ticker symbol has changed from “MATN” to “OTLC”.
Principles of Consolidation
The consolidated financial statements include the accounts of Oncotelic, its wholly owned subsidiaries, Oncotelic Inc. and PointR, and Edgepoint our non-controlled interest entity. Intercompany accounts and transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly state the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been omitted pursuant to such rules and regulations.
Liquidity and Going Concern
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company
has incurred net accumulated losses of approximately $
The Company’s long-term plans include continued development of its current pipeline of products to generate sufficient revenues, through either technology transfer or product sales, to cover its anticipated expenses. Until the Company is able to generate sufficient revenues from its current pipeline, the Company plans on funding its operations through the sale of equity and/or the issuance of debt, combined with or without warrants or other equity instruments.
Between
July 2020 and March 2021, the Company raised gross proceeds of $
| 10 |
In
addition to the JH Darbie Financing, the Company raised $
During
the three and six months ended June 30, 2020, the Company recorded a total of approximately $
Although no assurances can be given as to the Company’s ability to deliver on its revenue plans, or that unforeseen expenses may arise, management believes that the potential equity and debt financing or other potential financing will provide the necessary funding for the Company to continue as a going concern. Also, management cannot guarantee any potential debt or equity financing will be available on favorable terms or at all. As such, management does not believe the Company has sufficient cash for 12 months from the date of this report. If adequate funds are not available on acceptable terms, or at all, the Company will need to curtail operations, or cease operations completely.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity-based transactions and disclosure of contingent liabilities at the date of the financial statements and revenues and expense during the reporting period. Actual results could materially differ from those estimates.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the financial statements. Significant estimates include the valuation of goodwill and intangible assets for impairment, deferred tax asset and valuation allowance, and fair value of financial instruments.
Cash
As
of June 30, 2021, and December 31, 2020 the Company held all its cash in banks. The Company considers investments in highly liquid instruments
with a maturity of three months or less to be cash equivalents. The Company did
Fair Value of Financial Instruments
The carrying value of cash, accounts payable and accrued expense approximate their fair values based on the short-term maturity of these instruments. As defined in ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
The three levels of the fair value hierarchy defined by ASC 820 are as follows:
| ● | Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities. |
| 11 |
| ● | Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars. |
| ● | Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. |
The Company did not have any Level 1 or Level 2 assets and liabilities at June 30, 2021 and December 31, 2020. The derivative liabilities associated with its 2019 bridge financing Convertible Notes (see Note 5), consisted of conversion feature derivatives at June 30, 2021 and December 31, 2020, are Level 3 fair value measurements.
The table below sets forth a summary of the changes in the fair value of the Company’s derivative liabilities classified as Level 3 as of June 30, 2021 and 2020:
| June 30, 2021 Conversion Feature | June 30, 2020 Conversion Feature | |||||||
| Balance at January 1, 2021 and 2020 | $ | $ | ||||||
| New derivative liability | ||||||||
| Reclassification to additional paid in capital from conversion of debt to common stock | ( | ) | ( | ) | ||||
| Change in fair value | ( | ) | ( | ) | ||||
| Balance at June, 2021 and 2020 | $ | $ | ||||||
As of June 30, 2021 and 2020, the Company estimated the fair value of the conversion feature derivatives embedded in the convertible debentures based on assumptions used in the Black-Scholes valuation model. The key valuation assumptions used consists, in part, of the price of the Company’s Common Stock, a risk-free interest rate based on the yield of a Treasury note and expected volatility of the Company’s Common Stock all as of the measurement dates. The Company used the following assumptions to estimate fair value of the derivatives as of June 30, 2021 and 2020:
June 30, 2021 Key Assumptions for fair value of conversions | June 30, 2020 Key Assumptions for fair value of conversions | |||||||
| Risk free interest | % | % | ||||||
| Market price of share | $ | $ | ||||||
| Life of instrument in years | ||||||||
| Volatility | % | % | ||||||
| Dividend yield | % | % | ||||||
When the Company changes its valuation inputs for measuring financial liabilities at fair value, either due to changes in current market conditions or other factors, it may need to transfer those liabilities to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the periods ended June 30, 2021 and 2020, respectively, there were no transfers of financial assets or financial liabilities between the hierarchy levels.
| 12 |
Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share includes the effect of Common Stock equivalents (notes convertible into Common Stock, stock options and warrants) when, under either the treasury or if-converted method, such inclusion in the computation would be dilutive. The following number of shares have been excluded from diluted loss since such inclusion would be anti-dilutive:
| Six Months Ended June 30, | Three Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Convertible notes | ||||||||||||||||
| Stock options | ||||||||||||||||
| Warrants | ||||||||||||||||
| Potentially dilutive securities | ||||||||||||||||
The following table reflects the inclusion of the common stock equivalents included in the calculation of the diluted net income per share for the three months ended June 30, 2020. No similar calculations are required for the three months ended June 30, 2021 or the six months ended June 30, 2021 and 2020, respectively as all these periods had losses.
| Reconciliation for Basic to Diluted Weighted Average common stock outstanding | ||||
| Basic weighted average common stock outstanding | ||||
| Add: Dilutive Common Stock Instruments | ||||
| Shares issuable upon conversion of debt | ||||
| Diluted weighted average common stock outstanding |
The Company applies the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the statements of operations.
For stock options issued to employees and members of the Board of Directors (the “Board”) for their services, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the Common Stock consistent with the expected life of the option, risk-free interest rates and expected dividend yields of the Common Stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised.
Pursuant to ASU 2018-07 Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, the Company accounts for stock options issued to non-employees for their services in accordance with ASC 718. The Company uses valuation methods and assumptions to value the stock options that are in line with the process for valuing employee stock options noted above.
| 13 |
For warrants issued in connection with fund raising activities, the Company estimates the grant date fair value of each warrant using the Black-Scholes pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the warrant, the expected volatility of the Common Stock consistent with the expected life of the warrant, risk-free interest rates and expected dividend yields of the Common Stock. If the warrants are issued upon termination or cancellation of prior issued warrants, then the Company estimates the grant date fair value of the new warrants using the Black-Scholes pricing model and evaluates whether the new warrants are deemed as equity instruments or liability instruments. If the warrants are deemed to be equity instruments, the Company records stock compensation expense and an addition to additional paid in capital. If however, the warrants are deemed to be liability instruments, then the fair value is treated as a deemed dividend and credited to additional paid in capital.
Impairment of Long-Lived Assets
The
Company reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the
forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined
to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets
of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature
of the assets. For the three and six months ended June 30, 2021 and 2020, there were
Intangible Assets
The
Company records its intangible assets at cost in accordance with ASC 350, Intangibles – Goodwill and Other. The Company reviews
the intangible assets for impairment on an annual basis or if events or changes in circumstances indicate it is more likely than not
that they are impaired. These events could include a significant change in the business climate, legal factors, a decline in operating
performance, competition, sale or disposition of a significant portion of the business, or other factors. If the review indicates the
impairment, an impairment loss would be recorded for the difference of the value recorded and the new value. For the three and six months
ended June 30, 2021 and 2020, there were
Goodwill
Goodwill represents the excess of the purchase price of acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least once annually, at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired. The goodwill impairment test is applied by performing a qualitative assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is considered not more likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of goodwill for impairment would not be required. Otherwise, goodwill impairment is tested using a two-step approach.
The
first step involves comparing the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is
determined to be greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is determined
to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. The second step involves
calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill,
of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in
this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of
the goodwill, an impairment loss equivalent to the difference is recorded. For the three and six months ended June 30, 2021 and 2020,
there were
| 14 |
Derivative Financial Instruments Indexed to the Company’s Common Stock
We have generally issued derivative financial instruments, such as warrants, in connection with our equity offerings. We evaluate the terms of these derivative financial instruments in order to determine their accounting treatment in our financial statements. Key considerations include whether the financial instruments are freestanding and whether they contain conditional obligations. If the warrants are freestanding, do not contain conditional obligations and meet other classification criteria, we account for the warrants as an equity instrument. However, if the warrants contain conditional obligations, then we account for the warrants as a liability until the conditional obligations are met or are no longer relevant. Because no established market prices exist for the warrants that we issue in connection with our equity offerings, we must estimate the fair value of the warrants, which is as inherently subjective as it is for stock options, and for similar reasons as noted in the stock-based compensation section above. For financial instruments which are accounted for as a liability, we report any changes in their estimated fair values as gains or losses in our Consolidated Statement of Income.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815 “Derivatives and Hedging”.
ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with ASC 470-20 “Debt – Debt with Conversion and Other Options.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying Common Stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Original issue discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying Common Stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
ASC 815-40 “Derivatives and Hedging – Contracts in Entity’s Own Equity” provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.
Revenue Recognition
The Company recognizes revenue in accordance with ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).
Under ASU 2014-9, the Company recognizes revenue when its customers obtain control of the promised good or services, in an amount that reflects the consideration which the Company expects to receive in exchange for those goods or services. The Company applies the following five-step: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.
At contract inception, once the contract is determined to be within the scope of ASU 2014-09, the Company identifies the performance obligation(s) in the contract by assessing whether the goods or services promised within each contract are distinct. The Company then recognizes revenue for the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
| 15 |
The Company anticipates generating revenues from rendering services to other third party customers for the development of certain drug products and/or in connection with certain out-licensing agreements. In the case of services rendered for development of the drugs, revenue is recognized upon the achievement of the performance obligations or over time on a straight-line basis over the extended service period. In the case of out-licensing contracts, the Company records revenues either upon achievement of certain pre-defined milestones, when there is no obligation of the Company achieve any performance obligations in connection with the said pre-defined milestones, or upon achievement of the performance obligations if the milestones require the Company to provide the performance obligations.
The Company occasionally collects advance payments from customers toward commitments to provide services or performance obligations, in which case the advance payment is recorded as a liability until the obligations are fulfilled and revenue is recognized.
Research Service Agreement between GMP and Oncotelic /Oncotelic Inc. (“Oncotelic Entities”)
In
February 2020, Oncotelic Inc. and GMP entered into a research and services agreement (the “Agreement”) memorializing
their collaborative efforts to develop and test COVID-19 antisense therapeutics. In March 2020, the Company reported the positive anti-viral
activity results of OT-101 (the “Product”) in an in vitro antiviral testing performed by an independent laboratory
to GMP, at which time, the Oncotelic Entities and GMP entered into a supplement to the Agreement (the “Supplement”)
to confirm the inclusion of the Product within the scope of the Agreement, pending positive confirmatory testing against COVID-19. In
consideration for the financial support provided by GMP for the research, pursuant to the terms of the Agreement (as amended by the Supplement)
GMP was entitled to obtain certain exclusive rights to the use of the Product in the COVID field on a global basis, and an economic interest
in the use of the Product in the COVID field including 50/50 profit sharing. GMP paid the Company fees of $
Agreement with Autotelic BIO (“ATB”)
Oncotelic
Inc. had entered into a license agreement in February 2018 (the “ATB Agreement”) with ATB. The ATB Agreement licensed
the use of OT-101 in combination with Interleukin-2 (the “Combined Product”), and granted to ATB an exclusive license
under the Oncotelic Inc. technology to develop, make, have made, use, sell, offer for sale, import and export the Combined Product, and
the Combination Product only, in the field, throughout the entire world (excluding the United States of America and Canada) as the territory,
on the terms and subject to the conditions of the ATB Agreement. The ATB Agreement requires ATB to be responsible for the development
of the Combination Product. Oncotelic Inc. was responsible to provide to ATB the technical know-how and other pertinent information on
the development of the Combination Product. ATB paid Oncotelic Inc. a non-refundable milestone payment in consideration for the rights
and licenses granted to ATB under the ATB Agreement, and ATB was to pay Oncotelic Inc. $
Research & Development Costs
In accordance with ASC 730-10-25 “Research and Development”, research and development costs are charged to expense as and when incurred.
| 16 |
Prior Period Reclassifications
Certain amounts in prior periods may have been reclassified to conform with current period presentation.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance requires only a one-step quantitative impairment test, whereby a goodwill impairment loss will be measured as the excess of a reporting period unit’s carrying amount over its fair value (not to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for annual periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 had no material impact on the Company’s consolidated financial statements and related disclosures.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for all entities by one year. ASU 2014-09 became effective on January 1, 2018. The ASU also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The Company adopted ASU 2015-14 during the three months ended March 31, 2020 as till then, no revenue was earned by the Company.
In August 2020, the FASB issued “ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)” which simplifies the accounting for convertible instruments. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. Either a modified retrospective method of transition or a fully retrospective method of transition is permissible for the adoption of this standard. Update No. 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted no earlier than the fiscal year beginning after December 15, 2020. The Company is currently evaluating the potential impact of the Update on its financial statements
All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
NOTE 3 - INTANGIBLE ASSETS AND GOODWILL
The
Company completed a merger with Oncotelic, which gave rise to Goodwill of $
Assignment and Assumption Agreement with Autotelic, Inc.
In
April 2018, Oncotelic Inc. entered into an Assignment and Assumption Agreement (the “Assignment Agreement”) with Autotelic
Inc., an affiliate company, and Autotelic LLC, an affiliate company, pursuant to which Oncotelic acquired the rights to all intellectual
property (“IP”) related to a patented product. As consideration for the Assignment Agreement, Oncotelic Inc. issued
shares of its Common Stock for a value of $
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Intangible Asset Summary
The following table summarizes the balances as of June 30, 2021 and December 31, 2020, of the intangible assets acquired, their useful life, and annual amortization:
| June 30, 2021 | Remaining Estimated | |||||||
| Intangible asset – Intellectual Property | $ | |||||||
| Intangible asset – Capitalization of license cost | ||||||||
| Less Accumulated Amortization | ( | ) | ||||||
| Total | $ | |||||||
| December 31, 2020 | Remaining Estimated | |||||||
| Intangible asset – Intellectual Property | $ | |||||||
| Intangible asset – Capitalization of license cost | ||||||||
| Less Accumulated Amortization | ( | ) | ||||||
| Total | $ | |||||||
Amortization
of identifiable intangible assets for the three months ended June 30, 2021 and 2020 was $
The future yearly amortization expense over the next five years and thereafter are as follows:
| For the six months and years ended December 31, | ||||
| Six months of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| $ | ||||
In-Process Research & Development (IPR&D) Summary
The
IPR&D assets were acquired in the PointR acquisition during the year ended December 31, 2019. Since January 2021, the Company has
determined that the IPR&D should be reported as an indefinitely lived asset and therefore will evaluate, on an annual basis, for
any impairment on the IPR&D and will record an impairment if identified. The balance of IPR&D as of June 30, 2021 and December
31, 2020 was $
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NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expense consists of the following amounts:
| June 30, 2021 | December 31, 2020 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued expense | ||||||||
| $ | $ | |||||||
| June 30, 2021 | December 31, 2020 | |||||||
| Accounts payable – related party | $ | $ | ||||||
NOTE 5 – CONVERTIBLE DEBENTURES, NOTES AND OTHER DEBT
As of June 30, 2021 special purchase agreements (SPAs) with convertible debentures and notes, net of debt discount and including accrued interest, if any, consist of the following amounts:
| June 30, 2021 | ||||
| Convertible debentures | ||||
| Fall 2019 Notes | ||||
| Geneva Notes | ||||
| Geneva notes | ||||
| Other Debt | ||||
| Short term debt from CEO | ||||
| Short term debt – bridge investors | ||||
| Short term debt from CFO | ||||
| Short term debt – Autotelic Inc | ||||
| Total of debentures, notes and other debt | $ | |||
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As of December 31, 2020, convertible debentures and notes, net of debt discount, consist of the following amounts:
| December 31, 2020 | ||||
| Convertible debentures | ||||
| $ | ||||
| Fall 2019 Notes | ||||
| Other Debt | ||||
| Short term debt from CFO | ||||
| Short term debt from CEO | ||||
| Other short term debt – Bridge Investor | ||||
| Total of debentures, notes and other debt | $ | |||
Convertible Debentures
The
gross principal balances on the convertible debentures listed above totaled $
Total
amortization expense related to these debt discounts was $
The
Company recorded additional derivative liability of approximately $
Bridge Financing
Peak One Financing
On
April 17, 2019, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Peak One
Opportunity Fund, L.P. (the “Buyer”, “Peak One”), for a commitment to purchase convertible notes
in the aggregate amount of $
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The
Convertible Note has a principal balance of $200,000, including a
The
issuance of the Convertible Note resulted in a discount from the beneficial conversion feature totaling $
On
June 12, 2019, the Company entered into an amendment of the Purchase Agreement (“Amendment #1”) in connection with
the draw-down of the second tranche, and to provide for additional borrowing capacity under that agreement. Amendment #1 increased the
borrowing amount up to $
On
June 12, 2019, the Buyer purchased Convertible Note Tranche #2 (“Tranche #2”) totaling $
The
issuance of Tranche #2 resulted in a discount from the beneficial conversion feature totaling $
On
November 5, 2019, the Company and Peak One amended the Convertible Note under Tranche #1 to extend the date of conversion of the Convertible
Note into Common Stock of the Company at
Peak
One converted $ of Tranche #1 out of their total debt into shares of the Company during the year ended December 31,
2020. Further, Peak One converted $
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TFK Financing
On
April 23, 2019, the Company, entered into a Convertible Note (the “TFK Note”) with TFK Investments, LLC (“TFK”).
The TFK Note has a principal balance of $
The
issuance of the TFK Note resulted in a discount from the beneficial conversion feature totaling $
On
November 5, 2019, the Company and TFK amended the TFK Convertible Note to extend the date of conversion of the Convertible Note into
Common Stock of the Company at
TFK
converted $
Notes with Officer and Bridge Investor
On
April 17, 2019, the Company entered into a Securities Purchase Agreement (the “Bridge SPA”) with our CEO and the Bridge
Investor with a commitment to purchase convertible notes in the aggregate of $
On
April 23, 2019, the Company entered into a convertible note with our Chief Executive Officer, Vuong Trieu, Ph. D. (the “Trieu
Note”). The Trieu Note has a principal balance of $
| 22 |
The
issuance of the Trieu Note resulted in a discount from the beneficial conversion feature totaling $
On April 23, 2019, pursuant to the Bridge SPA the Company entered into Convertible Note Tranche #1 (“Tranche #1”) with the Bridge Investor. Tranche #1 has a principal balance of $, an OID of $, resulting in net proceeds of $, with a maturity date of . Amounts due under Tranche #1 may also be converted into shares (the “Bridge SPA Conversion Shares”) of the Company’s Common Stock at any time, at
The issuance of the note resulted in a discount from the beneficial conversion feature totaling $. Total amortization of the OID and discount totaled $ for the six months ended June 30, 2021. Total unamortized discount on this note was $ as of June 30, 2021.
On August 6, 2019, pursuant to the Bridge SPA the Company entered into Convertible Note Tranche #2 (“Tranche #2”) with the Bridge Investor. Tranche #2 has a principal balance of $, an OID of $and debt issuance costs of $, resulting in net proceeds of $, with a maturity date of .
The issuance of the note resulted in a discount from the beneficial conversion feature totaling $. Total amortization of the OID and discount totaled $ at June 30, 2021. Total unamortized discount on this note was $ as of June 30, 2021.
This gave rise to a derivative feature within the debt instrument. As of June 30, 2021, Peak One and TFK had fully converted their notes.
Fall 2019 Debt Financing
In
December 2019, the Company closed its Fall 2019 Debt Financing raising an additional $
All
the Fall 2019 Notes provide for interest at the rate of
| 23 |
The
issuance of the Fall 2019 notes resulted in a discount from the BCF totaling $
Further,
the Company recorded interest expense of $
The
total amount outstanding under the Fall 2019 Notes, net of discounts and including accrued interest thereon, as of June 30, 2021, and
December 31, 2020, was $
Geneva Notes
In
May and June 2021, the Company entered into Securities Purchase Agreement with Geneva Roth Remark Holdings Inc. (“Geneva”),
whereby the Company issued two convertible notes in the aggregate principal amount of $
The
total amount outstanding under the Geneva Notes as of June 30, 2021, and December 31, 2020, was $
Paycheck Protection Program
In
April 2020, the Company received loan proceeds in the amount of $
| 24 |
The Company believes it met the PPP’s loan forgiveness requirements and on August 7, 2021 applied for forgiveness. When legal release is received from the SBA or lender, the Company will record the amount forgiven as forgiveness income within the other income section of its statement of operations. If any portion of the PPP loan is not forgiven, the Company will be required to repay that portion, plus interest, through the maturity date.
The SBA reserves the right to audit any PPP loan, regardless of size. These audits may occur after the forgiveness has been granted. In accordance with the CARES Act, all borrowers are required to maintain their PPP loan documentation for six years after the loan was forgiven or repaid in full and to provide that documentation to the SBA upon request.
The
balance outstanding on PPP loan, inclusive of accrued interest, was $
GMP Note
In
June 2020, the Company secured $
The
Company’s liability under GMP Note commenced to accrue when GMP first began to pay for services related to the clinical trial
to our third-party clinical research organization, up to a maximum of $2 million. As of December 31, 2020, GMP has been invoiced by
the clinical research organization for the full $
The
balance outstanding on the GMP Note, inclusive of accrued interest, was $
Other short-term loans
| Other Debt | ||||
| Short term debt from CEO | $ | |||
| Short term debt – bridge investors | ||||
| Short term debt from CFO | ||||
| Short term debt – Autotelic Inc | ||||
| $ | ||||
The
Company’s CEO had provided a short term loan of $
| 25 |
During
the three months ended June 30, 2021, the Company received $
NOTE 6 - PRIVATE PLACEMENT AND JH DARBIE FINANCING
During
the period from July 2020 to March 31, 2021, the Company entered into varioussubscription agreements with certain accredited investors,
including the CEO, pursuant to the JH Darbie Financing, whereby the Company issued and sold a total of Units, for total gross proceeds
of approximately $
| ■ | shares of Edge Point Common stock for a price of $ per share of Edge Point Common stock. | |
| ■ | One
convertible promissory note, convertible up to shares of Edge Point Common stock, at a conversion price of $ | |
| ■ |
As June 30, 2021, funds received under the JH Darbie Financing, net of debt discount, consist of the following amounts:
| June 30, 2021 | ||||
| Convertible promissory notes | ||||
| Subscription agreements - accredited investors | $ | |||
| Subscription agreements – related party | ||||
| Total convertible promissory notes | $ | |||
The
Company incurred approximately $
Concurrently
with the sale of the Units, JH Darbie was granted a warrant, exercisable over a five-year period, to purchase
The terms of convertible notes are summarized as follows:
| ■ | Term: Through June 30, 2021 (extended to March 31, 2022). | |
| ■ | Coupon:
| |
| ■ | ||
| ■ | The
conversion price is initially set at $ |
The Company allocated the proceeds among the freestanding financial instruments that were issued in the single transaction using the relative fair value method, which affects the determination of each financial instrument initial carrying amount. The Company utilized the relative fair value method as none of the freestanding financial instruments issued as part of the single transaction are measured at fair value. Under the relative fair value method, the Company made separate estimates of the fair value of each freestanding financial instrument and then allocated the proceeds in proportion to those fair value amounts. The Company recorded non-controlling interests of approximately $1 million in Edgepoint. Non-controlling interests represent the portion of net assets in consolidated entities that are not owned by the Company and are reported as a component of equity in the consolidated balance sheets.
| 26 |
As
of the multiple closings of the Company during the three months ended March 31, 2021, under the private placement memorandum with JH
Darbie, the estimated volume weighted grant date fair value of approximately $
| Expected Term | years | |||
| Expected volatility | %- | % | ||
| Risk-free interest rates | %- | % | ||
| Dividend yields | % | |||
As
of the multiple closings of the Company through December 31, 2020, under the private placement memorandum with JH Darbie, the estimated
grant date fair value of approximately $
| Expected Term | years | |||
| Expected volatility | %- | % | ||
| Risk-free interest rates | %- | % | ||
| Dividend yields | % | |||
The
Company recorded an initial debt discount of approximately $
The
Company recognized amortization expense related to the debt discount and debt issuance costs of $
On
June 29, 2021, the Company executed amendment #4 to the private placement memorandum. At the time of the original PPM, the Company had
inadvertently made an error in the PPM. Originally, the investor was granted of the Company’s warrants to purchase an equivalent
number of shares of the Company’s common stock at a strike price of $
In
connection with the additional warrants issued by the Company in connection with the amendment #4, the Company recorded a stock-based
compensation fair value expense of $
| Expected Term | - | |||
| Expected volatility | %- | % | ||
| Risk-free interest rates | %- | % | ||
| Dividend yields | % | |||
| 27 |
NOTE 7 - RELATED PARTY TRANSACTIONS
Master Service Agreement with Autotelic Inc.
In
October 2015, Oncotelic entered into a Master Service Agreement (the “MSA”) with Autotelic Inc., a related party that
is partly-owned by the Company’s CEO Vuong Trieu, Ph.D. Dr. Trieu, a related party, is a control person in Autotelic Inc. Autotelic
Inc. currently owns less than
Expenses
related to the MSA were $
Note Payable and Short Term Loan – Related Parties
In
April 2019, the Company issued a convertible note to Dr. Trieu totaling $
During
the three months ended March 31, 2021, Autotelic Inc, provided a short-term loan of $
Artius Consulting Agreement
On March 9, 2020, the Company and Artius Bioconsulting, LLC (“Artius”), for which Mr. King is the Managing Member, entered into an amendment to the Consulting Agreement dated December 1, 2018, under which Artius agreed to serve as a consultant to the Company for services related to the Company’s business from time to time, effective December 1, 2019 (the “Effective Date”) (the “Artius Agreement”). In connection with the Artius Agreement, Mr. King also agreed to assist the Company with strategic advisory services with respect to transactional and operational contracts, budgetary input, among other matters in connection with the formation of a new business unit to develop AI and Blockchain Driven Vision Systems (“EdgePoint AI”), for which Mr. King is Chief Executive Officer.
Under
the terms of the Artius Agreement, the Company agreed to grant to Artius, subject to approval by the Company’s Board of Directors
and pursuant to the Company’s 2017 Equity Incentive Plan, restricted shares of the Company’s Common
Stock, in addition to a
| 28 |
Either the Company or Artius may terminate the Artius Agreement at any time, for any reason following the Effective Date. The Artius Agreement will automatically renew one year from the Effective Date, unless the Parties agree to terminate the Artius Agreement at that time.
No expense was recorded during the three and six months ended June 30, 2021 or 2020, respectively, related to this Agreement.
Maida Consulting Agreement
Effective May 5, 2020, the Company and Dr. Maida entered into an independent consulting agreement, commencing April 1, 2020 (the “Maida Agreement”), under which Dr. Maida will assist the Company in providing medical expertise and advice from time to time in the design, conduct and oversight of the Company’s existing and future clinical trials.
Pursuant
to the terms of the Maida Agreement, the Company will grant to Dr. Maida restricted shares of the Company’s Common Stock
corresponding to $
Either the Company or Dr. Maida may terminate the Maida Agreement, for any reason, upon 30 days advance written notice.
The
Company recorded an expense of $
NOTE 8 - EQUITY PURCHASE AGREEMENT AND REGISTRATION RIGHTS AGREEMENT
On
May 3, 2021, the Company entered into an Equity Purchase Agreement (“EPL”) and Registration Rights Agreement with
Peak One Opportunity Fund LP (“Peak One” or the “Investor”). Under the terms of the EPL, the Company
issued shares of Common Stock to Peak One. Further,
under the terms of the EPL, Peak One agreed to purchase from the Company up to $
Following
effectiveness of the Registration Statement, and subject to certain limitations and conditions set forth in the Equity Purchase Agreement,
the Company shall have the discretion to deliver put notices to the Investor and the Investor will be obligated to purchase shares of
the Company’s Common Stock based on the investment amount specified in each put notice.
| 29 |
In connection with the EPL, the Company issued shares of Common Stock to Peak One and recorded a fair value stock compensation expense of approximately .
During
the three months ended June 30, 2021, the Company sold a total of shares of Common Stock at prices ranging from and
for total gross proceeds of approximately $
NOTE 9 - STOCKHOLDERS’ EQUITY
The following transactions affected the Company’s Stockholders’ Equity:
Equity Transactions During the Period Since the Merger
Issuance and conversion of Preferred Stock
In April 2019, pursuant to the Merger the Company issued shares of Series A Preferred in exchange for shares of Oncotelic Common Stock. Further, in November 2019 the Company issued shares of Series A Preferred to PointR in exchange of shares of PointR Common Stock upon the consummation of the PointR merger. In March 2021, shares of the Company’s preferred stock converted to shares of its Common Stock, effective March 31, 2021.
Issuance of Common Stock during the six months ended June 30, 2021
In January 2021, the Company issued shares of its Common Stock to TFK in connection with the part conversion of their convertible notes payable.
In March 2021, the Company converted shares of our Series A Preferred Stock to shares of its Common Stock.
In May 2021, the Company issued shares of its Common Stock to Peak One in connection with the EPL and recorded a stock compensation expense of approximately .
In
June 2021, the Company sold a total of registered shares of Common Stock at prices
ranging from and in connection with the EPL. The Company received
net cash of $
Issuance of Common Stock during the six months ended June 30, 2020
In February 2020, the Company issued shares of its Common Stock to Peak One in connection with the part conversion of one of their convertible notes payable.
In March 2020, the Company issued shares of its Common Stock to TFK in connection with the part conversion of their convertible notes payable.
In March 2020, the Company issued shares of its Common Stock to Peak One in connection with the part conversion of one of their convertible notes payable.
In March 2020, the Company issued shares of its Common Stock to TFK in connection with the part conversion of their convertible notes payable.
In February 2020, the Company issued shares of its Common Stock to Peak One in connection with the part conversion of one of their convertible notes payable.
In June 2020, Mateon issued shares of its Common Stock to Peak One in connection with the full conversion of one of their convertible notes payable.
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NOTE 10 – STOCK-BASED COMPENSATION
Options
Pursuant to the Merger, the Company’s Common Stock and corresponding outstanding options survived. The below information details the Company’s associated option activity.
As of June 30, 2021, options to purchase Common Stock were outstanding under three stock option plans – the 2017 Equity Incentive Plan (the “2017 Plan”), the 2015 Equity Incentive Plan (the “2015 Plan”) and the 2005 Stock Plan (the “2005 Plan”). Under the 2017 Plan, up to shares of the Company’s Common Stock may be issued pursuant to awards granted in the form of nonqualified stock options, restricted and unrestricted stock awards, and other stock-based awards. Under the 2015 and 2005 Plans, taken together, up to shares of the Company’s Common Stock may be issued pursuant to awards granted in the form of incentive stock options, nonqualified stock options, restricted and unrestricted stock awards, and other stock-based awards.
Employees, consultants, and directors are eligible for awards granted under the 2017 and 2015 Plans. The Company registered an additional total of shares of its Common Stock, which may be issued pursuant to the Registrant’s Amended and Restated 2015 Equity Incentive Plan (the “Plan”). Such additional shares were approved by the shareholders of the Company on August 10, 2020 and as reported to the Securities and Exchange Commission (the “SEC”) vide a Current Report on Form 8-K on August 14, 2020. As such, the total number of shares of the Company’s Common Stock available for issuance under the 2015 plan is . After June 30, 2021, the Company issued of its common shares in lieu of fully vested restricted stock units and incentive and non-qualified stock options to purchase its Common Stock to its employees. All these grants had been approved by the Board of Directors of the Company under the 2015 Plan.
Since the adoption of the 2015 Plan, further awards may be granted under the 2005 Plan, although options previously granted remain outstanding in accordance with their terms.
| Weighted | ||||||||
| For the six months ended June 30, 2021 | Average | |||||||
| Shares | Exercise Price | |||||||
| Outstanding at January 1, 2021 | $ | |||||||
| Outstanding at June 30, 2021 | $ | |||||||
For the year ended December 31, 2020
| Weighted | ||||||||
| Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding at January 1, 2020 | $ | |||||||
| Expired or canceled | ( | ) | ||||||
| Outstanding at December 31, 2020 | $ | |||||||
| Weighted- | ||||||||||||||||||
| Weighted- | Average | |||||||||||||||||
| Outstanding | Average | Exercise | Number | |||||||||||||||
| Exercise prices | Options | Remaining Life | Price | Exercisable | ||||||||||||||
| $ | $ | |||||||||||||||||
| $ | ||||||||||||||||||
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The compensation expense attributed to the issuance of the options is recognized as they are vested.
The employee stock option plan stock options are generally exercisable for from the grant date and vest over various terms from the grant date to .
The aggregate intrinsic value totaled $ and was based on the Company’s closing stock price of $ as of June 30, 2021, which would have been received by the option holders had all option holders exercised their options as of that date. Correspondingly, the aggregate intrinsic value totaled $ and was based on the Company’s closing stock price of $ as of December 31, 2020, which would have been received by the option holders had all option holders exercised their options as of that date.
As of June 30, 2021, there was future compensation cost as all stock options vested prior to December 31, 2019 and the compensation was fully expensed prior to the Merger. In August 2019, the Company had entered into Employment Agreements and incentive compensation arrangements with each of its executive officers, including Dr. Vuong Trieu, the Chief Executive Officer (“CEO”); Dr. Chulho Park, its prior Chief Technology Officer (“CTO’); and Mr. Amit Shah, the Chief Financial Officer (“CFO”). The incentive stock options and the restricted stock awards approved for the Company’s executive officers were granted and issued after June 30, 2021. The Company issued of its common shares in lieu of fully vested restricted stock units and incentive and non-qualified stock options to purchase its Common Stock to its employees, including the awards due to the CEO, CFO, the prior CTO and Saran Saund, the Chief Business Officer of the Company. The Company shall measure the stock-based compensation cost and record such cost in the relevant period.
Warrants
Pursuant to the Merger, the Company’s Common Stock and corresponding outstanding warrants survived. The below information represents the Company’s associated warrant activity.
During
the three months ended March 31, 2021,
In
February 2020, the Company offered to cancel to all the prior warrants of the warrant holders from the 2018 debt financing and offered
to reissue new warrants to such warrant holders. Out of all the warrant holders, holders of
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The issuance of warrants to purchase shares of the Company’s Common Stock, including those attributed to debt issuances, as of June 30, 2021 and December 31, 2020 are summarized as follows:
| Weighted- | ||||||||
| Average | ||||||||
| Shares | Exercise Price | |||||||
| Outstanding at January 1, 2021 | $ | |||||||
| Issued during six months ended June 30, 2021 | ||||||||
| Outstanding at June 30, 2021 | $ | |||||||
| Weighted- | ||||||||
| Average | ||||||||
| For the year ended December 31, 2020 | Shares | Exercise Price | ||||||
| Outstanding at January 1, 2020 | $ | |||||||
| Issued during the year ended December 31, 2020 | ||||||||
| Expired or cancelled | ( | ) | ||||||
| Outstanding at December 31, 2020 | $ | |||||||
The following table summarizes information about warrants outstanding and exercisable at June 30, 2021:
| Outstanding and exercisable | ||||||||||||||||||
| Weighted- | Weighted- | |||||||||||||||||
| Average | Average | |||||||||||||||||
| Number | Remaining Life | Exercise | Number | |||||||||||||||
| Exercise Price | Outstanding | in Years | Price | Exercisable | ||||||||||||||
| $ | $ | |||||||||||||||||
| $ | ||||||||||||||||||
The
Company issued warrants during the six months ended June 30,
2021, of which warrants issued during the three months ended June 30, 2021. The Company recorded stock-based compensation
of approximately $ million, as fair value of the warrants, using a Black Scholes valuation model using the following input values.
The expense attributed to the issuances of the warrants was recognized as they vested/earned. These warrants are exercisable for
to
| Expected Term | - years | |||
| Expected volatility | – | % | ||
| Risk-free interest rates | – | % | ||
| Dividend yields | % | |||
The
Company issued warrants issued during the six months ended June 30, 2020 were as recorded stock-based compensation of $
million as the fair value of the warrants using a Black Scholes valuation model using the following input values. The expense attributed
to the issuances of the warrants was recognized as they vested/earned. These warrants are exercisable for to
| Expected Term | years | |||
| Expected volatility | % | |||
| Risk-free interest rates | % | |||
| Dividend yields | % | |||
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NOTE 11 – INCOME TAXES
Significant components of the Company’s deferred tax assets and liabilities for federal and state income taxes as of June 30, 2021 and December 31, 2020 are as follows in thousands:
June 30, 2021 | December 31, 2020 | |||||||
| Deferred tax assets: | ||||||||
| Stock-based compensation | $ | $ | ||||||
| Assets | ||||||||
| Liability accruals | ||||||||
| R&D Credit | ||||||||
| Capital Loss | ||||||||
| Deferred state tax | ( | ) | ( | ) | ||||
| Net operating loss carry forward | ||||||||
| Total gross deferred tax assets | ||||||||
| Less - valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | $ | ||||||
The
Company had gross deferred tax assets of approximately $ million and $
As
of June 30, 2021 and December 31, 2020, the Company had gross federal net operating loss carryforwards of approximately $
At
June 30, 2021 and December 31, 2020, the Company had California state gross operating loss carry-forwards of approximately $
The Company identified its federal and California state tax returns as “major” tax jurisdictions. The periods out income tax returns are subject to examination for these jurisdictions are 2017 through 2020. We believe our income tax filing positions and deductions will be sustained on audit, and we do not anticipate any adjustments that would result in a material change to our financial position. Therefore, no liabilities for uncertain income tax positions have been recorded. As of the date of this filing, the Company has not filed its 2019 and 2020 federal and state corporate income tax returns. The Company expects to file these documents as soon as practical.
Portions
of these carryforwards will expire through
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Leases
Currently, the Company is leasing the office located at 29397 Agoura Road, Suite 107, Agoura Hills, CA 91301 on a month-to-month basis until such time a new office is identified. The Company believes the office is sufficient for its current operations.
Legal Claims
From time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. The Company is not presently a party to any legal proceedings that it currently believes, if determined adversely to the Company, would individually or taken together have a material adverse effect on the Company’s business, operating results, financial condition or cash flows.
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PointR Merger Contingent Consideration
The
total purchase price of $
NOTE 13 – SUBSEQUENT EVENTS
Stock Awards Under the 2015 Plan
The Company issued shares of its Common Stock in lieu of fully vested restricted stock units and incentive and non-qualified stock options to purchase its Common Stock to its employees. All these grants had been approved for issuance after June 30, 2021 by the Board of Directors of the Company under the 2015 Plan.
Unsecured Convertible Notes
In
August 2021, the Company issued Note Purchase Agreements with Autotelic Inc., the CFO, and certain other accredited investors. Under
the terms of the Note Purchase Agreements, the Company issued an aggregate of $
GMP Letter of Intent and Term Sheet
On
August 13, 2021 the Company, the CEO, and GMP executed a letter of intent and a non-binding term sheet (the “Term Sheet”),
which Term Sheet included certain binding terms relating to a standstill agreement and the issuance of a convertible promissory note
(as more fully described below). The Term Sheet sets forth the terms and conditions pursuant to which the Company and GMP will, subject
to shareholder approval, form a joint venture (the “JV”) with the objective to develop the Company’s product
portfolio. Pursuant to the Term Sheet, the Company will contribute its product portfolio to the JV in consideration for a 35% ownership
stake in the JV. As set forth above, the Term Sheet sets forth certain binding terms regarding (i) a 45-day standstill by the Company,
and (ii) the issuance by the Company of a convertible note for $
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (the “Quarterly Report” or “Report”) includes a number of forward-looking statements that reflect management’s current views with respect to future events and financial performance. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team, as well as the assumptions on which such statements are based.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. These statements are only predictions and involve known and unknown risks, uncertainties and other factors. Some of these risks are included in the section entitled “Risk Factors” set forth in this Quarterly Report and in other reports that we file with the Securities and Exchange Commission (“SEC”). The occurrence of any of these risks, or others of which we are currently unaware, may cause our company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks include, by way of example and without limitation:
| ● | our ability to successfully commercialize our products and services on a large enough scale to generate profitable operations; |
| ● | our ability to maintain and develop relationships with customers and suppliers; |
| ● | our ability to successfully integrate acquired businesses or new products, or to realize anticipated synergies in connection with acquisitions of businesses or products; |
| ● | expectations concerning our ability to raise additional funding and to continue as a going concern; |
| ● | our ability to successfully implement our business plan; |
| ● | our ability to avoid, or to adequately address any intellectual property claims brought by third parties; and |
| ● | the anticipated impact of any changes in industry regulation. |
Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that the actual results of operations or the results of our future activities will not differ materially from our assumptions.
Corporate History
Oncotelic Therapeutics, Inc. (also d/b/a Mateon Therapeutics, Inc.) (“Oncotelic”), was formed in the State of New York in 1988 as OXiGENE, Inc., was reincorporated in the State of Delaware in 1992, changed its name to Mateon Therapeutics, Inc. in 2016, and then Oncotelic Therapeutics, Inc. in November 2020. Oncotelic conducts business activities through Oncotelic and its wholly-owned subsidiaries, Oncotelic, Inc., a Delaware corporation, PointR Data, Inc. (“PointR”), a Delaware corporation, and EdgePoint AI, Inc. (“Edgepoint”), a Delaware Corporation for which there are non-controlling interests, (Oncotelic, Oncotelic Inc., PointR and Edgepoint are collectively called the “Company”). The Company is evaluating the further development of its product candidates OXi4503 as a treatment for acute myeloid leukemia and myelodysplastic syndromes and CA4P in combination with a checkpoint inhibitor for the treatment of advanced metastatic melanoma.
Amendments to Certificate of Incorporation
In November 2020 the Company filed an amendment to its Certificate of Incorporation with the Secretary of State for the State of Delaware changing its name from “Mateon Therapeutics, Inc.” to “Oncotelic Therapeutics, Inc.” A notice of corporate action was filed with the Financial Industry Regulatory Authority (“FINRA”), requesting confirmation to change its name and approval for a new ticker symbol. On March 29, 2021, the Company received approval from FINRA on its notice of corporate action, and effective March 30, 2021, the Company’s ticker symbol had changed from “MATN” to “OTLC”.
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In January 2021, the Company filed an additional amendment to its Certificate of Incorporation, as amended (the “Charter Amendment”), with the Secretary of State for the State of Delaware, which Charter Amendment went effective immediately upon acceptance by the Secretary of State for the State of Delaware. As approved by the Company’s stockholders by written consent on August 10, 2020, the Charter Amendment increased the number of authorized shares of common stock, par value $0.01 per share (“Common Stock”) from 150,000,000 shares to 750,000,000 shares.
Conversion of Series A Preferred Stock to Common Stock
Subsequent to obtaining the approval from FINRA on March 29, 2021 related to the various corporate actions, the Company converted 278,188 Series A Preferred Stock into 278,187,847 shares of Common Stock of the Company. After such conversion and as of May 7, 2021, the total number of shares of Common Stock outstanding is 369,696,959.
Recent Events
Peak One Equity Purchase Agreement
On May 3, 2021, the Company entered into an Equity Purchase Agreement (the “EPL”) and Registration Rights Agreement (the “Registration Rights Agreement”) with Peak One Opportunity Fund, L.P. (“Peak One”), pursuant to which the Company shall have the right, but not the obligation, to direct Peak One, to purchase up to $10.0 million (the “Maximum Commitment Amount”) in shares of the Company’s Common Stock. Under the EPL and subject to the Maximum Commitment Amount, the Company has the right, but not the obligation, to submit Put Notices (as defined in the EPL) to Peak One (i) in a minimum amount not less than $20,000.00, and (ii) in a maximum amount up to the lesser of (a) $1.0 million or (b) 250% of the Average Daily Trading Value (as defined in the EPL). In exchange for Peak One entering into the EPL, the Company agreed, among other things, to (A) issue Peak One and Peak One Investments, LLC, an aggregate of 250,000 shares of Common Stock, and (B) file a registration statement registering the Common Stock issued or issuable to Peak One under the EPL for resale (the “Registration Statement”) with the SEC within 60 calendar days of the date of the EPL, as more specifically set forth in the Registration Rights Agreement. The obligation of Peak One to purchase the Company’s Common Stock shall begin on the date of the EPL, and ending on the earlier of (i) the date on which Peak One shall have purchased Common Stock pursuant to the EPL equal to the Maximum Commitment Amount, (ii) twenty four (24) months after the initial effectiveness of the Registration Statement , (iii) written notice of termination by the Company to Peak One (subject to certain restrictions set forth in the EPL), (iv) the Registration Statement is no longer effective after the initial effective date of the Registration Statement, or (v) the date that the Company commences a voluntary case or any person commences a proceeding against the Company, a custodian is appointed for the Company or for all or substantially all of its property or the Company makes a general assignment for the benefit of its creditors (the “Commitment Period”). During the Commitment Period, the purchase price to be paid by Peak One for the Common Stock under the EPL shall be 91% of the Market Price, which is defined as the lesser of the (i) closing bid price of the Common Stock on the trading day immediately preceding the respective Put Date (as defined in the EPL), or (ii) lowest closing bid price of the Common Stock during the Valuation Period (as defined in the EPL), in each case as reported by Bloomberg Finance L.P or other reputable source designated by Peak One.
During the three months ended June 30, 2021, the Company sold total of 400,000 shares of Common Stock at prices ranging from $0.15 and $0.23 for total gross proceeds of approximately $99,000, net of issuance costs of approximately $29,000. Approximately $37,000 of the total net proceeds was received by the Company subsequent to June 30, 2021 and is included in the accounts receivable as of June 30, 2021.
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Private Placement through JH Darbie & Co., Inc.
Between July 2020 and March 2021, the Company offered and sold certain units (“Units”) in a private placement through JH Darbie & Co., Inc. (“JH Darbie”), with each unit consisting of: (i) 25,000 shares of Edgepoint common stock, par value $0.01 per share (“Edgepoint Common Stock”), for a price of $1.00 per share of Edgepoint Common Stock; (ii) one convertible promissory note issued by the Company (the “Unit Note”), convertible into up to 25,000 shares of EdgePoint Common Stock at a conversion price of $1.00 per share, or up to 138,889 shares of the Company’s Common Stock, at a conversion price of $0.18 per share; and (iii) 100,000 warrants (the “Warrants”), consisting of (a) 50,000 warrants to purchase an equivalent number of shares of EdgePoint Common Stock at $1.00 per share (“Edgepoint Warrant”), and (b) 50,000 warrants to purchase an equivalent number of shares of Company Common Stock at $0.20 per share (“Oncotelic Warrant”) (the sale of Units is hereinafter, the “JH Darbie Financing”). In total, as of December 31, 2020, the Company had issued and sold a total of 63 Units. In addition, 6.3 Units were issued to JH Darbie as fees. Subsequent to December 31, 2020 and through the date of this report, the Company sold the remaining 37 Units and JH Darbie earned an additional 3.7 Units as fees.
The JH Darbie Financing resulted in gross proceeds of $5 million to the Company. Placement agent fees of $0.65 million were paid to JH Darbie pursuant to that certain Placement Agent Agreement, dated February 25, 2020 between the Company and JH Darbie (the “Darbie Placement Agreement”). In addition, the Company paid approximately $39,000 as legal costs for the transaction. Under the Darbie Placement Agreement, JH Darbie had the right to sell a minimum of 40 Units and a maximum of 100 Units on a best-efforts basis. The Company has had nine tranches under the JH Darbie Financing between July and March 31, 2021. Subsequent to December 31, 2020, the Company received gross funds of $1.85 million through 4 tranches under the JH Darbie Financing. Placement fees of $0.2 million were paid to JH Darbie in connection with such financing.
In June 2021, the Company and the Investors agreed to extend the maturity date of the Notes from June 30, 2021, to March 31, 2022. In addition, the Company and JHDarbie identified an error in the Oncotelic Warrants and JH Darbie Financing documents which intended to have the investors to purchase $50,000 of shares of Common Stock or Edgepoint Common Stock. However, the Company only issued 50,000 Oncotelic Warrants, with an aggregate exercise price of $10,000. The error was corrected by the Company and the Company issued to the Investors an aggregate of 20.0 million additional Oncotelic Warrants, and 2.0 million additional Oncotelic Warrants to J.H. Darbie, as placement agent. Each Investor was entitled to receive 200,000 additional Oncotelic Warrants for each Unit purchased.
Geneva Roth Remark Notes
In May and June 2021, the Company entered into Securities Purchase Agreement (the “Geneva Agreement”) with Geneva Roth Remark Holdings Inc. (“Geneva”), whereby the Company issued two convertible notes (collectively, the “Geneva Notes”) in the aggregate principal amount of $307,500, convertible into shares of Common Stock. Under the terms of the Geneva Agreement, the Company will receive additional tranches of convertible note financing of up to $1.2 million throughout the term of the Geneva Agreement. The Geneva Notes have an interest rate of six percent (6%), which increases to twenty-two percent (22%) in the event of a default under each respective Note, and both mature one year from issuance (the “Maturity Date”). Geneva has the right from time to time, and at any time during the period beginning on the date which is one hundred eighty (180) days following issuance date and ending on the Maturity Date to convert all or any part of the outstanding and unpaid amount of the applicable Geneva Note into the Company’s Common Stock at a conversion price established at sixty five (65%) percent multiplied by the lowest two (2) daily volume weighted average price over the fifteen (15) consecutive trading days. The Geneva Notes include a clause accelerating the Company’s payment obligations upon the occurrence of certain events of default whereby, at the option of Geneva, the Company will become immediately obligated to repay Geneva in an amount equal to the principal of the applicable Geneva Loan plus both accrued but unpaid interest and default interest, in cash, with premium.
The total amount outstanding under the Geneva Notes as of June 30, 2021, and December 31, 2020, was $307,500 and $0, respectively. $100,000 of the total net proceeds for the June 2021 tranche was received by the Company subsequent to June 30, 2021 and is included in the accounts receivable as of June 30, 2021.
Short-term loans
The Company’s CEO had provided a short term loan of $70,000 to the Company during the year ended December 31, 2020, of which $50,000 was repaid. As such, $20,000 was outstanding at June 30, 2021. During the three months ended March 31, 2021, Autotelic Inc. provided a short term funding of $120,000 to the Company, which was repaid after the three months ended March 31, 2021. On May 18, 2021, Autotelic provided an additional short term funding of $250,000 to the Company. As such, $250,000 was outstanding and payable to Autotelic at June 30, 2021. During the fourth quarter of the year ended December 31, 2020, the Company’s CFO and the Bridge Investor provided short term loans of $25,000 and $50,000, respectively to the Company. Such loans were repaid as of March 31, 2021. Additionally, the Company received $69,050 from the Company’s CFO during the three months ended June 30, 2021 and such amount was outstanding as of June 30, 2021. During the three months ended June 30, 2021, the Company received $425,825 primarily from two bridge investors and such amount was outstanding as of June 30, 2021.
Unsecured convertible notes
In August 2021, the Company issued Note Purchase Agreements with Autotelic the CFO, and certain other accredited investors. Under the terms of the Note Purchase Agreements, the Company issued an aggregate of $698,500 (the “Principal Amount”) in debt in the form of unsecured convertible promissory notes (collectively, the “Notes”). The Notes are unsecured, and provide for interest at the rate of 5% per annum. Such Notes were issued against some of the short-term debt due as of June 30, 2021. All amounts outstanding under the Notes become due and payable at such time as determined by the holders of a majority of the Principal Amount of the Notes (the “Majority Holders”), on or after (a) the one year anniversary of the Notes ,or (b) the occurrence of an Event of Default (as defined in the Note Purchase Agreements) (the “Maturity Date”). The Company may prepay the Notes at any time. Events of Default under the Notes include, without limitation, (i) failure to make payments under the Notes within thirty (30) days of the Maturity Date, (ii) breaches of the Note Purchase Agreement or Notes by the Company which is not cured within thirty (30) days of notice of the breach, (iii) bankruptcy, or (iv) a change in control of the Company (as defined in the Note Purchase Agreements). The Majority Holders have the right, at any time not more than five days following the Maturity Date, to elect to convert all, and not less than all, of the outstanding accrued and unpaid interest and principal on the Notes. The Notes may be converted, at the election of the Majority Holders, into shares of the Company’s common stock, par value $0.01 per share, at a fixed conversion price of $0.18 per share.
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Consent Solicitation and Amendments to Certificate of Incorporation
On June 25, 2020, the Company commenced a solicitation of shareholder consents (the “Consent Solicitation”), pursuant to a consent solicitation statement (the “Consent Solicitation Statement”), to the holders (the “Stockholders”) of its Common Stock and Series A Convertible Preferred Stock. The deadline for Stockholders to respond to the Consent Solicitation Statement was August 10, 2020. Pursuant to the Consent Solicitation Statement, the following actions were approved by the written consent of the requisite number of Stockholders:
| (1) | changing the name of the Company and changing the Company’s ticker symbol (the “Name Change”); | |
| (2) | amending the Company’s Amended and Restated 2015 Equity Incentive Plan to increase the number of shares of Common Stock available for issuance from 7.25 million shares to 27.25 million shares, and increasing the maximum number of stock awards that may be issued in any fiscal year from 500,000 to 1,000,000 shares (the “Plan Amendment”); | |
| (3) | increasing the authorized number of shares of Common Stock from 150,000,000 to 750,000,000 (the “Capital Increase”); and | |
| (4) | amending and restating the certificate of incorporation for the Company to give effect to the Name Change, Capital Increase and forum selection provision. |
The Company filed a Current Report on Form 8-K with the SEC to declare the voting results on August 14, 2020. In November 2020, the Company filed an amendment to its Certificate of Incorporation with the Secretary of State for the State of Delaware changing its name from “Mateon Therapeutics, Inc.” to “Oncotelic Therapeutics, Inc.” A notice of corporate action was filed with FINRA, requesting confirmation to change its name and approval for a new ticker symbol. On March 29, 2021, the Company received approval from FINRA on its notice of corporate action, and effective March 30, 2021, the Company’s ticker symbol changed from “MATN” to “OTLC”.
In January 2021, the Company filed the Charter Amendment, with the Secretary of State for the State of Delaware, which Charter Amendment went effective immediately upon acceptance by the Secretary of State for the State of Delaware. As approved by the Company’s stockholders by written consent on August 10, 2020, the Charter Amendment increased the number of authorized shares of Common Stock from 150,000,000 shares to 750,000,000 shares.
The Company registered an additional 20,000,000 shares of its Common Stock, which may be issued pursuant to the Company’s Amended and Restated 2015 Equity Incentive Plan (the “Plan”). Such additional shares were approved by the Stockholders on August 10, 2020 and disclosed on the Company’s Current Report on Form 8-K filed on August 14, 2020. As such, the total number of shares of the Company’s Common Stock available for issuance under the Plan are 27,250,000.
In March 2021, the Company converted 278,188 shares of the Company’s Series A Preferred Stock to 278,187,847 shares of its Common Stock pursuant to the terms of the agreement and plans of merger with Oncotelic, Inc. and PointR (collectively, the “Mergers”). For additional information on the Mergers, refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC on April 15, 2021.
Mergers
The Company consummated the transactions for both Mergers in 2019. For additional information on both mergers, refer to our Annual Report on Form 10-K filed with the SEC on April 15, 2021.
Company Overview
We are a clinical stage biopharmaceutical company developing drugs for the treatment of cancer. Our goal is to advance our drug candidates into late stage pivotal clinical trials and either sell marketing rights to a larger pharmaceutical company or seek approval from the United States Food and Drug Administration (“FDA”) ourselves.
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The Company’s lead product candidate, OT-101, is being developed as a broad-spectrum anti-cancer drug that can also be used in combination with other standard cancer therapies to establish an effective multi-modality treatment strategy for difficult-to-treat cancers. Together, we plan to initiate phase 3 clinical trials for OT-101 in both high-grade glioma and pancreatic cancer. During Phase 2 clinical trials in pancreatic cancer, melanoma, and colorectal cancers (“Study P001”) and in high-grade gliomas (“Study G004”), meaningful clinical benefits were observed and OT-101 exhibited a favorable safety profile. These clinical benefits included long-term survival and meaningful tumor reduction. Both partial and complete responses have been observed in the Study G004 Phase 2 clinical trial of OT-101 as a single agent in patients with aggressive brain tumors.
The Company’s self-immunization protocol (“SIP™”) is based on novel and proprietary sequential treatment of cancers with OT-101 (an antisense against TGF-ß2) and chemotherapies. This sequential treatment strategy is aimed at achieving effective self-immunization against a patients’ own cancer, resulting in robust therapeutic immune response and consequently better control of the cancer and improved survival. Prolonged states of being cancer-free have been observed in some patients with the most aggressive forms of cancer, raising a renewed hope for a potential cure. The use of OT-101 lifts the suppression of the patient’s immune cells around the cancer tissue, providing the foundation for an effective initial priming, which is critical for a successful immune response. The subsequent chemotherapy results in the release of neoantigens that result in a robust boost of the immune response. We believe that a rational combination of the company’s SIP™ platform with immune-modulatory drugs like interleukin 2 (“IL-2”) and/or immune checkpoint inhibitors has the potential to help achieve sustained and robust immune responses in patients with the most difficult-to-treat forms of cancer.
The Company is also working on developing OT-101 as a possible drug candidate that can be deployed in various epidemic and pandemic diseases, such as Severe Acute Respiratory Syndrome (“SARS”) and specifically for the current COVID-19. As of the date of this report, the Company has filed an Investigational New Drug Application (“IND”) with the FDA to permit the Company to conduct clinical trials to prove the efficacy of OT-101 against COVID-19. The Company has initiated clinical trials in Latin America to evaluate the efficacy of OT-101 against COVID-19 and expects preliminary results before the end of the fiscal year 2021. The Company plans to initiate the Company’s Phase 2 clinical trial of OT-101, a TGF-β antisense, for the treatment of patients with mild to severe COVID-19 infection. The multi-center, double blind, randomized, placebo-control study pas planned to evaluate the safety and efficacy of OT-101 in combination with standard of care on two patient groups – (1) mild or moderate disease, and (2) severe disease requiring mechanical ventilation or intubation. The Company discontinued enrollment in its OT-101 clinical trial in patients with COVID-19 in June 2021. The trial completed randomization of 32 out of 36 patients planned, on an intent to treat basis. The discontinuance of the trial was due to the continuing rise of more severe variants in Latin America, leading to exhaustion of medical care infrastructure in Latin America.
In addition, the Company is developing Artemisinin as an Ayurvedic therapeutic under the product names ARTIVedaTM (when marketed within India), and ArtiShieldTM (when marketed outside of India) (ARTIVedaTM and ArtiShieldTM are collectively referred to herein as “ARTIVedaTM”). Artemisinin, purified from a plant Artemisia Annua, has exhibited an ability to inhibit TGF-β activity and neutralize COVID-19. The Company’s test results during an in vitro study at Utah State University showed Artemisinin having an EC50 of 0.45 ug/ml, and a Safety Index of 140. Artemisinin can target multiple viral threats including COVID-19 by suppressing both viral replication and clinical symptoms that arise from viral infection. Viral replication cannot occur without TGF-β. Artemisinin also has been reported to have antiviral activities against hepatitis B and C viruses, human herpes viruses, HIV-1, influenza virus A, and bovine viral diarrhea virus in the low micromolar range. TGF-β surge and cytokine storm cannot occur without TGF-β. In a clinical study undertaken in India, clinical consequences related to the TGF-β surge, including ARDS and cytokine storm, were suppressed by targeting TGF-β with Artemisinin. The clinical study (“ARTI-19”) showing these results was a global study, enrolling at least 120 patients. The number of patients planned to be enrolled in the ARTI-19 trial increases the total aggregate number of patients using ARTIVedaTM to 3,000. The ARTI-19 trials were conducted by Windlas Biotech Private Limited (“Windlas”), the Company’s business partner in India, as part of the Company’s global effort at deploying ARTIVedaTM across India, Africa, and Latin America. The Windlas study evaluates the safety and efficacy of Artemisia Absinthium Powder 500mg capsule of ARTIVedaTM in the treatment of adults with COVID-19. Data from ARTI-19 is expected by end of the fourth quarter of the fiscal year 2021. The ARTI-19 trial was registered under the Clinical Trials Registry India (“CTRI”) with three active sites and additional sites to be added as the trial progresses and expands. ARTI-19 was conducted with Windlas as part of the plan for the Company’s global effort at deploying PulmohealTM, a product package of ARTIVedaTM, our artificial intelligence (“AI”) cough application (“ArtiHealth”), and our AI post marketing survey (“PMS”), across India, Africa, and Latin America. We continue to evaluate to seek approval, and subsequently launch PulmoHealTM, with or without local partners, in various countries within the regions planned.
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In January 2021 and subsequently in February 2021, the Company announced preliminary results for ARTI-19 trials for ARTIVeda™. The interim results announced were, as previously disclosed above, based on 120 randomized patients across three sites in India. We reported positive topline results in April 2021, and we expect final data as soon as available. Upon completion of the trial results and obtaining regulatory approval for the use in India, it is the Company’s objective to file for Emergency Use Authorization (“EUA”) with regulatory authorities around the world, including India, the United States, the United Kingdom, countries in Africa and Latin America; discussions regarding EUA with several of these authorities have commenced.
No adverse events were reported that required discontinuation of treatment. When ARTIVeda™ was added to the standard of care (“SOC”), more patients recovered faster than SOC alone. Of the 39 patients, 31 patients (79.5%) being treated with ARTIVeda™ became asymptomatic after 5-day of therapy. In comparison, only 12 of the 21 control patients (57.1%) treated with SOC alone became asymptomatic on day 5 (P=0.028, Fisher’s exact test). For the sicklier patients (WHO scale 4), the median time to becoming asymptomatic was only 5 days for the ARTIVeda + SOC group (N=18), as compared to 14 days for the SOC alone group (N=10) (P=0.004, Log-rank test).These data sets provide clinical support that targeting the TGF-β pathway with ARTIVeda™ may contribute to a faster recovery of patients with mild to moderate COVID-19. The trend was more pronounced with higher initial disease status. Log rank statistics: WHO-scale 2,3,4: p= 0.0369 /RR = 1.476 (0.8957-2.433), WHO-scale 3,4: p= 0.026/ RR = 1.581 (0.9094-2.747), WHO-scale 4: p= 0.0043/ RR = 2.038 (0.9961-4.168). RR = rate ratio for recovery. The Company has published the results of the trial in certain renowned publications.
In addition to ARTIVeda™, the Company has also developed and launched ArtiHealth and the PMS, and when packaged with ARTIVedaTM , are packaged as a product offering under the name PulmoHeal™. PulmoHeal™ is a full evaluation package of drug and assessment platforms for COVID-19, and other respiratory disease patients. Windlas has launched ArtiHealth on Amazon.in, Flipkart, and 1mg.com. The platform has been powered by the Company’s AI supercomputing and AI platform in conjunction with IBM. Initially, the cough assessment will be powered by Salcit Pvt. Ltd.’s (“Salcit”) AI module. Per Salcit, their AI module has overall accuracy in predicting the pattern of the disease at 91.97%, sensitivity at 87.2%, and specificity at 93.69%.
Our artificial intelligence subsidiary, PointR, develops and deploys high performance cluster computers and AI technologies as a supercomputing grid that can be layered in and interconnected to create an all-point mesh to harvest operational data within manufacturing plants, hospitals, clinics, and phase I units. These grids provide real-time, localized decision-making, harvesting complex data from structured and unstructured sources. The deployment of this supercomputing grid enables data capture and insight extraction in real time in blocks which are chained into blockchain ledger records serving as immutable transactions for stakeholders such as regulatory agencies, caretakers, insurers, payers, and manufacturers. The PointR grid can integrate and fuse data from any type of sensors or collection devices. For example, the Vision platform is a network of activity detection cameras functionalized with AI algorithms to monitor, evaluate, and archive real time visual data as a series of metadata entries in a Blockchain ledger. In the pharmaceutical industry, PointR’s AI combined with Blockchain will be used in the entire life cycle of a drug: discovery, clinical trials and manufacturing. Leveraging its deep partnership with IBM, the PointR team will combine its own AI Vision technology with industry standard Blockchain to transform drug manufacturing and real-world evidence monitoring for clinical trials. The combined system has the potential to automatically record individual key steps in Current Good Manufacturing Practice regulations enforced by the FDA (“CGMP”) for manufacturing operations including the flow of people, raw materials and operations in trusted perpetual blockchain ledgers that are indisputable. This has the potential to create much more efficient CGMP manufacturing operations while simultaneously improving reliability and data security. The Company is also developing AI driven telehealth and other applications, that would be used in health monitoring and supporting the Company’s various clinical programs. The PointR technology is planned to be transferred into Edgepoint. Edgepoint also plans to redeploy TrustPoint, a tested technology for CGMP drug manufacturing relieving human errors in supply chain and increasing compliance with warehouse operating procedures. For example, the warehouse module of TrustPoint will automatically create a shopping list from standard templates and alert supply chain personnel to collect and deliver a list of raw materials to manufacturing. To support the anti-viral drug program, Edgepoint is developing ArtiHealth. Protected by patents and partnership with IBM Watson Health Research ArtiHealth allows patients to cough and speak into the ArtiHealth App that can be operated either by a nurse or by the end-user patient at home. ArtiHealth is part of the company’s Telehealth platform to remotely monitor patient’s progression of disease. The Company’s clinical trials of ARTIVedaTM will deploy ArtiHealth to COVID-19 patients in the study to collect and score data by medical professionals. The data will be used by the AI to predict and diagnose patients as a de-novo software as a medical device. After regulatory approvals, ArtiHealth will be bundled with ARTIVedaTM to be prescribed by physicians. Patients will be able to self-monitor progression of their respiratory condition with the Edgepoint App as much as they check their temperature with a thermometer. ArtiHealth virtualizes and expands the use of spirometers in the form of a software app.
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Since April 2019, we have been operating under significant capital constraints, which has curtailed our ability to achieve meaningful progress in either of the Company’s two clinical programs – one of which is developing OXi4503 as a treatment for acute myeloid leukemia and myelodysplastic syndromes and the other of which is developing CA4P in combination with a checkpoint inhibitor for the treatment of advanced metastatic melanoma. We believe that the merger of Oncotelic and Oncotelic Inc. creates a combined company that has potential to generate shareholder value through a promising pipeline of next generation immunotherapies targeting several significant cancer markets where there is a lack of therapeutic options and lack of an effective immunotherapy protocol
Research Service Agreement between Golden Mountain Partners LLC (“GMP”) and the Company.
When COVID-19 emerged in China, the Company and GMP contemplated a collaboration to develop drug candidates for COVID-19. Oncotelic Inc. and GMP entered into a research and services agreement (the “GMP Research Agreement”) on February 3, 2020 memorializing their collaborative efforts to develop and test COVID-19 antisense therapeutics (the “GMP Agreement Product”). On March 18, 2020, the Company reported the anti-viral activity of OT-101 – its lead drug candidate currently in phase 3 testing in pancreatic cancer and glioblastoma. In an in vitro antiviral testing performed by an independent laboratory, OT-101 has an 50% effective concentration (“EC50”) of 7.6 µg/mL and is not toxic at the highest dose of 1000 µg/mL giving a safety index (“SI”) value of >130, which is considered highly active. On March 23, 2020, the Company and GMP entered into a supplement to the GMP Research Agreement (the “GMP Research Supplement”) to confirm the inclusion of OT-101 within the scope of the GMP Research Agreement as a GMP Agreement Product, pending positive confirmatory testing against COVID-19. In consideration for the financial support provided by GMP for the research, pursuant to the terms of the GMP Research Agreement (as amended by the GMP Research Supplement) GMP is entitled to obtain certain exclusive rights to the use of the GMP Agreement Product in the COVID Field on a global basis, and an economic interest in the use of the GMP Agreement Product in the COVID Field, including up to an equal split of profit sharing. As described in the GMP Research Supplement, the Company intends to license or assign intellectual property rights, including the 2020 Patent Application and any other intellectual property rights owned or controlled by the Company relating to the GMP Agreement Product, OXi4503 and CA4P, to a joint venture company (the “Joint Venture Company”) to be established jointly between Oncotelic Inc. and GMP (or its designee), as well as providing management services and other expertise to the Joint Venture Company. GMP intends that it (or its designee, as the case may be) shall provide funding to the Joint Venture Company to support its development and commercial activities in the Joint Venture Company’s territories, and in each case, on terms to be agreed by the parties. GMP shall be entitled to use its governmental relations and local expertise in Greater China to assist with coordinating the research, development and commercialization of (i) the GMP Agreement Products in the COVID Field, (ii) the GMP Agreement Products in the OT101 Oncology Field, (iii) OXi4503; and (iv) CA4P, in each case in Greater China.
The Joint Venture Company is intended to be jointly owned by the Company and GMP (or its designee), and its principal activities shall be to research, develop, bring to market and commercialize: (i) the GMP Agreement Products in the COVID Field on a global basis, (ii) the GMP Agreement Products in the OT101 Oncology Field, (iii) OXi4503; and (iv) CA4P, in each case in Greater China. On April 6, 2020, the Company announced that it had delivered the requisite testing results to GMP confirming the applicability and potential use of OT-101 for the treatment of COVID-19. OT-101 exhibited potent activity against both COVID-19 and SARS with a robust safety index of greater than 500. Also, the Company has submitted a Pre-Investigational New Drug application package to the FDA. GMP paid the Company fees of $300,000 during the three months ended March 31, 2020 and $900,000 during the three months ended June 30, 2020 for the services rendered under the agreement. The Company also recorded approximately $40,000 for reimbursement of actual costs incurred.
In June 2020, the Company secured $2 million in debt financing, evidenced by a one-year convertible note (the “GMP Note”) from GMP or its affiliate, to conduct a clinical trial evaluating OT-101 against COVID-19 bearing 2% annual interest, and is personally guaranteed by Dr. Vuong Trieu, the Chief Executive Officer of the Company. The GMP Note is convertible into the Company’s Common Stock upon the GMP Note’s maturity one year from the date of the GMP Note, at the Company’s Common Stock price on the date of conversion with no discount. GMP does not have the option to convert prior to the GMP Note’s maturity at the end of one year. Such financing will be utilized solely to fund the clinical trial.
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The Company’s liability under GMP Note commenced to accrue when GMP first began to pay for services related to the clinical trial to our third-party clinical research organization, up to a maximum of $2 million. As of June 30, 2021, the clinical research organization has invoiced GMP’s affiliate for the entire $2 million, and the Company has accrued the $2 million as a convertible debt, including accrued interest thereon, under the terms of the GMP Note.
On August 13, 2021 the Company, the CEO, and GMP executed a letter of intent and a non-binding term sheet (the “Term Sheet”), which Term Sheet included certain binding terms relating to a standstill agreement and the issuance of a convertible promissory note (as more fully described below). The Term Sheet sets forth the terms and conditions pursuant to which the Company and GMP will, subject to shareholder approval, form a joint venture (the “JV”) with the objective to develop the Company’s product portfolio. Pursuant to the Term Sheet, the Company will contribute its product portfolio to the JV in consideration for a 35% ownership stake in the JV. As set forth above, the Term Sheet sets forth certain binding terms regarding (i) a 45-day standstill by the Company, and (ii) the issuance by the Company of a convertible note for $1.5 million to GMP to fund the OT-101 clinical trial study close-out. Although no assurances can be given, the Company and GMP currently intend to conduct an initial public offering of the JV, at a future date, on either the Hong Kong Exchange or other stock exchange. The formation of the JV is not assured as the formation of the JV is subject to approval of the Company’s shareholders and the execution of definitive agreements, among other conditions.
Entry into MOU and Agreement with Windlas
In August 2020, the Company executed a memorandum of understanding (the “MOU”) with Windlas for the development and commercialization of Artemisinin as a therapeutic pharmaceutical, nutraceutical and herbal supplement against COVID-19. The development of Artemisinin against COVID-19 is dependent on the successful completion of ARTI-19 clinical trial “Artemisinin Intervention trial against COVID-19” (“ARTI-19 trial”), which is being initiated globally in Africa, India, and South America. Windlas will be our manufacturing partner for the clinical trial batches as well as commercial batches. In September 2020, the Company executed the final MOU with Windlas regarding the development and commercialization of Artemisinin as therapeutic pharmaceutical, nutraceutical and herbal supplement against COVID-19.
The ARTI-19 trial has been cleared by India regulatory authorities and registered under CTRI. Three sites have been selected for the ARTI-19 trial, the approval of the requisite Institutional Review Boards has been obtained, and the respective staff has been trained into the protocol and electronic data capture systems. Additional sites will be added as the trial progresses. 120 patients were enrolled in the ARTI-19 trial during the year ended December 31, 2020. In January 2021 and subsequently in February 2021, the Company announced preliminary results for ARTIVedaTM, and final topline results in April 2021. As described above, ARTIVedaTM is the Company’s lead Ayurvedic drug against COVID-19 in India and being developed by the Company in partnership with Windlas. We expect final data available 6-8 weeks thereafter. Upon completion of the trial results, it is the Company’s objective to file for EUA with regulatory authorities around the world, including India, the United States, and the United Kingdom; discussions regarding EUA with several of these authorities have commenced. For more information, please see above under Company Overview.
Paycheck Protection Program
In April 2020, the Company received loan proceeds in the amount of $250,000 under the Paycheck Protection Program (“PPP”) which was established under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and is administered by the Small Business Administration (“SBA”). The PPP provides loans to qualifying businesses in amounts up to 2.5 times the average monthly payroll expenses and was designed to provide direct financial incentive to qualifying businesses to keep their workforce employed during the Coronavirus crisis. PPP Loans are uncollateralized and guaranteed by the SBA and are forgivable after a “covered period” (8 weeks or 24 weeks) as long as the borrower maintains its payroll levels and uses the loan proceeds for eligible expenses, including payroll, benefits, mortgage interest, rent and utilities. The forgiveness amount will be reduced if the borrower terminates employees or reduces salaries and wages more than 25% during the covered period. Any unforgiven portion is payable over 2 years if issued before, or 5 years if issued after, June 5, 2020 at an interest rate of 1% with payments deferred until the SBA remits the borrowers loan forgiveness amount to the lender, or if the borrower does not apply for forgiveness, 10 months after the covered period. PPP loans provide for customary events of default, including payment defaults, breach of representations and warranties, and insolvency events and may be accelerated upon occurrence of one or more of these events of default. Additionally, the PPP Loans do not include prepayment penalties.
The Company believes it met the PPP’s loan forgiveness requirements and on August 7, 2021 applied for forgiveness. When legal release is received from the SBA or lender, the Company will record the amount forgiven as forgiveness income within the other income section of its statement of operations. If any portion of the PPP loan is not forgiven, the Company will be required to repay that portion, plus interest, through the maturity date.
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The SBA reserves the right to audit any loan provided under the PPP, regardless of size. These audits may occur after the forgiveness has been granted. In accordance with the CARES Act, all borrowers are required to maintain their PPP loan documentation for six years after the loan was forgiven or repaid in full and to provide that documentation to the SBA upon request.
The balance outstanding on PPP Loan inclusive of interest accrued was $252,349 and $251,733 on June 30, 2021 and December 31, 2020, respectively.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expense during the reporting periods. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances at the time we make such estimates. Actual results and outcomes may differ materially from our estimates, judgments and assumptions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in the financial statements prospectively from the date of the change in estimate. Our significant accounting policies are more fully described in Note 2 to our Unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report.
We define our critical accounting policies as those accounting principles that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. We believe the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments are the following:
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. For the three months ended June 30, 2021 and 2020, there were no impairment losses recognized for long-lived assets.
Intangible Assets
The Company records its intangible assets at cost in accordance with ASC 350, Intangibles – Goodwill and Other. The Company reviews the intangible assets for impairment on an annual basis or if events or changes in circumstances indicate it is more likely than not that they are impaired. These events could include a significant change in the business climate, legal factors, a decline in operating performance, competition, sale or disposition of a significant portion of the business, or other factors.
Goodwill
Goodwill represents the excess of the purchase price of acquired business over the estimated fair value of the identifiable net assets acquired. Goodwill is not amortized but is tested for impairment at least once annually, at the reporting unit level or more frequently if events or changes in circumstances indicate that the asset might be impaired. The goodwill impairment test is applied by performing a qualitative assessment before calculating the fair value of the reporting unit. If, on the basis of qualitative factors, it is considered not more likely than not that the fair value of the reporting unit is less than the carrying amount, further testing of goodwill for impairment would not be required. Otherwise, goodwill impairment is tested using a two-step approach.
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The first step involves comparing the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit is determined to be greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount is determined to be greater than the fair value, the second step must be completed to measure the amount of impairment, if any. The second step involves calculating the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in step one. The implied fair value of the goodwill in this step is compared to the carrying value of goodwill. If the implied fair value of the goodwill is less than the carrying value of the goodwill, an impairment loss equivalent to the difference is recorded.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815 “Derivatives and Hedging”.
ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards.
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with ASC 470-20 “Debt – Debt with Conversion and Other Options.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Original issue discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.
ASC 815-40 “Derivatives and Hedging – Contracts in Entity’s Own Equity” provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.
Derivative Financial Instruments Indexed to the Company’s Common Stock
We have generally issued derivative financial instruments, such as warrants, in connection with our equity offerings. We evaluate the terms of these derivative financial instruments in order to determine their accounting treatment in our financial statements. Key considerations include whether the financial instruments are freestanding and whether they contain conditional obligations. If the warrants are freestanding, do not contain conditional obligations and meet other classification criteria, we account for the warrants as an equity instrument. However, if the warrants contain conditional obligations, then we account for the warrants as a liability until the conditional obligations are met or are no longer relevant. Because no established market prices exist for the warrants that we issue in connection with our equity offerings, we must estimate the fair value of the warrants, which is as inherently subjective as it is for stock options, and for similar reasons as noted in the stock-based compensation section above. For financial instruments which are accounted for as a liability, we report any changes in their estimated fair values as gains or losses in our Consolidated Statement of Income.
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Research and Development Expense
Research and development expense consist of costs we incur for the development of our investigational drugs and, to a lesser extent, for preclinical research activities. Research and development costs are expensed as incurred. Research and development expense include clinical trial costs, salaries and benefits of employees, including associated stock-based compensation, payments to clinical investigators, drug manufacturing costs, laboratory supplies and facility costs. Clinical trial costs are a significant component of our research and development expense, and these can be difficult to accurately estimate. Included in clinical trial costs are fees paid to other entities that conduct certain research and development activities on our behalf, such as clinical research organizations, or CROs. We estimate clinical trial expense based on the services performed pursuant to contracts with research institutions such as CROs and the actual clinical investigators. These estimates are based on actual time and expenses incurred by the CRO and the clinical investigators. Also included in clinical trial expense are costs based on the level of patient enrollment into the clinical trial and the actual services performed under the related clinical trial agreement. Changes in clinical trial assumptions, such as the length of time estimated to enroll all patients, rate of screening failures, patient drop-out rates, number and nature of adverse event reports and the total number of patients enrolled can impact the average and expected cost per patient and the overall cost of the clinical trial. Based on patient enrollment reports and services provided, we may periodically adjust estimates for the clinical trial costs. If we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed, the length of time for these services or the costs of these services, our actual expenses could differ from our estimates.
Share-Based Compensation
We record the estimated fair value of all share-based payments issued to employees and other service providers. Our share-based payments consist primarily of stock options. The valuation of stock options is an inherently subjective process, since market values are not available for any stock options in our equity securities. Market values are also not available on long-term, non-transferable stock options in other equity securities. With no market values on options to trade in our common stock and no comparable market values on any long-term non-transferable stock options, the process of valuing our stock options is even more uncertain and subjective. Accordingly, we use a Black-Scholes option pricing model to derive an estimated fair value of the stock options which we issue. The Black-Scholes option pricing model requires certain input assumptions, including the expected term of the options and the expected volatility of our common stock. Changes in these assumptions could have a material impact on the estimated fair value that we record for share-based payments that we issue. We determine the term of the options based on the simplified method, which averages the vesting period and the contractual life of the stock option. We determine the expected volatility based on the historical volatility of our common stock over a period commensurate with the option’s expected term. The Black-Scholes option pricing model also requires assumptions for risk-free interest rates and the expected dividend yield of our common stock, but we feel that these values are more objective and note that changes in these values do not have a significant impact on the estimated value of the options when compared to the volatility and term assumptions.
We are also required to estimate the level of award forfeitures expected to occur and record compensation expense only for those awards that are ultimately expected to vest. Accordingly, we perform a historical analysis of option awards that are forfeited prior to vesting, and record total stock option expense that reflects this estimated forfeiture rate.
Results of Operations
Comparison of the Results of Operations for the Three Months Ended June 30, 2021 to the Three Months Ended June, 2020
A comparison of the Company’s operating results for the three months ended June 30, 2021 and 2020, respectively, is as follows.
| June 30, 2021 | June 30, 2020 | Variance | ||||||||||
| Revenue | $ | - | $ | 1,400,000 | $ | (1,400,000 | ) | |||||
| Operating expense: | ||||||||||||
| Research and development | 956,814 | 482,142 | 474,672 | |||||||||
| General and administrative | 2,807,398 | 904,018 | 1,903,380 | |||||||||
| Total operating expense | 3,764,212 | 1,386,160 | 2,378,052 | |||||||||
| Loss from operations | (3,764,212 | ) | (1,386,160 | ) | 3,778,052 | |||||||
| Loss on conversion of debt | - | (41,469 | ) | (41,469 | ) | |||||||
| Change in the value of derivatives on debt | 630,174 | 746,809 | 116,635 | |||||||||
| Interest expense, net | (433,979 | ) | (137,089 | ) | 296,890 | |||||||
| Net income (loss) before controlling interests | $ | (3,568,017 | ) | $ | 582,091 | $ | (4,150,108 | ) | ||||
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Net (Income) Loss
We recorded a net loss of approximately $3.6 million for the three months ended June 30, 2021, compared to a net income of approximately $0.6 million for the three months ended June 30, 2020. The increased loss of approximately $4.1 million for the three months ended June 30, 2021 as compared to the same period of 2020 was primarily due to lower revenues of $1.4 million recorded in the three months ended June 30, 2020 compared to no revenues in the same period of 2020; and higher operating expenses of approximately $2.4 million and reduced by lower interest expense of $0.3 million and reduced change in value of derivatives of $0.1 million.
Revenue
We did not record services revenue during the three months ended June 30, 2021 as compared to $1.4 million during the same period ended June 30, 2020. No service has been provided during the three months ended June 30, 2021. The services revenue was recorded from services provided to GMP during the period ended June 30, 2020 in connection with the development of OT-101 for COVID-19 of $900,000, and $500,000 from Autotelic Bio.
Research and Development Expenses
Research and development (“R&D”) expenses increased by approximately $0.5 million for the three months ended June 30, 2021 compared to the same period in 2020. The higher R&D cost was primarily due to higher personnel expenses of approximately $0.1 million, and higher expenses related to clinical trials of approximately $0.4 million.
As a result of our mergers with Oncotelic, Inc. and PointR, we expect to increase research and development activities, including the initiation of new clinical trials including those for COVID-19, and therefore believe that research and development expenses will increase for the remainder of 2021 compared to research and development expenses in 2020, subject to our continuing ability to secure sufficient funding to continue planned operations.
General and Administrative Expenses
General and administrative (“G&A”) expenses increased by approximately $1.9 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to the an increase of approximately $2.0 million in stock compensation expense incurred in connection with issuance of new warrants during the three months ended June 30, 2021, partially offset by lower compensation expenses of $0.1 million.
As a result of our mergers with Oncotelic and PointR, we expect G&A expenses to increase for the remainder of 2020 in order to support our anticipated additional business development, fundraising, investor relations and administrative activities, subject to our continuing ability to secure sufficient funding to continue planned operations.
Loss on Conversion of Debt
During the three months ended June 30, 2020, we recorded a loss on conversion of debt by Peak One and TFK of approximately $42,000 related to the difference in fair value to the price at which the debt was converted. No similar expense was recorded during the same period in 2020.
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Change in Value of Derivatives
During the three months ended June, 2021, we recorded approximately $0.6 million change in value upon conversion of certain debt owed to Peak One and TFK, to liabilities as a derivative, as well as new debt converting to liabilities on the convertible promissory notes issued to our CEO and a bridge investor (collectively, the “Convertible Notes”). The Company recorded $0.7 million change during the same period in 2020. The Convertible Notes became convertible 180 days after issuance, and as such Peak One, TFK, the CEO and the bridge investor had the ability to convert that debt into equity at: (i) the variable conversion price of 65% of the Company’s lowest traded price after the first 180 days, or (ii) at the lower of $0.10 per share or 55% of the Company’s traded stock price under certain circumstances. This gave rise to a derivative feature within the debt instrument which resulted in the recording of a derivative liability and change in value of the derivative.
Interest Expense, Net
We recorded interest expense, including amortization of debt costs, of approximately $0.4 million for the three months ended June 30, 2021 primarily in connection with debt raised from convertible notes and the JH Darbie Financing, as compared to $0.1 million for the same period of 2020, in connection with debt raised from convertible notes during 2019. For more information on debt raised from convertible notes and the JH Darbie Financing, see Note 5 and Note 6 of the Unaudited Consolidated Financial Statements of this Quarterly Report.
Comparison of the Results of Operations for the Six Months Ended June 30, 2021 to the Six Months Ended June 30, 2020
A comparison of the Company’s operating results for the six months ended June 30, 2021 and 2020, respectively, is as follows.
| June 30, 2021 | June 30, 2020 | Variance | ||||||||||
| Revenue | $ | - | $ | 1,740,855 | $ | (1,740,855 | ) | |||||
| Operating expense: | ||||||||||||
| Research and development | 2,513,486 | 794,141 | 1,719,345 | |||||||||
| General and administrative | 3,288,607 | 3,583,168 | (294,561 | ) | ||||||||
| Total operating expense | 5,082,093 | 4,377,309 | 1,424,784 | |||||||||
| Loss from operations | (5,082,093 | ) | (2,636,454 | ) | (3,165,639 | ) | ||||||
| Loss on conversion of debt | (27,504 | ) | (166,067 | ) | 138,563 | |||||||
| Change in the value of derivatives on debt | 93,829 | 10,512 | 83,317 | |||||||||
| Interest expense, net | (954,886 | ) | (1,283,794 | ) | 328,908 | |||||||
| Net loss before controlling interests | $ | (6,690,654 | ) | $ | (4,075,803 | ) | $ | (2,614,851 | ) | |||
Net Loss
We recorded a net loss of approximately $6.7 million for the six months ended June 30, 2021, compared to a net loss of approximately $4.1 million for the three months ended June 30, 2020. The reduced loss of approximately $2.6 million for the six months ended June, 2021 as compared to the same period of 2020 was primarily due to lower revenues of approximately $1.7 million, higher operating expenses of approximately $1.4 million, partially offset by reduced interest expense, including acceleration of amortization of debt issuance costs related to the debt of approximately $0.3 million, reduced change in value of derivatives of $0.1 million and lower loss on conversion of debt of $0.1 million.
Revenue
We did not record services revenue during the six months ended June 30, 2021 as compared to $1.7 million during the same period ended June 30, 2020. The services revenue of $1.2 million was recorded from services provided to GMP during the period ended June 30, 2020 in connection with the development of OT-101 for COVID-19, and included reimbursement of costs incurred of approximately $41,000 and $0.5 million from Autotelic Bio.
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Research and Development Expenses
Research and development (“R&D”) expenses increased by approximately $1.7 million for the six months ended June 30, 2021 compared to the same period in 2020. The higher expenses related to clinical trials of approximately $1.4 million, higher personnel overhead costs of approximately $0.4 million and partially offset by lower operational costs of approximately $0.1 million.
As a result of our mergers with Oncotelic, Inc. and PointR, we expect to increase research and development activities, including the initiation of new clinical trials including those for COVID-19, and therefore believe that research and development expenses will increase for the remainder of 2021 compared to research and development expenses in 2020, subject to our continuing ability to secure sufficient funding to continue planned operations.
General and Administrative Expenses
General and administrative (“G&A”) expenses decreased by approximately $0.3 million for the six months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to the lower compensation costs of approximately $0.2 million and lower legal and professional costs of approximately $0.1 million.
As a result of our mergers with Oncotelic and PointR, we expect G&A expenses to increase for the remainder of 2020 in order to support our anticipated additional business development, fundraising, investor relations and administrative activities, subject to our continuing ability to secure sufficient funding to continue planned operations.
Loss on Conversion of Debt
During the six months ended June 30, 2021, we recorded a loss on conversion of debt by TFK of approximately $27 thousand related to the difference in fair value to the price at which the debt was converted, compared to a loss of $0.1 million during the same period in 2020 upon the conversion of debt by Peak One.
Change in Value of Derivatives
During the six months ended June 30, 2021, we recorded approximately $0.1 million change in value upon conversion of the debt to liabilities as a derivative as well as new debt converting to liabilities on the Convertible Notes. The Company recorded approximately $10,000 change in value during the same period in 2020. The Convertible Notes became convertible 180 days after issuance, and as such Peak One, TFK, the CEO and the bridge investor had the ability to convert that debt into equity at: (i) the variable conversion price of 65% of the Company’s lowest traded price after the first 180 days, or (ii) at the lower of $0.10 per share or 55% of the Company’s traded stock price under certain circumstances. This gave rise to a derivative feature within the debt instrument which resulted in the recording of a derivative liability and change in value of the derivative.
Interest Expense, Net
We recorded interest expense, including amortization of debt costs, of approximately $1.0 million for the six months ended June 30, 2021 primarily in connection with debt raised from convertible notes and the JH Darbie Financing, as compared to $1.3 million for the same period of 2020, in connection with debt raised from convertible notes during 2019.
Liquidity, Financial Condition and Capital Resources ($s in ‘000’s)
| June 30, 2021 | December 31, 2020 | |||||||
| Cash | $ | 461 | $ | 474 | ||||
| Working capital | (13,431 | ) | (10,567 | ) | ||||
| Stockholders’ Equity | 9,585 | 12,481 | ||||||
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The Company has experienced net losses every year since inception and as of June 30, 2021 had an accumulated deficit of approximately $27.7 million. As of June 30, 2021, the Company had approximately $0.5 million in cash, and current liabilities of approximately $14.1 million. Of the approximately $14.1 million in current liabilities, approximately $2.0 million was debt for conducting clinical trials for OT-101 from GMP, and $2.6 million related to contingent liability to issue Common Stock of the Company to PointR shareholders upon achievement of certain milestones (see Note 1 of our Annual Report on Form 10K for the year ended December 31, 2020 filed with the SEC on April 15, 2021). The Company does not expect to generate any meaningful revenue from product sales in the near future and expects to incur additional operating losses over the next several years, primarily as a result of the Company’s plans to continue clinical trials for its investigational drugs. The Company’s limited capital resources, history of recurring losses and uncertainties as to whether the Company’s operations will become profitable raise substantial doubt about its ability to continue as a going concern. The financial statements contained in this report do not include any adjustments related to the recoverability of assets or classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
The principal source of the Company’s working capital deficit to date has been the issuance of convertible notes, a substantial part of which has been provided by officers and certain insiders. The Company will need to raise additional capital in order to fund its operations and continue development of product candidates. The Company is evaluating the options to further the development of the Company’s lead product candidate, OT-101 for both cancer and COVID-19, Artemisinin for COVID-19, developing AI technologies to support the COVID-19 therapies; in addition to evaluating the development pathway of its product candidates; OXi4503 and/or CA4P.
The Company anticipates raising substantial additional capital through the sale of equity securities and/or debt, but no other financing arrangements are in place at this time.
If the Company is unable to access additional funds when needed, it may not be able to continue the development of these investigational drugs and the Company could be required to delay, scale back or eliminate some or all of its development programs and operations. Any additional equity financing, if available, would be dilutive to the current stockholders and may not be available on favorable terms. Additional debt financing, if available, may involve restrictive covenants and could also be dilutive. The Company’s ability to access capital is not assured and, if access is not achieved on a timely basis, would materially harm the Company’s financial condition, the value of its Common Stock and its business prospects.
Cash Flows
| Six month ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities | $ | (2,465,917 | ) | $ | 258,940 | |||
| Net cash provided by financing activities | 2,453,183 | 320,000 | ||||||
| Increase (decrease) in cash | $ | (12,734 | ) | $ | 578,940 | |||
Operating Activities
Net cash used in operating activities was approximately $2.5 million for the six months ended June 30, 2021. This was due to the net loss of approximately $6.7 million, primarily offset by non-cash amortization of debt discounts and deferred financing costs of $0.7 million, non-cash stock compensation costs on fair value of the warrants issued during the three months ended June 30, 2021 of $2.1 million and changes in operating assets and liabilities of approximately $1.3 million.
Net cash generated from operating activities was approximately $32 thousand for the six months ended June 30, 2020. This was due to the net loss of approximately $4.1 million, which was partially offset by non-cash charges of approximately $3.6 million, non-cash loss on conversion of debt of approximately $0.2 million and changes in operating assets and liabilities of $0.7 million.
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Financing Activities
For the six months ended June 30, 2021, net cash provided by financing activities was $2.5 million, due to a receipt of cash from the JH Darbie Financing of $1.6 million, sale of equity of $0.1 million, proceeds of a convertible note of $0.3 million and a short-term loans from certain bridge investors of $0.8 million, partially offset by repayments of debt of approximately $0.2 million.
For the six months ended June 30, 2020, net cash provided by financing activities $250,000 from the PPP Loan and $70,000 from receipt of cash from the Company’s CEO.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Effects of Inflation
We do not believe that inflation has had a material impact on our business, revenues or operating results during the periods presented.
Contractual Obligations
Our current drug development programs are based on a series of compounds called combretastatins, which we have exclusively licensed from Arizona State University, or ASU. If our current drug candidates are approved, we will be required to pay low to mid-single-digit royalties on future net sales of products associated with the ASU patent rights until these patent rights expire.
We also have an exclusive license from Bristol-Myers Squibb, or BMS, for certain patent rights to particular combretastatins, including CA4P. If CA4P is approved, we will be required to pay low-single-digit royalties on future net sales of products associated with the BMS patent rights until these patent rights expire.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our cash is maintained in U.S. dollar accounts. We have adopted a policy for the cash that we hold, and also for any cash equivalents and investments that we may hold, the primary objective of which is to preserve principal, while also maintaining liquidity to meet our operating needs and maximize yields to the extent possible. Although our investments can be subject to credit risk, we follow procedures to limit the amount of credit exposure in any single issue, issuer or type of investment. Our investments are also subject to interest rate risk and would be likely to decrease in value if market interest rates increase. However, due to the generally conservative nature of our investments and relatively short duration, we believe that interest rate risk is mitigated.
Although we may from time to time manufacture drugs and conduct preclinical or clinical trials outside of the United States, we believe our exposure to foreign currency risk to be immaterial.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. In designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.
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As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”) conducted an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our CEO and our CFO each concluded that our disclosure controls and procedures are not effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to our management, including our CEO and our CFO, as appropriate to allow timely decisions regarding required disclosure.
Material Weaknesses in Internal Control over Financial Reporting
Management conducted an assessment of the effectiveness of our internal control over financial reporting as of June 30, 2021 based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Registrant’s internal control over financial reporting as of June 30, 2021 was not effective as a result of certain material weaknesses.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
The ineffectiveness of our internal control over financial reporting was due to the following material weaknesses which are observed in many small companies with a small number of accounting and financial reporting staff:
| ● | Lack of formal policies and procedures; |
| ● | Lack of a functioning audit committee and independent directors on the Company’s board of directors to oversee financial reporting responsibilities; |
| ● | Inadequate or lack of segregation of duties; |
| ● | Lack of dedicated resources and experienced personnel to design and implement internal control procedures to support financial reporting objectives; |
| ● | Lack of qualified accounting personnel to prepare and report financial information in accordance with GAAP; and |
| ● | Lack of risk assessment procedures on internal controls to detect financial reporting risks on a timely manner. |
Management’s Plan to Remediate the Material Weaknesses
Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions planned include:
| ● | Continue to search for, evaluate and recruit qualified independent outside directors; |
| ● | Hire qualified accounting personnel to prepare and report financial information in accordance with GAAP; |
| ● | Identify gaps in our skills base and the expertise of our staff required to meet the financial reporting requirements of a public company; and |
| ● | Continue to develop policies and procedures on internal control over financial reporting and monitor the effectiveness of operations on existing controls and procedures. |
Changes in Internal Control over Financial Reporting
During the six months ended June 30, 2021, we continued to execute upon our planned remediation actions which are all intended to strengthen our overall control environment. We are evaluating hiring an external firm to help us with the remediation efforts. While we have made progress in our planned remediation efforts and we expect the Company to complete its planned execution of internal controls over financial reporting during the year ended December 31, 2021, we may not be able to achieve our objectives in completely remediating our existing weaknesses.
We are committed to maintaining a strong internal control environment and believe that these remediation efforts will represent significant improvements in our control environment. Our management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
In addition to the risk factor described below, for information about the risks and uncertainties related to our business, please see the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2020 filed on April 15, 2021. The risks described below and in our Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Our business may suffer from the severity or longevity of the COVID-19 Global Outbreak.
The COVID-19 is currently impacting countries, communities, supply chains and markets, as well as the global financial markets. To date, COVID-19 has not had a material impact on the Company, other than as set forth above. However, the Company cannot predict whether COVID-19 will have a material impact on our financial condition and results of operations due to understaffing, disruptions in government spending, among other factors. In addition, at this time we cannot predict the impact of COVID-19 on our ability to obtain financing necessary for the Company to fund its working capital requirements. In most respects, it is too early in the COVID-19 pandemic to be able to quantify or qualify the longer-term ramifications on our business, our customers and/or our potential investors.
There is no guaranty that the Company will enter into definitive agreements for the formation of a joint venture (the “Joint Venture”) with Golden Mountain Partners, LLC (“GMP”), or that the Company will benefit from entering into the Joint Venture with GMP.
As of the date of this Quarterly Report, definitive agreements have not been executed necessary to form the Joint Venture, as discussed in that certain Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on August 17, 2021 (the “Current Report”). Therefore, no assurances can be given that the Company will receive any of the benefits set in the Current Report regarding the Joint Venture, or that the Joint Venture will be formed at all. If the Joint Venture is formed, and definitive agreements are executed, no assurances can be given that: (i) the Joint Venture will consummate an initial public offering, (ii) the Joint Venture will obtain the value anticipated by management; or (iii) the Company will realize a return on its investment in the Joint Venture.
Item 2. Unregistered Sales of Equity Securities and Use Of Proceeds
In January 2021, the Company issued 657,000 shares of its Common Stock to TFK in connection with the partial conversion of their convertible promissory notes. For more information regarding the convertible promissory note issued to TFK, see Note 5 to the Unaudited Consolidated Financial Statements included in this Quarterly Report.
In March 2021, the Company converted 278,188 shares of the Company’s Series A Preferred Stock into 278,187,847 shares of its Common Stock pursuant to the terms of the Merger Agreement and PointR Merger Agreement. For more information regarding the Merger Agreement and the PointR Merger Agreement, see Note 1 to our Annual Report on form 10-K for the year ended December 31, 2020 filed with the SEC on April 15, 2021).
In May 2021, the Company issued 250,000 shares of its common stock to Peak One as compensation in connection with the EPL. These shares were subsequently registered by the filing of our Registration Statement on Form S-1 with the SEC.
In August 2021, the Company issued Note Purchase Agreements with Autotelic Inc., the CFO, and certain other accredited investors. Under the terms of the Note Purchase Agreements, the Company issued an aggregate of $698,500 in debt in the form of unsecured convertible promissory notes. Such Notes were issued against some of the short-term debt due as of June 30, 2021. Such unsecured convertible notes may be converted into shares of the Company’s common stock upon the conversion of the unsecured convertible note.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
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Item 5. Other Information
In August 2021, the Company, Golden Mountain Partners, LLC, and Vuong Trieu, the Company’s Chief Executive Officer signed a letter of intent and a term sheet (the “Term Sheet”) pursuant to which the Company is to receive a loan of $1.5 million in exchange for the issuance of a convertible promissory note, which may be convertible into shares of the Company’s Common Stock upon certain terms and conditions as to be negotiated by the parties at a later date.
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
In reviewing the agreements included as exhibits to this Quarterly Report, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the parties to the applicable agreement and:
| ● | should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; | |
| ● | have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; | |
| ● | may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and | |
| ● | were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Quarterly Report and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
The following exhibits are included as part of this Quarterly Report. A more complete list of previously filed Exhibits can be found with our Annual Report on Form 10K filed with the SEC on April 15, 2021:
| Incorporated by Reference | ||||||||||
| Exhibit Number |
Description | Form | Filing Date | Exhibit Number | Filed Herewith | |||||
| 10.1 | Amendment to the Oncotelic Therapeutics, Inc. 2015 Equity Incentive Plan | S-8 | 4/19/2021 | 10.1 | ||||||
| 10.2 | Equity Purchase Agreement by and between Oncotelic Therapeutics, Inc., and Peak One Opportunity Fund, L.P., dated May 3, 2021 | 8-K | 5/7/2021 | 10.2 | ||||||
| 10.3 | Registration Rights Agreement, by and between Oncotelic Therapeutics, Inc., and Peak One Opportunity Fund, L.P., dated May 3, 2020 | S-8 | 5/7/2021 | 10.1 | ||||||
| 10.4 | 8-K | 8/5/2021 | 10.1 | |||||||
| 10.5 | 8-K | 8/5/2021 | 10.2 | |||||||
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a). | x | ||||||||
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a). | x | ||||||||
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | x | ||||||||
| 101.1 | Interactive Data Files for the three and six months ended June 30, 2021 and June 30, 2020 | x | ||||||||
| 101.INS | XBRL Instance Document | x | ||||||||
| 101.SCH | XBRL Taxonomy Extension Schema | x | ||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | x | ||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | x | ||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | x | ||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | x | ||||||||
| * | Confidential treatment has been granted for portions of this Exhibit. Redacted portions filed separately with the Securities and Exchange Commission. |
| + | Management contract or compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ONCOTELIC THERPAEUTICS INC.
| By: | /s/ Vuong Trieu | |
| Vuong Trieu, Ph.D. | ||
| Chief Executive Officer and Director (Principal Executive Officer) | ||
| Date: | August 20, 2021 | |
| By: | /s/ Amit Shah | |
| Amit Shah | ||
Chief Financial Officer (Principal Financial and Accounting Officer) |
||
| Date: | August 20, 2021 |
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