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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-31 · 139 added, 162 removed, 204 unchanged (60% of the section changed)

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Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in such forward-looking statements, including those discussed in the section “Risk Factors” in Part I — Item 1A of this Annual Report on Form 10-K.

We are a late-stage clinical biopharmaceutical company focused on developing novel cancer immunotherapeutics for a broad range of cancer indications.

Our product candidates currently include galinpepimut-S and nelipepimut-S.

We are a late-stage clinical biopharmaceutical company focused on the development of novel therapeutics for a broad range of cancer indications.

Our product candidates currently include galinpepimut-S, or GPS, a peptide immunotherapy directed against the Wilms tumor 1, or WT1, antigen, and GFH009, a highly selective small molecule cyclin-dependent kinase 9, or CDK9, inhibitor.

Galinpepimut-S, or GPS:

Our lead product candidate, galinpepimut-S, or GPS, is a cancer immunotherapeutic agent licensed from Memorial Sloan Kettering Cancer Center, or MSK, that targets the Wilms tumor 1, or WT1, protein, which is present in 20 or more cancer types.

Highly Novel and Engineered Immunotherapy targeting the WT1 Antigen

Our lead product candidate, GPS, is a cancer immunotherapeutic agent licensed from Memorial Sloan Kettering Cancer Center, or MSK, that targets the WT1 protein, which is present in 20 or more cancer types.

Based on its mechanism of action as a directly immunizing agent, GPS has potential as a monotherapy or in combination with other immunotherapeutic agents to address a broad spectrum of hematologic, or blood, cancers and solid tumor indications.

In January 2020, we commenced a Phase 3 trial, the REGAL study, for GPS monotherapy in patients with acute myeloid leukemia, or AML, in the maintenance setting after achievement of second complete remission, or CR2, following successful completion of second-line antileukemic therapy.

In January 2020, we commenced in the United States an open label randomized Phase 3 clinical trial, the REGAL study, for GPS monotherapy in patients with acute myeloid leukemia, or AML, in the maintenance setting after achievement of second complete remission, or CR2, following successful completion of second-line antileukemic therapy.

Patients are randomized to receive either GPS or best available treatment, or BAT.

We expect this study will be used as the basis for submission of a Biologics License Application, or BLA, subject to a statistically significant and clinically meaningful data outcome and agreement with the U.S.

Food & Drug Administration, or the FDA.

The REGAL study is expected to enroll approximately 116 patients at up to approximately 85 clinical sites primarily in the United States, Europe, and Asia with a planned interim safety and futility analysis after 80 events (deaths).

At the request of several investigators, we are planning to institute an Expanded Access Program that would allow qualified physicians who desire so to treat with GPS AML patients who do not meet currently required study entry criteria for the ongoing REGAL trial.

The access will be provided on a case by case basis to patients in the U.S.

and, potentially, Germany.

Patients treated under the Expanded Access Program will not be considered participants in the REGAL study.

We expect the program to commence in the second quarter of 2022.

In December 2018, we initiated a Phase 1/2 multi-arm "basket" type clinical study of GPS in combination with Merck & Co., Inc.’s anti-PD-1 therapy, Keytruda® (pembrolizumab).

The tumor type currently being studied is ovarian cancer (second or third line).

In February 2022, we announced that we had completed enrollment of 17 evaluable patients in this Phase 1/2 clinical trial.

Data from 15 patients is expected to be examined by mid-2022, with final data analysis of all 17 evaluable patients in the study by the end of 2022.

In February 2020, a Phase I open-label investigator-sponsored clinical trial of GPS, in combination with Bristol-Myers Squibb’s anti-PD-1 therapy, nivolumab (Opdivo®), in patients with malignant pleural mesothelioma, or MPM, who harbor relapsed or refractory disease after having received frontline standard of care multimodality therapy was commenced at MSK.

Completion of enrollment of a target total of 10 evaluable patients is expected during the second half of 2022.

GPS was granted Orphan Drug Product Designations from the FDA, as well as Orphan Medicinal Product Designations from the European Medicines Agency, or EMA, for GPS in AML, malignant pleural mesothelioma, or MPM, and multiple myeloma, or MM, as well as Fast Track Designation for AML, MPM, and MM from the FDA.

Nelipepimut-S or NPS

Nelipepimut-S, or NPS, is a cancer immunotherapy that targets human epidermal growth factor receptor 2, or HER2, expressing cancers.

We have presented data from Phase 2 studies of NPS in different types of breast cancers, which we considered to be the lead indication for NPS;

however, we do not currently plan to conduct or fund a Phase 3 program for NPS.

Following extensive efforts over the past four years to out-license NPS for further development in breast cancer, we have concluded that continued effort to seek a licensee for NPS for breast cancer will not result in a transaction which would provide value for the asset to us or our shareholders.

We are reviewing our options for NPS.

Financial Position

At December 31, 2021, we had cash and cash equivalents of $21.4 million.

We have incurred operating losses since inception and have not generated any product sales revenue or achieved profitable operations.

We incurred net losses of $20.7 million and $16.8 million for the years ended December 31, 2021 and 2020, respectively.

Our accumulated deficit as of December 31, 2021 was $138.6 million, and we expect to continue to incur substantial losses in future periods.

Our operating expenses will increase substantially as we continue to advance our product candidates assuming we receive sufficient funding to continue our ongoing studies and initiate our planned studies.

We anticipate that our expenses will increase as we:

• complete our ongoing and planned clinical trials, including the REGAL study;

• continue the research, development and scale-up of manufacturing capabilities to optimize products and dose forms for which we may obtain regulatory approval;

• scale up manufacturing for GPS, including manufacturing validation activities;

• maintain, expand and protect our global intellectual property portfolio;

• hire additional personnel, including clinical, manufacturing, and scientific personnel, sales and marketing personnel, and general and administrative personnel.

We intend to use our existing cash and cash equivalents for working capital and to fund the research and development of our product candidates.

We believe that our existing cash and cash equivalents as of December 31, 2021 will not be sufficient to fund our current planned operating expenses for at least the next twelve months from the date of issuance of these financial statements.

Food and Drug Administration, or the FDA.

The primary endpoint of the clinical trial is overall survival.

We plan to enroll approximately 125 to 140 patients at approximately 95 clinical sites in North America, Europe and Asia with a planned interim safety, efficacy and futility analysis after 60 events (deaths).

Under our current assumptions with respect to completion of enrollment and the estimated survival times for both the treated and control groups in the study, we believe, after discussions with our external statisticians and experts, that the planned interim analysis after 60 events (deaths) per the protocol will occur by the end of 2023 or early 2024 and the final analysis after 80 events will occur by the end of 2024.

Because these analyses are event driven, they may occur at a different time than currently expected.

In December 2020, we entered into an exclusive license agreement, or 3DMed License Agreement, with 3D Medicines Inc., or 3D Medicines, a China-based biopharmaceutical company developing next-generation immuno-oncology drugs, for the development and commercialization of GPS, as well as the Company’s next generation heptavalent immunotherapeutic GPS+, which is at preclinical stage, across all therapeutic and diagnostic uses in mainland China, Hong Kong, Macau and Taiwan, which we refer to as Greater China.

We have retained sole rights to GPS and GPS+ outside of Greater China.

In November 2022, we announced that we have agreed with 3D Medicines for 3D Medicines to participate in the REGAL study through the inclusion of approximately 20 patients from mainland China.

Such participation by 3D Medicines will trigger two development milestone payments totaling $13.0 million, which we expect to receive in the first half of 2023.

If the REGAL study meets its primary endpoint for efficacy and the Chinese regulatory authorities determine that the REGAL data is sufficient for approval in China, GPS could potentially reach the market in Greater China much earlier than we and 3D Medicines had anticipated when we entered into the license agreement in December 2020.

As of March 15, 2023, we have received an aggregate of $10.5 million in upfront and milestone payments under our license agreement with 3D Medicines and a total of $191.5 million in potential future development, regulatory and sales milestones, not including future royalties, remains under the license agreement, which milestones are variable in nature and not under our control.

In December 2018, pursuant to a Clinical Trial Collaboration and Supply Agreement, we initiated a Phase 1/2 multi-arm "basket" type clinical study of GPS in combination with Merck & Co., Inc.’s anti-PD-1 therapy, pembrolizumab (Keytruda).

In 2020, we, together with Merck, determined to focus on ovarian cancer (second or third line).

In November 2022, we reported topline clinical and initial immune response data from this study, which showed that treatment with the combination of GPS and pembrolizumab compared favorably to treatment with anti-PD-1 therapy alone in a similar patient population.

We plan to present final data from this study at a medical conference in the first half of 2023.

In February 2020, a Phase 1 open-label investigator-sponsored clinical trial of GPS, in combination with Bristol-Myers Squibb’s anti-PD-1 therapy, nivolumab (Opdivo), in patients with malignant pleural mesothelioma, or MPM, who harbor relapsed or refractory disease after having received frontline standard of care multimodality therapy was commenced at MSK.

Enrollment of a target total of 10 evaluable patients was completed at the end of 2022.

We expect to report topline data from this study in the first half of 2023.

GPS was granted Orphan Drug Product Designations from the FDA, as well as Orphan Medicinal Product Designations from the European Medicines Agency, or EMA, for GPS in AML, MPM, and multiple myeloma, or MM, as well as Fast Track Designation for AML, MPM, and MM from the FDA.

Highly Selective Next Generation CDK9 Inhibitor

On March 31, 2022, we entered into an exclusive license agreement, or the GFH009 Agreement, with GenFleet Therapeutics (Shanghai), Inc., or GenFleet, a clinical-stage biotechnology company developing cutting-edge therapeutics in oncology and immunology, that grants rights to us for the development and commercialization of GFH009, a highly selective small molecule CDK9 inhibitor, across all therapeutic and diagnostic uses worldwide, except for Greater China.

CDK9 activity has been shown to correlate negatively with overall survival in a number of cancer types, including hematologic cancers, such as AML and lymphomas, as well as solid cancers, such as osteosarcoma, pediatric soft tissue sarcomas, melanoma, endometrial, lung, prostate, breast and ovarian.

As demonstrated in preclinical and clinical data, to date, GFH009’s high selectivity has the potential to reduce toxicity as compared to older CDK9 inhibitors and other next-generation CDK9 inhibitors currently in clinical development and to potentially be more efficacious.

GFH009 is currently in a Phase 1 dose-escalating clinical trial in the United States and China.

We are evaluating both twice-a-week and once-a-week dosing, and the indications are relapsed/refractory AML, chronic lymphocytic leukemia, or CLL, small lymphocytic leukemia, or SLL, and lymphoma.

The primary goal of the trial is to establish the recommended Phase 2 dose and to assess safety.

We expect enrollment in this study to be completed in the first quarter of 2023 and we expect to determine the recommended Phase 2 dose and report analyzed data from the study early in the second quarter of 2023.

Following completion of the Phase 1 clinical trial and determination of the recommended Phase 2 dose, we intend to commence a Phase 2a clinical trial of GFH009 in combination with venetoclax and azacitidine in AML patients who failed or did not respond to treatment with venetoclax and azacitidine.

The primary endpoint of the Phase 2a clinical trial, which we expect to initiate during the second quarter of 2023, will likely be complete remission, or CR, rate and secondary endpoints will likely include progression free survival, OS and proportion of patients proceeding to transplant.

We are also planning to potentially commence a Phase 2 clinical trial of GFH009 in certain solid tumors and/or lymphoma in the third quarter of 2023 and are exploring various options with respect to clinical development for GFH009 in several pediatric indications.

Impact of COVID-19

The ongoing global COVID-19 pandemic, including the surges of cases from the Delta and Omicron variants, continues to disrupt our business operations and those of our contractors, contract research organizations, or CROs, suppliers, clinical sites, contract manufacturing organizations, or CMOs, and other partners.

The COVID-19 pandemic could affect the health and availability of our workforce and that of the third-parties we rely on, such as our CROs, clinical sites, CMOs, and other contractors as well as the governmental agencies, such as the FDA and health authorities in other countries which could delay or otherwise adversely impact the ability of such parties to fulfill their obligations.

We have implemented a return-to-work policy in compliance with federal, state and local requirements and guidance, which provides for a hybrid of remote and in-office work, and we operated on such a semi-virtual basis in 2021.

We are continuously monitoring the impact of the pandemic on our clinical development programs.

Our Phase 3 REGAL study is progressing, with the necessary work to activate additional sites in the United States and Europe continuing.

However, since the onset of the COVID-19 pandemic, we have observed that, at certain times and in certain instances, clinical site initiations, patient screening and patient enrollment have been delayed.

These delays are likely due to many reasons, which have been changing and evolving as the COVID-19 pandemic itself has evolved, including the prioritization of hospital resources towards the care of patients with COVID-19, delays in reviews and approvals by independent institutional review boards, or IRBs, and/or ethics committees at clinical sites, the challenges for clinicians and patients to comply with clinical trial protocols due to quarantines impeding patient movement or interrupting operations at sites, restrictions on travel and, most recently, inadequate staffing at clinical sites, supply chain-related delays, and materials shortages.

Throughout the United States, Europe and Asia, newly initiated sites have taken longer than expected to become fully operational and begin enrolling patients.

We have taken several steps to mitigate these actual and potential delays, including increasing the number of clinical sites from 50 to up to approximately 85, increasing the number of additional countries, both in Europe and Asia, in which sites were or will be initiated, allocating additional resources, including additional CROs and internal personnel, to the REGAL study, and making certain changes to the protocol for the study.

We are continuing to monitor each clinical site through our CROs as well as conducting direct outreach to investigators and study staff through site visits investigator meetings and other modes of communication.

Accordingly, due to the accumulation of these delays over the past two years, we have adjusted the projected timing of the REGAL study.

The full extent to which the COVID-19 pandemic will continue to directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain, subject to change and cannot be predicted with confidence, including the duration of the outbreak, the continued availability and efficacy of vaccines, new information which may emerge concerning the severity of COVID-19, the emergence of new variants of COVID-19, and the actions to contain COVID-19 or treat its impact, among others.

Public health crises such as pandemics or similar outbreaks could adversely impact our business.

Notably, the COVID-19 pandemic continues to evolve.

The extent to which COVID-19 impacts our operations or those of our collaborators, contractors, suppliers, CROs, clinical sites, CMOs and other material business relations and governmental agencies will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the ultimate duration of the outbreak, new information that will emerge concerning the severity of the virus and the actions to contain it or treat its impact, among others.

Previously, our clinical trial operations were directly and indirectly adversely impacted, and could continue to be directly and indirectly adversely impacted, by the COVID-19 pandemic.

While the potential economic impact brought by, and the ultimate duration of, the COVID-19 pandemic, have been, and continue to be, difficult to assess or predict, the spread of COVID-19 has caused a broad impact globally.

The extent to which the COVID-19 pandemic may impact our business continues to be highly uncertain and cannot be predicted with confidence.

Components of Results of Operations

License Revenue

License revenue consists of revenue recognized pursuant to our Exclusive License Agreement with 3D Medicines Inc., or 3DMed, dated December 7, 2020, or the 3DMed Agreement.

In the future, we may generate revenue from a combination of regulatory, development, and sales milestone payments and royalties in connection with the 3DMed Agreement.

License revenue consists of revenue recognized pursuant to the 3DMed License Agreement.

In the future, we may generate revenue from a combination of regulatory, development, and sales milestone payments and royalties in connection with the 3DMed License Agreement.

Research and Development

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• expenses incurred under agreements with CROs, as well as investigative sites and consultants that conduct our preclinical studies and clinical trials;

• manufacturing expenses;

• manufacturing and clinical drug supply expenses;

• outsourced professional scientific development services;

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This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of our clinical trials, which vary significantly over the life of a project as a result of many factors, including:

• the number of clinical sites included in the trials;

• the number and geographical location of clinical sites included in the trials;

• the length of time required to enroll suitable patients;

• the number of patients that ultimately participate in the trials;

• the number and geographical location of patients that ultimately participate in the trials;

• the number of doses patients receive;

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• the results of clinical trials;

• the expenses associated with manufacturing;

• the expenses associated with manufacturing and clinical drug supply;

• the receipt of marketing approvals;

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Research and development activities are central to our business model.

Cancer immunotherapy product candidates in the later stages of clinical development generally have higher development costs than those in the earlier stages of clinical development, primarily due to the increased size and duration of the later-stage clinical trials.

Oncology product candidates in the later stages of clinical development generally have higher development costs than those in the earlier stages of clinical development, primarily due to the increased size and duration of the later-stage clinical trials.

We expect our research and development expenses to increase for the foreseeable future as we conduct and complete our ongoing early and late-stage clinical trials and initiate additional clinical trials.

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If and when we believe that regulatory approval of a product candidate appears likely, we anticipate that an increase in general and administrative expenses will occur as a result of our preparation for commercial operations, particularly as it relates to the sales and marketing of such product candidate.

Cancer immunotherapy product commercialization may take several years and millions of dollars in development costs.

Oncology product commercialization may take several years and millions of dollars in development costs.

Acquired In-Process Research and Development

Acquired in-process research and development consists of costs to acquire or license product candidates from third parties for development with no alternative future use as the technology and know-how acquired are not currently commercially viable.

In-Process Research and Development Impairment Charge

Intangible assets are comprised of identifiable in-process research and development assets, or IPR&D, and are considered indefinite-lived assets and are assessed for impairment annually or more frequently if impairment indicators are present.

Our indefinite-lived intangible asset consisted of IPR&D of NPS that was acquired as part of the merger with Galena Biopharma, Inc.

Our indefinite-lived intangible asset consisted of IPR&D of nelipepimut-S, or NPS, that was acquired as part of the merger with Galena Biopharma, Inc.

in 2017, or the Merger.

We are not currently engaging in any clinical development activities for NPS nor do we currently have any plans to do so in the future.

The impairment charge recognized during the year ended December 31, 2021 was a result of the determination that the carrying amount of the IPR&D was not recoverable and was measured by the amount the carrying value exceeded its fair value.

Non-Operating Income (Expense), Net

Non-operating income (expense), net consists of changes in fair value of our warrant liability, changes in fair value of our contingent consideration, and interest income.

Non-Operating Income

Non-operating income consists of changes in fair value of our warrant liability, changes in fair value of our contingent consideration, and interest income.

Interest income primarily reflects the interest earned from our cash and cash equivalents.

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Operating expenses:

Cost of license revenue 200 — 200

Cost of revenue 100 200 (100)

Research and development 20,268 15,674 4,594

General and administrative 12,582 11,320 1,262

Acquired in-process research and development 10,000 — 10,000

In-process research and development charge — 5,700 (5,700)

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Loss from operations (41,950) (25,294) (16,656)

Non-operating income, net 4,358 208 4,150

Non-operating income 649 4,358 (3,709)

Loss before income taxes (41,301) (20,936) (20,365)

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For the year ended December 31, 2022, our net loss was $41.3 million compared with a net loss of $20.7 million for the year ended December 31, 2021 .

The increase of $3.9 million in net loss was primarily attributable to an increase in operating expenses of $14.0 million, driven by a $6.4 million increase in research and development expenses, a $5.7 million non-cash impairment charge of IPR&D, a $1.7 million increase in general and administrative expenses, and a $0.2 million increase in costs of license revenue.

These increases in operating expenses were partially offset by a $5.7 million increase in licensing revenue, a $4.2 million increase in non-operating income, and a $0.2 million increase in income tax benefit.

The increase of $20.6 million in net loss was primarily attributable to an increase in operating expenses of $10.1 million, a decrease in licensing revenue of $6.6 million, a decrease of $3.7 million in non-operating income, and a $0.2 million decrease in income tax benefit.

The increase in operating expenses were driven by a $10.0 million charge for acquired in-process research and development, a $4.6 million increase in research and development expenses, and a $1.3 million increase in general and administrative expenses, which were partially offset by a $5.7 million decrease in non-cash IPR&D impairment charges and a $0.1 million decrease in costs of license revenue.

Further analysis of the changes and trends in our operating results are discussed below.

License Revenue

License revenue for the year ended December 31, 2021 was $7.6 million compared to $1.9 million for the year ended December 31, 2020 and related to the out-licensing of intellectual property rights and transfer of technical know-how associated with the 3DMed Agreement for the development and commercialization of GPS in China, Hong Kong, Macau, and Taiwan.

License revenue for the year ended December 31, 2022 was $1.0 million and related to approval by China's NMPA of an IND application filed by 3D Medicines for a small Phase 1 clinical trial investigating safety of GPS in China.

License revenue of $7.6 million for the year ended December 31, 2021 related to the out-licensing of intellectual property rights and transfer of technical know-how associated with the 3DMed License Agreement for the development and commercialization of GPS in Greater China.

Cost of License Revenue

We incurred $0.2 million of sublicensing fees payable under our license from MSK in connection with the 3DMed Agreement during year ended December 31, 2021.

There was no cost of license revenue during the year ended December 31, 2020.

We incurred $0.1 million and $0.2 million of sublicensing fees payable under our license from MSK in connection with the 3DMed License Agreement during the years ended December 31, 2022 and 2021, respectively.

Research and Development

Research and development expenses were $20.3 million for the year ended December 31, 2022 compared to $15.7 million for the year ended December 31, 2021.

As compared to the prior period, the $6.4 million increase in research and development expenses was primarily attributable to a $4.3 million increase in clinical trial expenses primarily related to our ongoing Phase 3 REGAL clinical trial of GPS in AML, a $1.7 million increase in manufacturing and drug supply costs due to the ramp up of the manufacture of clinical trial materials and registration batches of GPS, a technology transfer to a new contract manufacturer, and clinical drug supply purchase costs in the European Union as we prepared to open sites and enroll patients in European Union countries for our Phase 3 REGAL clinical trial for GPS in AML, and a $0.5 million increase in personnel related expenses due to increased headcount.

These increases were partially offset by a $0.1 million decrease in other research and development expenses.

We anticipate that our research and development expenses will increase in the future as we continue to advance the development of GPS, including our Phase 3 REGAL clinical trial of GPS in AML.

As compared to the prior period, the $4.6 million increase in research and development expenses was primarily attributable to a $2.6 million increase in clinical trial expenses primarily related to our ongoing Phase 3 REGAL clinical trial of GPS in AML, a $1.4 million increase in personnel related expenses due to increased headcount, a $0.8 million increase in clinical and regulatory consulting expenses, and a $0.2 million increase in other research and development expenses.

These increases were partially offset by a $0.4 million decrease in manufacturing and clinical drug supply costs due to the timing of registration batches and a technology transfer in the prior period.

We anticipate that our research and development expenses will increase in the future as we continue to advance the development of GPS, including our Phase 3 REGAL clinical trial of GPS in AML, and the ongoing and planned clinical trials of GFH009.

General and Administrative

General and administrative expenses were $12.6 million for the year ended December 31, 2022 compared to $11.3 million for the year ended December 31, 2021.

The $1.7 million increase was primarily driven by a $1.1 million amortization expense of our contract asset associated with the 3DMed License Agreement and a $0.9 million increase in personnel related expenses, including a $0.3 million increase in non-cash stock-based compensation.

These increases were partially offset by a $0.3 million decrease in other general and administrative expenses.

The $1.3 million increase was primarily driven by a $1.9 million increase in personnel related expenses due to increased headcount including a $0.6 million increase in non-cash stock-based compensation, a $0.7 million increase in outside services and public company costs, and a $0.2 million increase in office and other general and administrative costs.

These increases were partially offset by a $1.1 million decrease related to amortization expense of our contract asset associated with the 3DMed License Agreement, and a $0.4 million decrease in legal fees.

Acquired In-Process Research and Development

During the year ended December 31, 2022, we recognized $10.0 million for the acquisition of in-process research and development related to the in-licensing of GFH009, a highly selective next generation CDK9 inhibitor, $4.5 million of which was paid in April 2022 and the remaining $5.5 million which is deemed probable to occur and expected to be paid by the end of the second quarter of 2023.

There was no acquired in-process research and development expense during the year ended December 31, 2021.

In-Process Research and Development Impairment Charge

There were no in-process research and development charges during the year ended December 31, 2022.

In the fourth quarter of 2021, we performed an annual impairment analysis of our IPR&D.

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The Company determined that the carrying amount of the IPR&D associated with NPS exceeded the fair value and recorded a $5.7 million impairment charge during the year ended December 31, 2021.

Non-Operating Income, Net

Non-operating income, net for the years ended December 31, 2021 and 2020, respectively, was as follows (in thousands):

Years Ended December 31,

Non-Operating Income

Non-operating income for the years ended December 31, 2022 and 2021, respectively, was as follows (in thousands):

Year ended December 31,

2022 2021 Change

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Interest income 317 6 311

Total non-operating income, net $ 4,358 $ 208 $ 4,150

The increase in our net non-operating income during the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to a $4.1 million increase in the change in fair value of contingent consideration, and a $0.1 million increase in the change in the fair value of liability-classified warrants to acquire shares of our common stock.

The change in estimated fair value of contingent consideration is driven by changes in discount periods and rates, changes in the timing of development milestones achieved and changes in probability assumptions with respect to the likelihood of achieving the various earnout criteria.

The $4.3 million change in fair value of the contingent consideration during the year ended December 31, 2021 related to the inability to execute an out-licensing transaction of NPS for further development in breast cancer and reflected adjusted assumptions of deferred development timelines and a lower probability of success, associated with earlier stages of clinical development, for the potential development of NPS in other oncology indications.

The change in the estimated fair value of our warrant liability was primarily due to the changes in our common stock price.

Interest income for the years ended December 31, 2021 and 2020 consists of nominal interest earned from our cash and cash equivalents.

Total non-operating income $ 649 $ 4,358 $ (3,709)

The decrease in our non-operating income during the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily due to a $4.0 million decrease in the change in fair value of contingent consideration, partially offset by a $0.3 million increase in interest income earned from our cash and cash equivalents.

The $4.3 million change in estimated fair value of the contingent consideration during the year ended December 31, 2021 related to the inability to execute an out-licensing transaction of NPS for further development in breast cancer and reflected adjusted assumptions of deferred development timelines and a lower probability of success, associated with earlier stages of clinical development, for the potential development of NPS in other oncology indications.

During the year ended December 31, 2022, we ceased all development activity of NPS and effort to out-license the asset in any indication and reduced the probability of success of achieving certain regulatory and net sales milestones to zero.

Interest income for the years ended December 31, 2022 and 2021 consists of interest earned from our cash and cash equivalents.

Interest income increased during the year December 31, 2022 primarily due to higher interest rates.

The change in estimated fair value of liability-classified warrants to acquire shares of our common stock during the years ended December 31, 2022 and 2021 related to changes in our common stock price and less time to expiration.

The changes in fair value of warrant liability and changes in fair value of contingent consideration are all non-cash in nature.

Income Tax Benefit

There was no income tax benefit recognized for the year ended December 31, 2022.

For the year ended December 31, 2021, we recognized an income tax benefit of $0.2 million, primarily related to the intangible asset impairment charge.

For the year ended December 31, 2020, we recognized a de minimis income tax benefit.

Liquidity and Capital Resources

We have not generated any revenue from product sales in the years ended December 31, 2021 and 2020.

Since inception, we have incurred net losses, used net cash from our operations, and have funded substantially all of our operations through proceeds from the sale of debt and equity securities.

We did not generate any revenue from product sales in the years ended December 31, 2022 and 2021.

Through December 31, 2022, we have only generated licensing revenue from the 3DMed License Agreement.

Since inception, we have incurred net losses, used net cash in our operations, and have funded substantially all of our operations through proceeds of the sale of equity securities and convertible notes.

Sources of Liquidity

To date, we have received $10.5 million in upfront payments and certain technology transfer and regulatory milestones from 3DMed, pursuant to its Exclusive License Agreement for GPS.

The participation of 3DMed in the REGAL Phase 3 clinical trial in China will trigger two development milestone payments totaling $13.0 million to us, which we expect to receive in the first half of 2023.

A total of $191.5 million in potential future development, regulatory, and sales milestones, not including future royalties, remains under the 3DMed License Agreement as of December 31, 2022, which milestones are all variable in nature and not under the Company's control.

On February 28, 2023, we consummated an underwritten public offering, or the February 2023 Offering, issuing 7,220,217 shares of common stock and accompanying common stock warrants to purchase an aggregate of 7,220,217 shares of common stock.

The shares of common stock and accompanying common stock warrants were sold at a combined price of $2.77 per share and accompanying common stock warrant.

Each common stock warrant sold with the shares of common stock represents the right to purchase one share of our common stock at an exercise price of $2.77 per share.

The common stock warrants are exercisable immediately and will expire on February 28, 2028, five years from the date of issuance.

The net proceeds from the February 2023 Offering were approximately $18.5 million, after deducting underwriting discounts and commissions and estimated offering expenses, and excluding the exercise of any warrants.

On April 5, 2022, we consummated an underwritten public offering, or the April 2022 Offering, issuing 4,629,630 shares of common stock and accompanying common stock warrants to purchase an aggregate of 4,629,630 shares of common stock.

The shares of common stock and accompanying common stock warrants were sold at a combined price of $5.40 per share and accompanying common stock warrant.

Each common stock warrant sold with the shares of common stock represents the right to purchase one share of our common stock at an exercise price of $5.40 per share.

The common stock warrants are exercisable immediately and will expire on April 5, 2027, five years from the date of issuance.

The net proceeds to us from the April 2022 Offering, after deducting the underwriting discounts and commissions and other offering expenses, and excluding the exercise of any warrants, were approximately $23.0 million.

On March 31, 2022, or the effective date of the GFH009 Agreement, we entered into the GFH009 Agreement with GenFleet pursuant to which GenFleet granted to us a sublicensable, royalty-bearing license to certain of its intellectual property to develop, manufacture, and commercialize GFH009 for the treatment, diagnosis or prevention of disease in humans and animals in all countries and territories of the world other than Greater China, or the GFH009 Territory.

GFH009 is currently in a Phase 1 clinical trial in the United States and China.

In consideration for the exclusive license, we agreed to pay GenFleet (i) an upfront and technology transfer fee of $10.0 million, of which $4.5 million was paid in April 2022, and $5.5 million is due upon the first day of the 15th calendar month following the effective date of the GFH009 Agreement, (ii) development and regulatory milestone payments for up to three indications totaling up to $48.0 million in the aggregate, and (iii) sales milestone payments totaling up to $92.0 million in the aggregate upon the achievement of certain net sales thresholds in a given calendar year.

We have also agreed to pay GenFleet single-digit tiered royalties based upon a percentage of annual net sales, with the royalty rate escalating based on the level of annual net sales of GFH009 in the GFH009 Territory ranging from the low to high single digits.

On April 16, 2021, the Company entered into a Controlled Equity Offering SM Sales Agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or the Agent.

From time to time during the term of the Sales Agreement, we may offer and sell shares of common stock having an aggregate offering price up to a total of $50.0 million in gross proceeds.

The Agent will collect a fee equal to 3% of the gross sales price of all shares of common stock sold.

Shares of common stock sold under the Sales Agreement are offered and sold pursuant to our registration statement on Form S-3, which was filed with the SEC on April 16, 2021 and declared effective on April 29, 2021.

During the year ended December 31, 2022, we sold 415,005 shares of common stock pursuant to the Sales Agreement at an average price of $2.60 per share for aggregate net proceeds of approximately $1.0 million.

Subsequent to December 31, 2022, the Company sol d 76,882 shares of common stock pursuant to the Sales Agreement at an average price of $3.59 for aggregate net proceeds of approximately $0.3 million.

There remains approximately $39.2 million available for future sales of shares of common stock under the Sales Agreement.

Other than the Sales Agreement, we currently do not have any commitments to obtain additional funds.

Funding Requirements

During the year ended December 31, 2022, we incurred a net loss of $41.3 million, used $23.8 million of cash in operations, and had an accumulated deficit of $179.9 million as of December 31, 2022.

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We expect that our cash and cash equivalents will not be sufficient to fund our current planned operations for at least the next twelve months from the date of issuance of these financial statements.

The $13.0 million of development milestone payments to us triggered by 3DMed's participation in the REGAL study are variable in nature and not under our control, and therefore are not included in our going concern assumption.

These conditions give rise to a substantial doubt over our ability to continue as a going concern.

This going concern assumption is based on management’s assessment of the sufficiency of our current and future sources of liquidity considering whether or not it is probable we will be able to meet our obligations as they become due for at least one year from the date our consolidated financial statements are available to be issued, and if not, whether our liquidation is imminent.

Our consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

We anticipate incurring additional losses until such time, if ever, that we can generate significant sales of any current or future product candidates in development.

On April 16, 2021, the Company entered into a Controlled Equity Offering SM Sales Agreement, or the Sales Agreement, with Cantor Fitzgerald & Co., or the Agent.

From time to time during the term of the Sales Agreement, we may offer and sell shares of common stock having an aggregate offering price up to a total of $50.0 million in gross proceeds.

The Agent will collect a fee equal to 3% of the gross sales price of all shares of common stock sold.

During the year ended December 31, 2021, we sold 786,927 shares of common stock pursuant to the Sales Agreement at an average price of $12.04 per share for aggregate net proceeds of approximately $9.0 million.

Other than the Sales Agreement, we currently do not have any commitments to obtain additional funds.

During the year ended December 31, 2021, we received $3.1 million from the exercise of warrants to acquire shares of common stock.

During the year ended December 31, 2021, we received $2.0 million from milestones achieved pursuant to the 3DMed Agreement.

In January 2022, we announced that an IND application for a small Phase I clinical trial investigating safety of GPS in China was accepted by China's National Medical Products Administration, or the NMPA.

On March 30, 2022, the IND was approved by the NMPA triggering a $1.0 million milestone payment to the Company which is expected to be received in the second quarter of 2022.

3D Medicines expects to initiate the trial by mid-2022 and will be responsible for all expenses related to executing the trial in China.

The current clinical development plan provides for initiation of a Phase II clinical trial following receipt of satisfactory safety data from the Phase I study;

the initiation of the Phase II study will also trigger a milestone payment to us which we expect will occur in the second half of 2022.

Total remaining potential milestone payments to us under the 3DMed Agreement between total $192.5 million, not including future royalties.

We will require substantial additional financing to develop any current or future product candidates.

Alternatively, we will be required to scale back our plans and place certain activities on hold.

Other than the Sales Agreement, we currently do not have any commitments to obtain additional funds, and may be unable to obtain sufficient funding in the future on acceptable terms, if at all.

If we are unable to obtain additional funding on a timely basis, we will be required to scale back our plans and place certain activities on hold.

Other than the Sales Agreement, we currently do not have any commitments to obtain additional funds.

Our management continues to evaluate different strategies to obtain the required funding for future operations.

These strategies may include utilizing the Sales Agreement, public and private placements of equity and/or debt securities, payments from potential strategic research and development collaborations, and licensing and/or marketing arrangements with pharmaceutical companies.

Additionally, we continue to pursue discussions with global and regional pharmaceutical companies for licensing and/or co-development rights to our late- and early-stage pipeline candidates.

These strategies may include utilizing the Sales Agreement, public and private placements of equity and/or debt securities and payments from potential strategic research and development collaborations.

Additionally, we continue to pursue discussions with global and regional pharmaceutical companies for licensing and/or co-development rights to our product candidates.

There can be no assurance that these future funding efforts will be successful.

If we cannot obtain the necessary funding, we will need to delay, scale back or eliminate some or all of our research and development programs;

consider other various strategic alternatives, including a merger or sale;

or cease operations.

Our future operations are highly dependent on a combination of factors, including (i) the timely and successful completion of additional financing, (ii) our ability to complete revenue-generating partnerships with pharmaceutical companies, (iii) the success of our research and development activities, (iv) the development of competitive therapies by other biotechnology and pharmaceutical companies, and, ultimately, (v) regulatory approval and market acceptance of our proposed future products.

Our future operations are highly dependent on a combination of factors, including (i) the timely and successful completion of any additional financings, (ii) our ability to complete revenue-generating partnerships with pharmaceutical and biotechnology companies, (iii) the success of our research and development activities, (iv) the development of competitive therapies by other biotechnology and pharmaceutical companies, and, ultimately, (v) regulatory approval and market acceptance of our product candidates.

Components of Cash, Cash Equivalents, Restricted Cash, and Restricted Cash Equivalents

The following table provides a reconciliation of the components of cash, cash equivalents, restricted cash, and restricted cash equivalents reported in our consolidated balance sheets to the total of the amount presented in the consolidated statements of cash flows (in thousands):

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The following table summarizes our cash flows from operating, investing, and financing activities for the years ended December 31, 2022 and 2021 (in thousands):

For the December 31,

Year ended December 31,

Net cash (used in) provided by:

Operating activities $ (23,809) $ (26,021)

Investing activities (4,500) —

Financing activities 24,079 12,074

Net increase (decrease) in cash, cash equivalents, restricted cash, and restricted cash equivalents $ (13,947) $ 28,025

Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents $ (4,230) $ (13,947)

Net Cash Flow from Operating Activities

Net cash used in operating activities of $23.8 million during the year ended December 31, 2022 was primarily attributable to our net loss of $41.3 million, and partially offset by various net non-cash charges of $11.9 million, and a change in our operating assets and liabilities of $5.6 million.

Net non-cash charges were driven by $10.0 million in expense related to the acquired in-process research and development, $1.7 million in non-cash stock compensation expense, and $0.2 million in other net non-cash charges.

The net change in our operating assets and liabilities is due to an increase in accrued expenses and other current liabilities of $3.6 million, an increase in accounts payable of $1.2 million and a decrease in prepaid expenses and other current assets of $1.3 million, which was partially offset by a decrease in operating lease liabilities of $0.5 million.

Net cash used in operating activities of $26.0 million during the year ended December 31, 2021 was primarily attributable to our net loss of $20.7 million and a change in our operating assets and liabilities of $7.6 million, which was partially offset by various net non-cash charges of $2.3 million.

The net change in our operating assets and liabilities is primarily attributable to a decrease in deferred revenue of $5.6 million, a decrease in accounts payable and accrued expenses and other current liabilities of $1.8 million, a $1.1 million increase in prepaid expenses and other assets primarily for clinical trial costs, and a $0.2 million decrease in operating lease liabilities, which were partially offset by a $1.1 million decrease in contract acquisition costs related to the out-licensing of intellectual property rights and transfer of technical know-how associated with the 3DMed License Agreement.

Net cash used in operating activities of $10.4 million during the year ended December 31, 2020 was primarily attributable to our net loss of $16.8 million.

This amount was offset by a change in our operating assets and liabilities of $5.9 million and various net non-cash charges of $0.5 million These noncash charges were comprised of $0.6 million in non-cash stock-based compensation expense and $0.2 million in other noncash charges.

These amounts were partially offset by a gain of $0.3 million from the decrease in the fair value of our contingent consideration liability.

The net change in our operating assets and liabilities is primarily attributable to an increase in deferred revenue related to our 3DMed License Agreement.

The net change in our operating assets and liabilities was primarily attributable to a decrease in deferred revenue of $5.6 million, a decrease in accounts payable and accrued expenses and other current liabilities of $1.8 million, a $1.1 million increase in prepaid expenses and other assets primarily for clinical trial costs, and a $0.2 million decrease in operating lease liabilities, which were partially offset by a $1.1 million decrease in contract acquisition costs related to the out-licensing of intellectual property rights and transfer of technical know-how associated with the 3DMed License Agreement.

Net Cash Used in Investing Activities

Net cash used in investing activities of $4.5 million during the year ended December 31, 2022 related to license payments made for the acquisition of in-process research and development under the GFH009 Agreement.

There was no cash used in investing activities during the year ended December 31, 2021.

Net Cash Flow from Financing Activities

We generated $24.1 million of net cash from financing activities for the year ended December 31, 2022, which was due to $23.0 million in aggregate net proceeds received from our underwritten public offering, which closed in April 2022, $1.0 million in aggregate net proceeds received from the issuance of common stock under the Sales Agreement, and $0.1 million in aggregate net proceeds received from the issuance of common stock under our employee stock purchase plan.

We generated $12.1 million of net cash from financing activities for the year ended December 31, 2021, which was primarily attributable to $9.0 million in net proceeds from the issuance of common stock under the Sales Agreement and $3.1 million in net proceeds from the exercise of warrants to acquire shares of common stock.

We generated $38.4 million of net cash from financing activities for the year ended December 31, 2020, which was primarily attributable to $29.9 million in net proceeds from the sale of common stock, common stock pre-funded warrants, and common stock warrants and $8.5 million in net proceeds from the exercise of warrants to acquire shares of common stock.

Contractual Obligations and Other Commitments

Our lease commitments reflect payments due for our lease agreement for office space at the premises that expire in December 2024 in New York, New York.

As of December 31, 2021, our contractual commitments for our lease was $1.5 million, which will be paid over the term of the lease.

The amount of lease commitments reflects payments due for additional premises under an amendment to our lease agreement that had not commenced as of December 31, 2021, and as a result, our future lease payments as of December 31, 2021 was $1.0 million.

On February 21, 2022, the Company took possession of the additional premises and the lease amendment commenced.

Our lease commitments reflect payments due under our lease agreement for our office space in New York, New York that expires in December 2024, including additional space which began in February 2022.

As of December 31, 2022, our contractual commitment for our lease was $1.1 million, which will be paid over the remaining term of the lease.

For additional information on our leases and timing of future payments, please read Note 8, Leases, to the consolidated financial statements included in this Form 10-K.

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Milestone payments may be required, contingent upon the successful achievement of an important point in the development life-cycle of the pharmaceutical product (e.g., approval of the product for marketing by a regulatory agency).

We also typically have to make royalty payments based upon a percentage of the sales of the product candidate in the event that regulatory approval for marketing is obtained.

We also typically will need to make royalty payments based upon a percentage of the sales of the product candidate in the event that regulatory approval for marketing is obtained.

Because of the contingent nature of these payments, they are not included in the table of contractual obligations.

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We enter into contracts in the normal course of business with various third parties for clinical trials, manufacturing, and other services and products for operating purposes.

These contracts provide for termination upon notice.

These contracts provide for termination

Payments due upon cancellation generally consist only of payments for services provided or expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation.

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Revenue Recognition

We record revenue in accordance with ASC Topic 606, Revenue From Contracts with Customers .

We record revenue in accordance with Accounting Standard Codification, or ASC, Topic 606, Revenue From Contracts with Customers .

This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.

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To date, we have not recognized any royalty revenue resulting from any of our licensing arrangements.

Valuation of Intangible Assets

Intangible assets are comprised of identifiable IPR&D acquired in conjunction with the completion of the Merger and are considered indefinite-lived intangible assets and are assessed for impairment annually during the fourth quarter of each fiscal year or more frequently if impairment indicators exist.

The identifiable intangible assets are measured at their respective fair values as of the acquisition date and may be subject to revision within the measurement period, which may be up to one year from the acquisition date.

The models used in valuing these intangible assets require the use of significant estimates and assumptions including but not limited to:

• estimates of revenue and operating profits related to products or product candidates;

• the probability of success for unapproved product candidates considering their stages of development;

• the time and resources needed to complete the development and approval of product candidates;

• the life of the potential commercialized products and associated risks, including the inherent difficulties and uncertainties in developing a product candidate such as obtaining FDA and other regulatory approvals;

• risks related to the viability of and potential alternative treatments in any future target markets.

We believe that the fair values used to record intangible assets acquired in connection with a business combination use information known and knowable, and are based upon reasonable estimates and assumptions given the facts and circumstances as of the related valuation dates.

Intangible assets related to IPR&D are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts.

If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time.

During the period the assets are considered indefinite-lived, they are not amortized but are tested for impairment on an annual basis as well as between annual tests if we become aware of any events or changes that would indicate that it is more likely than not that the fair value of the IPR&D is below their respective carrying amounts.

The fair value of our indefinite-lived intangible assets is dependent on assumptions such as the expected timing or probability of achieving the specified milestones, changes in projected revenues or changes in discount rates.

Significant judgment is employed in determining these assumptions and changes to our assumptions could have a significant impact on our results of operations in any given period.

When performing our impairment assessment, we calculate the fair value using the same methodology as described above.

If the carrying value of our IPR&D exceeds its fair value, then the intangible asset is written down to its fair value.

Changes in estimates and assumptions used in determining the fair value of our IPR&D could result in an impairment.

Impairment charges are recorded within our consolidated statements of operations.

Based on our most recent impairment assessment we incurred a $5.7 million impairment charge for the year ended December 31, 2021, mainly related to our determination that the execution of an out-licensing transaction of NPS for further development in breast cancer was unlikely and taking into account the deferred development timelines and a lower probability of success associated with earlier stages of clinical development for the potential development of NPS in other oncology indications.

See Note 4, Goodwill and Intangible Assets , to our consolidated financial statements included in this report.

Goodwill is the excess of the cost of an acquired entity over the net amounts assigned to tangible and intangible assets acquired and liabilities assumed.

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The fair value of net sales milestones is based on probability adjusted sales estimates and estimated discount rates and utilizes an option pricing model with Monte Carlo simulation to simulate a range of possible payment scenarios, and the average of the payments in these scenarios is then discounted to calculate present fair value.

During the fourth quarter of 2021, we changed the valuation technique of net sales milestones from a probability adjusted, discounted cash flow approach to the option pricing model with Monte Carlo simulation.

The discount rates are an estimated measure of credit risk associated with the years of expected payments based on the current development stage of the product candidate, our specific development plan for that product candidate adjusted for the probability of completing the stages of development and when the contingent payments would be triggered.

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Given our limited history as a publicly traded company following the Merger on December 29, 2017, we did not have sufficient trading data to calculate volatility based on our own common stock, and the expected volatility was calculated as of each grant date based on our own implied volatility in combination with a peer group of publicly traded companies.

The expected term of the stock options was determined based upon the simplified approach for employees, allowed under SEC Staff Accounting Bulletin No.

The expected term of the stock options was determined based upon the simplified approach for employees and non-employee directors, allowed under SEC Staff Accounting Bulletin No.

110, which assumes that the stock options will be exercised evenly from vesting to expiration.

As data associated with future exercises is obtained, the expected term of future grants will be adjusted accordingly.

For non-employee awards, we use the remaining contractual term.

We measure compensation for restricted stock units, or RSUs, based on the price of our shares at the grant date and we recognize the expense on a straight-line basis over the vesting period.

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As a result, if we revise such assessment, our stock-based compensation expense could change.

Recent Accounting Pronouncements Adopted

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740):Simplifying the Accounting for Income Taxes which, among other things, eliminates certain exceptions in the current rules regarding the approach for intra-period tax allocations and the methodology for calculating income taxes in an interim period, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.

The standard was adopted by the Company on January 1, 2021.

This new standard did not have a material impact on the Company's consolidated financial statements.

Recent Accounting Standards Not Yet Adopted

In August 2020, the FASB issued ASU No.

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity which, among other things, simplifies the accounting models for the allocation of proceeds attributable to the issuance of a convertible debt instrument.

As a result, after adopting the ASU’s guidance, entities will not separately present in equity an embedded conversion feature in such debt.

Instead, they will account for a convertible debt instrument wholly as debt, and for convertible preferred stock wholly as preferred stock (i.e., as a single unit of account), unless (i) a convertible instrument contains features that require bifurcation as a derivative under ASC 815 or (ii) a convertible debt instrument was issued at a substantial premium.

The standard becomes effective for the Company in the first quarter of 2024 and early adoption is permitted.

The Company is currently evaluating the potential impact of the adoption of this standard on its consolidated financial statements.

In May 2021, ASU No.

2021-04, Issuer’s Accounting for Certain Modifications of Exchanges of Freestanding Equity-Classified Written Call Options was issued to clarify the accounting for modifications or exchanges of freestanding equity-classified written call options, such as warrants to acquire shares of common stock, that remain equity classified after modification or exchange.

This ASU became effective for the Company on January 1, 2022 and is not expected to have a material impact on the consolidated financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis