Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This Annual Report on Form 10-K, including the following sections, contains forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see Item 1A “Risk Factors” in this Annual Report on Form 10-K. See also “Cautionary Note Regarding Forward-Looking Statements and Industry Data.” We caution the reader not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Form 10-K.

Overview

We are a late clinical-stage biopharmaceutical company working to develop the first U.S. Food and Drug Administration, or FDA, approved ophthalmic formulation of bevacizumab for use in retinal indications. Our goal is to launch ONS-5010 directly or through a strategic partner as the first and only approved bevacizumab in the United States, Europe, Japan and other markets for the treatment of wet age-related macular degeneration, or wet AMD, diabetic macular edema, or DME, and branch retinal vein occlusion, or BRVO, and we are in active late-stage discussions for the licensing and/or co-development rights to ONS-5010.

ONS-5010 (LYTENAVA (bevacizumab-vikg)), our sole product candidate in active clinical development, is an investigational ophthalmic formulation of bevacizumab, which we are developing to be administered as an intravitreal injection for the treatment of wet AMD and other retinal diseases. Bevacizumab is a full-length, humanized anti-VEGF (Vascular Endothelial Growth Factor) recombinant monoclonal antibody, or mAb, that inhibits VEGF and associated angiogenic activity. The study design for our Phase 3 clinical program to evaluate ONS-5010 as an ophthalmic formulation of bevacizumab was reviewed at an end of Phase 2 meeting with the FDA in April 2018, and we filed our investigational new drug application, or IND, with the FDA in the first quarter of calendar 2019.

Our registration plans for wet AMD, the initial indication planned for ONS-5010, consists of three clinical trials which we refer to as NORSE ONE, NORSE TWO and NORSE THREE. We reported achieving the anticipated safety and efficacy and positive proof-of-concept topline results from NORSE ONE, a clinical experience study, in August 2020. NORSE TWO is our masked, randomized, pivotal Phase 3 clinical trial that serves as the second of our two required clinical trials evaluating ONS-5010 against ranibizumab for wet AMD. Enrollment is complete with a total of 227 primarily treatment naïve patients enrolled at 39 clinical trial sites in the United States. NORSE THREE is an open-label safety study being conducted to ensure the adequate number of safety exposures to ONS-5010 are available for the initial regulatory filings in wet AMD. A total of 195 patients were enrolled during October 2020 with a range of retinal diseases for which an anti-VEGF drug is a therapeutic option, including wet AMD, DME and BRVO. Patients in NORSE 3 will receive three doses of ONS-5010 over three months. Enrollment is now complete. As of October 2020, all three of the clinical trials required for our planned BLA submission for wet AMD in the second half of calendar 2021 have either been completed or are fully enrolled.

We have also received agreement from the FDA on three Special Protocol Assessments, or SPAs, for three additional registration clinical trials for our ongoing Phase 3 program for ONS-5010. The agreements reached with the FDA on these SPAs cover the protocols for NORSE FOUR, a registration clinical trial evaluating ONS-5010 to treat BRVO, and NORSE FIVE and NORSE SIX, two registration clinical trials evaluating ONS-5010 to treat DME. We intend to initiate these studies in 2021 after submission of our BLA for wet AMD.

Currently, the cancer drug Avastin (bevacizumab) is used off-label for the treatment of wet AMD and other retinal diseases such as DME and BRVO even though Avastin has not been approved by regulatory authorities for use in these diseases. If the ONS-5010 clinical program is successful, it will support our plans to submit for regulatory approval in multiple markets in 2021 including the United States, United Kingdom, Europe and Japan, as well as other markets. Because there are no approved bevacizumab products for the treatment of retinal diseases in such major markets, we are developing ONS-5010 as a standard Biologics License Application, or BLA, and not using the biosimilar drug development pathway

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that would be required if Avastin were an approved drug for the targeted diseases. If approved, we believe ONS-5010 has potential to mitigate risks associated with off-label use of unapproved bevacizumab. Off-label use of unapproved bevacizumab is currently estimated to account for at least 50% of all wet AMD prescriptions in the United States.

Going Concern

Through September 30, 2020, we have funded substantially all of our operations with $278.3 million in proceeds from the sale and issuance of our equity and debt securities. We have also received $29.0 million pursuant to our collaboration and licensing agreements through such date.

On May 6, 2020, we terminated our lease for office space in Cranbury, New Jersey and relocated our headquarters to Monmouth Junction, New Jersey, a site previously used by us as our warehouse location. We expect that the termination of the Cranbury office lease will reduce our cash needs by approximately $14.0 million over the remaining life of the original lease, through February 2028.

On November 5, 2020, we received $10.0 million in net proceeds from issuance of an unsecured promissory note with face amount of $10.2 million. The note bears interest at a rate of 7.5% per annum, matures January 1, 2022, and includes an original issue discount of $0.2 million. We may prepay all or a portion of the note at any time by paying 105% of the outstanding balance elected for pre-payment. In November 2020, we repaid $3.6 million of unsecured stockholder notes that were due on demand as of September 30, 2020.

As described in their audit report included elsewhere in this Annual Report on Form 10-K, our auditors have included an explanatory paragraph that states that we have incurred recurring losses and negative cash flows from operations and have an accumulated deficit at September 30, 2020 of $289.7 million, which raises substantial doubt about our ability to continue as a going concern.We will need to raise substantial additional capital to fund our planned future operations, commence clinical trials, receive approval for and commercialize ONS-5010, or to develop other product candidates. We plan to finance our future operations with a combination of proceeds from potential licensing and/or marketing arrangements with pharmaceutical companies, the issuance of equity securities, and the issuance of additional debt, potential collaborations and revenues from potential future product sales, if any. There are no assurances that we will be successful in obtaining an adequate level of financing for the development and commercialization of ONS-5010 or any other current or future product candidates. If we are unable to secure adequate additional funding, our business, operating results, financial condition and cash flows may be materially and adversely affected. Our consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

We do not have any products approved for sale and we have only generated revenue from our collaboration agreements. We have incurred operating losses and negative operating cash flows since inception and there is no assurance that we will ever achieve profitable operations, and if achieved, that profitable operations will be sustained. Our net loss for the year ended September 30, 2020 was $35.2 million. We also had a net loss of $34.5 million for the year ended September 30, 2019. In addition, development activities, clinical and preclinical testing and commercialization of our product candidates will require significant additional financing.

Impacts of the COVID-19 Pandemic

We continue to monitor the ongoing COVID-19 global pandemic, which has resulted in travel and other restrictions to reduce the spread of the disease. To date, we have experienced only minor disruptions from the ongoing COVID-19

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pandemic, including a brief delay in patient enrollment and recruitment in NORSE TWO due to local clinical trial site protocols designed to protect staff and patients. Given our current infrastructure needs and current strategy, we were able to transition to remote working with limited impact on productivity, as shelter-in-place and other types of local and state orders were imposed. We have confirmed with the Ophthalmic Division of the FDA that it considers both approved and investigational treatments for sight-threatening conditions such as wet AMD not to be elective, and that as such they should continue during the COVID-19 restrictions. All clinical and chemistry, manufacturing and control, or CMC, activities are currently active.

All three of our clinical trials have completed enrollment and NORSE ONE has also completed patient follow-up activities. NORSE TWO and THREE patients continue to require monthly follow-up visits, which will continue over the next 12 and 3 months, respectively. To date, we have not experienced any significant COVID-19 disruptions to patient follow-up but the clinical trial protocol accounts for potential delayed or missed visits for any reason, including COVID-19 type interruptions. The FDA has provided guidance in the event of COVID-19 disruptions and we intend to confer with the FDA and follow the appropriate guidance in the event that NORSE TWO experiences an unusually high number of delayed or missed patient visits due to COVID-19.

The safety, health and well-being of all patients, medical staff and our internal and external teams is paramount and is our primary focus. As shelter-in-place rules evolve in jurisdictions across the country, we are aware that the potential exists for further disruptions to our projected timelines. We are in close communication with our clinical teams and key vendors and are prepared to take action should the pandemic worsen and impact our business in the future.

The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of any impacts the evolving COVID-19 pandemic may have on our business, operations, financial position and our clinical and regulatory activities. See also the section titled “Risk Factors” herein for additional information on risks and uncertainties related to the ongoing COVID-19 pandemic.

Collaboration and License Agreements

From time to time, we enter into collaboration and license agreements for the research and development, manufacture and/or commercialization of our products and/or product candidates. These agreements generally provide for non-refundable upfront license fees, development and commercial performance milestone payments, cost sharing, royalty payments and/or profit sharing. We have also licensed rights to our inactive biosimilar product candidates (ONS-3010, ONS-1045 and ONS-1050) in other markets and are in active late-stage discussions for the licensing and/or co-development rights to ONS-5010.

MTTR, LLC – ONS 5010

In January 2020, we agreed to terminate our February 2018 arrangement with MTTR LLC, or MTTR, for ONS-5010. Following receipt of necessary stockholder approval, in March 2020, we issued an aggregate of 7,244,739 shares of our common stock to the four principals of MTTR (who include two of our named executive officers, Mr. Dagnon and Mr. Evanson) pursuant to individual consulting agreements we entered into with each of them, and paid MTTR a one-time settlement fee of $110,000. The consulting agreements also include terms setting for the respective compensation arrangements of each of the principals, including for Mr. Dagnon and Mr. Evanson, who have been serving as executive officers since November 2018.

See also Item 1 “Business—Collaboration and License Agreements—MTTR-Strategic Parternship Agreement (ONS-5010).”

MTTR and its four principals under the strategic partnership agreement and the subsequent individual consulting agreements earned an aggregate $1,294,089 and $1,744,933 during the years ended September 30, 2020 and 2019, respectively, which includes monthly consulting fees and expense reimbursement, but excludes stock-based compensation related to restricted stock.

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Syntone – Private Placement and PRC Joint Venture

In May 2020, we entered into a stock purchase agreement with Syntone, pursuant to which we sold and issued in June 2020, in a private placement, 16,000,000 shares of our common stock at a purchase price of $1.00 per share, for aggregate gross proceeds of $16.0 million. In connection with the entry into the stock purchase agreement, we entered into a joint venture agreement with Syntone’s People’s Republic of China, or PRC, based-affiliate, pursuant to which we agreed to form a PRC joint venture that will be 80% owned by Syntone’s PRC-affiliate and 20% owned by us. Once formed, we intend to enter into a royalty-free license with the PRC joint venture for the development, commercialization and manufacture of ONS-5010 in the greater China market, which includes Hong Kong, Taiwan and Macau.

Selexis SA

In October 2011, we entered into a research license agreement with Selexis whereby we acquired a non-exclusive license to conduct research internally or in collaboration with third parties to develop recombinant proteins from cell lines created in mammalian cells using the Selexis expression technology, or the Selexis Technology. The research license expired on October 9, 2018 and accordingly, we are no longer using the Selexis Technology in our research.

Selexis also granted us a non-transferrable option to obtain a perpetual, non-exclusive, worldwide commercial license under the Selexis Technology to manufacture, or have manufactured, a recombinant protein produced by a cell line developed using the Selexis Technology for clinical testing and commercial sale. We exercised this option in April 2013 and entered into three commercial license agreements with Selexis for our ONS-3010, ONS-1045 (which covers ONS-5010) and ONS-1050 product candidates. We paid an upfront licensing fee to Selexis for each commercial license and also agreed to pay a fixed milestone payment for each licensed product. In addition, we are required to pay a single-digit royalty on a final product-by-final product and country-by-country basis, based on worldwide net sales of such final products by us or any of our affiliates or sub-licensees during the royalty term. At any time during the term, we have the right to terminate our royalty payment obligation by providing written notice to Selexis and paying Selexis a royalty termination fee. The initiation of our Phase 3 clinical program for ONS-5010 triggered a CHF 65,000 (approximately $0.1 million) milestone payment under the commercial license agreement, which we paid in November 2019.

Components of Our Results of Operations

Collaboration Revenue

To date, we have derived revenue only from activities pursuant to our emerging market collaboration and licensing agreements related to our inactive biosimilar development program. We have not generated any revenue from commercial product sales. For the foreseeable future, we expect all of our revenue, if any, will be generated from our collaboration and licensing agreements. If any of our product candidates currently under development are approved for commercial sale, we may generate revenue from product sales, or alternatively, we may receive royalties from any collaborator we select to commercialize our product candidates.

Each of our collaboration and licensing agreements was considered to be a multiple-element arrangement for accounting purposes. We determined that there were two deliverables; specifically, the license to our product candidate and the related research and development services that we were obligated to provide. We concluded that these deliverables should be accounted for as a single unit of accounting and revenue was being recognized on a straight-line basis through the estimated period of completion of our obligations under the agreement. As of September 30, 2019, all future development will be completed by our partners without any further assistance by us, accordingly, we recognized all remaining deferred revenue under our collaboration agreements as of September 30, 2019. We did not recognize any collaboration revenue in the fiscal year ended September 30, 2020.

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Research and Development Expenses

Research and development expense consists of expenses incurred in connection with the discovery and development of our product candidates. We expense research and development costs as incurred. These expenses include:

● outsourced professional scientific development services;

● laboratory materials and supplies used to support our research activities; and

● allocated expenses, utilities and other facility-related costs.

The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from any of our other product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:

● the number of clinical sites included in the trials;

● the length of time required to enroll suitable patients;

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

● the number of doses patients receive;

● the duration of patient follow-up;

● the results of our clinical trials;

● the establishment of commercial manufacturing capabilities;

● the receipt of marketing approvals; and

● the commercialization of product candidates.

Our expenditures are subject to additional uncertainties, including the terms and timing of regulatory approvals. We may never succeed in achieving regulatory approval for any of our biosimilar product candidates. We may obtain unexpected results from our clinical trials. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of these variables with respect to the development of a product candidate

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could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the U.S. Food and Drug Administration, or FDA, or other regulatory authorities were to require us to conduct clinical trials beyond those that we currently anticipate, or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. Product commercialization will take several years and millions of dollars in development costs.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size, complexity and duration of later-stage clinical trials.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, administrative, finance and legal functions, including stock-based compensation, travel expenses and recruiting expenses. Other general and administrative expenses include facility related costs, patent filing and prosecution costs and professional fees for business development, legal, auditing and tax services and insurance costs.

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

Interest Expense

Interest expense consists of cash paid and non-cash interest expense related to our senior secured notes, and unsecured notes with current and former stockholders, equipment loans, lease liabilities and other finance obligations.

Loss on Extinguishment of Debt

During the year ended September 30, 2020, we recorded a loss on extinguishment of $1.9 million in connection with the exchange of our old senior secured notes for new senior secured notes in December 2019 and the exchange of the remaining outstanding principal and accrued interest on all new senior secured notes for shares of our common stock during the third quarter in fiscal 2020. The new senior secured notes were considered substantially different from the old notes, as such, they qualified for extinguishment accounting.

We recorded a loss on extinguishment of debt of $0.6 million during the year ended September 30, 2019 in connection with a forbearance and exchange agreement in March 2019 pursuant to which a third party purchased two stockholder notes previously issued in an aggregate original principal amount of $1.0 million with an aggregate outstanding balance of $1.9 million, including accrued interest.

Change in Fair Value of Redemption Feature

Change in fair value of the redemption feature reflects the change in the fair value of the embedded derivative contained in the new senior secured notes issued in December 2019, as a result of the fact that such notes were convertible into a variable number of shares of our common stock and at a discount that was deemed to be substantial. This embedded derivative was recorded at fair value and was subject to re-measurement at each balance sheet date until our obligations under the new senior secured notes were satisfied.

Change in Fair Value of Warrant Liability

We issued warrants to purchase our common stock in conjunction with our old senior secured notes, which are classified as liabilities and recorded at fair value. The warrants are subject to re-measurement at each balance sheet date and we recognize any change in fair value in our statements of operations as other (income) expense.

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Income Taxes

During the years ended September 30, 2020 and 2019, we sold New Jersey State net operating losses, or NOLs, in the amount of $33.3 million and $31.2 million, respectively, and unused research and development, or R&D, tax credits in the amount of $0.6 million and $0.9 million, respectively, resulting in the recognition of income tax benefits of $3.3 million and $3.4 million respectively, recorded in our statement of operations.

Since inception, we have not recorded any U.S. federal or state income tax benefits (excluding the sale of New Jersey state NOLs and R&D tax credits) for the net losses we have incurred in each year or on our earned R&D tax credits, due to our uncertainty of realizing a benefit from those items. As of September 30, 2020, we had federal and state NOL carryforwards of $236.5 million and $72.3 million, respectively, that will begin to expire in 2030 and 2038, respectively. As of September 30, 2020, we had federal foreign tax credit carryforwards of $2.4 million available to reduce future tax liabilities, which begin to expire starting in 2023. As of September 30, 2020, we also had federal research and development tax credit carryforwards of $6.6 million and $0.3 million, respectively, which begin to expire in 2032 and 2033, respectively.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an "ownership change" is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We have not completed a study to assess whether an ownership change has occurred in the past. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Our NOLs are also subject to international regulations, which could restrict our ability to utilize our NOLs. Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities.

Furthermore, our ability to utilize NOLs of companies that we may acquire in the future may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities.

Results of Operations

Comparison of Years Ended September 30, 2020 and 2019

Year ended September 30,

Operating expenses:

Change in fair value of redemption feature (1,796,982) — (1,796,982)

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Collaboration Revenues

The following table sets forth a summary of revenue recognized from our collaboration and licensing agreements for the years ended September 30, 2020 and 2019:

Year ended September 30,

IPCA Collaboration $ — $ 1,664,085

Liomont Collaboration — 1,097,412

Huahai Collaboration — 4,828,584

BioLexis Collaboration — 556,042

There were no collaboration revenues for the year ended September 30, 2020 as compared to $8.1 million for the year ended September 30, 2019. The decrease is due to the full recognition of IPCA, Liomont, and Huahai deferred revenue during the fourth quarter of fiscal 2019, after we determined that we had no further performance obligations on these collaboration arrangements. During fourth quarter of fiscal year 2019, we substantially completed our efforts to outsource the commercial manufacturing and remaining development for the ONS-5010 program, resulting in the termination of the majority of manufacturing and development personnel and initiation of efforts to sell or transfer excess manufacturing, laboratory and related computer equipment no longer required for the development of ONS-5010. As a result, we no longer have the internal capability to support our inactive development programs for ONS-3010 (biosimilar for Humira) and ONS-1045 (biosimilar for Avastin) and currently do not intend to complete the development of these assets in the United States and other developed markets. We expect that all future development for the biosimilar programs, if any, will be completed by our existing partners without further assistance from us. In addition, BioLexis collaboration revenue was recognized in full during the second quarter of fiscal 2019.

Research and Development Expenses

The following table summarizes our research and development expenses by functional area for the years ended September 30, 2020 and 2019:

Year ended September 30,

Research and development expenses for the year ended September 30, 2020 increased by $2.5 million compared to the year ended September 30, 2019. We saw a significant increase in ONS-5010 development costs of $10.5 million as we advanced and fully enrolled our NORSE TWO Phase 3 clinical trial during the year and initiated the necessary process characterization and manufacturing scale up activities with external partners to support our planned BLA filing in 2021. These increased costs were offset by decreased other research and development costs of $5.0 million and lower compensation costs including stock-based compensation of $3.0 million due to the discontinuation of in house development and manufacturing related activities.

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General and Administrative Expenses

The following table summarizes our general and administrative expenses by type for the years ended September 30, 2020 and 2019:

Year ended September 30,

General and administrative expenses for the year ended September 30, 2020 increased by $0.6 million compared to the year ended September 30, 2019. The increase was primarily due to a $0.7 million lease termination loss recognized upon termination of our lease at our former corporate headquarters in Cranbury, New Jersey.

Impairment of Property and Equipment

During the year ended September 30, 2020, we recorded an impairment charge of $0.5 million primarily due to the write-off of assets held for sale after we determined that the carrying amount of these assets was not recoverable as result of the May 2020 termination of our remaining lease for office, manufacturing and laboratory space at our former corporate headquarters in Cranbury, New Jersey and relocation of our corporate headquarters to our warehouse space in Monmouth Junction, New Jersey.

During the year ended September 30, 2019, we recognized a loss on impairment of property and equipment of $11.3 million. The impairment was recognized due to the substantial completion of our efforts to outsource the commercial manufacturing and remaining development for the ONS-5010 program during the fourth quarter of fiscal 2019. As a result, we were no longer using the manufacturing or development areas of our facility and had been engaged in an effort to sublease all or a portion of the facility and sell or transfer excess manufacturing, laboratory and related computer equipment no longer required for the development of ONS-5010. For a discussion of the impairment analysis, refer to Item 8 “Consolidated Financial Statements and Supplementary Data - Notes to the Consolidated Financial Statements – Note 5 - Property and Equipment.”

Interest Expense, Net

Interest expense, net decreased by $1.7 million to $1.8 million for the year ended September 30, 2020 as compared to $3.5 million for the year ended September 30, 2019. The decrease was primarily due to the termination of the finance lease for the corporate and manufacturing space in Cranbury, New Jersey and the reduction of outstanding principal amount of notes and other indebtedness due to exchanges of such indebtedness for shares of our common stock in fiscal 2020 and partially due to repayments in fiscal 2019.

Change in Fair Value of Warrant Liability

During the years ended September 30, 2020 and 2019, we recorded income of $0.2 and $2.4 million, respectively, related to the decrease in the fair value of our common stock warrant liability as a result of the decrease in the price of our common stock during the period.

Liquidity and Capital Resources

We have not generated any revenue from product sales. Since inception, we have incurred net losses and negative cash flows from our operations. Through September 30, 2020, we have funded substantially all of our operations through the sale and issuance of $278.3 million net proceeds of our equity securities, debt securities and borrowings under debt

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facilities. We have also received an aggregate of $29.0 million pursuant to emerging markets collaboration and licensing agreements for our inactive biosimilar development programs.

Our current cash resources of $12.5 million as of September 30, 2020 together with the $10.0 million in proceeds from an unsecured promissory note we issued in November 2020, after taking into account repayment of $3.6 million of debt, are expected to fund our operations into March 2021. As of September 30, 2020, we had stockholders’ equity of $4.6 million. In addition, $3.6 million unsecured notes, which were due on demand as of such date, and $0.9 million loan granted pursuant to the PPP of the CARES Act, which matures on May 2, 2022 are outstanding as of September 30, 2020. These factors raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. We anticipate incurring additional losses until such time, if ever, that we can generate significant sales of ONS-5010 or any other product candidate we may develop. We will need substantial additional financing to fund our operations and to commercially develop ONS-5010 or any other product candidate we may develop. Management is currently evaluating various strategic opportunities to obtain the required funding for future operations. These strategies may include but are not limited to payments from potential strategic research and development, licensing and/or marketing arrangements with pharmaceutical companies, private placements and/or public offerings of equity and/or debt securities. Although we are in active late-stage discussions for the licensing and/or co-development rights to ONS-5010, there can be no assurance that these future funding efforts will be successful. Alternatively, we will be required to, among other things, make further reductions in our workforce, scale back our plans and place certain activities on hold, discontinue our development programs, liquidate all or a portion of our assets, and/or seek protection under the provisions of the U.S. Bankruptcy Code.

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

Cash Flows

The following table summarizes our cash flows for each of the years presented:

Year ended September 30,

Net cash used in investing activities (900,000) (437,307)

Operating Activities

During the year ended September 30, 2020, we used $31.8 million of cash in operating activities resulting primarily from our net loss of $35.2 million and the change in our operating assets and liabilities of $3.0 million. This use of cash was partially offset by $4.7 million of non-cash items such as change in fair value of redemption feature, non-cash interest expense, stock-based compensation, change in fair value of warrant liability, impairment of property and equipment, loss on extinguishment of debt, loss on lease termination, and depreciation and amortization expense. The change in our operating assets and liabilities of $1.3 million was primarily due to an increase in our prepaid expenses of $0.3 million associated with our ONS 5010 development costs and a decrease in our accounts payable and operating lease liability of

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$1.7 million primarily due to payments in fiscal 2020 offset by an increase in accrued expenses of $0.7 million associated with our ONS 5010 development costs and clinical trial costs.

During the year ended September 30, 2019, we used $32.3 million of cash in operating activities resulting primarily from our net loss of $34.5 million and the change in our operating assets and liabilities of $13.2 million. This use of cash was partially offset was partially offset by $15.4 million of noncash items such as non-cash interest expense, stock-based compensation, change in fair value of warrant liability, impairment of property and equipment, loss on extinguishment of debt and depreciation and amortization expense. The change in our operating assets and liabilities was primarily due (i) to prepayments associated with our clinical trials and ONS 5010 development costs; (ii) payments of our accounts payable and accrued expenses from September 30, 2018; and (iii) full recognition of our deferred revenues balances from collaborations as September 30, 2019.

Investing Activities

During the year ended September 30, 2020, we used cash of $0.9 million in investing activities for the initial investment in our planned PRC joint venture.

During the year ended September 30, 2019, we used cash of $0.4 million in investing activities for the purchase of property and equipment.

Financing Activities

During the year ended September 30, 2020, net cash provided by financing activities was $37.2 million, primarily attributable to $9.2 million in net proceeds from a February 2020 registered direct offering and concurrent private placement; $16.0 million in net proceeds from the initial private placement to Syntone; and $9.2 million in net proceeds from the registered direct offering in June 2020, and $1.0 million from a concurrent private placement that closed in July 2020. We also received $1.1 million in net proceeds from the exercise of common stock warrants and $0.9 million in proceeds from the PPP loan. We made $0.3 million in debt and finance lease obligations payments during the year ended September 30, 2020.

During the year ended September 30, 2019, net cash provided by financing activities was $39.0 million, primarily attributable to $19.8 million in net proceeds from the November 2018 BioLexis private placement, and $26.2 million in net proceeds from the April 2019 public offering. We also paid $6.9 million in debt and lease obligations payments.

Funding Requirements

We plan to focus in the near term on advancing ONS-5010 through clinical trials to support the filing of a Biologics License Application with the FDA to support the generation of commercial revenues. We anticipate we will incur net losses and negative cash flow from operations for the foreseeable future. We may not be able to complete the development and initiate commercialization of ONS-5010 if, among other things, our clinical trials are not successful or if the FDA does not approve our application arising out of our current clinical trials when we expect, or at all, or if we are not able to enter into a licensing deal for ONS-5010 providing for sufficient funding of our expected development costs and we are unable to obtain such funding elsewhere.

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, manufacturing and facility costs, external research and development services, laboratory and related supplies, legal and other regulatory expenses, and administrative and overhead costs. Our future funding requirements will be heavily determined by the resources needed to support development of our lead product candidate and any other product candidates we may choose to pursue.

We believe our existing cash as of September 30, 2020 of $12.5 million together with the $10.0 million in proceeds from the November 2020 issuance of an unsecured promissory note, after taking into account repayment of $3.6 million of debt, is expected to fund our operations into March 2021. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. We will need to raise substantial

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additional capital in order to complete our planned ONS-5010 development program. We plan to finance our future operations with a combination of proceeds from potential strategic collaborations, sale of the development and commercial rights to our drug product candidates, the issuance of equity securities, the issuance of additional debt, and revenues from potential future product sales, if any. If we raise additional capital through the sale of equity or convertible debt securities, your ownership will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a holder of our common stock. There are no assurances that we will be successful in obtaining an adequate level of financing for the development and commercialization of ONS-5010 or any other current or future product candidates. Alternatively, we will be required to, among other things, modify our clinical trial plans for ONS-5010 in additional indications, make reductions in our workforce, scale back our plans and place certain activities on hold, discontinue our development programs, liquidate all or a portion of our assets, and/or seek protection under the provisions of the U.S. Bankruptcy Code.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical products, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on many factors, including:

● the number and characteristics of the product candidates we pursue;

See Item 1A “Risk Factors” for additional risks associated with our substantial capital requirements.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reported period. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions.

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While our significant accounting policies are described in more detail in the notes to our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements

Revenue Recognition

On October 1, 2018, we adopted Accounting Standards Update, or ASU No. 2014-09, Revenue from Contracts with Customers, and changed our revenue recognition policies accordingly. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about:

Our arrangements fall under Accounting Standards Codification, or ASC, Topic 808, Collaborative Arrangements, or ASC 808. ASC 808 does not address recognition or measurement matters but prescribes that entities look to other GAAP by analogy, namely ASU 2014-09. As such, we completed an analysis of existing contracts with our collaboration partners and assessed the differences in accounting for such contracts under ASU 2014-09 compared with current revenue accounting standards. We previously recognized substantive milestones in the period the milestones were achieved, but ASU 2014-09 prescribes that those milestones are a form of variable consideration that results in such amounts being recognized over the estimated performance period. During the fiscal year ended September 30, 2019, we would have recognized $4.5 million of collaboration revenues under revenue recognition guidance in effect during fiscal 2018 prior to the adoption of ASU 2014-09.

Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers require advance payments; however, some invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met. We make estimates of our prepaid expenses and accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of the estimates with the service providers and make adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:

● vendors in connection with preclinical development activities

● CMOs for the production of preclinical and clinical trial materials;

● CROs in connection with clinical trials; and

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● clinical trial sites.

We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions and CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, we have not made any material adjustments to our prior estimates of accrued research and development expenses.

We estimate the fair value of stock options as of the date of grant and warrant liability at the end of each reporting period using the Black-Scholes option pricing model, which requires management to apply judgment and make estimates including the volatility of our common stock, the expected term of our stock options, the expected dividend yield and the fair value of our common stock on the date of grant. We estimate the fair value of restricted stock based on the closing price of our common stock on the date of grant.

JOBS Act Accounting Election

The JOBS Act permits an “emerging growth company” such as our company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.

Recently Issued Accounting Pronouncements

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, or 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. We are currently evaluating the impact of the adoption of this standard.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

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Item 8. Consolidated Financial Statements and Supplementary Data

OUTLOOK THERAPEUTICS, INC.

ANNUAL REPORT ON FORM 10-K

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm 81

Consolidated Balance Sheets 82

Consolidated Statements of Operations 83

Consolidated Statements of Cash Flows 85

Notes to Consolidated Financial Statements 86

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Outlook Therapeutics, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Outlook Therapeutics, Inc. and subsidiaries (the Company) as of September 30, 2020 and 2019, the related consolidated statements of operations, convertible preferred stock and stockholders’ equity (deficit), and cash flows for the years then ended and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred recurring losses and negative cash flows from operations since its inception and has an accumulated deficit of $289.7 million as of September 30, 2020 that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2015.

Philadelphia, Pennsylvania

December 23, 2020

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Outlook Therapeutics, Inc.

Consolidated Balance Sheets

September 30,

Assets

Current assets:

Assets held for sale — 500,000

Operating lease right-of-use assets, net 166,986 —

Current liabilities:

Convertible senior secured notes $ — $ 6,699,000

Current portion of finance lease liabilities 29,778 192,290

Current portion of operating lease liabilities 187,486 —

Other liabilities — 3,942,948

Commitments and contingencies (Note 10)

Convertible preferred stock:

Total convertible preferred stock — 5,359,404

Stockholders’ equity (deficit):

See accompanying notes to consolidated financial statements

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Outlook Therapeutics, Inc.

Consolidated Statements of Operations

Year ended September 30,

Collaboration revenues $ — $ 8,146,123

Operating expenses:

Change in fair value of redemption feature (1,796,982) —

Change in fair value of warrant liability (184,962) (2,438,201)

Deemed dividend upon modification of warrants (3,140,009) (829,530)

Per share information:

Net loss per share of common stock, basic and diluted $ (0.67) $ (1.98)

See accompanying notes to consolidated financial statements

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Outlook Therapeutics, Inc.

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

Convertible Preferred Stock Stockholders' Equity (Deficit)

Shares Amount Shares Amount Capital Deficit Equity (Deficit)

See accompanying notes to consolidated financial statements.

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Outlook Therapeutics, Inc. and Subsidiary

Consolidated Statements of Cash Flows

Year ended September 30,

OPERATING ACTIVITIES

Change in fair value of redemption feature (1,796,982) —

Change in fair value of warrant liability (184,962) (2,438,201)

Loss on lease termination 680,017 —

Changes in operating assets and liabilities:

Prepaid expenses and other current assets (310,270) (3,245,146)

Operating lease liability (164,686) —

Income taxes payable (2,805) 3,305

Deferred revenue — (8,146,123)

INVESTING ACTIVITIES

Purchase of property and equipment — (437,307)

Investment in joint venture (900,000) —

Net cash used in investing activities (900,000) (437,307)

FINANCING ACTIVITIES

Proceeds from debt 904,200 —

Proceeds from exercise of common stock warrants 1,138,900 4,350

Payments of finance lease obligations (215,074) (526,087)

Supplemental disclosure of cash flow information

Accrued interest settled by conversion into common stock $ 1,531,004 $ 1,393

Supplemental schedule of non-cash financing activities:

Unsecured notes principal converted into common stock $ 977,966 $ 480,000

Issuance of exchange notes at estimated fair value $ 7,050,206 $ —

Issuance of redemption feature at estimated fair value $ 8,264,451 $ —

Accrued directors' fees settled in fully vested stock options $ — $ 49,121

See accompanying notes to consolidated financial statements.

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

1. Organization and Operations

Description of the Business

Outlook Therapeutics, Inc., (formerly Oncobiologics, Inc.), ("Outlook" or the "Company") was incorporated in New Jersey on January 5, 2010, started operations in July 2011, 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 Monmouth Junction, New Jersey.

The Company has been actively monitoring the novel coronavirus (“COVID-19”) pandemic and its impact globally. Given the Company’s current infrastructure needs and current strategy, the Company was able to transition to remote working with limited impact on productivity, as shelter-in-place and similar government orders were imposed. All clinical and chemistry, manufacturing and control activities are currently active for NORSE ONE, NORSE TWO and NORSE THREE, the Company’s clinical trials under its Phase 3 program for ONS-5010.

The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition will depend on future developments that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19. Management believes the financial results for the year ended September 30, 2020 were not significantly impacted by COVID-19.

2. Liquidity

The Company has incurred recurring losses and negative cash flows from operations since its inception and has an accumulated deficit of $289.7 million as of September 30, 2020, which raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying 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 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 November 5, 2020, the Company received $10.0 million in net proceeds from issuance of an unsecured promissory note with face amount of $10.2 million. The note bears interest at a rate of 7.5% per annum, matures January 1, 2022, and includes an original issue discount of $0.2 million. The Company may prepay all or a portion of the note at any time by paying 105% of the outstanding balance elected for pre-payment. In November 2020, the Company repaid $3.6 million of unsecured stockholder notes that were due on demand as of September 30, 2020.

Management believes that the Company’s existing cash as of September 30, 2020 together with the $10.0 million in proceeds from the unsecured promissory note issued in November 2020, after taking into account repayment of $3.6 million of debt, is expected to fund its operations into March 2021. 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

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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 consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). 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”). The accompanying consolidated financial statements include the accounts of the Company and Outlook Therapeutics Pty Ltd, its wholly-owned subsidiary incorporated in Australia (the “Subsidiary”). All intercompany accounts and transactions have been eliminated in consolidation.The Company has determined the functional currency of the Subsidiary to be the U.S. dollar. The Company translates assets and liabilities of its foreign operations at exchange rates in effect at the balance sheet date. The Company records remeasurement gains and losses on monetary assets and liabilities, such as incentive and tax receivables and accounts payables, which are not in the functional currency of the operation. These remeasurement gains and losses are recorded in the consolidated statement of operations as they occur.

Use of estimates

The preparation of the 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 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 consolidated financial statements in the period they are determined to be necessary.

Fair value of financial instruments

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.

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.

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

At September 30, 2020 and 2019, the Company’s financial instruments included cash, accounts payable, accrued expenses, equipment loans, stockholder notes and the Paycheck Protection Program (the “PPP”) loan under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The carrying amount of accounts payable, accrued expenses, equipment loans, and stockholder notes approximates fair value due to the short-term maturities of these instruments.

Fair Value of Other Financial Instruments

As of September 30, 2020, the fair value and carrying value of the PPP loan included in long-term debt on the consolidated balance sheets was $837,000 and $904,200, respectively. The estimated fair value for the Company’s PPP loan was based on discounted expected future cash flows using prevailing interest rates which are Level 3 inputs under the fair value hierarchy.

Property and equipment

Property and equipment are recorded at cost. Depreciation and amortization is determined using the straight-line method over the estimated useful lives ranging from 3 to 10 years. Leasehold improvements are amortized over the term of the lease or the estimated useful life of the assets, whichever is shorter. Expenditures for maintenance and repairs are expensed as incurred while renewals and betterments are capitalized. When property and equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in operations.

Long-lived assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated. Impairment charges are recognized at the amount by which the carrying amount of an asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. The Company recognized an impairment charge of $0.5 million and $11.3 million during the years ended September 30, 2020 and 2019, respectively, which is described more fully in Note 5.

Leases

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 standard 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. 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 $3,909,448 pertaining to a lease for premises that had been leased in Cranbury, New Jersey for a planned office and laboratory expansion that did not materialize, and which prior termination remained unchanged as a result of the transition. Refer to Note 10 for the Company’s lease disclosures.

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

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 September 30, 2020.

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 incurred 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.

Stock-based compensation

The Company measures equity classified stock-based awards based on the estimated fair value on the date of grant and recognizes compensation expense of those awards on a straight-line basis over the requisite service period, which is generally the vesting period of the respective award. The Company accounts for forfeitures of stock option awards as they occur.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model, which is described more fully in Note 13. The fair value of each restricted stock award is measured as the fair value per share of the Company’s common stock on the date of grant.

Revenue recognition

On October 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) and changed its revenue recognition policies accordingly. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about:

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

The Company’s revenue is generated primarily through collaboration research and license agreements. The terms of these agreements generally contain multiple deliverables which may include (i) licenses, (ii) research and development activities, (iii) clinical manufacturing and, (iv) product supply. The payment terms of these agreements may include nonrefundable upfront fees, payments for research and development activities, payments based upon the achievement of certain milestones, royalty payments based on product sales derived from the collaboration, and payments for supplying product. The Company typically receives upfront, nonrefundable payments when licensing its intellectual property.

The Company’s arrangements fall under ASC 808, Collaborations (“ASC 808”). ASC 808 does not address recognition or measurement matters but prescribes that entities look to other GAAP by analogy, namely ASU 2014-09. As such, the Company completed an analysis of existing contracts with the Company’s collaboration partners and assessed the differences in accounting for such contracts under ASU 2014-09 compared with current revenue accounting standards. Under the ASU 2014-09, the Company treats substantive milestones as forms of variable consideration which is recognized over the estimated performance period. Payments or reimbursements resulting from the Company’s research and development efforts are recognized as the services are performed.

The Company adopted the new accounting standard utilizing the modified retrospective method and, therefore, no adjustments were made to amounts in its prior period financial statements. The Company recorded the cumulative effect of adopting the standard as an adjustment to increase accumulated deficit by $3.6 million. During the fiscal year ended September 30, 2020, the Company would have recognized $4.5 million of collaboration revenues under revenue recognition guidance in effect during fiscal 2018 prior to the adoption of ASU 2014-09.

Incentive and tax receivables

The Subsidiary is eligible to participate in an Australian research and development tax incentive program. As part of this program, the Subsidiary is eligible to receive a cash refund from the Australian Taxation Office for a percentage of the research and development costs expended by the Subsidiary in Australia. The cash refund is available to eligible companies with annual aggregate revenues of less than $20.0 million (Australian) during the reimbursable period. The Company’s estimate of the amount of cash refund it expects to receive related to the Australian research and development tax incentive program is included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. As of September 30, 2020, the Company’s estimate of the amount of cash refund it expects to receive in 2021 for 2020 eligible spending as part of this incentive program was $0.8 million. As of September 30, 2019, the Company had a receivable of $1.1 million which was received in 2020 as part of this incentive program.

In addition, the Subsidiary incurs Goods and Services Tax (“GST”) on services provided by Australian vendors. As an Australian entity, the Subsidiary is entitled to a refund of the GST paid. The Company’s estimate of the amount of cash refund it expects to receive related to GST incurred is included in prepaid expenses and other current assets in the accompanying consolidated balance sheet. As of September 30, 2019, prepaid expenses and other current assets included $0.1 million for refundable GST on expenses incurred with Australian vendors.

Research and development

Research and development costs are expensed as incurred and consist primarily of funds paid to third parties for the provision of services for product candidate development, clinical and preclinical development and related supply and manufacturing costs, and regulatory compliance costs. At the end of the reporting period, the Company compares payments made to third-party service providers to the estimated progress toward completion of the research or development objectives. Such estimates are subject to change as additional information becomes available. Depending on the timing of payments to the service providers and the progress that the Company estimates has been made as a result of the service provided, the Company may record net prepaid or accrued expense relating to these costs.

Upfront milestone payments made to third parties who perform research and development services on the Company’s behalf are expensed as services are rendered. Costs incurred in obtaining technology licenses are charged to research and

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

development expense as acquired in-process research and development if the technology licensed has not reached technological feasibility and has no alternative future use. Research and development expenses are recorded net of expected refunds of eligible research and development costs paid to Australian vendors pursuant to the Australian research and development tax incentive program and GST incurred on services provided by Australian vendors. During the years ended September 30, 2020 and 2019, the Company recorded $0.5 million and $1.2 million, respectively, in its consolidated statements of operations related to the cash refund it expected to receive from the Australian research and development tax incentive program.

Income taxes

The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to the extent it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Net loss per share

Basic 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 net 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 potentially dilutive securities have been excluded from the computation of diluted weighted-average shares outstanding as of September 30, 2020 and 2019, as they would be antidilutive:

As of September 30,

Series A-1 convertible preferred stock — 1,255,789

Convertible senior secured notes — 767,605

Convertible unsecured notes — 149,573

Performance-based stock units 2,470 15,691

Restricted stock units — 109

Recently issued accounting pronouncements

On October 1, 2019, the Company adopted ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting Compensation, issued by the FASB in June 2018. The amendments in this ASU expanded the scope of Compensation—Stock Compensation (“Topic 718”) to include share-based payment transactions for acquiring goods and services from nonemployees. The amendments specified that Topic 718 applied to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The Company applied the new guidance to share-based payments entered into after October 1, 2019, and the adoption of this standard did not have a material impact on the Company’s financial statements.

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OUTLOOK THERAPEUTICS, INC.

Notes to 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.

4. Fair Value Measurements

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

(Level 1) (Level 2) (Level 3)

Liabilities

Warrant liability $ — $ — $ 70,772

(Level 1) (Level 2) (Level 3)

Liabilities

Warrant liability $ — $ — $ 255,734

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 years ended September 30, 2020 and 2019:

Redemption

Warrants Feature

Write off due to extinguishment of senior secured notes — (6,467,469)

The warrants issued in connection with the convertible senior secured notes (see Note 9) are classified as liabilities on the accompanying consolidated balance sheets 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:

September 30,

Risk-free interest rate 0.24 % 1.56 %

Remaining contractual life of warrant 4.38 years 5.38 years

Expected volatility 94.7 % 89.0 %

Annual dividend yield 0 % 0 %

Fair value of common stock $ 0.72 per share $ 1.49 per share

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

The fair value of the redemption feature was estimated by using a Monte Carlo simulation model and a with-and-without perspective, where the fair value of debt instrument was 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 depended on the daily stock price path followed by the Company’s common stock price. This model simulated daily common stock prices from the issuance date through 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.

5. Property and Equipment

Property and equipment, net, consists of:

September 30,

Leasehold improvements — 160,086

Land and building — 3,000,000

Less: accumulated depreciation and amortization (740,102) (1,051,477)

Depreciation and amortization expense for the years ended September 30, 2020 and 2019 was $219,416 and $3,361,873, 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 10 for the Company’s lease disclosures.

At September 30, 2019, the Company’s corporate office was classified as a capital lease and had a gross carrying amount of $3,000,000 and accumulated amortization of $475,000.

Impairment Charge

During the year ended September 30, 2020, the Company recorded an impairment charge of $527,624 primarily due to the write-off of assets held for sale after the Company determined that the carrying amount of these assets was not recoverable as result of a lease termination agreement entered into in May 2020. Refer to Note 10 for further details.

In the fourth quarter of fiscal year 2019, as a result of management’s decision to outsource the commercial manufacturing and remaining development for the Company’s ONS-5010 program, the Company decided to vacate and sublease the Company’s manufacturing and corporate offices and sell or transfer excess laboratory and related computer equipment no longer required for the development of the Company’s ONS-5010 program. These events qualified as indicators of impairment in accordance with ASC 360, Property, Plant and Equipment (“ASC 360”) and required an impairment analysis. As a result of the analysis, management determined that the Company’s long-lived assets with a carrying amount of $13,032,320 were no longer recoverable and were impaired and wrote the assets down to their estimated fair value of $3,676,008. The estimated fair value for the Company’s land and building and leasehold improvement assets was based on discounted expected future cash flows using Level 3 inputs under ASC 820, Fair Value Measurements (“ASC 820”). The estimated fair value for the Company’s laboratory and related computer equipment was based on offers the Company received from unrelated third parties to purchase the assets which is classified as a Level 3 measurement under ASC 820’s fair value hierarchy. Management determined that $500,000 of laboratory equipment met the definition of “held for sale”

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

under ASC 360 as it was probable that a sale of the laboratory equipment could be completed within one year as of September 30, 2019.

The Company recorded an impairment charge totaling $11,270,110 for the year ended September 30, 2019 in the consolidated statements of operations associated with the above items.

6. Other Assets

Other assets consist of:

September 30,

Advance to PRC joint venture (see Note 14) $ 900,000 $ —

In June 2020, the Company issued 16,000,000 shares of common stock to Syntone Ventures LLC, or Syntone, a U.S. affiliate of Syntone Technologies Group Co. Ltd., a People's Republic of China, or PRC, entity, its strategic partner for ONS-5010 in China, pursuant to a stock purchase agreement entered in May 2020, at a purchase price of $1.00 per share, receiving aggregate gross proceeds of $16.0 million (see Note 11).

7. Accrued Expenses

Accrued expenses consists of:

September 30,

Lease termination obligation 3,971,111 —

8. Stockholder Notes

September 30,

$ — $ —

The Company previously repurchased shares of its restricted stock in exchange for notes totaling $800,000 that bore interest at rates ranging from 0% to 4% per annum and were due on demand. These notes were paid in full in November 2020.

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

The Company had a $2,812,500 note payable related to the previous repurchase of common stock that did not bear interest and was due on demand. This note was paid in full in November 2020.

The Company also borrowed from stockholders for working capital purposes and had two unsecured stockholder notes having an original aggregate principal amount of $1,000,000 and which bore interest from 0% to 30% per annum. These notes were purchased in March 2019 by Iliad Research and Trading, L.P., a Utah limited partnership, (the “Lender”) from the former stockholders, and subsequently converted to common stock and are no longer outstanding. Refer to Note 9 for the details on the purchase agreement.

During the year ended September 30, 2019, the Company recognized interest expense related to the stockholder notes of $105,357.

9. Debt

Senior secured notes

September 30,

Convertible senior secured notes $ — $ 6,699,000

In November 2018, the Company reached an agreement with the holders of its $13.5 million senior secured notes to extend the maturity of the senior secured notes until December 22, 2019, in exchange for making several payments of principal and interest during 2019, as well as subject to meeting additional capital raising commitments that the Company met in April 2019 through the completed public offering. In addition, the Company agreed to make the senior secured notes convertible into common stock at a price of $8.9539 per share and reduced the exercise price of warrants to purchase 485,245 shares of common stock held by the senior secured noteholders from $24.00 per share to $12.00 per share. The increase in the fair value of the warrants of $1.5 million due to the modification was recorded as additional debt discount and amortized over the remaining term of the senior secured notes using the effective interest rate method. The total amortization of the debt discount for the years ended September 30, 2020 and 2019 was $235,636 and $1,314,321, respectively.

During the year ended September 30, 2019, convertible senior secured notes with a carrying amount of $400,575 and accrued interest of $1,393 were converted into 50,394 shares of the Company’s common stock. During the year ended September 30, 2019, the Company repaid a total of $6.4 million of principal and $1.3 million of accrued interest on such notes.

In June 2019, the Company entered into a Third Note Amendment (the “Third Amendment”) with the holders of the remaining $6.7 million outstanding aggregate principal amount of senior secured notes. Under the Third Amendment, the maturity date of the convertible senior secured notes was amended to December 22, 2019 and eliminated the scheduled payments of certain principal and interest payments on or prior to December 22, 2019. The Company also agreed to increase the interest rate payable on such convertible senior secured notes to 12.0% per annum from 5.0% per annum. The Third Amendment was accounted for as an extinguishment of debt. Loss on extinguishment of convertible senior secured notes recognized during the year ended September 30, 2019 was $423,686.

In December 2019, the Company entered into an exchange agreement with the holders of its $7,254,077 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 $7,589,027 which included an aggregate exchange fee of $334,950.

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

The new senior secured notes were substantially similar to the Old Senior Notes, as amended through the date of the Exchange Agreement, bore interest at a rate of 12.0% per annum and would have matured 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 were 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. 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 $8,264,451 at issuance (see Note 4). The Exchange Agreement was accounted for as an extinguishment of debt. The Company recognized a loss on extinguishment of convertible senior secured notes for the Exchange Agreement of $8,060,580, which amount was equal to the excess fair value of the notes and bifurcated redemption feature over the notes’ net carrying value.

During the year ended September 30, 2020, the holder of the new senior secured notes converted the entire outstanding principal and accrued interest totaling $7,994,494 for 12,201,461 shares of the Company’s common stock at an average conversion price of $0.66 per share. As of September 30, 2020, there are no longer any new senior secured notes outstanding. The Company recognized a $6,164,284 gain on extinguishment of the new senior secured notes exchanged for shares of common stock during the year ended September 30, 2020 primarily due to the redemption feature liability and write-off of unamortized debt discount.

Aggregate interest expense on the Old Senior Notes and the new senior secured notes for the years ended September 30, 2020 and 2019 was $819,498 and $1,892,155, respectively.

Other indebtedness

The Company has other outstanding debt consisting of unsecured notes, a PPP term loan and equipment loans. Refer to Note 8 for additional information on unsecured notes (working capital notes).

September 30,

Unsecured notes $ — $ 977,966

Paycheck Protection Program term loan 904,200 —

Unsecured notes

On March 7, 2019, the Company entered into a forbearance and exchange agreement with 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.

During the year ended September 30, 2020, the remaining unsecured notes with an aggregate 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 an average exchange price of $1.05. As of September 30, 2020, these unsecured notes were no longer outstanding.

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

Paycheck Protection Program term loan

On May 4, 2020, the Company received $904,200 in proceeds from a loan granted pursuant to the PPP of the CARES Act. The PPP term loan is evidenced by a promissory note containing the terms and conditions for repayment of the PPP term loan. The PPP term loan provides for an initial six-month deferral of payments and any amount owed on the loan has a two-year maturity (May 2022), with an interest rate of 1% per annum. Commencing October 15, 2021, the Company is required to pay the lender equal monthly payments of principal and interest as required to fully amortize any principal amount outstanding on the PPP term loan as of October 15, 2021 by May 2, 2022. The Company has the right to prepay any amounts outstanding under this loan at any time and from time to time, in whole or in part, without penalty.

Equipment loans

The equipment loans bear interest at rates ranging from 12% to 16% with the original term of the loans ranging from one to five years. Minimum monthly payments of principal and interest under the equipment loans are collateralized by the related equipment purchased and an unconditional personal guarantee by the founding stockholder and former chief executive officer.

Interest expense on other indebtedness for the years ended September 30, 2020 and 2019 was $25,628 and $83,963, respectively.

Future maturities of other indebtedness at September 30, 2020 are as follows for the years ending September 30:

10. Commitments and Contingencies

Selexis Commercial License Agreements

In April 2013, the Company entered into commercial license agreements with Selexis for each of the ONS-3010, ONS-1045 and ONS-1050 biosimilar product candidates (which agreements were subsequently amended on May 21, 2014). Under the terms of each commercial license agreement, the Company acquired a non-exclusive worldwide license under the Selexis Technology to use the applicable Selexis expression technology along with the resulting Selexis materials/cell lines, each developed under the research license, to manufacture and commercialize licensed and final products, with a limited right to sublicense.

The Company paid an upfront licensing fee to Selexis for each commercial license and also agreed to pay a fixed milestone payment for each licensed product. In addition, the Company is required to pay a low single-digit royalty on a final product-by-final product and country-by-country basis, based on worldwide net sales of such final products by the Company or any of the Company’s affiliates or sublicensees during the royalty term. The royalty term for each final product in each country is the period commencing from the first commercial sale of the applicable final product in the applicable country and ending on the expiration of the specified patent coverage. At any time during the term, the Company has the right to terminate its royalty payment obligation by providing written notice to Selexis and paying Selexis a royalty termination fee.

Each of the Company’s commercial agreements with Selexis will expire upon the expiration of all applicable Selexis patent rights. Either party may terminate the related agreement in the event of an uncured material breach by the other party or in the event the other party becomes subject to specified bankruptcy, winding up or similar circumstances. Either party may also terminate the related agreement under designated circumstances if the Selexis Technology infringes third-

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

party intellectual property rights. In addition, the Company has the right to terminate each of the commercial agreements at any time at its convenience; however, with respect to the agreements relating to ONS-3010 and ONS-1045, this right is subject to the licensee’s consent pursuant to a corresponding letter the Company executed in conjunction with the standby agreement entered into between Selexis and Laboratories Liomont, S.A. de C.V. (“Liomont”) in November 2014.

The standby agreement permits Liomont to assume the license under the applicable commercial agreement for Mexico upon specified triggering events involving the Company’s bankruptcy, insolvency or similar circumstances.

Technology license

The Company entered into a technology license agreement with Selexis that will require milestone payments of $381,174 (based on an exchange rate on September 30, 2020 for converting Swiss Francs to U.S. dollars) to the licensor by the Company upon achievement of certain clinical milestones and pay a single digit royalty on net sales by the Company utilizing such technology. The Company also has the contractual right to buy out the royalty payments at a future date.

Litigation

On July 20, 2020, Liomont, filed a complaint against the Company in the U.S. District Court of the Southern District of New York alleging certain breach of contract claims under the June 25, 2014 strategic development, license and supply agreement relating to the biosimilar development program for ONS-3010 and ONS-1045. According to the complaint, Liomont is claiming $3,000,000 in damages due. The Company disputes the claims in the Liomont complaint, believes they are without merit, and intends to defend against these claims vigorously.

Leases

Prior to October 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases. Effective October 1, 2019, the Company adopted the guidance of ASC 842, Leases, which requires an entity to recognize a right-of-use asset and a lease liability for virtually all leases. The implementation of ASC 842 did not have a material impact on the Company’s consolidated financial statements and did not have a significant impact on the Company’s liquidity. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information for fiscal year 2019 has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for that period.

Corporate office and warehouse leases

On May 6, 2020, the Company terminated its lease agreement for approximately 66,000 square feet of office, manufacturing and laboratory space located in Cranbury, New Jersey, which previously served as its headquarters, and relocated its corporate office to Monmouth Junction, New Jersey, a site previously used as a warehouse location. In consideration for the termination of the Cranbury lease, the Company agreed to make payments to the landlord totaling $981,987, payable in eight monthly installments commencing May 1, 2020. The Company’s Monmouth Junction, New Jersey lease matures in September 2021.

In connection with the lease termination, the Company recorded a liability of $981,987 at May 11, 2020, the cease-use date, that represents the undiscounted future termination payments as the termination period is less than a year. The Company derecognized the assets and liabilities associated with the financing lease and recorded a charge of $680,017 to general and administrative expense.

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OUTLOOK THERAPEUTICS, INC.

Notes to Consolidated Financial Statements

At September 30, 2020, the lease termination obligation of $356,987 is included in accounts payable on the consolidated balance sheets. A rollforward of the charges incurred to general and administrative expense for the year ended September 30, 2020:

Balance Expensed / Accrued Cash Non-cash Balance

October 1, 2019 Expense Payments Adjustments September 30, 2020

Assets and liabilities derecognition — (842,514) — 842,514 —

Office and laboratory 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 which was due to expire in March 2026. 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.

In connection with the lease termination, the Company recorded a $4.2 million liability at September 1, 2018, the cease-use date that represents the present value of the future termination payments. The Company derecognized the assets and liabilities associated with the financing lease and recorded a lease termination charge of $4.2 million to general and administrative expense for the year ended September 30, 2018. At September 30, 2020, the lease termination obligation is included in accrued expenses and in other liabilities at September 30, 2019 on the consolidated balance sheets. A rollforward of the charges incurred to general and administrative expense for the years ended September 30, 2020 and 2019 is as follows:

Balance Expensed / Accrued Cash Balance

Equipment leases

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Consolidated Financial Statements and Supplementary Data

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Consolidated Financial Statements and Supplementary Data

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