UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-36829
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive office) (Zip Code)
Registrant’s telephone number, including area code:
(646 ) 440-9100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
|
Non-accelerated filer ☐ |
Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
As of November 2, 2020, there were 55,233,798 shares of common stock, $0.01 par value per share, outstanding.
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PART I - FINANCIAL INFORMATION |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II - OTHER INFORMATION |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 6. |
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Forward-looking statements
This Quarterly Report on Form 10-Q for the Quarter ended September 30, 2020 (“Form 10-Q”), contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The words “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” and variations of such words and similar expressions are intended to identify such forward-looking statements, which may include, but are not limited to, statements concerning the following:
| • | federal, state, and non-U.S. regulatory requirements, including regulation of our current or any other future product candidates by the U.S. Food and Drug Administration (“FDA”) |
| • | the safety, effectiveness and timing of product candidates that we may develop, to treat Fanconi Anemia (FA), Leukocyte Adhesion Deficiency-I (LAD-I), Pyruvate Kinase Deficiency (PKD), Infantile Malignant Osteopetrosis (IMO) and Danon Disease; |
| • | the timing of and our ability to submit regulatory filings to the FDA and to obtain and maintain FDA or other regulatory authority approval, or other actions with respect to our product candidates; |
| • | our competitors’ activities, including decisions as to the timing of competing product launches, generic entrants, pricing and discounting; |
| • | whether safety and efficacy results of our clinical trials and other required tests for approval of our product candidates provide data to warrant progression of clinical trials, potential regulatory approval or further development of any of our product candidates; |
| • | our ability to develop, acquire and advance product candidates, enroll a sufficient number of patients into, and successfully complete, clinical studies, and our ability to apply for and obtain regulatory approval for such product candidates, within currently anticipated timeframes, or at all; |
| • | our ability to establish key collaborations and vendor relationships for our product candidates and any other future product candidates; |
| • | our ability to successfully develop and commercialize any technology that we may in-license or products we may acquire; |
| • | our ability to acquire additional businesses, form strategic alliances or create joint ventures and our ability to realize the benefit of such acquisitions, alliances or joint ventures; |
| • | unanticipated delays due to manufacturing difficulties, including the development of our direct manufacturing capabilities for our AAV programs, and any supply constraints or changes in the regulatory environment; |
| • | our ability to successfully operate in non-U.S. jurisdictions in which we currently or in the future may do business, including compliance with applicable regulatory requirements and laws; |
| • | uncertainties associated with obtaining and enforcing patents to protect our product candidates, and our ability to successfully defend ourselves against unforeseen third-party infringement claims; |
| • | anticipated trends and challenges in our business and the markets in which we operate; |
| • | our estimates regarding our capital requirements; |
| • | our ability to obtain additional financing and raise capital as necessary to fund operations or pursue business opportunities ; and |
| • | the continuing impact of the COVID-19 pandemic, including the scope thereof, on our business, operations, strategy, goals and anticipated milestones, including our ongoing and planned research and discovery activities, ability to conduct ongoing and planned preclinical studies and clinical trials, clinical supply of current or future drug candidates. |
Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make or enter into.
You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results, performance or achievements may be materially different from what we expect. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.
Rocket Pharmaceuticals, Inc.
(in thousands, except per share amounts)
September 30, |
December 31, |
|||||||
2020 |
2019 |
|||||||
Assets |
(unaudited) |
|||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ |
$ |
||||||
Investments |
||||||||
Prepaid expenses and other assets |
||||||||
Total current assets |
||||||||
Property and equipment, net |
||||||||
Goodwill |
||||||||
Restricted cash |
||||||||
Deposits |
||||||||
Operating lease right-of-use assets |
||||||||
Finance lease right-of-use asset |
||||||||
Total assets |
$ |
$ |
||||||
Liabilities and stockholders' equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ |
$ |
||||||
Convertible notes, net of unamortized discount, current |
||||||||
Operating lease liabilities, current |
||||||||
Finance lease liabilities, current |
||||||||
Total current liabilities |
||||||||
Convertible notes, net of unamortized discount, non-current |
||||||||
Operating lease liabilities, non-current |
||||||||
Finance lease liabilities, non-current |
||||||||
Other liabilities |
||||||||
Total liabilities |
||||||||
Commitments and contingencies (Note 11) |
||||||||
Stockholders' equity: |
||||||||
Preferred stock, $ |
||||||||
Series A convertible preferred stock; |
||||||||
Series B convertible preferred stock; |
||||||||
Common stock, $ |
||||||||
Treasury stock, at cost, |
( |
) |
( |
) |
||||
Additional paid-in capital |
||||||||
Accumulated other comprehensive loss |
||||||||
Accumulated deficit |
( |
) |
( |
) |
||||
Total stockholders' equity |
||||||||
Total liabilities and stockholders' equity |
$ |
$ |
||||||
The accompanying notes are an integral part of these consolidated financial statements.
Rocket Pharmaceuticals, Inc.
(in thousands, except per share amounts)
(unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Revenue |
$ |
$ |
$ |
$ |
||||||||||||
Operating expenses: |
||||||||||||||||
Research and development |
||||||||||||||||
General and administrative |
||||||||||||||||
Total operating expenses |
||||||||||||||||
Loss from operations |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Research and development incentives |
||||||||||||||||
Interest expense |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Interest and other income net |
||||||||||||||||
(Amortization of premium) accretion of discount on investments - net |
( |
) |
( |
) |
||||||||||||
Net loss |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||
Net loss per share attributable to common stockholders - basic and diluted |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||
Weighted-average common shares outstanding - basic and diluted |
||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Rocket Pharmaceuticals, Inc.
(in thousands)
(unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2020 |
2019 |
2020 |
2019 |
|||||||||||||
Net loss |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||
Other comprehensive loss |
||||||||||||||||
Net unrealized (loss) gain on investments |
( |
) |
( |
) |
||||||||||||
Total comprehensive loss |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
||||
The accompanying notes are an integral part of these consolidated financial statements.
Rocket Pharmaceuticals, Inc.
For the Three and Nine Months Ended September 30, 2020 and 2019
(in thousands except share amounts)
(unaudited)
Accumulated |
||||||||||||||||||||||||||||
Additional |
Other |
Total |
||||||||||||||||||||||||||
Common Stock |
Treasury |
Paid-In |
Comprehensive |
Accumulated |
Stockholders' |
|||||||||||||||||||||||
Shares |
Amount |
Stock |
Capital |
Income/(Loss) |
Deficit |
Equity |
||||||||||||||||||||||
Balance at December 31, 2019 |
$ |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||||||
Issuance of common stock pursuant to exercise of stock options |
( |
) |
||||||||||||||||||||||||||
Share repurchase |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
Sale of treasury stock |
||||||||||||||||||||||||||||
Issuance of treasury stock pursuant to exercise of stock options |
( |
) |
( |
) |
||||||||||||||||||||||||
Unrealized comprehensive loss on investments |
- |
( |
) |
( |
) |
|||||||||||||||||||||||
Share-based compensation |
- |
|||||||||||||||||||||||||||
Net loss |
- |
( |
) |
( |
) |
|||||||||||||||||||||||
Balance at March 31, 2020 |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
|||||||||||||||||
Issuance of common stock pursuant to exercise of stock options |
||||||||||||||||||||||||||||
Sale of treasury stock |
||||||||||||||||||||||||||||
Issuance of treasury stock pursuant to exercise of stock options |
( |
) |
( |
) |
||||||||||||||||||||||||
Unrealized comprehensive gain on investments |
- |
|||||||||||||||||||||||||||
Share-based compensation |
- |
|||||||||||||||||||||||||||
Net loss |
- |
( |
) |
( |
) |
|||||||||||||||||||||||
Balance at June 30, 2020 |
$ |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||||
Issuance of common stock pursuant to exercise of stock options |
||||||||||||||||||||||||||||
Issuance of treasury stock pursuant to exercise of stock options |
( |
) |
( |
) |
||||||||||||||||||||||||
Unrealized comprehensive loss on investments |
- |
( |
) |
( |
) |
|||||||||||||||||||||||
Share-based compensation |
- |
|||||||||||||||||||||||||||
Net loss |
- |
( |
) |
( |
) |
|||||||||||||||||||||||
Balance at September 30, 2020 |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||
Additional |
Other |
Total |
||||||||||||||||||||||||||
Common Stock |
Treasury |
Paid-In |
Comprehensive |
Accumulated |
Stockholders' |
|||||||||||||||||||||||
Shares |
Amount |
Stock |
Capital |
Income (Loss) |
Deficit |
Equity |
||||||||||||||||||||||
Balance at December 31, 2018 |
$ |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
||||||||||||||||
Issuance of common stock pursuant to exercise of stock options |
||||||||||||||||||||||||||||
Stock repurchase |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
Retirement of treasury stock |
( |
) |
( |
) |
( |
) |
||||||||||||||||||||||
Unrealized comprehensive gain on investments |
- |
|||||||||||||||||||||||||||
Share-based compensation |
- |
|||||||||||||||||||||||||||
Net loss |
- |
( |
) |
( |
) |
|||||||||||||||||||||||
Balance at March 31, 2019 |
$ |
$ |
$ |
( |
) |
$ |
( |
) |
$ |
|||||||||||||||||||
Issuance of common stock, net of issuance costs |
||||||||||||||||||||||||||||
Issuance of common stock pursuant to exercise of stock options |
||||||||||||||||||||||||||||
Net exercise of options |
- |
( |
) |
( |
) |
|||||||||||||||||||||||
Unrealized comprehensive gain on investments |
- |
|||||||||||||||||||||||||||
Share-based compensation |
- |
|||||||||||||||||||||||||||
Net loss |
- |
( |
) |
( |
) |
|||||||||||||||||||||||
Balance at June 30, 2019 |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||
Issuance of common stock, net of issuance costs |
||||||||||||||||||||||||||||
Issuance of common stock pursuant to exercise of stock options |
||||||||||||||||||||||||||||
Net exercise of options |
- |
|||||||||||||||||||||||||||
Unrealized comprehensive loss on investments |
- |
( |
) |
( |
) |
|||||||||||||||||||||||
Share-based compensation |
- |
|||||||||||||||||||||||||||
Net loss |
- |
( |
) |
( |
) |
|||||||||||||||||||||||
Balance at September 30, 2019 |
$ |
( |
) |
$ |
$ |
$ |
( |
) |
$ |
|||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Rocket Pharmaceuticals, Inc.
(in thousands)
(unaudited)
Nine Months Ended September 30, |
||||||||
2020 |
2019 |
|||||||
Operating Activities: |
||||||||
Net loss |
$ |
( |
) |
$ |
( |
) |
||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Accretion of discount on convertible notes |
||||||||
Depreciation and amortization expense |
||||||||
Write down of property and equipment |
||||||||
Stock-based compensation |
||||||||
Accretion of discount (amortization of premium) on investments, net |
( |
) |
||||||
Changes in operating assets and liabilities: |
||||||||
Prepaid expenses and other assets |
( |
) |
( |
) |
||||
Accounts payable and accrued expenses |
||||||||
Operating lease liabilities |
( |
) |
( |
) |
||||
Finance lease liability |
||||||||
Net cash used in operating activities |
( |
) |
( |
) |
||||
Investing activities: |
||||||||
Purchases of investments |
( |
) |
( |
) |
||||
Proceeds from maturities of investments |
||||||||
Payments made to acquire right of use asset |
( |
) |
||||||
Purchases of property and equipment |
( |
) |
( |
) |
||||
Purchases of internal use software |
( |
) |
||||||
Net cash used in investing activities |
( |
) |
( |
) |
||||
Financing activities: |
||||||||
Proceeds from sale of treasury stock |
||||||||
Proceeds from exercise of options |
||||||||
Issuance of common stock, net of issuance costs |
||||||||
Common stock repurchase |
( |
) |
( |
) |
||||
Payment of withholding tax on option exercise |
( |
) |
||||||
Convertible notes refinancing costs to the lender |
( |
) |
||||||
Net cash provided by financing activities |
||||||||
Net change in cash, cash equivalents and restricted cash |
( |
) |
( |
) |
||||
Cash, cash equivalents and restricted cash at beginning of period |
||||||||
Cash, cash equivalents and restricted cash at end of period |
$ |
$ |
||||||
Supplemental disclosure of non-cash financing and investing activities: |
||||||||
Accrued purchases of property and equipment |
$ |
$ |
||||||
Accrued purchases of internal use software |
$ |
$ |
||||||
Retirement of treasury stock |
$ |
$ |
||||||
Net exercise of options |
$ |
$ |
||||||
Unrealized gain on investments |
$ |
$ |
||||||
Finance lease right of use asset and lease liability |
$ |
$ |
||||||
Reclassification of construction in process of finance right of use asset |
$ |
$ |
||||||
Supplemental cash flow information: |
||||||||
Cash paid for interest |
$ |
$ |
||||||
The accompanying notes are an integral part of these consolidated financial statements
.
ROCKET PHARMACEUTICALS, INC.
( in thousands, except per share data)
(Unaudited)
| 1. | Nature of Business |
Rocket Pharmaceuticals, Inc., together with its subsidiaries (collectively “Rocket”, the “Company” or “we”) is a clinical-stage, multi-platform biotechnology company focused on the development of first, only and best-in-class gene therapies, with direct on-target mechanism of action and clear clinical endpoints, for rare and devastating diseases. The Company has four clinical-stage ex vivo lentiviral vector (“LVV”) programs currently enrolling patients in the United States (“U.S.”) and Europe for Fanconi Anemia (“FA”), a genetic defect in the bone marrow that reduces production of blood cells or promotes the production of faulty blood cells, Leukocyte Adhesion Deficiency-I (“LAD-I”), a genetic disorder that causes the immune system to malfunction, Pyruvate Kinase Deficiency (“PKD”), a rare red blood cell autosomal recessive disorder that results in chronic non-spherocytic hemolytic anemia and Infantile Malignant Osteopetrosis (“IMO”), a genetic disorder characterized by increased bone density and bone mass secondary to impaired bone resorption. Of these, both the Phase 2 FA program and the Phase 1/2 LAD-I program are in registration-enabling studies in the U.S. and Europe. In addition, in the U.S. the Company has a clinical stage in vivo adeno-associated virus (“AAV”) program for Danon disease, a multi-organ lysosomal-associated disorder leading to early death due to heart failure. The Company has global commercialization and development rights to all of these product candidates under royalty-bearing license agreements. Additional work in the discovery stage for an FA CRISPR/CAS9 program as well as a gene therapy program for the less common FA subtypes C and G is ongoing.
| 2. | Risks and Liquidity |
The Company has not generated any revenue and has incurred losses since inception. The Company’s operations are subject to certain risks and uncertainties, including, among others, uncertainty of drug candidate development, technological uncertainty, uncertainty regarding patents and proprietary rights, lack of commercial manufacturing experience, a lack of marketing or sales capability or experience, dependency on key personnel, compliance with government regulations and the need to obtain additional financing. In addition, there are possible additional delays that could result from the COVID-19 situation. Drug candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance-reporting capabilities.
The Company’s five product candidates are in clinical development. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary government approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies.
The Company’s consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company has experienced negative cash flows from operations and had an accumulated deficit of $261.9 million as of September 30, 2020. As of September 30, 2020, the Company had $228.7 million of cash, cash equivalents and investments. Rocket expects such resources will be sufficient to fund its operating expenses and capital expenditure requirements into the second quarter of 2022.
In the longer term, the future viability of the Company is dependent on its ability to generate cash from operating activities or to raise additional capital to finance its operations. The Company’s failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies.
| 3. | Basis of Presentation, Principles of Consolidation and Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2019 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 6, 2020 (“2019 Form 10-K”). The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2020 and the results of its operations and its cash flows for the three and nine months ended September 30, 2020 and 2019. The financial data and other information disclosed in these consolidated notes related to the three and nine months ended September 30, 2020 and 2019 are unaudited. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020 and any other interim periods or any future year or period.
Principles of Consolidation
The consolidated financial statements represent the consolidation of the accounts of the Company and its subsidiaries in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). All intercompany accounts have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include but are not limited to goodwill impairment, the accrual of research and development (“R&D”) expenses, the valuation of equity transactions and stock-based awards. Changes in estimates and assumptions are reflected in reported results in the period in which they become known. Actual results could differ from those estimates.
Significant Accounting Policies
The significant accounting policies used in the preparation of these consolidated financial statements for the three and nine months ended September 30, 2020 are consistent with those disclosed in Note 3 to the consolidated financial statements in the 2019 Form 10-K, except as noted below.
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consists of bank deposits, certificates of deposit and money market accounts with financial institutions. Cash equivalents are carried at cost which approximates fair value due to their short-term nature and which the Company believes do not have a material exposure to credit risk. The Company considers all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. The Company’s cash and cash equivalent accounts, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Restricted cash consists of deposits collateralizing letters of credit issued by a bank in connection with the Company’s finance and operating leases (see Note 11 “Commitments and Contingencies” for additional disclosures) and a deposit collateralizing a letter of credit issued by a bank supporting the Company’s Corporate Credit Card. Cash, cash equivalents and restricted cash consist of the following:
September 30, 2020 |
December 31, 2019 |
|||||||
Cash and cash equivalents |
$ |
$ |
||||||
Restricted cash |
||||||||
$ |
$ |
|||||||
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13 (“ASU 2018-13”), Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company adopted this guidance on January 1, 2020. The adoption of ASU 2018-13 had no impact on the Company as the Company does not have Level 3 investments.
There were no other recent accounting standards that impacted the Company for the three months ended September 30, 2020.
| 4. | Fair Value of Financial Instruments |
Items measured at fair value on a recurring basis are the Company’s investments. The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy:
Fair Value Measurements as of September 30, 2020 Using: |
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Level 1 |
Level 2 |
Level 3 |
Total |
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Assets: |
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Money market mutual funds (included in cash and cash equivalents) |
$ |
$ |
$ |
$ |
||||||||||||
United States Treasury securities |
||||||||||||||||
Corporate Bonds |
||||||||||||||||
Municipal Bonds |
||||||||||||||||
Investments |
||||||||||||||||
$ |
$ |
$ |
$ |
|||||||||||||
Fair Value Measurements as of December 31, 2019 Using: |
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Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
Assets: |
||||||||||||||||
Money market mutual funds (included in cash and cash equivalents) |
$ |
$ |
$ |
$ |
||||||||||||
Cash |
||||||||||||||||
United States Treasury securities |
||||||||||||||||
Government Bonds |
||||||||||||||||
Corporate Bonds |
||||||||||||||||
Municipal Bonds |
||||||||||||||||
Investments |
||||||||||||||||
$ |
$ |
$ |
$ |
|||||||||||||
The Company classifies its money market mutual funds and U.S. Treasury securities as Level 1 assets under the fair value hierarchy, as these assets have been valued using quoted market prices in active markets without any valuation adjustment. The Company classifies its Government, Corporate and Municipal Bonds as Level 2 assets as these assets are not traded in an active market and have been valued through a third-party pricing service based on quoted prices for similar assets.
The fair value of the 2021 Convertible Notes as of September 30, 2020 was $5.5 million. The fair value of the 2022 Convertible Notes as of September 30, 2020 was $48.5 million (see Note 7).
| 5. | Property and Equipment, Net |
The Company’s property and equipment consisted of the following:
September 30, 2020 |
December 31, 2019 |
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Laboratory equipment |
$ |
$ |
||||||
Machinery and equipment |
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Computer equipment |
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Furniture and fixtures |
||||||||
Leasehold improvements |
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Internal use software |
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Construction costs in progress |
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Less: accumulated depreciation and amortization |
( |
) |
( |
) |
||||
$ |
$ |
|||||||
Construction costs in progress as of December 31, 2019 comprised costs associated with the build out of the Company’s research, manufacturing and office facility in Cranbury, NJ. See Note 11 “Commitments and Contingencies” for the treatment of construction costs as part of the right of use asset as of September 30, 2020. During the three and nine months ended September 30, 2020, the Company recognized $0.3 million and $0.5 million of depreciation and amortization expense, respectively. During the three and nine months ended September 30, 2019, the Company recognized $0.1 million and $0.3 million of depreciation and amortization expense, respectively.
| 6. | Accounts Payable and Accrued Expenses |
At September 30, 2020 and December 31, 2019, the Company’s accounts payable and accrued expenses consisted of the following:
September 30, |
December 31, |
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2020 |
2019 |
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Research and development |
$ |
$ |
||||||
Property and equipment |
||||||||
Employee compensation |
||||||||
Accrued interest |
||||||||
Government grant payable |
||||||||
Professional fees |
||||||||
Internal use software |
||||||||
Other |
||||||||
$ |
$ |
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| 7. | Convertible Notes |
On January 4, 2018, in connection with its reverse merger with Inotek Pharmaceuticals, Corporation (“Inotek”), the Company assumed the obligations of Inotek under its outstanding convertible notes, with an aggregate principal amount of $52.0 million, (the “2021 Convertible Notes”). The 2021 Convertible Notes were issued in 2016 and mature on August 1, 2021 (the “Maturity Date”). The 2021 Convertible Notes are unsecured and accrue interest at a rate of 5.75 % per annum and interest is payable semi-annually on February 1 and August 1 of each year. Each holder of the 2021 Convertible Notes (“Holder”) has the option until the close of business on the second business day immediately preceding the Maturity Date to convert all, or any portion, of the 2021 Convertible Notes held by it at a conversion rate of 31.1876 shares of the Company’s common stock per $1.00 principal amount of 2021 Convertible Notes (the “Conversion Rate”) which is $32.08 per share. The Conversion Rate is subject to adjustment from time to time upon the occurrence of certain events, including the issuance of stock dividends and payment of cash dividends.
The Company, at its option, may redeem for cash all or any portion of the 2021 Convertible Notes if the last reported sale price of a share of the Company’s common stock is equal to or greater than 200 % of the Conversion Rate for the 2021 Convertible Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending within the trading days immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100 % of the principal amount of the 2021 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The 2021 Convertible Notes are considered a hybrid financial instrument consisting of a fixed interest rate “host” and various embedded features that required evaluation as potential embedded derivatives under FASB ASC 815, Derivatives and Hedging (“ASC 815”). Based on the nature of the host instrument and the embedded features, management concluded that none of the conversion, put and redemption features required bifurcation and separate accounting from the host instrument. The Company determined that the Additional Interest was an embedded derivative that contains non-credit related events of default. As a result, the Additional Interest feature required bifurcation and separate accounting under ASC 815. Based on the amount of Additional Interest that would be owed and the likelihood of occurrence, the Company estimated the fair value of the Additional Interest feature to be insignificant upon issuance and as of September 30, 2020 and December 31, 2019. As of September 30, 2020, the stated interest rate was 5.75 %, and the effective interest rate was 15.3 %.
Convertible Notes Exchange Agreement
On February 20, 2020 and June 5, 2020, the Company entered into separate, privately negotiated exchange agreements (the “Exchange Agreements”) with certain holders of the 2021 Convertible Notes. Pursuant to the Exchange Agreements, on February 20, 2020, the Company exchanged approximately $39.35 million aggregate principal amount of the 2021 Convertible Notes (representing approximately 76 % of the aggregate outstanding principal amount of the 2021 Convertible Notes) for (a) approximately $39.35 million aggregate principal amount of 6.25 % Convertible Senior Notes due (the “2022 Convertible Notes”) (an exchange ratio equal to 1.00 2022 Convertible Note per exchanged 2021 Convertible Note) and (b) $119,416 to pay the accrued and unpaid interest on the exchanged 2021 Convertible Notes from February 1, 2020, to February 20, 2020, the closing date of the February 20, 2020 exchange transactions. Additionally, the Company repurchased 3,000 shares of its common stock that have been retired for an aggregate amount of $71,670 from certain holders of the 2021 Convertible Notes participating in the exchange transactions in privately negotiated, private transactions.
Also pursuant to the Exchange Agreements, on June 12, 2020, the Company exchanged $7.5 million aggregate principal amount of the 2021 Convertible Notes for (a) $7.5 million aggregate principal amount of its newly issued 6.25 % Convertible Senior Notes due 2022 (an exchange ratio equal to 1.00 2022 Convertible Notes per exchanged 2021 Convertible Notes) and (b) approximately $11,000 to pay the accrued and unpaid interest on the exchanged 2021 Convertible Notes from, and including, February 1, 2020, to, but excluding, the closing date of the exchange transaction, adjusted to take into account the unearned accrued interest on the 2022 Convertible Notes from, and including, February 20, 2020, to, but excluding, the closing date of the exchange transaction.
The 2022 Convertible Notes were issued in a private placement exempt from registration in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). The 2022 Convertible Notes issued in the exchange transaction were issued as additional notes pursuant to the Indenture, dated as of August 5, 2016, between the Company and Wilmington Trust, National Association, as trustee, as supplemented by the Second Supplemental Indenture, dated as of February 20, 2020, governing the 2022 Convertible Notes. After giving effect to the issuance of the additional 2022 Convertible Notes and the exchange of the 2021 Notes pursuant to the exchange transaction, $46.85 million aggregate principal amount of the 2022 Convertible Notes remains issued and outstanding and $5.15 million aggregate principal amount of the 2021 Convertible Notes remains issued and outstanding.
The conversion rate for the 2022 Convertible Notes is initially 31.1876 shares of the Company’s common stock per 1.00 principal amount of 2022 Convertible Notes, which is equivalent to an initial conversion price of approximately $32.06 per share of common stock, and is subject to adjustment under the terms of the 2022 Convertible Notes. The Company may redeem for cash all or any portion of the 2022 Convertible Notes, at its option, if the last reported sale price of its common stock is equal to or greater than 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending within the trading days immediately preceding the date on which the Company provides written notice of redemption. The 2022 Convertible Notes Indenture contains customary terms and covenants and events of default. As of September 30, 2020, the stated interest rate was 6.25 %, and the effective interest rate was 15.3 %.
The exchange transactions were accounted for as a modification of the 2021 Convertibles Notes and have been accounted for based on ASC 470-50 Modifications and Extinguishments. The remaining outstanding principal of the 2021 Convertible Notes will be accounted for consistent with the original accounting assessment. The Company incurred $1.6 million of costs in connection with the February 2020 exchange and $0.3 million of costs in connection with the June 2020 exchange transaction which have been included in G&A expenses in the consolidated financial statements for the three and nine months ended September 30, 2020. Costs incurred of $0.1 million in connection with the February exchange transaction and $0.1 million in connection with the June exchange transaction that were paid directly to the creditors have been included as a debt discount and is being amortized over the life of the 2022 Convertible Notes.
The table below summarizes the carrying value of the 2021 Convertible Notes as of September 30, 2020:
September 30, 2020 |
||||
Principal amount |
$ |
|||
Discount |
( |
) |
||
Carrying value as of September 30, 2020 |
$ |
|||
Accretion of the 2021 Convertible Notes discount was $0.1 million and $0.9 million for the three and nine months ended September 30, 2020, respectively. Accretion of the 2021 Convertible Notes discount was $0.9 million and $2.7 million for the three and nine months ended September 30, 2019, respectively.
The table below summarizes the carrying value of the 2022 Convertible Notes as of September 30, 2020:
September 30, 2020 |
||||
Principal amount |
$ |
|||
Discount |
( |
) |
||
Carrying value as of September 30, 2020 |
$ |
|||
Accretion of the 2022 Convertible Notes discount was $0.6 million and $1.2 million for the three and nine months ended September 30, 2020, respectively.
| 8. | Stock Based Compensation |
Stock Option Valuation
The weighted average assumptions that the Company used in the Black-Scholes pricing model to determine the fair value of the stock options granted to employees, non-employees and directors were as follows:
Nine Months Ended September 30, |
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2020 |
2019 |
|||||||
Risk-free interest rate |
% |
% |
||||||
Expected term (in years) |
||||||||
Expected volatility |
% |
% |
||||||
Expected dividend yield |
% |
% |
||||||
Exercise price |
$ |
$ |
||||||
Fair value of common stock |
$ |
$ |
||||||
The Company recognizes compensation expense for only the portion of awards that are expected to vest.
The following table summarizes stock option activity for the nine months ended September 30, 2020 under the Second Amended and Restated 2014 Stock Option and Incentive Plan:
Number of Shares |
Weighted Average Exercise Price |
Weighted Average Contractual Term (Years) |
Aggregate Intrinsic Value |
|||||||||||||
Outstanding as of December 31, 2019 |
$ |
$ |
||||||||||||||
Granted |
||||||||||||||||
Exercised |
( |
) |
||||||||||||||
Cancelled |
( |
) |
||||||||||||||
Outstanding as of September 30, 2020 |
$ |
$ |
||||||||||||||
Options vested and exercisable as of September 30, 2020 |
$ |
$ |
||||||||||||||
Options unvested as of September 30, 2020 |
$ |
|||||||||||||||
The weighted average grant-date fair value per share of stock options granted during the nine months ended September 30, 2020 and 2019 was $14.42 and $9.50 , respectively.
The total fair value of options vested during the nine months ended September 30, 2020 and 2019 was $12.7 million and $49.4 million, respectively.
Stock-Based Compensation
Three Months Ended September 30, |
Nine Months Ended September 30, |
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