10-Q 1 otlk-20191231x10q.htm 10-Q otlk_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2019

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 No. 001‑37759

OUTLOOK THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

38‑3982704

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

7 Clarke Drive
Cranbury, New Jersey

 

08512

(Address of principal executive offices)

 

(Zip Code)

 

(609) 619‑3990

(Registrant’s  telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock

 

OTLK

 

Nasdaq Stock Market LLC

Series A Warrants

 

OTLKW

 

Nasdaq Stock Market LLC

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b‑2 of the Exchange Act.

 

 

 

 

 

 

Large accelerated filer

 

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  

The number of shares of the registrant’s common stock, $0.01 par value per share, outstanding as of February 7,  2020 was 43,088,776.

 

 

 

Outlook Therapeutics, Inc.

Table of Contents

 

    

Page
Number

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

 

Item 1. Financial Statements (Unaudited) 

 

1

 

 

 

Consolidated Balance Sheets as of December 31, 2019 and September 30, 2019 

 

1

 

 

 

Consolidated Statements of Operations for the Three Months Ended December 31, 2019 and 2018 

 

2

 

 

 

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the Three Months Ended December 31, 2019 and 2018 

 

3

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2019 and 2018 

 

4

 

 

 

Notes to Unaudited Interim Consolidated Financial Statements 

 

5

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

20

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

31

 

 

 

Item 4. Controls and Procedures 

 

31

 

 

 

PART II. OTHER INFORMATION 

 

32

 

 

 

Item 1. Legal Proceedings 

 

32

 

 

 

Item 1A. Risk Factors 

 

32

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

32

 

 

 

Item 3. Defaults Upon Senior Securities 

 

32

 

 

 

Item 4. Mine Safety Disclosures 

 

32

 

 

 

Item 5. Other Information 

 

32

 

 

 

Item 6. Exhibits 

 

33

 

 

 

SIGNATURES 

 

34

 

In this report, unless otherwise stated or as the context otherwise requires, references to “Outlook Therapeutics,” “Outlook,” “the Company,” “we,” “us,” “our” and similar references refer to Outlook Therapeutics, Inc. (formerly known as Oncobiologics, Inc.) and its consolidated subsidiaries. The Outlook logo, Oncobiologics logo and other trademarks or service marks of Outlook Therapeutics, Inc. appearing in this report are the property of Outlook Therapeutics, Inc. This report also contains registered marks, trademarks and trade names of other companies. All other trademarks, registered marks and trade names appearing in this report are the property of their respective holders.

 

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this report, including statements regarding our future financial condition, business strategy and plans, and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should,” “would,” “potentially” or the negative of these terms or similar expressions in this report.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” contained in our annual report on Form 10-K for the year ended September 30, 2019 filed with the SEC on December 19, 2019, including, among other things, risks associated with:

·

the timing and the success of the design of the clinical trials and planned clinical trials of our lead product candidate, ONS-5010;

·

whether the results of our clinical trials will be sufficient to support domestic or global regulatory approvals;

·

our ability to obtain and maintain regulatory approval for ONS-5010 in the United States and other markets if we successfully complete clinical trials;

·

our expectations regarding the potential market size and the size of the patient populations for our product candidates, if approved, for commercial use;

·

our ability to fund our working capital requirements;

·

the rate and degree of market acceptance of our current and future product candidates;

·

the implementation of our business model and strategic plans for our business and product candidates;

·

developments or disputes concerning our intellectual property or other proprietary rights;

·

our ability to maintain and establish collaborations or obtain additional funding;

·

our expectations regarding government and third-party payor coverage and reimbursement;

·

our ability to compete in the markets we serve; and

·

the factors that may impact our financial results.

These risks are not exhaustive. Additional factors could harm our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

 

 

ii

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Outlook Therapeutics, Inc.

Consolidated Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

 

December 31, 

 

September 30, 

 

    

2019

    

2019

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

1,333,559

 

$

8,015,528

Prepaid expenses and other current assets

 

 

4,707,497

 

 

4,986,033

Assets held for sale

 

 

500,000

 

 

500,000

Total current assets

 

 

6,541,056

 

 

13,501,561

 

 

 

 

 

 

 

Property and equipment, net

 

 

587,184

 

 

3,175,960

Operating lease right-of-use assets, net

 

 

282,107

 

 

 —

Finance lease right-of-use assets, net 

 

 

2,450,000

 

 

 —

Other assets

 

 

562,748

 

 

457,476

Total assets

 

$

10,423,095

 

$

17,134,997

 

 

 

 

 

 

 

Liabilities, convertible preferred stock and stockholders’ equity (deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Convertible senior secured notes

 

$

7,065,928

 

$

6,699,000

Current portion of long-term debt

 

 

48,936

 

 

1,026,168

Current portion of finance lease liabilities

 

 

172,609

 

 

192,290

Current portion of operating lease liabilities

 

 

170,228

 

 

 —

Stockholder notes

 

 

3,612,500

 

 

3,612,500

Accounts payable

 

 

2,567,995

 

 

2,277,817

Accrued expenses

 

 

4,602,769

 

 

4,622,988

Income taxes payable

 

 

1,859,434

 

 

1,859,434

Total current liabilities

 

 

20,100,399

 

 

20,290,197

 

 

 

 

 

 

 

Long-term debt

 

 

38,011

 

 

50,285

Redemption feature

 

 

8,226,506

 

 

 —

Finance lease liabilities

 

 

3,344,505

 

 

3,365,790

Operating lease liabilities

 

 

142,129

 

 

 —

Warrant liability

 

 

54,356

 

 

255,734

Other liabilities

 

 

3,923,913

 

 

3,942,948

Total liabilities

 

 

35,829,819

 

 

27,904,954

 

 

 

 

 

 

 

Convertible preferred stock:

 

 

 

 

 

 

Series A convertible preferred stock, par value $0.01 per share: 1,000,000 shares authorized,  no shares issued and outstanding

 

 

 —

 

 

 —

Series A-1 convertible preferred stock, par value $0.01 per share: 200,000 shares authorized, 68,112 shares issued and outstanding at December 31, 2019 and 66,451 shares issued and outstanding at September 30, 2019

 

 

5,525,537

 

 

5,359,404

Total convertible preferred stock

 

 

5,525,537

 

 

5,359,404

 

 

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

 

Preferred stock, par value $0.01 per share: 7,300,000 shares authorized, no shares issued and outstanding

 

 

 —

 

 

 —

Series B convertible preferred stock, par value $0.01 per share: 1,500,000 shares authorized, no shares issued

 

 

 —

 

 

 —

Common stock, par value $0.01 per share; 200,000,000 shares authorized; 38,430,924 shares issued and outstanding at December 31, 2019 and 28,609,995 shares issued and outstanding at September 30, 2019

 

 

384,309

 

 

286,100

Additional paid-in capital

 

 

239,766,786

 

 

238,064,947

Accumulated deficit

 

 

(271,083,356)

 

 

(254,480,408)

Total stockholders' equity (deficit)

 

 

(30,932,261)

 

 

(16,129,361)

Total liabilities, convertible preferred stock and stockholders' equity (deficit)

 

$

10,423,095

 

$

17,134,997

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

1

Outlook Therapeutics, Inc.

Consolidated Statements of Operations

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 

 

    

2019

    

2018

Collaboration revenues

 

$

 —

 

$

1,067,598

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

5,847,302

 

 

6,071,522

General and administrative

 

 

2,336,724

 

 

2,903,988

Impairment of property and equipment

 

 

 —

 

 

2,349,403

 

 

 

8,184,026

 

 

11,324,913

Loss from operations

 

 

(8,184,026)

 

 

(10,257,315)

Interest expense, net

 

 

597,665

 

 

1,120,849

Loss on extinguishment of debt

 

 

8,060,580

 

 

 —

Change in fair value of redemption feature

 

 

(37,945)

 

 

 —

Change in fair value of warrant liability

 

 

(201,378)

 

 

(1,636,320)

Net loss 

 

 

(16,602,948)

 

 

(9,741,844)

Series A-1 convertible preferred stock dividends and related settlement

 

 

(166,133)

 

 

(150,508)

Deemed dividend upon modification of warrants

 

 

(1,708,603)

 

 

 —

Net loss attributable to common stockholders

 

$

(18,477,684)

 

$

(9,892,352)

 

 

 

 

 

 

 

Per share information:

 

 

 

 

 

 

Net loss per share of common stock, basic and diluted

 

$

(0.62)

 

$

(1.00)

Weighted average shares outstanding, basic and diluted

 

 

29,901,285

 

 

9,843,540

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 

2

Outlook Therapeutics, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Stock

 

 

Stockholders' Equity (Deficit)

 

 

Series A-1

 

 

Common Stock

 

Additional  Paid-in

 

Accumulated

 

Total Stockholders'

 

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Capital

    

Deficit

    

Equity (Deficit)

Balance at October 1, 2019

 

66,451

 

$

5,359,404

 

 

28,609,995

 

$

286,100

 

$

238,064,947

 

$

(254,480,408)

 

$

(16,129,361)

Issuance of common stock in connection with exercise of warrants

 

 —

 

 

 —

 

 

8,345,562

 

 

83,455

 

 

(25,177)

 

 

 —

 

 

58,278

Issuance of common stock in connection with conversion of stockholder notes

 

 —

 

 

 —

 

 

1,475,258

 

 

14,753

 

 

1,533,673

 

 

 —

 

 

1,548,426

Issuance of vested restricted stock units

 

 —

 

 

 —

 

 

109

 

 

 1

 

 

(1)

 

 

 —

 

 

 —

Series A-1 convertible preferred stock dividends and related settlement

 

1,661

 

 

166,133

 

 

 —

 

 

 —

 

 

(166,133)

 

 

 —

 

 

(166,133)

Stock-based compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

359,477

 

 

 —

 

 

359,477

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(16,602,948)

 

 

(16,602,948)

Balance at December 31, 2019

 

68,112

 

$

5,525,537

 

 

38,430,924

 

$

384,309

 

$

239,766,786

 

$

(271,083,356)

 

$

(30,932,261)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Stock

 

 

Stockholders' Equity (Deficit)

 

 

Series A-1

 

 

Common Stock

 

Additional  Paid-in

 

Accumulated

 

Total Stockholders'

 

    

Shares

    

Amount

  

  

Shares

    

Amount

    

Capital

    

Deficit

    

Equity (Deficit)

Balance at October 1, 2018

 

60,203

 

$

4,734,416

 

 

9,027,491

 

$

90,275

 

$

190,672,166

 

$

(216,307,363)

 

$

(25,544,922)

Cumulative effect of adoption of ASU 2014-09 (Topic 606)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,649,258)

 

 

(3,649,258)

Proceeds from exercise of common stock warrants

 

 —

 

 

 —

 

 

554

 

 

 6

 

 

(6)

 

 

 —

 

 

 —

Private placement sale of common stock, net of costs

 

 —

 

 

 —

 

 

1,608,234

 

 

16,082

 

 

11,794,776

 

 

 —

 

 

11,810,858

Issuance of vested restricted stock units

 

 —

 

 

 —

 

 

144

 

 

 1

 

 

(1)

 

 

 —

 

 

 —

Series A-1 convertible preferred stock dividends and related settlement

 

1,505

 

 

150,508

 

 

 —

 

 

 —

 

 

(150,508)

 

 

 —

 

 

(150,508)

Stock-based compensation expense

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

872,289

 

 

 —

 

 

872,289

Accrued directors fees settled in fully vested stock options

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

49,121

 

 

 —

 

 

49,121

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(9,741,844)

 

 

(9,741,844)

Balance at December 31, 2018

 

61,708

 

$

4,884,924

 

 

10,636,423

 

$

106,364

 

$

203,237,837

 

$

(229,698,465)

 

$

(26,354,264)

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 

3

Outlook Therapeutics, Inc.

Consolidated Statements of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 

 

    

2019

    

2018

OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(16,602,948)

 

$

(9,741,844)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

175,341

 

 

823,077

Loss on extinguishment of debt

 

 

8,060,580

 

 

 —

Non-cash interest expense

 

 

15,722

 

 

450,381

Stock-based compensation

 

 

359,477

 

 

872,289

Change in fair value of redemption feature

 

 

(37,945)

 

 

 —

Change in fair value of warrant liability

 

 

(201,378)

 

 

(1,636,320)

Impairment of property and equipment

 

 

 —

 

 

2,349,403

Changes in operating assets and liabilities:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

288,930

 

 

(50,486)

Other assets

 

 

(115,666)

 

 

21,913

Operating lease liability

 

 

(39,815)

 

 

 —

Accounts payable 

 

 

290,178

 

 

(260,943)

Accrued expenses

 

 

1,105,318

 

 

(1,419,110)

Deferred revenue

 

 

 —

 

 

(1,052,598)

Other liabilities

 

 

28,530

 

 

(137,137)

Net cash used in operating activities

 

 

(6,673,676)

 

 

(9,781,375)

INVESTING ACTIVITIES

 

 

 

 

 

 

Purchase of property and equipment

 

 

 —

 

 

(236,433)

Net cash used in investing activities

 

 

 —

 

 

(236,433)

FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from the sale of common stock, net of offering costs

 

 

 —

 

 

11,885,833

Proceeds from exercise of common stock warrants

 

 

58,278

 

 

 —

Payments of finance lease obligations

 

 

(55,031)

 

 

(231,221)

Repayment of debt

 

 

(11,540)

 

 

(3,126,479)

Net cash (used in) provided by financing activities

 

 

(8,293)

 

 

8,528,133

Net decrease in cash

 

 

(6,681,969)

 

 

(1,489,675)

Cash at beginning of period

 

 

8,015,528

 

 

1,717,391

Cash at end of period

 

$

1,333,559

 

$

227,716

Supplemental disclosure of cash flow information

 

 

 

 

 

 

Cash paid for interest

 

$

360,904

 

$

1,657,157

Supplemental schedule of noncash investing activities:

 

 

 

 

 

 

Purchases of property and equipment in accounts payable and accrued expenses

 

$

 —

 

$

625,830

Supplemental schedule of noncash financing activities:

 

 

 

 

 

 

Unsecured notes and accrued interest converted into common stock

 

$

1,548,426

 

$

 —

Issuance of exchange notes at estimated fair value

 

$

7,050,206

 

$

 —

Issuance of redemption feature at estimated fair value

 

$

8,264,451

 

$

 —

Change in fair value of convertible senior secured notes warrants capitalized as deferred financing costs

 

$

 —

 

$

1,466,710

Series A-1 convertible preferred stock dividends and related settlement

 

$

166,133

 

$

150,508

Deferred offering costs and common stock issuance costs in accounts payable and accrued expenses

 

$

 —

 

$

74,975

Accrued directors' fees settled in fully vested stock options

 

$

 —

 

$

49,121

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

 

4

Table of Contents

Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

 

1.     Organization and Description of Business

Outlook Therapeutics, Inc. (“Outlook” or the “Company”) was incorporated in New Jersey on January 5, 2010, started operations in July 2011, and reincorporated in Delaware by merging with and into a Delaware corporation in October 2015 and changed its name to “Outlook Therapeutics, Inc.” in November 2018. The Company is a late clinical-stage biopharmaceutical company focused on developing and commercializing ONS-5010, an ophthalmic formulation of bevacizumab for use in retinal indications. The Company is based in Cranbury, New Jersey.

2.    Liquidity

The Company has incurred substantial losses and negative cash flows from operations since its inception and has a stockholders’ deficit of  $30.9 million as of December 31, 2019. As of December 31, 2019, the Company had substantial indebtedness that included $7.6 million outstanding aggregate principal amount and accrued interest of senior secured notes that mature on December 31, 2020 and $3.6 million unsecured notes that were due on demand as of such date. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited interim consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The unaudited interim 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.

On December 11, 2019, the Company received approval from the New Jersey Economic Development Authority’s Technology Business Tax Certificate Transfer Program to sell approximately $3.6 million of its unused New Jersey net operating losses (“NOLs”) and research and development tax credits (“R&D credits”). The Company expects to receive approximately $3.3 million of proceeds from the sale of the New Jersey NOLs and R&D credits in March 2020. 

Management believes that the Company’s existing cash as of December 31, 2019, the $1.1 million of cash proceeds from the exercise of warrants in January 2020,  and the $3.3 million of proceeds from the sale of New Jersey NOLs and R&D credits expected to be received in March 2020,  will be sufficient to fund its operations through March 2020, excluding any repayment of debt. Substantial additional financing will be needed by the Company to fund its operations in the future and to commercially develop its product candidates. Management is currently evaluating different strategies to obtain the required funding for future operations. These strategies may include but are not limited to: payments from potential strategic research and development partners, licensing and/or marketing arrangements with pharmaceutical companies, private placements of equity and/or debt securities, sale of its development stage product candidates to third parties and public offerings of equity and/or debt securities. There can be no assurance that these future funding efforts will be successful.

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

3.     Basis of Presentation and Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited interim consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10‑Q and Article 10 of Regulation S-X. Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

5

Table of Contents

Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

 

In the opinion of management, the accompanying unaudited interim consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of December 31, 2019 and its results of operations for the three months ended December 31, 2019 and 2018,  cash flows for the three months ended December 31, 2019 and 2018, and convertible preferred stock and stockholders’ equity for the three months ended December 31, 2019 and 2018. Operating results for the three months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2020. The unaudited interim consolidated financial statements, presented herein, do not contain the required disclosures under GAAP for annual consolidated financial statements. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes as of and for the year ended September 30, 2019 included in the Company’s Annual Report on Form 10‑K filed with the Securities and Exchange Commission (“SEC”) on December 19, 2019.

Reverse stock-split

On March 15, 2019, the Company amended its amended and restated certificate of incorporation to implement a one-for-eight reverse stock split of its common stock. As a result of the reverse stock split, the Company adjusted the share amounts under its employee incentive plans, outstanding options, restricted stock units and common stock warrant agreements with third parties. The disclosure of common shares and per common share data in the accompanying unaudited interim consolidated financial statements and related notes reflect the reverse stock split for all periods presented.

Use of estimates

The preparation of the unaudited interim consolidated financial statements in conformity with 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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the unaudited interim consolidated financial statements, actual results may materially vary from these estimates. Estimates and assumptions are periodically reviewed and the effects of revisions are reflected in the unaudited interim consolidated financial statements in the period they are determined to be necessary.

Net loss per share

Basic and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.

For purposes of calculating diluted loss per common share, the denominator includes both the weighted average common shares outstanding and the number of common stock equivalents if the inclusion of such common stock equivalents would be dilutive. Dilutive common stock equivalents potentially include warrants, stock options and non-vested restricted stock unit (“RSU”) awards using the treasury stock method. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares due to the Company’s loss.

The following table sets forth the computation of basic earnings per share and diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

Three months ended December 31, 

 

    

2019

    

2018

Net loss attributable to common stockholders

 

$

(18,477,684)

 

$

(9,892,352)

Common stock outstanding (weighted average)

 

 

29,901,285

 

 

9,843,540

Basic and diluted net loss per share

 

$

(0.62)

 

$

(1.00)

 

6

Table of Contents

Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

 

The following potentially dilutive securities (in common stock equivalents) have been excluded from the computation of diluted weighted-average shares outstanding as of December 31, 2019 and 2018, as they would be antidilutive:

 

 

 

 

 

 

 

 

As of December 31, 

 

    

2019

    

2018

Series A-1 convertible preferred stock

 

1,287,178

 

1,166,156

Convertible senior secured notes

 

 —

 

1,162,994

Performance-based stock units

 

2,470

 

16,136

Restricted stock units

 

 —

 

7,457

Stock options

 

1,791,500

 

386,247

Common stock warrants

 

5,559,763

 

5,661,015

 

Recently issued and adopted accounting pronouncements

On October 1, 2019, the Company adopted ASU No. 2016-02, Leases (“ASC 842” or “ASU 2016-02”) issued by the FASB in February 2016 which was subsequently supplemented by clarifying guidance to improve financial reporting of leasing transactions. The new lease accounting guidance requires lessees to recognize lease liabilities and right-of-use assets on the balance sheet for all leases with initial terms longer than 12 months and provides enhanced disclosures on key information of leasing arrangements. The guidance allowed companies to apply the requirements retrospectively, either to all prior periods presented or through a cumulative adjustment in the year of adoption. 

The Company adopted the new standards effective October 1, 2019 using the modified retrospective transition method using the package of practical expedients and a discount rate of 9% and elected to not apply the standard in the comparative periods presented in the year of adoption. The Company has implemented the internal controls to monitor and record historical and future lease arrangements and required disclosures. For all existing operating leases as of September 30, 2019, the Company recorded right of use assets of $352,172 and corresponding lease liabilities of $318,672 with an offset to other liabilities of $33,500 to eliminate deferred rent on the consolidated balance sheets. The Company recorded right of use assets of $2,525,000 and corresponding finance lease liabilities of $3,558,080 for leases previously classified as capital leases. This did not include an existing lease termination obligation of approximately $3,909,448 pertaining to a lease for the Company’s planned office and laboratory expansion space in Cranbury, New Jersey that remained unchanged as a result of the transition.  Refer to Note 9 for the Company’s lease disclosures.

At lease commencement, the Company records a lease liability based on the present value of lease payments over the expected lease term including any options to extend the lease that the Company is reasonably certain to exercise. The Company calculates the present value of lease payments using an incremental borrowing rate as the Company’s leases do not provide an implicit interest rate. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. At the lease commencement date, the Company records a corresponding right-of-use lease asset based on the lease liability, adjusted for any lease incentives received and any initial direct costs paid to the lessor prior to the lease commencement date. The Company may enter into leases with an initial term of 12 months or less (“Short-Term Leases”). For Short-Term Leases, the Company records the rent expense on a straight-line basis and does not record the leases on the consolidated balance sheet. The Company had no Short-Term Leases as of December 31, 2019.

After lease commencement, the Company measures its leases as follows: (i) the lease liability based on the present value of the remaining lease payments using the discount rate determined at lease commencement and (ii) the right-of-use lease asset based on the re-measured lease liability, adjusted for any unamortized lease incentives received, any unamortized initial direct costs and the cumulative difference between rent expense and amounts paid under the lease agreement. Any lease incentives received, and any initial direct costs are amortized on a straight-line basis over the expected lease term. Rent expense is recorded on a straight-line basis over the expected lease term.

The adoption of the new lease accounting standard did not have a material impact on the Company’s results of operations or cash flows.

7

Table of Contents

Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

 

In August 2018, the FASB issued ASU No. 2018‑13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"), which removes and modifies some existing disclosure requirements and adds others. ASU 2018-13 modifies the disclosure requirements for fair value measurements and removes the requirement to disclose (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (2) the policy for timing of transfers between levels, and (3) the valuation processes for Level 3 fair value measurements. ASU 2018-13 requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods therein. Early adoption is permitted for any eliminated or modified disclosures upon issuance of this ASU. The Company is currently evaluating the impact of the adoption of this standard.

Reclassifications

Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation.

4.     Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

·

Level 1 - Quoted prices in active markets for identical assets or liabilities.

·

Level 2 - Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

·

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

8

Table of Contents

Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

 

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

    

(Level 1)

    

(Level 2)

    

(Level 3)

Liabilities

 

 

 

 

 

 

 

 

 

Redemption feature

 

$

 —

 

$

 —

 

$

8,226,506

Warrant liability

 

 

 —

 

 

 —

 

 

54,356

 

 

$

 —

 

$

 —

 

$

8,280,862

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

(Level 1)

    

(Level 2)

    

(Level 3)

Liabilities

 

 

 

 

 

 

 

 

 

Redemption feature

 

$

 —

 

$

 —

 

$

 —

Warrant liability

 

 

 —

 

 

 —

 

 

255,734

 

 

$

 —

 

$

 —

 

$

255,734

 

The Company evaluated a redemption feature within the senior secured notes issued in December 2019 and determined bifurcation of the redemption feature was required. The redemption feature is accounted for as a derivative instrument and re-measured at each reporting period until the redemption feature is exercised, expires, or otherwise settled.

 

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the warrant liability and redemption feature for the three months ended December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption

 

 

    

Warrants

    

Feature

 

Balance at October 1, 2019

 

$

255,734

 

$

 —

 

Addition of feature on December 20, 2019

 

 

 —

 

 

8,264,451

 

Change in fair value

 

 

(201,378)

 

 

(37,945)

 

Balance at December 31, 2019

 

$

54,356

 

$

8,226,506

 

 

The warrants issued in connection with the senior secured notes (see Note 7) are classified as liabilities on the accompanying consolidated balance sheet as the warrants include cash settlement features at the option of the holders under certain circumstances. The warrant liability is revalued each reporting period with the change in fair value recorded in the accompanying consolidated statements of operations until the warrants are exercised or expire. The fair value of the warrant liability is estimated using the Black-Scholes option pricing model using the following assumptions:

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

September 30,

 

 

    

2019

 

2019

 

Risk-free interest rate

 

 

1.70

%  

 

1.56

%  

Remaining contractual life of warrant

 

 

5.13

years  

 

5.38

years  

Expected volatility

 

 

88

%  

 

89

%  

Annual dividend yield

 

 

 0

%  

 

 0

%  

Fair value of common stock

 

$

0.59

per share  

$

1.49

per share  

 

The fair value of the redemption feature is estimated by using a Monte Carlo simulation model and a with-and-without perspective, where the fair value of debt instrument is measured with the derivative and without the derivative and the difference is the implied fair value of the redemption feature.  The value of the debt instrument with the redemption feature depends on the daily stock price path followed by the Company’s common stock price.  This model simulates daily common stock prices from the issuance date thru the maturity date for the debt instrument.  At issuance, the Company utilized a volatility estimate of 130% based upon the observed historical volatility of both the Company and peer group for 1-year and 2-year periods.  Risk-free interest rate was based upon US treasury yields.

 

 

9

Table of Contents

Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

 

5.    Property and Equipment, Net

Property and equipment, net, consists of:

 

 

 

 

 

 

 

 

 

 

December 31, 

 

September 30, 

 

    

2019

    

2019

Laboratory equipment

 

$

1,067,351

 

$

1,067,351

Leasehold improvements

 

 

160,086

 

 

160,086

Land and building

 

 

 —

 

 

3,000,000

 

 

 

1,227,437

 

 

4,227,437

Less: accumulated depreciation and amortization

 

 

(640,253)

 

 

(1,051,477)

 

 

$

587,184

 

$

3,175,960

 

Depreciation and amortization expense was $63,776 and $823,077 for the three months ended December 31, 2019 and 2018, respectively. 

On October 1, 2019, the Company adopted ASC 842, which resulted in the reclassification of property and equipment under capital leases to finance lease right-of-use assets separately disclosed on the consolidated balance sheets. Refer to Note 9 for the Company’s lease disclosures.

At September 30, 2019,  $3,000,000 represented the Company’s corporate office lease that was classified as a capital lease. The Company’s corporate office lease matures in February 2028 and the effective interest rate on the corporate office lease is 43.9%. At September 30, 2019, $475,000 of accumulated amortization related to capital leases.

Impairment Charge

 

During the three months ended December 31, 2018, the Company wrote off certain construction in progress and laboratory equipment with a carrying amount of $2,349,403. The Company determined that the carrying amount of these assets as of December 31, 2018 was not recoverable and was less than the fair value less the cost to sell due to the Company changing its operations to outsource the manufacturing of ONS-5010.

6.     Accrued Expenses

Accrued expenses consists of:

 

 

 

 

 

 

 

 

 

 

December 31, 

 

September 30, 

 

    

2019

    

2019

Compensation  

 

$

969,399

 

$

919,394

Severance and related costs 

 

 

389,558

 

 

505,570

Research and development 

 

 

2,765,669

 

 

1,692,040

Interest payable

 

 

23,125

 

 

934,145

Professional fees  

 

 

285,747

 

 

419,216

Other accrued expenses  

 

 

169,271

 

 

152,623

 

 

$

4,602,769

 

$

4,622,988

 

 

10

Table of Contents

Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

 

7.    Debt

 

Senior secured notes

 

 

 

 

 

 

 

 

 

 

December 31, 

 

September 30, 

 

    

2019

    

2019

Convertible senior secured notes

 

$

7,589,027

 

$

6,699,000

Unamortized debt discount

 

 

(523,099)

 

 

 —

 

 

$

7,065,928

 

$

6,699,000

 

In December 2019, the Company entered into an exchange agreement with the holders of its approximately $7.3 million outstanding aggregate principal amount and accrued interest of senior secured notes (the “Old Senior Notes”) originally issued pursuant to the certain Note and Warrant Purchase Agreement dated December 22, 2017, as amended on April 13, 2017, November 5, 2018, and June 28, 2019 (the “Exchange Agreement”). Pursuant to the Exchange Agreement, the holders of the Old Senior Notes exchanged the entire outstanding principal and accrued interest for new senior secured notes having an aggregate outstanding original principal amount of $7.6 million, which includes an aggregate exchange fee of approximately $0.3 million.

The new senior secured notes are substantially similar to the Old Senior Notes, as amended through the date of the Exchange Agreement, bear interest at a rate of 12.0% per annum and will mature December 31, 2020 (subject to extension to June 30, 2021 at the Company’s option upon payment of an extension fee equal to 3% of the outstanding balance and being in compliance with applicable Nasdaq listing requirements). The new senior secured notes are convertible, at the option of the holder, beginning April 1, 2020, into shares of the Company’s common stock at a conversion price equal to 90% of the two lowest closing bid prices in the 20 trading days immediately preceding such conversion, subject to a floor price of $0.232 per share.  In the event the conversion price is lower than the floor price for 20 consecutive trading days, the Company is required to make a cash redemption equal to $350,000 (provided that it shall not be required to make more than one redemption in any calendar month, nor shall a trading day where the conversion price is lower than the floor price be included in more than one 20-trading day period). The conversion feature was determined to be a redemption feature and was bifurcated from the debt instrument.  The estimated fair value of the redemption feature was $8.3 million at issuance (see Note 4).

The Exchange Agreement was accounted for as an extinguishment of debt. Loss on extinguishment of convertible senior secured notes recognized during the three months ended December 31, 2019 was $8.0 million and equal to the excess fair value of the notes and bifurcated redemption feature over the notes’ net carrying value.

Aggregate interest expense on the Old Senior Notes and the new senior secured notes for the three months ended December 31, 2019 and 2018 was $201,521 and $151,052, respectively.

Stockholder Notes

The Company previously repurchased shares of its restricted stock in exchange for notes in the amount of $800,000 that do not bear interest and are due on demand.

The Company has a $2,812,500 note payable related to the previous repurchase of common stock that does not bear interest and is due on demand.

11

Table of Contents

Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

 

8.    Other Indebtedness

The Company has other outstanding debt consisting of equipment loans and unsecured notes.

 

 

 

 

 

 

 

 

 

December 31, 

 

September 30, 

 

 

2019

    

2019

Unsecured notes

 

$

 —

 

$

977,966

Equipment loans

 

 

86,947

 

 

98,487

 

 

 

86,947

 

 

1,076,453

Less: current portion

 

 

(48,936)

 

 

(1,026,168)

Long-term debt

 

$

38,011

 

$

50,285

On March 7, 2019, the Company entered into a Forbearance and Exchange Agreement (the "Agreement") with Iliad Research and Trading, L.P., a Utah limited partnership (the "Lender"). Concurrently with the execution of this Agreement, the Lender purchased two stockholder notes issued by the Company previously in the original principal amount of $1,000,000 with an aggregate outstanding balance as of March 7, 2019 of $1,947,133 including accrued interest. The stockholder notes were accruing interest at the rate of 2.5% per month. The Lender agreed to refrain and forbear from bringing any action to collect under the stockholder notes until March 7, 2020 and to reduce the interest rates currently in effect to 12.0% per annum simple interest during such forbearance period. The Company also agreed to, at Lender's election, repay or exchange the stockholder notes (or portions thereof) for shares of the Company's common stock at an exchange rate of $13.44 per share or, beginning September 2019, at 95% of the average of the two lowest closing bid prices in the prior twenty trading days, as applicable.

In September 2019, the Lender began exchanging the outstanding principal and accrued interest from those notes for the Company’s common stock per the terms of a forbearance agreement dated March 7, 2019. During the three months ended December 31, 2019, the remaining unsecured notes with a carrying amount of $977,966 and accrued interest of $570,460 were exchanged for 1,475,258 shares of the Company’s common stock at a weighted average exchange price of $1.10. As of December 31, 2019, these unsecured notes were no longer outstanding.

During the three months ended December 31, 2019 and 2018, the Company recognized interest expense related to the unsecured notes of $12,997 and $75,000, respectively.

 

9.    Leases

 

The Company has finance leases for its corporate office and a commitment under an operating lease for warehouse space in the State of New Jersey.  The Company’s leases for the corporate office and warehouse mature in February 2028 with two five-year renewal options and in September 2021, respectively. The terms of the equipment leases are between 12 and 36 months and are recorded as finance leases. The equipment leases bear interest between 4.0% and 19.4% and the effective interest rate on the corporate office lease is 43.9%. Certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include minimum payments that the Company is obligated to make under the non-cancelable initial terms of the leases as the renewal terms are at the Company’s option. Lease expense is included in research and development or general and administrative based on the use of the lease asset.

12

Table of Contents

Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

 

The components of lease cost for the three-month period ended December 31, 2019 are as follows:

 

 

 

 

 

 

Three months ended

 

    

December 31, 2019

Finance lease cost:

 

 

  

Amortization of right-of-use assets

 

$

75,000

Interest on lease liabilities

 

 

372,223

Total finance lease cost

 

 

447,223

Operating lease cost

 

 

43,625

Total lease cost

 

$

490,848

 

Amounts reported in the consolidated balance sheets for leases where the Company is the lessee as of December 31, 2019 were as follows:

 

 

 

 

 

    

December 31, 2019

Operating leases:

 

 

  

Right-of-use asset

 

$

282,107

Operating lease liabilities

 

 

312,357

Finance leases:

 

 

  

Right-of-use asset

 

$

2,450,000

Financing lease liabilities

 

 

3,517,114

Weighted-average remaining lease term (years):

 

 

  

Operating leases

 

 

1.8

Finance leases

 

 

7.7

Weighted-average discount rate:

 

 

  

Operating leases

 

 

9.0%

Finance leases

 

 

41.8%

 

Other information related to leases for the three-month period ended December 31, 2019 are as follows:

 

 

 

 

 

 

Three months ended

 

    

December 31, 2019

Cash paid for amounts included in the measurement of lease obligations:

 

 

  

Operating cash flows from finance leases

 

$

358,159

Operating cash flows from operating leases

 

 

46,875

Financing cash flows from finance leases

 

 

55,031

Right-of-use assets obtained in exchange for lease obligations:

 

 

  

Operating leases

 

$

 —

Finance leases

 

 

 —

 

13

Table of Contents

Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

 

Future minimum lease payments under non-cancelable leases as of December 31, 2019 are as follows for the years ending September 30:

 

 

 

 

 

 

 

 

    

Operating leases

    

Finance leases

2020 (remaining nine months)

 

$

140,625

 

$

1,208,977

2021

 

 

195,000

 

 

1,518,146

2022

 

 

 —

 

 

1,535,809

2023

 

 

 —

 

 

1,564,028

2024

 

 

 —

 

 

1,597,371

Thereafter

 

 

 —

 

 

5,753,515

Total undiscounted lease payments

 

$

335,625

 

$

13,177,846

Less: Imputed interest

 

 

23,268

 

 

9,660,732

Total lease obligations

 

$

312,357

 

$

3,517,114

 

Future minimum rental payments under non-cancelable leases prior to adoption of ASC 842, Leases, as of September 30, 2019 were as follows:

 

 

 

 

 

 

 

 

 

    

Operating leases

    

Finance leases

2020

 

$

187,500

 

$

1,608,067

2021

 

 

195,000

 

 

1,506,592

2022

 

 

 —

 

 

1,535,809

2023

 

 

 —

 

 

1,564,027

2024

 

 

 —

 

 

1,593,291

Thereafter

 

 

 —

 

 

5,691,492

Total undiscounted lease payments

 

$

382,500

 

$

13,499,278

Less: Imputed interest

 

 

 —

 

 

9,941,198

Total lease obligations

 

$

382,500

 

$

3,558,080

 

Lease termination obligation

In August 2018, the Company entered into a lease termination agreement effective September 1, 2018, to terminate the lease for office and laboratory space in Cranbury, New Jersey. In consideration for the termination of the lease, the Company agreed to make payments to the landlord totaling up to $5.8 million, which includes (i) $287,615 upon execution of the termination agreement, (ii) $50,000 per month for up to 30 months, commencing September 1, 2018, and (iii) a $4.0 million payment, in any event, on or before February 1, 2021. The Company and landlord agreed that the $174,250 security deposit will be used to pay the 7th, 8th, 9th and a portion of the 10th monthly payments. The Company may pay the final $4.0 million payment at any time, whereupon the Company’s obligation to make the remaining monthly payments terminates.

At December 31, 2019, the lease termination obligation of $3,923,913 is included in other liabilities on the consolidated balance sheets. A roll forward of the charges incurred to general and administrative expense for the three months ended December 31, 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

Expensed / Accrued

 

Cash

 

Balance

 

    

October 1, 2019