VTV THERAPEUTICS INC. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth in Part I, Item 1A, "Risk Factors" in this Annual Report on Form 10-K. See the sections entitled "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements."
Company Overview
We are a clinical stage pharmaceutical company focused on treating metabolic and
inflammatory diseases to minimize their long- term complications and improve the
lives of patients. We have an innovative pipeline of first-in-class small
molecule clinical and pre-clinical drug candidates. Our lead program is TTP399,
an orally administered, small molecule, liver-selective glucokinase activator
("GKA") as an adjunctive therapy to insulin for the treatment of type 1 diabetes
("T1D").
Recent Developments
On July 27, 2022 , the Company appointed Paul Sekhri as President and Chief
Executive Officer (CEO) effective August 1, 2022 , and Mr. Sekhri was confirmed
as a member of the board of directors on August 9, 2022 . Mr. Sekhri brings
nearly 30 years of healthcare experience, including serving as President and CEO
of several healthcare companies, experience in several senior business
development and strategy roles and he has been a director on more than 30
private, public company and non-profit boards.
On December 13, 2022 . the Company announced the appointment of Steven Tuch as
Chief Financial Officer effective December 8, 2022 . Mr. Tuch brings more than 20
years of financial and business development experience with multiple life
science companies during various stages of financial planning and development.
The following table summarizes our drug candidates, their partnership status and their respective stages of development:
[[Image Removed: vtvt-20221231_g1.jpg]]Our Type 1 Diabetes Program - TTP399
The Company is planning two pivotal, placebo-controlled clinical trials of
TTP399 in subjects with T1D and has engaged with the FDA on the optimal clinical
trial designs for these studies. The studies will recruit a total of
approximately 1,000 patients across two studies, and at least one of the studies
will be one year of treatment. The FDA and the Company
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have agreed on the primary endpoint for the studies as the difference between placebo and TTP399-treated group in number of hypoglycemia events. We expect site-specific startup activities and patient enrollment for these pivotal studies to begin in the second half of 2023. InOctober 2021 , we announced positive results of a mechanistic study of TTP399 in patients with T1D. The study demonstrated that patients with T1D taking TTP399 experienced no increase in ketone levels relative to placebo during a period of acute insulin withdrawal, indicating no increased risk of ketoacidosis. Consistent with previous clinical studies, improved fasting plasma glucose levels and fewer hypoglycemic events were observed in the TTP399 treated group during the week of treatment prior to the insulin withdrawal test. The results of the mechanistic study provided additional evidence to support the idea that treatment with TTP399 will not increase the risk of diabetic ketoacidosis ("DKA") in patients with T1D. The data demonstrate that in contrast to agents such as SGLT2 inhibitors and GLP1RAs, TTP399 does not increase the risk of ketoacidosis when used as an adjunctive therapy to insulin in individuals with T1D. Moreover, these findings support prior studies that demonstrate that TTP399 improves glucose control and reduces hypoglycemia and suggests a protective effect of TTP399 against acidosis in people with T1D. Full study results were published in the Diabetes Obesity and Metabolism journal in conjunction with the 82nd American Diabetes Association Scientific Sessions onJune 6, 2022 .
In
G42 Investments
OnMay 31, 2022 , the Company announced entry into agreements that include a$25.0 million investment byG42 Investments AI Holding RSC Ltd. ("G42 Investments"). Under the terms of the agreements, the Company agreed to sell G42 Investments 10,386,274 shares of the Company's Class A common stock at an issue price of$2.41 per share, with$12.5 million paid in cash at closing, and the remaining amount of$12.5 million payable onMay 31, 2023 pursuant to a promissory note (the "G42 Promissory Note"). The agreements also provide for the potential issuance of$30.0 million in additional shares of Class A common stock to G42 Investments (or cash in lieu of such issuance at the option of G42 Investments) if the FDA approves the marketing and sale of a pharmaceutical product containing TTP399 as the active ingredient for treatment of T1D inthe United States . The agreements set forth the terms under which the Company and an affiliate of G42 Investments plan to collaborate on clinical trials for pharmaceutical products that contain TTP399 and grant G42 Investments an exclusive license to develop and commercialize pharmaceutical products containing TTP399 in a specified territory, principally consisting of theMiddle East ,North Africa andCentral Asia . OnFebruary 28, 2023 , the Company and G42 Investments amended the G42 Purchase Agreement and modified the G42 Promissory Note to accelerate the payment due under the note. Pursuant to the amendment, onFebruary 28, 2023 , the Company received$12.0 million , which reflected the original amount due under the G42 Promissory Note less a 3.75% discount, in full satisfaction of the note. CinRx Purchase Agreement OnJuly 25, 2022 , the Company announced entry into agreements that included a$10.0 million investment byCinPax, LLC ("CinPax"), a subsidiary ofCinRx Pharma, LLC ("CinRx"). Under the terms of the agreements, CinPax acquired 4,154,549 shares of Class A common stock of vTv at an issue price of approximately$2.41 per share, with$6.0 million paid in cash at closing, and the remaining amount of$4.0 million was paid to the Company onNovember 22, 2022 . The agreements also provide for the issuance of 1,200,000 warrants to CinRx to acquire additional shares of Class A common stock that become exercisable upon agreed vesting triggers (including FDA approval of TTP399). In addition to the investment, the Company and CinRx entered into aMaster Service Agreement whereby CinRx provides the Company with consulting, preclinical and clinical trial services, as enumerated in project proposals negotiated between the Company and CinRx from time to time.
Holding Company Structure
vTv Therapeutics Inc. is a holding company, and its principal asset is a controlling equity interest in vTvTherapeutics LLC ("vTv LLC"), the principal operating subsidiary. We have determined that vTv LLC is a variable-interest entity ("VIE") for accounting purposes and thatvTv Therapeutics Inc. is the primary beneficiary of vTv LLC because (through its managing member interest in vTv LLC and the fact that the senior management ofvTv Therapeutics Inc. is also the senior management of vTv LLC) it has the power to direct all of the activities of vTv LLC, which include those that most significantly impact vTv LLC's economic performance.vTv Therapeutics Inc. has therefore consolidated vTv LLC's results under the VIE accounting model in its consolidated financial statements. 51 --------------------------------------------------------------------------------
Table of Con tents Financial Overview Revenue To date, we have not generated any revenue from drug sales. Our revenue has been primarily derived from up-front proceeds and research fees under collaboration and license agreements. In the future, we may generate revenue from a combination of product sales, license fees, milestone payments and royalties from the sales of products developed under licenses of our intellectual property. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, milestone and other payments, and the amount and timing of payments that we receive upon the sale of our products, to the extent any are successfully commercialized. If we fail to complete the development of our drug candidates in a timely manner or obtain regulatory approval for them, our ability to generate future revenue and our results of operations and financial position will be materially adversely affected.
Research and Development Expenses
Since our inception, we have focused our resources on our research and development activities, including conducting preclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for our drug candidates. We recognize research and development expenses as they are incurred. Our direct research and development expenses consist primarily of external costs such as fees paid to investigators, consultants, central laboratories and contract research organizations in connection with our clinical trials, and costs related to acquiring and manufacturing clinical trial materials. Our indirect research and development costs consist primarily of cash and share-based compensation costs, the cost of employee benefits and related overhead expenses for personnel in research and development functions. Since we typically use our employee and infrastructure resources across multiple research and development programs such costs are not allocated to the individual projects. From our inception, including our predecessor companies, throughDecember 31, 2022 , we have incurred approximately$612.5 million in research and development expenses.
Our research and development expenses by project for the years ended
Years Ended
2022 2021 2020
Direct research and development expense:
TTP399 $ 9,611 $ 2,608 $ 917
HPP737 - 2,762 493
Azeliragon - 822 6,103
Other projects 563 717 683
Indirect research and development expense 2,183 6,415 2,819
Total research and development expense $ 12,357 $ 13,324 $ 11,015 We plan to continue to incur significant research and development expenses for the foreseeable future as we continue the development of TTP399 and further advance the development of our other drug candidates, subject to the availability of additional funding.
The successful development of our clinical and preclinical drug candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our clinical or preclinical drug candidates or the period, if any, in which material net cash inflows from these drug candidates may commence. This is due to the numerous risks and uncertainties associated with the development of our drug candidates, including:
•the uncertainty of the scope, rate of progress and expense of our ongoing, as well as any additional, clinical trials and other research and development activities;
•the potential benefits of our candidates over other therapies;
•our ability to market, commercialize and achieve market acceptance for any of our drug candidates that we are developing or may develop in the future;
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•future clinical trial results;
•our ability to enroll patients in our clinical trials;
•the timing and receipt of any regulatory approvals; and
•the filing, prosecuting, defending and enforcing of patent claims and other intellectual property rights, and the expense of doing so.
A change in the outcome of any of these variables with respect to the development of a drug candidate could mean a significant change in the costs and timing associated with the development of that drug candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a drug candidate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time with respect to the development of that drug candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits and related costs for employees in executive, finance, corporate development, human resources and administrative support functions. Other significant general and administrative expenses include accounting and legal services, expenses associated with obtaining and maintaining patents, cost of various consultants, occupancy costs and information systems.
Interest Income
Interest income represents non-cash interest income related to the imputed interest from our promissory note receivable, all of which are recognized in our Consolidated Statement of Operations using the effective interest method.
Interest Expense, Net
For periods prior toDecember 31, 2021 , interest expense primarily consisted of cash and non-cash interest expense related to our Venture Loan and Security Agreement (the "Loan Agreement") with Horizon Technology Finance Corporation andSilicon Valley Bank . The Loan Agreement was fully repaid and terminated inDecember 2020 . Cash interest on the Loan Agreement was recognized at a floating interest rate equal to 10.5% plus the amount by which the one-monthLondon Interbank Offer Rate ("LIBOR") exceeded 0.5%. Non-cash interest expense represented the amortization of the costs incurred in connection with the Loan Agreement, the allocated fair value of the warrants to purchase shares of our Class A common stock issued in connection with the Loan Agreement (the "Warrants") and the accretion of the final interest payments (which were required to be paid in cash upon maturity), all of which are recognized in our Consolidated Statement of Operations using the effective interest method.
Other Income (Expense), Net
Other income/expense primarily consists of unrealized gains or losses
attributable to the changes in fair value of the equity investments held in our
licensees as well the recognition of changes in fair value of the warrants to
purchase shares of our Class A common stock held by related parties.
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Results of Operations
In this section, we discuss the results of our operations for the year ended
December 31, 2022 , compared to the year ended December 31, 2021 . For a
discussion of the year ended December 31, 2021 , compared to the year ended
December 31, 2020 , please refer to Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Annual Report
on Form 10-K for the year ended December 31, 2021 .
Comparison of the years ended
The following table sets forth certain information concerning our results of operations for the periods shown:
(dollars in thousands) Year Ended Statement of operations data: 2022 2021 Change Revenue $ 2,018 $ 4,005 $ (1,987) Operating expenses: Research and development 12,357 13,324 (967) General and administrative 12,201 12,343 (142) Total operating expenses 24,558 25,667 (1,109) Operating loss (22,540) (21,662) (878) Interest income 352 1 351 Interest expense (15) (12) (3) Other (expense) income, net (2,670) 4,057 (6,727) Loss before income taxes (24,873) (17,616) (7,257) Income tax provision 200 115 85 Net loss before noncontrolling interest (25,073) (17,731) (7,342) Less: Net loss attributable to noncontrolling (5,909) (4,744) (1,165)
interest
Net loss attributable to
(6,177)
Revenues
Revenues were $2.0 million and $4.0 million for the years ended December 31,
2022 and 2021, respectively. The revenue recognized in 2022 related to the
increase to the transaction price for the license performance obligations under
the amended license agreement with Huadong due to the satisfaction of a
development milestone. The revenue recognized in 2021 related to the
reallocation of revenue to the license and technology transfer performance
obligation made in connection with the First Huadong Amendment as well as
increases to the transaction prices for the license performance obligations
under the Newsoara License Agreement and the Reneo License Agreement due to the
satisfaction of development milestones.
Research and Development Expenses
Research and development expenses were$12.4 million and$13.3 million for the years endedDecember 31, 2022 and 2021, respectively. The decrease in research and development expenses during this period of approximately$1.0 million , or 7.3%, was primarily driven by (i) decreased spending of$2.8 million related to the multiple ascending dose study for HPP737, due to its completion in 2021, (ii) decrease of$2.0 million for a license payment in 2021 to Novo Nordisk for the completion of TTP399 phase 2 studies in 2021, (iii) decreases in indirect and other costs of$2.4 million primarily related to payroll and severance costs due to the reduction in workforce, and (iv) and a decrease in clinical trial costs of$0.8 million for azeliragon which was driven by discontinuance of its development as a potential treatment of Alzheimer's disease in patients with type 2 diabetes, partially offset by increases in TTP399 drug related costs of$7.0 million and initial preparatory costs for the upcoming clinical trials.
General and Administrative Expenses
General and administrative expenses were$12.2 million and$12.3 million for the years endedDecember 31, 2022 and 2021, respectively. The decrease in general and administrative expenses during this period of approximately$0.1 million , or 1.2%, was primarily driven by (i) a decrease of$2.1 million in payroll costs due to the reduction in workforce, (ii) a decrease of$0.7 million in severance costs, and (iii) a decrease of$0.9 million in share-based expense, partially offset by (iv) an increase in legal expense of$2.3 million , and v) an increase of$1.3 million in other general and administrative costs. 54
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Interest Income
Interest income for the year endedDecember 31, 2022 is related to the imputed interest on the G42 promissory note. Interest income for the year endedDecember 31, 2021 , was insignificant. Interest Expense, Net
Interest expense for the years ended
Other Income / (Expense)
Other expense was$2.7 million for the year endedDecember 31, 2022 and was driven by an unrealized loss recognized related to the Company's investment in Reneo as well as the losses related to the change in the fair value of the outstanding warrants to purchase shares of our Class A common stock issued to related parties. Other income was$4.1 million for the year endedDecember 31, 2021 , and was driven by an unrealized gain recognized related to the Company's investment in Reneo as well as gains related to the change in fair value of the outstanding warrants held by a related party.
Liquidity and Capital Resources
Liquidity and Going Concern
As ofDecember 31, 2022 , we had an accumulated deficit of$265.5 million . Since our inception, we have experienced a history of negative cash flows from operating activities. We anticipate that we will continue to incur losses for the foreseeable future as we continue our clinical trials. Further, we expect that we will need additional capital to continue to fund our operations. As ofDecember 31, 2022 , we had cash and cash equivalents of$12.1 million . In addition to available cash and cash equivalents, we are evaluating several financing strategies to fund the on-going and future clinical trials of TTP399, including direct equity investments and the potential licensing and monetization of other Company programs. The Company received proceeds of$12.0 million from the G42 promissory note onFebruary 28, 2023 (See Note 20). Based on our current operating plan, we may rely on the remaining availability of$37.3 million under our Controlled Equity OfferingSM Sales Agreement (the "Sales Agreement") withCantor Fitzgerald & Co. ("Cantor Fitzgerald") pursuant to which we could offer and sell, from time to time shares of our Class A common stock (the "ATM Offering") and our ability to sell approximately 9.4 million shares of Class A common stock toLincoln Park Capital Fund, LLC ("Lincoln Park") pursuant and subject to the limitations of the purchase agreement (the "LPC Purchase Agreement"). However, the ability to use these sources of capital is dependent on a number of factors, including the prevailing market price of and the volume of trading in our Class A common stock. In addition to available cash and cash equivalents and available funds discussed above, we are seeking possible additional partnering opportunities for our GKA, GLP-1r and other drug candidates which we believe may provide additional cash for use in our operations and the continuation of the clinical trials for our drug candidates. We are evaluating several financing strategies to fund our planned and ongoing clinical trials, including direct equity investments and future public offerings of our common stock. The timing and availability of such financing are not yet known. We are currently in active discussions with respect to financing, partnering and licensing transactions for the further development of TTP399, but we may not be successful in completing such transactions. These factors raise substantial doubt about our ability to continue as a going concern. ATM Offering We have entered into the Sales Agreement withCantor Fitzgerald pursuant to which we may offer and sell, from time to time, through or toCantor Fitzgerald , as sales agent or principal, shares of our Class A common stock having an aggregate offering price of up to$68.5 million . We are not obligated to sell any shares under the Sales Agreement. Under the terms of the Sales Agreement, we will payCantor Fitzgerald a commission of up to 3% of the aggregate proceeds from the sale of shares and reimburse certain legal fees or other disbursements. As ofDecember 31, 2022 , we have sold$31.2 million worth of Class A common stock under the ATM Offering for net proceeds of$30.3 million , leaving$37.3 million available to be sold.
Lincoln Park Purchase Agreement
We have entered into the LPC Purchase Agreement, pursuant to which we have the
right to sell to Lincoln Park shares of the Company's Class A common stock
having an aggregate value of up to
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have issued 5,331,306 of these shares for gross proceeds of approximately
Over the 36-month term of the LPC Purchase Agreement, we have the right, but not the obligation, from time to time, in our sole discretion, to direct Lincoln Park to purchase up to 250,000 shares per day (the "Regular Purchase Share Limit") of the Class A common stock (each such purchase, a "Regular Purchase"). The Regular Purchase Share Limit will increase to 275,000 shares per day if the closing price of the Class A common stock on the applicable purchase date is not below$4.00 per share and will further increase to 300,000 shares per day if the closing price of the Class A common stock on the applicable purchase date is not below$5.00 per share. In any case, Lincoln Park's maximum obligation under any single Regular Purchase will not exceed$2,000,000 . The purchase price for shares of Class A common stock to be purchased by Lincoln Park under a Regular Purchase will be equal to the lower of (in each case, subject to the adjustments described in the LPC Purchase Agreement): (i) the lowest sale price for the Class A common stock on the applicable purchase date and (ii) the arithmetic average of the three lowest closing sales prices for the Class A common stock during the 10 consecutive trading days prior to the purchase date. If we direct Lincoln Park to purchase the maximum number of shares of Class A common stock that we may sell in a Regular Purchase, then in addition to such Regular Purchase, and subject to certain conditions and limitations in the LPC Purchase Agreement, we may direct Lincoln Park to make an "accelerated purchase" and an "additional accelerated purchase", each of an additional number of shares of Class A common stock which may not exceed the lesser of: (i) 300% of the number of shares purchased pursuant to the corresponding Regular Purchase and (ii) 30% of the total number of shares of the common stock traded during a specified period on the applicable purchase date as set forth in the LPC Purchase Agreement. The purchase price for such shares will be the lesser of (i) 97% of the volume weighted average price of the Class A common stock over a certain portion of the date of sale as set forth in the LPC Purchase Agreement and (ii) the closing sale price of the Class A common stock on the date of sale (an "Accelerated Purchase"). Under certain circumstances and in accordance with the LPC Purchase Agreement, we may direct Lincoln Park to purchase shares in multiple Accelerated Purchases on the same trading day. The LPC Purchase Agreement also prohibits us from directing Lincoln Park to purchase any shares of its Class A common stock if those shares, when aggregated with all other shares of Class A common stock then beneficially owned by Lincoln Park and its affiliates, would result inLincoln Park and its affiliates having beneficial ownership, at any single point in time, of more than 9.99% of the then total outstanding shares of Class A common stock as calculated pursuant to Section 13(d) of the Securities Exchange Act of 1934, as amended, and Rule 13d-3 thereunder. Cash Flows Year Ended December 31, 2022 2021 (dollars in thousands) Net cash used in operating activities$ (16,022) $ (19,308) Net cash used in investing activities (21) - Net cash provided by financing activities 14,754 26,976 Net (decrease)/increase in cash and cash equivalents$ (1,289) $ 7,668 Operating Activities For the year endedDecember 31, 2022 , our net cash used in operating activities decreased by$3.3 million from the prior year. The significant contributor to the change in cash used during the year was working capital changes offset by$6.8 million of cash received related to contract liabilities as a result from the excess of the fair value of the Class A common stock issued to G42 Investments.
Investing Activities
For the year endedDecember 31, 2022 , net cash used in investing activities was insignificant. No cash was provided by or used in investing activities for the year endedDecember 31, 2021 . Financing Activities For the year endedDecember 31, 2022 , net cash provided by financing activities was$14.8 million , consisting primarily of net proceeds from sales of our Class A common stock under the G42 Investments and CinRx Purchase 56
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Agreements. For the year endedDecember 31, 2021 , net cash provided by financing activities was driven by sales of shares of our Class A common stock during the year endedDecember 31, 2021 .
Future Funding Requirements
To date, we have not generated any revenue from drug product sales. We do not know when, or if, we will generate any revenue from drug product sales. We do not expect to generate revenue from drug sales unless and until we obtain regulatory approval of and commercialize any of our drug candidates. At the same time, we expect our expenses to continue or to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our drug candidates. In addition, subject to obtaining regulatory approval of any of our drug candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations. Based on our current operating plan, we believe that our current cash and cash equivalents and proceeds from the G42 promissory note of$12.0 million which was received onFebruary 28, 2023 (see Note 20) will allow us to meet our liquidity requirements through the end of the second quarter of 2023. We plan to finance our operations into the first quarter of 2024 through the use of our cash and cash equivalents and based on current operating plans, we are evaluating several financing strategies to fund the on-going and future clinical trials of TTP399, including direct equity investments and the potential licensing and monetization of other Company programs. The timing of any such transactions is not certain, and we may not be able to complete such transactions on acceptable terms, or at all. Even if we are able to complete such transactions, it may contain restrictions on our operations or cause substantial dilution to our stockholders. We have based our estimates on assumptions that may prove to be wrong, and we may use our available capital resources sooner than we currently expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our drug candidates, we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of our drug candidates. Additionally, we may rely on our ability to sell shares of our Class A common stock pursuant to the ATM Offering and LPC Purchase Agreement. However, the ability to use these sources of capital is dependent on a number of factors, including the prevailing market price of and the volume of trading in the Company's Class A common stock, and we may use our available capital resources sooner than we currently expect.
Our future capital requirements will depend on many factors, including:
•The progress, costs, results and timing of our planned trials to evaluate TTP399 as a potential adjunctive therapy for the treatment of type 1 diabetes;
•the willingness of the FDA to rely upon our completed and planned clinical and preclinical studies and other work, as the basis for review and approval of our drug candidates;
•the outcome, costs and timing of seeking and obtaining FDA and any other regulatory approvals;
•the number and characteristics of drug candidates that we pursue, including our drug candidates in preclinical development;
•the ability of our drug candidates to progress through clinical development successfully;
•our need to expand our research and development activities;
•the costs associated with securing, establishing and maintaining commercialization capabilities;
•the costs of acquiring, licensing or investing in businesses, products, drug candidates and technologies;
•our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;
•our need and ability to hire additional management and scientific and medical personnel;
•the effect of competing technological and market developments;
•our need to implement additional internal systems and infrastructure, including financial and reporting systems;
•the economic and other terms, timing and success of our existing licensing arrangements and any collaboration, licensing or other arrangements into which we may enter in the future;
•the amount of any payments we are required to make to
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•the impact and duration of the COVID-19 outbreak / pandemic.
Until such time, if ever, as we can generate substantial revenue from drug sales, we expect to finance our cash needs through a combination of equity offerings, debt financings, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. We currently have committed external source of funds available through the ATM Offering and LPC Purchase Agreement. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants that will further limit or restrict our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams or drug candidates or grant licenses on terms that may not be favorable to us. If we are unable to obtain additional funding, we could be forced to delay, reduce or eliminate our research and development programs or commercialization efforts, or pursue one or more alternative strategies, such as restructuring, any of which could adversely affect our business prospects.
Off-Balance Sheet Arrangements
As of
Discussion of Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with generally accepted accounting principles inthe United States ("GAAP"). The preparation of our 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 our financial statements, as well as the reported revenues and expenses during the reported periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors 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 other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in Note 2, "Summary of Significant Accounting Policies," to our audited financial statements, we believe that the following accounting policies related to revenue recognition, research and development, income taxes, and share-based compensation are the most critical for fully understanding and evaluating our financial condition and results of operations.
Basis of Presentation
The Company is a holding company, and its principal asset is a controlling equity interest in vTv LLC, the Company's principal operating subsidiary. The Company has determined that vTv LLC is a VIE for accounting purposes and that the Company is the primary beneficiary of vTv LLC because (through its managing member interest in vTv LLC and the fact that the senior management of the Company is also the senior management of vTv LLC) it has the power to direct all of the activities of vTv LLC, which include those that most significantly impact vTv LLC's economic performance. The Company has therefore consolidated vTv LLC's results under the VIE accounting model in its consolidated financial statements.
Revenue Recognition
The majority of our revenue results from its license and collaboration
agreements associated with the development of investigational drug products. We
account for a contract when it has approval and commitment from both parties,
the rights of the parties are identified, payment terms are identified, the
contract has commercial substance and collectability of consideration is
probable. For each contract meeting these criteria, we identify the performance
obligations included within the contract. A performance obligation is a promise
in a contract to transfer a distinct good or service to the customer. We then
recognize revenue under each contract as the related performance obligations are
satisfied.
The transaction price under the contract is determined based on the value of the
consideration expected to be received in exchange for the transferred assets or
services. Development, regulatory and sales milestones included in our
collaboration agreements are considered to be variable consideration. The amount
of variable consideration expected to be received is included in the transaction
price when it becomes probable that the milestone will be met. For contracts
with multiple
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performance obligations, the contract's transaction price is allocated to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate standalone selling price is the expected cost plus margin approach. Revenue is recognized over the related period over which we expect the services to be provided using a proportional performance model or a straight-line method of recognition if there is no discernable pattern over which the services will be provided. See Note 2 "Summary of Significant Accounting Policies", to the Consolidated Financial Statements in Item 15 of Part IV of this Annual Report on Form 10-K for further information regarding the adoption of ASC 606, "Revenue From Contracts With Customers" and the related changes in the recognition of revenue that were adopted onJanuary 1, 2018 .
Research and Development
Major components of research and development costs include cash compensation, costs of preclinical studies, clinical trials and related clinical manufacturing, costs of drug development, costs of materials and supplies, facilities cost, overhead costs, regulatory and compliance costs, and fees paid to consultants and other entities that conduct certain research and development activities on our behalf. Costs incurred in research and development are expensed as incurred. We record accruals based on estimates of the services received, efforts expended and amounts owed pursuant to contracts with numerous contract research organizations. In the normal course of business, we contract with third parties to perform various clinical study activities in the ongoing development of potential products. The financial terms of these agreements are subject to negotiation and variation from contract to contract and may result in uneven payment flows. Payments under the contracts depend on factors such as the achievement of certain events and the completion of portions of the clinical study or similar conditions. The objective of our accrual policy is to match the recording of expenses in our financial statements to the actual services received and efforts expended. As such, expense accruals related to clinical studies are recognized based on our estimate of the degree of completion of the event or events specified in the specific clinical study.
We record nonrefundable advance payments we make for future research and development activities as prepaid expenses. Prepaid expenses are recognized as expense in the statements of operations as we receive the related goods or services.
Income Taxes
In connection with the IPO,vTv Therapeutics Inc. was formed. FromAugust 1, 2015 ,vTv Therapeutics Inc. has been subject to corporate level income taxes. Prior toJuly 30, 2015 , our predecessor entities were taxed as partnerships and all their income and deductions flowed through and were subject to tax at the partner level.vTv Therapeutics Inc. holds vTv Units and is required to recognize deferred tax assets and liabilities for the difference between the financial reporting and tax basis of its investment in vTv LLC. Our income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management's best assessment of estimated future taxes to be paid. We are subject to income taxes in boththe United States and various state jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period in which the enactment date occurs. We recognize deferred tax assets to the extent we believe these assets are more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent results of operations. We record uncertain tax positions on the basis of a two-step process in which (1) we determine whether it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions meeting the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. 59
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Table of Con tents
Interest and penalties related to income taxes are included in the benefit (provision) for income taxes in our Consolidated Statement of Operations. We have not incurred any significant interest or penalties related to income taxes in any of the periods presented.
Share-Based Compensation
Compensation expense for share-based compensation awards issued is based on the fair value of the award at the date of grant, and compensation expense is recognized for those awards earned over the service period. The grant date fair value of stock option awards is estimated using the Black-Scholes option pricing formula. Expected volatility is based on the historical volatility of the Company's Class A common stock over the most recent period commensurate with the estimated expected term of the Company's stock options offering period which is derived from historical experience. The risk-free rate is based on theU.S. Treasury yield curve in effect at the time of grant. Due to a lack of historical exercise data, we estimate the expected life of our outstanding stock options using the simplified method specified under Staff Accounting Bulletin Topic 14.D.2. The fair value of restricted stock units ("RSU") grants are based on the market value of our Class A common stock on the date of grant. We also estimate the amount of share-based awards that are expected to be forfeited based on historical employee turnover rates.
Effect of Recent Accounting Pronouncements
See discussion of recent accounting pronouncements in Note 2, "Summary of Significant Accounting Policies", to the Consolidated Financial Statements in Item 15 of Part IV of this Annual Report on Form 10-K.
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