9 METERS BIOPHARMA, INC. Management report and analysis of the financial situation and operating results. (Form 10-K)
The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by the forward-looking statements due to important factors and risks including, but not limited to, those set forth in the "Risk Factors" in Part I, Item 1A of this report. Overview 9 Meters is a clinical-stage company pioneering novel treatments for people with rare digestive diseases, gastrointestinal conditions with unmet needs, and debilitating disorders in which the biology of the gut is a contributing factor. Our pipeline includes drug candidates for short bowel syndrome ("SBS"), celiac disease ("CeD"), multi-system inflammatory syndrome in children ("MIS-C") and a robust pipeline of early-stage candidates for undisclosed rare diseases and/or unmet needs. Our current product development pipeline is described in the table below: [[Image Removed: nmtr-20211231_g2.jpg]]
Vurolenatide for the treatment of short bowel syndrome
Vurolenatide is a long-acting injectable glucagon-like-peptide-1 ("GLP-1") analogue being developed for SBS, a debilitating orphan disease with an underserved market. It affects up to 20,000 adults in the
U.S., with similar prevalence in Europe. Patients with SBS cannot absorb enough water, vitamins, protein, fat, calories and other nutrients from food. It is a severe disease with life-changing consequences, such as impaired intestinal absorption, diarrhea and metabolic complications. A portion of patients have life-long dependency on Parenteral Support (PS) to survive with risk of life-threatening infections and extra-organ impairment. Vurolenatide links exenatide, a GLP-1 analogue, to a long-acting linker technology and is designed specifically to address the gastric effects in SBS patients by slowing digestive transit time. The asset uses proprietary XTEN® technology to extend the half-life of exenatide, allowing for weekly to every other week dosing, thus potentially increasing convenience for patients and caregivers. Vurolenatide is patent-protected and has received orphan drug designation by the U.S. Food and Drug Administration("FDA"). We announced top-line results from our Phase 1b/2a clinical trial for vurolenatide in SBS in the fourth quarter of 2020. The study met its primary objective as vurolenatide demonstrated excellent safety and tolerability. In addition, vurolenatide demonstrated a clinically relevant improvement in total stool output (TSO) volume within 48 hours of first dose. The Phase 1b/2a clinical trial was an open-label, two-dose study evaluating the safety and tolerability of three escalating fixed doses of vurolenatide (50 mg, 100 mg, 150 mg) in 9 adults with SBS for 56 days. The trial was conducted at Cedars-Sinai Medical 55 -------------------------------------------------------------------------------- Center. Patients in each of the three cohorts received two subcutaneous doses two weeks apart with six weeks of subsequent follow-up. The study assessed the safety and tolerability of repeated doses on Days 1 and 15 at each dose level. Because reduced TSO volume and bowel movement frequency are correlated with improved intestinal absorption and potentially less need for intravenous supplementation for nutrition and hydration, these were key secondary objectives in the trial. The primary purpose of this open-label Phase 1b/2a trial was to assess the compound's safety and potential efficacy in order to inform future development.
Vulolenatide was generally safe and well tolerated: 17 treatment-related adverse events (TEAEs) were observed in 9 patients, 15 of which were mild, transient and self-limiting without further intervention. The majority of TEAEs were of gastrointestinal origin (nausea and vomiting).
Importantly, 8 of the 9 patients experienced meaningful declines in TSO following each dose, relative to a baseline output. The rapid onset of clinical improvements in stool volumes, as observed in all 9 patients having substantial reductions in stool output within 48 hours of the first dose, shows the potential for vurolenatide to address the primary problem of chronic malabsorptive diarrhea in SBS patients. Additionally, four of seven patients showed reductions in bowel movement frequency after one dose and five of six evaluable patients showed reductions in bowel movement frequency after the second dose. Furthermore, of the five patients on PS in the trial, two patients showed reduction in PS after each dose. Results of the short-form health survey quality of life instrument demonstrated directional improvement in multiple elements of health status over the course of the trial. The short-form health survey, or SF-36, is a set of generic, coherent and easily administered quality-of-life measures. These measures rely upon patient self-reporting and are now widely utilized by managed care organizations and by Medicare for routine monitoring and assessment of care outcomes in adult patients. We launched a multi-center, double-blind, double-dummy, randomized, placebo-controlled Phase 2 trial of vurolenatide for the treatment of SBS in the second quarter of 2021 using TSO as the primary efficacy outcome measure. The FDA has provided global anchor questions and specific guidance for performance of exit interviews to support clinical meaningfulness of observed efficacy. We anticipate topline results from the Phase 2 trial in the second quarter of 2022 followed by an End-of-Phase 2 meeting with the FDA. Shortly after our End-of-Phase 2 meeting with the FDA, we plan to initiate the Phase 3 trial. Vurolenatide has received Orphan Drug Designation from the FDA.
The FDA Office of Orphan Products Developmentgrants orphan designation to advance the evaluation of safe and effective drugs and biologics to treat, prevent or diagnose rare diseases affecting fewer than 200,000 people in the U.S.Under the Orphan Drug Act, orphan designation qualifies drug sponsors for development incentives conferred by the FDA, including tax credits for qualified clinical testing.
Larazotide for celiac disease
In 2019, we initiated a Phase 3 clinical trial ("CeDLara") for our co-lead drug candidate, larazotide, for the treatment of CeD. Larazotide has the potential to be a first-to-market therapeutic for CeD, an unmet medical need affecting an estimated 1% of the
U.S.population or more than 3 million individuals. Patients with CeD have no treatment alternative other than a strict lifelong adherence to a gluten-free diet, which is difficult to maintain and can be deficient in key nutrients. In CeD, larazotide is the only drug which has successfully met its primary clinical efficacy endpoint with statistical significance in a Phase 2b efficacy trial, which was comprised of 342 patients. We completed the End-of-Phase 2 meeting with the FDA for the treatment of CeD with larazotide and received Fast Track designation. Larazotide has been shown to be safe and effective after being tested in several clinical trials involving nearly 600 patients. We have over 100 active clinical trial sites in our Phase 3 trial with three treatment groups, 0.25 mg of larazotide, 0.5 mg of larazotide and a placebo arm. In addition, after consultation with the FDA, the analytical approach to the primary endpoint was modified to perform a continuous variable analysis instead of a responder analysis of the primary efficacy outcome. The new methodology enables a more capital-efficient study, with reduction in participants from 630 to 525. Site activation and patient enrollment have been impacted by the COVID-19 pandemic. We continue to monitor the evolving situation with COVID-19, which is likely to impact the pace of enrollment directly or indirectly over the next several months. Interim results are anticipated in the second quarter of 2022. During 2021, we engaged Beyond Celiac and The Celiac Disease Foundation, both leading non-profit patient advocacy groups, to further identify potential and appropriate patients for enrollment in the Phase 3 trial. We also launched a CeD trial awareness campaign utilizing a dedicated YouTube channel and initiated a social media geo-targeting CeDLara awareness campaign. In October 2021, we held a live/virtual investigators' 56 -------------------------------------------------------------------------------- meting directed toward enhancing enrollment efforts. We continue to evaluate and respond to trial execution challenges related to the ongoing COVID-19 pandemic and will implement additional measures as needed.
NM-003 GLP-2 long-acting
NM-003 is a proprietary long-acting glucagon-like-peptide ("GLP-2") receptor agonist with improved serum half-life compared with short-acting versions. On
December 9, 2020, we announced that the FDA has granted orphan drug designation to NM-003 for prevention of acute graft versus host disease. NM-003, also called teduglutide, utilizes proprietary XTEN technology to extend circulating half-life. NM-003 is currently undergoing a preclinical proof-of-concept study. Based on the results of this study, we intend to progress NM-003 through a clinical and regulatory pathway in an undisclosed orphan and rare GI indication.
NM-102 Tight Junction Microbiome Modulator
NM-102, a small molecule peptide, is being developed as a potential microbiome modulator and undergoing an indication selection process. NM-102 is a long-acting, degradation-resistant peptide, believed to be gut-restricted, and presumed to prevent gut microbial metabolites and antigens from trafficking into systemic circulation. We recently announced a collaboration with
Gustav Roussy, a leading cancer center in Villejuif, France, using NM-102. This collaboration adds to an initial 14-month preclinical research project initiated in March 2019, which focused on the relationship between intestinal microbiome composition and systemic responses to cancer treatments such as chemotherapy and immune checkpoint inhibitors.
Humanized Monoclonal Antibody NM-136
July 19, 2021, we entered into and closed an Asset Purchase Agreement with Lobesity LLC("Lobesity"), pursuant to which we acquired global development rights to a proprietary and highly specific humanized monoclonal antibody, now known as NM-136, that targets glucose-dependent insulinotropic polypeptide ("GIP"), as well as the related intellectual property (the "Lobesity Acquisition"). GIP is a hormone found in the upper small intestine that is released into circulation after food is ingested, and when found in high concentrations, can contribute to obesity and obesity-related disorders such as Prader-Willi Syndrome. NM-136 has been shown to prevent GIP from binding to its receptor, which in preclinical obesity models has been shown to significantly decrease weight and abdominal fat by reducing nutrient absorption from the intestine as well as nutrient storage without affecting appetite. We have initiated antibody profiling to support a preclinical development program and expect to have a pre-IND meeting by the end of 2022.
NM-004 is a double-cleaved mesalamine with an immunomodulator. NM-004 is currently undergoing a probability of technical, regulatory and intellectual property analysis in an undisclosed GI indication. Based on the results of that analysis, we intend to determine the viability of a path forward.
Agreement and proposed merger and reorganization with
October 6, 2019, we entered into an Agreement and Plan of Merger and Reorganization pursuant to which we agreed to acquire all of the outstanding capital stock of privately-held RDD Pharma, Ltd., an Israelcorporation ("RDD"), in exchange for common stock issued by us to the existing RDD shareholders (the "RDD Merger"). The RDD Merger closed on April 30, 2020. In connection with the RDD Merger, we changed our name from Innovate Biopharmaceuticals, Inc.to 9 Meters Biopharma, Inc.
RDD Merger Funding
April 29, 2020, we entered into a securities purchase agreement with various accredited investors, pursuant to which we agreed to issue and sell to the investors units ("Units") consisting of (i) one share of Series A Convertible Preferred Stock (the "Series A Preferred Stock") and (ii) one five-year warrant (the "Preferred Warrants") to purchase one share of Series A Preferred Stock (the "RDD Merger Financing"). On May 4, 2020, we closed the RDD Merger Financing and sold an 57 -------------------------------------------------------------------------------- aggregate of (i) 382,779 shares of Series A Preferred Stock, which converted into 38,277,900 shares of common stock on June 30, 2020, upon receipt of approval by our stockholders (the "Automatic Conversion"), and (ii) Preferred Warrants to purchase up to 382,779 shares of Series A Preferred Stock, which, following the Automatic Conversion, became exercisable for 38,277,900 shares of common stock. The exercise price of the Preferred Warrants was $58.94per share of Series A Preferred Stock, and following the Automatic Conversion, became $0.5894per share of common stock, subject to adjustments as provided under the terms of the Preferred Warrants. In addition, broker warrants covering 8,112 Units and broker warrants covering 10,899 shares of Series A Preferred Stock, which, following the Automatic Conversion, became exercisable for 2,712,300 shares of common stock, were issued in connection with the RDD Merger Financing. Gross proceeds from the RDD Merger Financing were approximately $22.6 millionwith net proceeds of approximately $19.2 millionafter deducting commissions and estimated offering costs. Naia Acquisition On May 6, 2020, we entered into and consummated a two-step merger with Naia Rare Diseases, Inc.in accordance with the terms of an Agreement and Plan of Merger (the "Naia Acquisition"). The consideration for the Naia Acquisition at closing consisted of $2.1 millionin cash and 4,835,438 shares of common stock valued at $2.2 million, plus the pre-payment of certain operating costs on behalf of Naiatotaling $0.1 million. Consideration for the Naia Acquisition also included potential future development and sales milestone payments worth up to $80.4 millionand royalties on net sales of certain products to which Naiahas exclusive rights by license. No contingent consideration for the NaiaAcquisition was recorded at the time of acquisition because the potential development and sales milestones were not deemed probable.
Acquisition of obesity
July 19, 2021, we completed an Asset Purchase Agreement with Lobesity, pursuant to which we acquired global development rights to a proprietary and highly specific humanized monoclonal antibody, NM-136, that targets GIP, as well as the related intellectual property. We paid a combination of cash and equity consideration in the form of a $5 millionupfront payment, as 40% cash and 60% equity (consisting of 2,417,211 shares of unregistered common stock priced at our 3-day volume weighted-price immediately prior to the closing), plus the right to contingent payments including certain potential worldwide regulatory and clinical milestone payments totaling $45.5 millionfor a single indication (with the total amount payable, if multiple indications are developed, not to exceed $58.0 million), global sales-related milestone payments totaling up to $50.0 million, and, subject to certain adjustments, a mid-single digit royalty on worldwide net sales. Financial Overview Since our inception, we have focused our efforts and resources on identifying and developing our research and development programs. We have not had any products approved for commercial sale and have incurred operating losses in each year since inception. Substantially all of our operating losses resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. To date, we have financed our operations primarily through public offerings of equity securities and private placements of convertible debt and equity securities. As of December 31, 2021, we had an accumulated deficit of $168.8 million. We incurred net losses of $36.8 millionand $61.5 millionfor the years ended December 31, 2021and 2020, respectively. We expect to continue to incur significant expenses and increase our operating losses for the foreseeable future, which may fluctuate significantly between periods. We anticipate that our expenses will increase substantially as and to the extent we:
•pursue research and development, including preclinical and clinical development of our existing and future product candidates, including larazotide and vurolenatide;
• experiencing delays in our clinical trials due to the COVID-19 pandemic;
• successfully develop the acquired clinical assets
• seek regulatory approval for our product candidates;
• commercialize any product candidate for which we obtain regulatory approval;
•maintain and protect our intellectual property rights;
• add operational, financial and management staff and information systems;
•pursue additional entry or exit licenses or similar strategic transactions; and
•continue to incur additional legal, accounting, regulatory, tax and other costs necessary to operate as a public company.
As such, we will need substantial additional funding to support our operating activities. Adequate funding may not be available to us on acceptable terms, or at all. We currently anticipate that we will seek to fund our operations through equity or debt financings, strategic alliances or licensing arrangements, or other sources of financing. Our failure to obtain sufficient funds on acceptable terms could have a material adverse effect on our business, results of operations and financial condition.
The effect of the COVID-19 pandemic and its associated restrictions, including the recent Omicron variant, has delayed and may continue to delay the expected development timelines and may increase the anticipated aggregate costs for our product candidates. Impacts from the COVID-19 pandemic include, but are not limited to, disruptions in the supply chain for clinical supplies, delays in the timing and pace of participant enrollment in clinical trials and lower than anticipated participant enrollment and completion rates due to COVID-19 clinical site closures, delays in the review and approval of our regulatory submissions by the FDA and other agencies with respect to our product candidates, and other unforeseen disruptions. Site activation and patient enrollment have been impacted by the COVID-19 pandemic and could continue to be impacted by the pandemic over the next several months. We are working closely with our clinical trial sites and product candidate manufacturers to ensure that patient safety and clinical supply of our product candidates are not adversely impacted by the pandemic, while also attempting to progress our trials and product candidate development as much as we can. In response to the COVID-19 pandemic, we put in place several safety measures for our employees, patients, healthcare providers and suppliers. These measures included, but were not limited to, substantially restricting travel, limiting access to our corporate office, including allowing employees to work remotely, providing personal protective equipment to employees, investigator sites and third-party vendors, implementing social distancing protocols, and coordinating safety protocols with our investigator sites. The ultimate impact resulting from the COVID-19 pandemic will depend, among other factors, on the extent of the pandemic in the regions with clinical trial sites, the timing and availability of the COVID-19 vaccines and length and severity of travel restrictions and other limitations ordered by governmental agencies. New and potentially more contagious variants could further affect the impact of the COVID-19 pandemic on our operations. The economic impact of the COVID-19 pandemic and its effect on capital markets and investor sentiment may adversely impact our ability to raise capital when needed or on acceptable terms to fund our development programs and operations. However, we closed public offerings and received net proceeds of approximately
$31.5 millionin April 2021and $32.0 millionin December 2020, which we plan to use to complete the Phase 2 trial vurolenatide in SBS and continue progression of our Phase 3 larazotide trial in CeD. In addition, we have a robust pipeline of early-stage product candidates, including recently acquired NM-136. We do not yet know the full extent of potential delays or impacts on our business, clinical trial activities, ability to access capital or on healthcare systems or the global economy as a whole due to the COVID-19 pandemic. However, these effects could have a material adverse impact on our business and financial condition. 59
Comparison of the years ended
The following table presents the main components of our results of operations for the years ended
Year Ended December 31, 2021 2020 $ Change % Change Operating expenses: Research and development
$ 21,995,291 $ 10,933,023 $ 11,062,268101 % Acquired in-process research and development 5,103,753 32,266,893 (27,163,140) (84) % General and administrative 9,662,875 10,519,955 (857,080) (8) % Warrant inducement expense - 7,157,887 (7,157,887) (100) % Total operating expenses 36,761,919 60,877,758 (24,115,839) (40) % Loss from operations (36,761,919) (60,877,758) 24,115,839 40 % Total other income (expense), net (17,481) (618,731) 601,250 97 % Net loss $ (36,779,400) $ (61,496,489) $ 24,717,08940 %
Research and development costs
Research and development expense for the year ended
December 31, 2021increased approximately $11.1 million, or 101%, as compared to the year ended December 31, 2020. The increase was primarily due to an increase of approximately $5.6 millionin clinical trial expenses associated with completion of the Phase 1b trial and launching of the Phase 2 trial in SBS. In addition, expenses associated with our other pipeline drugs increased by approximately $3.9 millionfor the Phase 3 trial in CeD, $1.7 millionfor IND-enabling activities for NM-102 and $1.0 millionfor preclinical development of NM-136. Personnel costs and benefits increased by approximately $1.5 milliondue to the addition of research and development personnel during the year ended December 31, 2021. These increases were offset by a decrease in research and development license fees of approximately $1.6 millionand a decrease in non-cash share-based compensation expense of approximately $1.0 million. The accelerated vesting of certain outstanding options upon closing of the RDD Merger in 2020 and additional options awarded in 2020, some of which were fully vested upon grant as a non-cash merger bonus, contributed to non-cash share-based compensation expense being higher in 2020. The table below summarizes our research and development expenses by program, license fees and other research and development expenses for the periods indicated. Year Ended December 31, 2021 2020 Research and development expenses: Larazotide - Celiac Disease $ 7,484,835$
Vurolenatide – Short bowel syndrome 7,419,098 1,772,388
NM-102 - Orphan Indication 1,728,513 - NM-136 - Obesity Disorder 1,020,748 - License fees 600,000
Other research and development costs 3,742,097 3,324,359
Total research and development expenditure
Acquired in-process research and development expense was approximately
$5.1 millionfor the year ended December 31, 2021as compared to $32.3 millionfor the year ended December 31, 2020. Acquired in-process research and development expense during the year ended December 31, 2021represents expenses associated with the Lobesity Acquisition and includes approximately $2.6 millionnon-cash acquired in-process research and development expense paid in equity ownership. Acquired in-process research and development expense during the year ended December 31, 2020represents expenses associated with the RDD Merger and NaiaAcquisition. Approximately $28.8 millionrepresents non-cash acquired in-process research and development expense paid in equity ownership.
General and administrative costs
General and administrative expense for the year ended
December 31, 2021decreased by approximately $0.9 million, or 8%, as compared to the year ended December 31, 2020. The decrease was primarily due to decreases in (i) non-cash stock compensation expense of approximately $1.3 million, (ii) personnel costs and benefits of approximately $0.2 million, (iii) costs associated with operating as a public company of $0.4 million, and (iv) professional fees of $0.3 million. The accelerated vesting of certain outstanding options upon closing of the RDD Merger in 2020 and additional options awarded in 2020, some of which were fully vested upon grant as a non-cash merger bonus, contributed to non-cash share-based compensation being higher in 2020. Personnel costs and benefits was higher in 2020 due to severance expense related to the termination of former Innovate employees upon closing of the RDD Merger. These decreases were offset by increases in general corporate fees, including patent protection of our intellectual property, market research and business development of approximately $1.3 million.
Warrant Induction Fee
During the year ended
December 31, 2020, we recognized warrant inducement expense of approximately $7.2 million. The warrant inducement expense represents the accounting fair value of consideration issued to induce conversion of the April Warrants and Placement Agent Warrants exchanged for 1.2 shares of our common stock per warrant and to induce the exercise of certain warrants in the Offer to Amend and Exercise, further described in "Note 1-Summary of Significant Accounting Policies" to the accompanying consolidated financial statements included in this Annual Report on Form 10-K. There was no warrant inducement expense during the year ended December 31, 2021.
Other income (expenses), net
Other expense, net, for the year ended
December 31, 2021, decreased by approximately $0.6 million, or 97%, as compared to the year ended December 31, 2020. The change in other expense consists of a decrease in interest expense of approximately $4.0 million, which includes the non-cash beneficial conversion feature of $2.2 millionassociated with our convertible note. This decrease was offset by the decrease in other income related to the prior year gain on fair value of warrant liabilities of approximately $2.6 millionand the gain on fair value of derivative liability of approximately $0.8 million.
Cash and capital resources
Sources of liquidity
December 31, 2021, we had cash and cash equivalents of approximately $47.0 million, compared to approximately $37.9 millionas of December 31, 2020. The increase in cash and cash equivalents was primarily due to the net proceeds of $31.5 millionreceived in the public offering of common stock that closed in April 2021. In addition, the Company received proceeds of approximately $9.2 millionfrom the exercise of warrants and approximately $0.3 millionfrom the exercise of stock options during the year ended December 31, 2021. These increases in cash were offset by expenditures for business operations, research and development and clinical trial costs, including the launch of the Phase 2 clinical trial in SBS and the Lobesity Acquisition. To date, we have not generated revenue from product sales. We do not know when, or if, we will generate any revenue from product sales. We expect to incur substantial expenditures in the foreseeable future for the continued development and clinical trials of our product candidates. We will continue to require additional financing to develop and eventually 61 -------------------------------------------------------------------------------- commercialize our product candidates. Our future liquidity and capital requirements will depend on a number of factors, including the outcome of our clinical trials, which could be delayed due to the ongoing COVID-19 pandemic, and our ability to complete the development and commercialization of our products. There are a number of variables beyond our control including the timing, success and overall expense associated with our clinical trials. Consequently, there can be no assurance that we will be able to achieve our objectives and we will need to seek additional funding. If we are unable to raise additional funds when needed, our ability to develop our product candidates will be impaired. We may also be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We continue to evaluate multiple dilutive and non-dilutive sources for future funding. If we raise additional funds through the issuance of equity securities, substantial dilution to our existing shareholders could occur. We have concluded that the prevailing conditions and ongoing liquidity risks faced by us raise substantial doubt about our ability as a going concern.
The following table presents the main sources and uses of cash for the years ended
Year Ended December 31, 2021 2020 Net cash (used in) provided by: Operating activities
$ (29,478,275) $ (19,409,786)Investing activities (2,430,641) (3,186,997) Financing activities 41,050,813 55,855,239
Net increase in cash and cash equivalents
Operating Activities For the year ended
December 31, 2021, net cash used in operating activities of approximately $29.5 millionprimarily consisted of a net loss of $36.8 million, offset by adjustments for non-cash share-based compensation of approximately $2.4 million, amortization of debt discount of less than $0.1 millionand non-cash in process research and development expense of approximately $2.6 million. In addition, the net change in operating assets and liabilities increased by approximately $2.2 million. For the year ended December 31, 2020, net cash used in operating activities of approximately $19.4 millionprimarily consisted of a net loss of $61.5 million, a non-cash gain of $2.6 millionfor the change in the fair value of the warrant liabilities and a non-cash gain of approximately $0.8 millionfor the change in fair value of the convertible note derivative liabilities. These decreases were offset by adjustments for non-cash share-based compensation of approximately $4.7 million, non-cash warrant inducement expense of $7.2 million, non-cash interest expense of approximately $1.8 million, a non-cash beneficial conversion feature of approximately $2.2 millionassociated with the conversion of convertible note principal and interest, and non-cash in process research and development expense of approximately $28.8 million. In addition, the net change in operating assets and liabilities increased by approximately $0.8 million.
For the year ended
December 31, 2021, net cash used in investing activities represents the purchase of property and equipment of approximately $12,000and the purchase of in-process research and development, net of assets received, of approximately $2.5 million. These cash outflows were offset by the maturity of our restricted investment of $75,000. Net cash used in investing activities for the year ended December 31, 2020represented the purchase of property and equipment of approximately $2,500and the purchase of in-process research and development, net of assets received, of approximately $3.2 million. 62 --------------------------------------------------------------------------------
For the year ended
December 31, 2021, net cash provided by financing activities of approximately $41.1 millionprimarily consisted of (i) proceeds of $34.5 millionfrom the public offering of our common stock that closed in April 2021, (ii) proceeds $9.2 millionfrom the exercise of warrants and (iii) proceeds of $0.3 millionfrom the exercise of stock options. These increases were offset by approximately $0.1 millionin debt repayments and approximately $2.9 millionin stock issuance costs. For the year ended December 31, 2020, net cash provided by financing activities of approximately $55.9 millionprimarily consisted of (i) $37.1 millionreceived from the sale of our common stock and warrants; (ii) proceeds of $22.6 millionfrom the issuance of preferred stock and warrants in the RDD Merger Financing, (iii) proceeds of $2.5 millionfrom the issuance of the unsecured convertible promissory note issued in January 2020and (iv) proceeds of approximately $2.5 millionfrom the exercise of warrants. These increases were offset by approximately $2.5 millionin debt repayments and approximately $6.4 millionin stock issuance costs.
Contractual obligations and commitments
July 2020, we entered into a four-year lease agreement for office space that expires on September 30, 2024. Base annual rent for the four-year lease period is $72,000with monthly rent payments of $6,000. We estimated the present value of the lease payments over the remaining term of the lease using a discount rate of 12%, which represented our estimated incremental borrowing rate. The two-year renewal option was excluded from the lease payments as we concluded the exercise of this option was not considered reasonably certain. Periodically, we enter into separation and general release agreements with former executives that include separation benefits consistent with the former executive's employment agreements. We recognized severance expense totaling $0.4 millionand $0.8 millionduring the years ended December 31, 2021and 2020, respectively. Severance payments are made in equal installments over 12 months from the date of separation. The accrued severance obligation in respect of former executives is approximately $0.4 millionas of December 31, 2021. We are obligated to make future payments to third parties under in-license agreements, including sublicense fees, royalties and payments that become due and payable on the achievement of certain development and commercialization milestones. In general, the amount and timing of sub-license fees and the achievement and timing of development and commercialization milestones are not probable and estimable, and as such, these commitments have not been included on the accompanying consolidated balance sheets. During the years ended December 31, 2021and 2020, we incurred development milestone fees of approximately $0.6 millionand $2.2 million, respectively. We also enter into agreements in the normal course of business with contract research organizations and other third parties with respect to services for clinical trials, clinical supply manufacturing and other operating purposes that are generally terminable by us with thirty to ninety days advance notice.
Off-balance sheet arrangements
Significant Accounting Policies and Use of Estimates
Use of estimates
Our management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of our consolidated financial statements 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 consolidated financial statements, as well as the reported expenses incurred during the reporting periods. Our estimates are based on our historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from 63 -------------------------------------------------------------------------------- other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.
Critical accounting policies
While our significant accounting policies are more fully described in the notes to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements and understanding and evaluating our reported financial results. Areas of our consolidated financial statements where estimates may have the most significant effect include acquired in-process research and development, accrued expenses, share-based compensation, income taxes and management's assessment of our ability to continue as a going concern. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from these estimates.
We have acquired and may in the future acquire, rights to develop and commercialize new drug candidates and/or other in-process research and development assets. The up-front acquisition payments, as well as future milestone payments associated with asset acquisitions that are deemed probable to achieve the milestones and do not meet the definition of a derivative, are expensed as acquired in-process research and development provided that the drug has not achieved regulatory approval for marketing, and, absent obtaining such approval, have no alternative future use. See "Note 3-Merger and Acquisition" to our consolidated financial statements for further discussion of acquired in-process research and development expense during the years ended
December 31, 2021and 2020. Accrued Expenses We incur periodic expenses such as cost associated with clinical trials and non-clinical activities, manufacturing of pharmaceutical active ingredients and drug products, regulatory fees and activities, fees paid to external service providers and consultants, salaries and related employee benefits and professional fees. We are required to estimate our accrued expenses, which involves reviewing quotations and contracts, identifying services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice monthly in arrears for services performed or when contractual milestones are met. We estimate accrued expenses as of each balance sheet date based on facts and circumstances known at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. Costs incurred in research and development of products are charged to research and development expense as incurred. Costs for preclinical studies and clinical trial activities are recognized based on an evaluation of the vendors' progress towards completion of specific tasks, using data such as patient enrollment, clinical site activations or information provided by vendors regarding the actual costs incurred. Payments for these activities are based on the terms of individual contracts and payment timing may differ significantly from the period in which services are performed. We determine accrual estimates through reports from and discussions with applicable personnel and outside service providers as to the progress or state of clinical trials, or the services completed. Nonrefundable advance payments for goods or services that will be used in future research and development activities are expensed when the activity is performed or when the goods have been received, rather than when payment is made. The estimates of accrued expenses as of each balance sheet date are based on the facts and circumstances known at the time. Although we do not expect our estimates to be materially different from those actually incurred, our estimates and assumptions could differ significantly from actual costs, which could result in increases or decreases in research and development expenses in future periods when actual results are known.
We account for share-based compensation using the fair value method of accounting which requires the grant of stock options to be recognized in the consolidated statements of operations based on the option's fair value at the grant date. Share-based compensation expense is generally recognized on a straight-line basis over the requisite service period for awards with time-based vesting. For awards with performance conditions, compensation cost is recognized from the time achievement of the performance criteria is probable over the remaining expected term. 64 -------------------------------------------------------------------------------- We estimate the fair value of our stock-based awards using the Black-Scholes option pricing model, which requires the input of valuation assumptions, some of which are highly subjective. Key valuation assumptions include:
• Expected Dividend Yield: The expected dividend is assumed to be zero as we have never paid dividends and currently have no plans to pay dividends on our common stock.
•Expected stock price volatility: due to our limited historical trading data as a public company, the expected volatility is derived from the average historical volatilities of publicly traded companies within the same industry that we consider to be comparable to our business over a period approximating the expected term. In evaluating comparable companies, we consider factors such as industry, stage of life cycle, financial leverage, size and risk profile.
•Risk-free interest rate: the risk-free interest rate is based on
notes whose maturity is approximately equal to the expected term.
•Expected term: the expected term represents the period that the stock-based awards are expected to be outstanding. Due to limited history of stock option exercises, we estimate the expected term of stock options with service conditions based on the simplified method, which calculates the expected term as the average of the time-to-vesting and the contractual life of options. Pursuant to ASU 2018-07, we elected to use the contractual life of the option as the expected term for non-employee options. The expected term for performance options is the longer of the explicit or implicit service period.
No provision for federal and state income tax expense has been recorded for the years ended
December 31, 2021and 2020 due to the valuation allowance recorded against the net deferred tax asset and recurring losses. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of December 31, 2021, we had net operating loss carryforwards for federal, state and foreign income tax purposes of approximately $88,722,200, $88,568,100and $30,689,600respectively. Federal loss carryforwards of $3,551,900begin to expire in 2034 and $85,170,300of the federal losses carryforward indefinitely. The state loss carryforwards begin to expire in 2029. Foreign net operating losses carry forward indefinitely, and may be subject to limitation. As of December 31, 2021, we had contribution carryforwards of approximately $11,000, which begin to expire in 2023. In addition, we have federal research and development credits of $2,534,600, which begin to expire in 2038. The Internal Revenue Code of 1986, as amended, contains provisions which limit the ability to utilize the net operating loss and tax credit carryforwards in the case of certain events, including significant changes in ownership interests. If our net operating loss and tax credit carryforwards are limited, and we have taxable income which exceeds the permissible yearly net operating loss and tax credit carryforwards, we would incur a federal income tax liability even though net operating loss and tax credit carryforwards would be available in future years.
Recent accounting pronouncements
For more details on recent accounting pronouncements that we have adopted or that are currently being evaluated, refer to “Note 1 – Summary of Significant Accounting Policies – Recently Issued Accounting Standards” to the Consolidated Financial Statements below. – attachments included in this Annual Report on Form 10-K.
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