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 biopharmaceutical company working to launch the first ophthalmic formulation of bevacizumab approved by the U.S. Food and Drug Administration, or FDA, for use in retinal indications. Our goal is to launch directly in the United States as the first and only approved ophthalmic bevacizumab for the treatment of wet age-related macular degeneration, or wet AMD, diabetic macular edema, or DME, and branch retinal vein occlusion, or BRVO. Our plans also include seeking approval and launching the product in the United Kingdom, Europe, Japan and other markets, either directly or through a strategic partner. If approved, we expect to receive 12 years of regulatory exclusivity in the United States and up to 10 years of market exclusivity in the European Union.
Bevacizumab is a full-length, humanized anti-VEGF (Vascular Endothelial Growth Factor) recombinant monoclonal antibody, or mAb, that inhibits VEGF and associated angiogenic activity. 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.
In March 2022, we submitted a Biologics License Application, or BLA, with the FDA for ONS-5010 (LYTENAVA (bevacizumab-vikg)), an investigational ophthalmic formulation of bevacizumab, which we have developed to be administered as an intravitreal injection for the treatment of wet AMD and other retinal diseases. In May 2022, we voluntarily withdrew our BLA to provide additional information requested by the FDA. We re-submitted the BLA to the FDA for ONS-5010 on August 30, 2022, and in October 2022, we received confirmation from the FDA that our BLA had been accepted for filing with a goal date of August 29, 2023 for a review decision by the FDA. On August 29, 2023, we received a Complete Response Letter, or CRL, in which the FDA concluded it could not approve the BLA during this review cycle due to several CMC issues, open observations from pre-approval manufacturing inspections, and a lack of substantial evidence. At subsequent Type A meetings with the FDA, we learned that the FDA requires the successful completion of an additional adequate and well-controlled clinical trial evaluating ONS-5010, as well as additional requested CMC data indicated in the CRL to approve ONS-5010 for use in wet AMD.
Separately, in October 2022 we submitted a Marketing Authorization Application, or MAA, for ONS-5010 with the European Medicines Agency, or the EMA. On December 22, 2022, our MAA was validated for review by the EMA. The formal review process of the MAA by the EMA’s Committee for Medicinal Products for Human Use, or CHMP, is now well advanced with an estimated decision date expected in the first half of calendar 2024. ONS-5010 is our sole product candidate in active development.
Because there are no approved bevacizumab products for the treatment of retinal diseases in the United States and other major markets, we submitted a standard BLA, and are not using the biosimilar drug development pathway 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. In the United States, approximately 66.3% of new patient starts are off-label repackaged bevacizumab (ASRS 2022 Membership Survey Presented at ASRS NY 2022).
Our initial BLA submission for ONS-5010 in wet AMD involved three clinical trials, which we refer to as NORSE ONE, NORSE TWO and NORSE THREE. The study design for our 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
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investigational new drug application, or IND, with the FDA in the first quarter of calendar 2019. In August 2020, we reported achieving the anticipated safety and efficacy and positive proof-of-concept topline results from NORSE ONE, a clinical experience study. NORSE TWO is our pivotal Phase 3 clinical trial comparing ONS-5010 (bevacizumab-vikg) to ranibizumab (LUCENTIS). The topline results reported from NORSE TWO in August 2021 showed that ONS-5010 met the primary and key secondary endpoint for efficacy with clinically impactful change observed for treated patients. The NORSE TWO primary endpoint difference in proportion of subjects gaining at least 15 letters in Best Corrected Visual Acuity, or BCVA, score was met and was both highly statistically significant and clinically relevant. In the ITT primary dataset, the percentage of patients who gained at least 15 letters who were treated with ONS-5010, was 41.7%, and the percentage of patients who gained at least 15 letters who were treated with ranibizumab was 23.1% (p = 0.0052). The primary endpoint was also statistically significant and clinically relevant in the PP dataset (p = 0.04) where the percentages were almost identical, at 41.0% with ONS-5010, and 24.7% with ranibizumab. The key secondary endpoint BCVA score change from baseline to month 11 in the primary ITT dataset was also highly statistically significant and clinically relevant (p = 0.0043). A mean change of 11.2 letters in BCVA score was observed with ONS-5010, and with ranibizumab the mean change was 5.8 letters. The results were also statistically significant in the secondary PP dataset (p = 0.05) with a mean change with ONS-5010 of 11.1 letters versus 7.0 letters with ranibizumab. Results were also positive for the remaining NORSE TWO secondary endpoints with 56.5% (p = 0.0016) of ONS-5010 subjects gaining ≥ 10 letters of vision and 68.5% (p = 0.0116) of ONS-5010 subjects gaining ≥ 5 letters of vision. NORSE THREE is an open-label safety study we conducted to ensure the adequate number of safety exposures to ONS-5010 were available for the initial ONS-5010 BLA submission with the FDA. In March 2021, we reported that the results from NORSE THREE showed a positive safety profile for ONS-5010. The NORSE BLA registration program is also being used to support our MAA submission in the European Union.
To support the resubmission of our BLA, we have agreed to run an additional clinical trial. In December 2023, we submitted a Special Protocol Assessment, or SPA, to the FDA for this study (NORSE EIGHT) seeking confirmation that it will meet the requirements for a second adequate and well-controlled clinical trial to support our planned resubmission of the ONS-5010 BLA. A response from the FDA is expected in early February 2024. NORSE EIGHT will be a randomized, controlled, parallel-group, masked non-inferiority study of neovascular age-related macular degeneration subjects randomized in a 1:1 ratio to receive 1.25 mg ONS-5010 or 0.5 mg ranibizumab intravitreal injections. Subjects will receive injections at Day 0 (randomization), Week 4, and Week 8 visits. Approximately 400 patients are expected to be enrolled in the study. Enrollment of patients is expected to begin in early 2024. We have submitted a SPA for NORSE EIGHT seeking confirmation from the FDA that, if successful, this study will address the FDA’s requirement for a second adequate and well-controlled clinical trial to support the resubmission of the ONS-5010 BLA for wet AMD. The FDA is expected to respond to the SPA in early February 2024.
We have received agreement from the FDA on three 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 exudative age related macular degeneration, or DME. We intend to initiate these studies following the anticipated FDA approval of our BLA for wet AMD.
In November 2021, we began enrolling patients in our NORSE SEVEN clinical trial. The study compares the safety of ophthalmic bevacizumab in vials versus pre-filled syringes. This study supports a supplemental BLA, or sBLA, we expect to submit subsequent to our current BLA receiving approval for wet AMD.
Going Concern Consideration
Through September 30, 2023, we have funded substantially all of our operations with $470.6 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. Our net loss for the year ended September 30, 2023 was $59.0 million. We also had a net loss of $66.1 million for the year ended September 30, 2022. We have not generated any revenue from product sales. 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.
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On March 26, 2021, we entered into an At-the-Market Offering Agreement with H.C. Wainwright & Co., as sales agent (“Wainwright”), (the “Wainwright ATM Agreement” or the “Wainwright ATM Offering”), under which we could issue and sell shares of our common stock having an aggregate offering price of up to $40,000,000 from time to time through Wainwright. We incurred financing costs of $197,654, which were capitalized and reclassified to additional paid in capital on a pro rata basis when we sold common stock under the Wainwright ATM Offering. Under the Wainwright ATM Agreement, we paid Wainwright a commission equal to 3.0% of the aggregate gross proceeds of any sales of common stock under the Wainwright ATM Agreement. We terminated the Wainwright ATM Agreement effective May 15, 2023.
During the year ended September 30, 2023, we sold 895,391 shares of common stock under the Wainwright ATM Offering and generated $1,127,904 in gross proceeds. We paid fees to the Wainwright and other issuance costs of $38,799.
On May 16, 2023, we entered into an At-the-Market Sales Agreement with BTIG, LLC (“BTIG”), as sales agent (the “BTIG ATM Agreement” or the “BTIG ATM Offering”), under which we may issue and sell shares of our common stock having an aggregate offering price of up to $100,000,000 from time to time through BTIG. We incurred financing costs of $353,688, which were capitalized and are being reclassified to additional paid in capital on a pro rata basis when we sell common stock under the BTIG ATM Offering.
Under the BTIG ATM Agreement, the Company pays BTIG a commission equal to 3.0% of the aggregate gross proceeds of any sales of common stock under the BTIG ATM Agreement. The offering of common stock pursuant to the BTIG ATM Agreement will terminate upon the earlier of (i) the sale of all common stock subject to the BTIG ATM Agreement or (ii) termination of the BTIG ATM Agreement in accordance with its terms.
During the year ended September 30, 2023, we sold 3,578,223 shares of common stock pursuant to the BTIG ATM Offering, generating $6.3 million in gross proceeds. The fees paid to BTIG were $0.2 million.
We evaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern. We do not believe our current cash resources of $23.4 million as of September 30, 2023 are sufficient to fund our operations through one year from the Form 10-K filing date as a result of the costs associated with initiating the planned NORSE EIGHT clinical trial and the April 1, 2024 maturity date of the December 2022 Note, as amended in December 2023. We are currently in discussions with the Lender of the December 2022 Note to further extend the maturity of the December 2022 Note. However, there can be no assurance that we will be successful in further extending the maturity date. The terms of a further extension could include additional interest or other fees, or a change in the conversion price that could increase the number of shares that need to be issued to satisfy a conversion of the December 2022 Note. We are currently assessing the costs to conduct NORSE EIGHT and will need to secure additional funding to complete the study. These factors raise 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, receive approval for and commercialize ONS-5010, commence and continue clinical trials, or 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.
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 legacy biosimilar product candidates (ONS-3010, ONS-1045 and ONS-1050) in other markets.
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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 a private placement in June 2020, 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 is 80% owned by Syntone’s PRC-affiliate and 20% owned by us. Upon formation of the PRC joint venture in April 2021, we entered 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
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
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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 could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the 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. Full product commercialization will take several years and millions of dollars in additional 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.
Loss on equity method investment
Loss on equity method investment represents our proportionate share for the period of the net loss of our investee to which the equity method of accounting is applied. We account for equity investments where we own a non-controlling interest, but have the ability to exercise significant influence, under the equity method of accounting.
Interest Expense, Net
Interest expense, net consists of cash paid and non-cash interest expense related to our senior secured notes, equipment loans, lease liabilities and other finance obligations, net of de minimis amount of interest income.
Loss on Extinguishment of Debt
We recognized a $0.6 million loss on extinguishment related to the prepayment and cancellation our November 2021 Note (as defined below) during the year ended September 30, 2023 that was accounted for as an extinguishment. During the year ended September 30, 2022, we recorded a loss on extinguishment of $1.0 million in connection with our November
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2020 Note (as defined below) amendment during the year that was accounted for as an extinguishment of the November 2020 Note.
Change in Fair Value of Promissory Notes
The change in fair value relates to convertible promissory notes that we elected to account for at fair value. As permitted under ASC 825, we elected the fair value option to account for our convertible promissory notes. We recorded the convertible promissory note at fair value with changes in fair value recorded in the consolidated statements of operations.
Change in Fair Value of Warrant Liability
We issued warrants to purchase our common stock in conjunction with convertible senior secured notes issued pursuant to a certain Note and Warrant Purchase Agreement dated December 22, 2017, 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.
Income Taxes
During the years ended September 30, 2023 and 2022, we had no accruals for foreign withholding taxes in connection with our collaboration and licensing agreements. We did not sell any NOLs or unused research and development tax credits during the years ended September 30, 2023 and 2022.
Since inception, we have not recorded any U.S. federal or state income tax benefits (excluding the sale of New Jersey state NOLs and research and development, or 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, 2023, we had federal and state NOL carryforwards of $371.7 million and $207.5 million, respectively, that will begin to expire in 2030 and 2039, respectively. As of September 30, 2023, we had federal foreign tax credit carryforwards of $1.6 million available to reduce future tax liabilities, which begin to expire starting in 2023. As of September 30, 2023, we also had federal and state R&D tax credit carryforwards of $11.2 million and $0.8 million, respectively, that will 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 in connection with or after our Initial Public Offering, or IPO, 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.
On August 16, 2022, President Biden signed the Inflation Reduction Act, or the IRA. The IRA contains a number of tax related provisions including a 15% minimum corporate income tax on certain large corporations as well as an excise tax on stock repurchases, both provisions are effective for tax years beginning after December 31, 2022. We are in the process of evaluating the IRA, but do not expect it to have a material impact on our consolidated financial statements.
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.
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Results of Operations
Comparison of Years Ended September 30, 2023 and 2022
Year ended September 30,
Operating expenses:
Income tax expense 2,800 2,800 —
Research and Development Expenses
The following table summarizes our research and development expenses by functional area for the years ended September 30, 2023 and 2022:
Year ended September 30,
Research and development expenses for the year ended September 30, 2023 decreased by $15.9 million compared to the year ended September 30, 2022. The decrease was primarily due to BLA submission fees of $6.2 million paid in the prior period that were subsequently waived and refunded by the FDA in the current period, $0.9 million decrease in ONS 5010 development costs in the current period, and a decrease in stock-based compensation expenses of $1.7 million primarily due to vesting of performance-based stock options for some of our executives in the prior period.
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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, 2023 and 2022:
Year ended September 30,
General and administrative expenses for the year ended September 30, 2023 increased by $5.9 million compared to the year ended September 30, 2022. The increase compared to the prior period was primarily due to an increase in professional fees of $5.8 million related to our pre-launch preparations in anticipation of a potential approval of our BLA for ONS-5010 during 2023.
Loss on Equity Method Investment
Loss on equity method investment represents our share of the loss from Beijing Syntone Biopharma Ltd, or Syntone JV.
Interest Expense, Net
Interest expense increased by $0.1 million to $1.6 million for the year ended September 30, 2023, as compared to $1.5 million for the year ended September 30, 2022. The increase was primarily related to a new unsecured convertible promissory note issued in December 2022. The comparable prior period interest expense related to an unsecured promissory note issued in November 2021 which was prepaid and cancelled during the year ended September 30, 2023.
Loss on Extinguishment of Debt
We recognized a $0.6 million loss on extinguishment related to the prepayment and cancellation of our November 2021 Note (as defined below) during the year ended September 30, 2023 that was accounted for as an extinguishment. During the year ended September 30, 2022, we recorded a loss on extinguishment of $1.0 million in connection with our November 2020 Note (as defined below) amendment during the year that was accounted for as an extinguishment of the November 2020 Note.
Change in Fair Value of Promissory Notes
The change in fair value relates to the convertible promissory notes that we elected to account for at fair value. As permitted under ASC 825, we elected the fair value option to account for our convertible promissory notes. We record the convertible promissory notes at fair value with changes in fair value recorded in the consolidated statements of operations.
Change in Fair Value of Warrant Liability
We recognized income related to the decrease in the fair value of our common stock warrant liability in both fiscal years 2023 and 2022. This income was attributed to a decline in the price of our common stock during those periods. In fiscal year 2023, we recorded income of $0.1 million, compared to $0.5 million in fiscal year 2022.
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, 2023, we have funded substantially all of our operations with $470.6 million in net proceeds from the sale and issuance 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.
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 launch 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. Alternatively, we will be required to, among other things, 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.
On November 5, 2020, we received $10.0 million in net proceeds from the issuance of an unsecured promissory note, or the November 2020 Note, with a face amount of $10.2 million. The November 2020 Note bore interest at a rate of 7.5% per annum, and was due to mature on January 1, 2022, and included an original issue discount of $0.2 million. On November 16, 2021, we entered into an amendment to the November 2020 Note, which, among other things, (i) extended the maturity date to January 1, 2023, (ii) increased the interest rate from 7.5% per annum to 10% per annum beginning on January 1, 2022, and (iii) provided for the lender’s right to redeem some or all of the outstanding balance of the 2020 Note for shares of our common stock beginning July 1, 2022, subject to certain limitations. On June 30, 2022, we prepaid the 2020 Note in full by paying 105% of the outstanding balance. The total payment was $12.9 million, which included interest of $1.5 million and other fees totaling $1.2 million.
On November 16, 2021, we received $10.0 million in net proceeds from the issuance of the November 2021 Note, with a face amount of $10.2 million. The November 2021 Note bore interest at a rate of 9.5% per annum, was due to mature January 1, 2023 and included an original issue discount of $0.2 million. We could prepay all or a portion of the note at any time by paying 105% of the outstanding balance elected for pre-payment. On December 28, 2022, we prepaid the November 2021 Note in full by paying 105% of the outstanding balance. The total payment was $11.9 million, which included interest of $1.2 million and a prepayment fee of $0.6 million.
In November 2021, we issued in an underwritten public offering an aggregate of 46,000,000 shares of common stock at a purchase price per share of $1.25 for $54.0 million in net proceeds after payment of underwriter discounts and commissions and other underwriter offering costs. GMS Ventures, our largest stockholder, purchased an aggregate of 16,000,000 shares of common stock in the public offering. In connection with the underwritten public offering, we issued the underwriter warrants to purchase up to an aggregate of 2,100,000 shares of common stock at an exercise price of $1.5625 per share, which warrants have a five-year term.
During the year ended September 30, 2022, warrants to purchase an aggregate of 400,360 shares of common stock with a weighted average exercise price of $12.00 expired; and warrants to purchase an aggregate of 15,675 shares of common stock with a weighted average exercise price of $12.00 were exercised for cash.
During the year ended September 30, 2023, we sold 895,391 shares of common stock under our Wainwright ATM Offering for $1.1 million in net proceeds, and the fees paid to the sales agent were immaterial. During the year ended September 30, 2022, we sold 4,808,269 shares of common stock under our Wainwright ATM Offering for $8.3 million in gross proceeds, after we paid fees to the sales agent of $0.3 million.
During the year ended September 30, 2023, we sold 3,578,223 shares of common stock pursuant to the BTIG ATM Offering, generating $6.1 million in net proceeds after we paid fees to BTIG of $0.2 million.
In December 2022, in a registered direct equity offering to certain institutional and accredited investors, including GMS Ventures, our largest stockholder, we issued 28,460,831 shares of common stock at a purchase price per share of $0.8784 for $23.2 million in net proceeds after payment of placement agent fees and other offering costs. GMS Ventures purchased an aggregate of 14,230,418 shares of common stock in the registered direct equity offering. In connection with the registered direct equity offering, we issued to M.S. Howells & Co., as placement agent for certain accredited investors in
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the offering, warrants to purchase up to an aggregate of 515,755 shares of common stock, which will be exercisable commencing on the one-year anniversary of the closing of the offering at an exercise price of $1.05 per share, which warrants have a three-year term.
On December 22, 2022, we entered into a Securities Purchase Agreement and issued an unsecured convertible promissory note with a face amount of $31.8 million, or the December 2022 Note, to Streeterville Capital, LLC, or the Lender, the holder of our November 2021 Note. The December 2022 Note has an original issue discount of $1.8 million. A portion of the proceeds from the December 2022 Note were used to repay in full the remaining outstanding principal and accrued interest on the November 2021 Note, which was cancelled upon repayment. We received net proceeds of $18.1 million upon the closing on December 28, 2022, after deducting the Lender’s transaction costs in connection with the issuance and November 2021 Note repayment. The December 2022 Note bears interest at 9.5% per annum and matures on January 1, 2024. The December 2022 Note contains customary covenants, including a restriction on our ability to pledge certain of our assets, subject to certain exceptions, without the Lender’s consent. The Lender has have the right to convert the December 2022 Note at an initial conversion price of $2.00 per share. The principal amount and conversion price of the December 2022 Note are subject to adjustment upon certain triggering events. See “Description of Indebtedness” below for additional detail.
We evaluated whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern. As of September 30, 2023, we had an accumulated deficit of $467.9 million and $36.8 million of principal, accrued interest and exit fees due on the December 2022 Note. We do not believe our current cash resources of $23.4 million are sufficient to fund our operations through one year from the Form 10-K filing date as a result of the costs associated with initiating the planned NORSE EIGHT clinical trial and the April 1, 2024 maturity date of the December 2022 Note, as amended in December 2023. We are currently in discussions with the holder of the December 2022 Note to further extend the maturity of the December 2022 Note. The terms of a further extension could include additional interest or other fees, or a change in the conversion price that could increase the number of shares that need to be issued to satisfy a conversion of the December 2022 Note. We are currently assessing the costs to conduct NORSE EIGHT and will need to secure additional funding to complete the study. 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. There can be no assurance that these future funding efforts will be successful. Alternatively, we will be required to, among other things, 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.
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.
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Cash Flows
The following table summarizes our cash flows for each of the years presented:
Year ended September 30,
Operating Activities
During the year ended September 30, 2023, we used $43.0 million of cash in operating activities resulting primarily from our net loss of $59.0 million. This use of cash was partially offset by $12.4 million of non-cash items such as stock-based compensation, non-cash interest expense, change in fair value of promissory notes, change in fair value of warrant liability, loss on extinguishment of debt, loss on equity method investment and depreciation and amortization expense. We also paid interest on debt of $1.2 million during the period. The net cash inflow of $4.8 million from changes in our operating assets and liabilities was primarily due to a net increase in accounts payable and accrued expenses of $2.4 million and a decrease in prepaid expenses of $2.6 million for timing of payments associated with ONS-5010 development costs, partially offset by an increase in other assets of $0.2 million.
During the year ended September 30, 2022, we used $56.7 million of cash in operating activities resulting primarily from our net loss of $66.1 million. This use of cash was partially offset by $11.1 million of non-cash items such as stock-based compensation, non-cash interest expense, change in fair value of warrant liability, change in fair value of promissory notes, loss on extinguishment of debt, loss on equity method investment and depreciation and amortization expense. The net cash outflow of $1.7 million from changes in our operating assets and liabilities was primarily due to an increase in prepaid expenses of $3.1 million for prepayments associated with ONS-5010 development costs, partially offset by an increase in accounts payable and accrued expenses of $1.5 million.
Financing Activities
During the year ended September 30, 2023, net cash provided by financing activities was $49.0 million, primarily attributable to $23.2 million in net proceeds from a registered direct equity offering in December 2022 of an aggregate of 28,460,831 shares of our common stock, $7.2 million in net proceeds from the sale of common stock under our Wainwright ATM Offering and BTIG ATM Offering and $30.0 million in net proceeds from the issuance of the December 2022 Note with a face amount of $31.8 million in December 2022. We also made $10.2 million in debt and finance lease obligation payments and a $0.8 million payment of financing costs.
During the year ended September 30, 2022, net cash provided by financing activities was $59.6 million, primarily attributable to $54.0 million in net proceeds from an underwritten public offering in November 2021 of an aggregate of 46,000,000 shares of our common stock and accompanying 2,100,000 warrants to purchase shares of our common stock, $0.2 million in net proceeds from exercise of common stock warrants, $8.3 million in net proceeds from the sale of common stock under our Wainwright ATM Offering and $9.4 million in net proceeds from the issuance of the November 2021 Note with a face amount of $10.2 million in November 2021. We also made $12.3 million in debt and finance lease obligation payments.
Description of Indebtedness
On December 22, 2022, we entered into the Securities Purchase Agreement and issued the December 2022 Note to the Lender. The December 2022 Note has a face value of $31.8 million and an original issue discount of $1.8 million. The December 2022 Note bears interest at 9.5% per annum and matures on January 1, 2024. The December 2022 Note contains customary covenants, including a restriction on our ability to pledge certain of our assets, subject to certain exceptions, without the Lender’s consent. The Lender has the right to convert the December 2022 Note at the Conversion Price (as defined below). The principal amount and Conversion Price of the December 2022 Note are subject to adjustment upon
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certain triggering events. In addition, the Company has the right to convert all or any portion of the outstanding balance under the December 2022 Note into shares of common stock at the Conversion Price if certain conditions have been met at the time of conversion, including if at any time after the six-month anniversary of the closing date, the daily volume-weighted average price of the common stock on Nasdaq equals or exceeds $2.50 per share (subject to adjustments for stock splits and stock combinations) for a period of 30 consecutive trading days. We may make payments (i) in cash, (ii) in shares of common stock, with the number of shares being equal to the portion of the applicable payment amount divided by the Conversion Price (as defined below), or (iii) a combination of cash and shares of common stock. Any payments made by us in cash, including prepayments or repayment at maturity, will be subject to an additional fee of 7.5%. Upon the occurrence of certain events described in the December 2022 Note, including, among others, the Company’s failure to pay amounts due and payable under the December 2022 Note, events of insolvency or bankruptcy, failure to observe covenants contained in the Securities Purchase Agreement and the December 2022 Note, breaches of representations and warranties in the Securities Purchase Agreement, and the occurrence of certain transactions without the Lender’s consent (each such event, a Trigger Event), the Lender shall have the right, subject to certain exceptions, to increase the balance of the December 2022 Note by 10% for a Major Trigger Event (as defined in the December 2022 Note) and 5% for a Minor Trigger Event (as defined in the December 2022 Note). If a Trigger Event is not cured within ten (10) trading days of written notice thereof from the Lender, it will result in an event of default (such event, an Event of Default). Following an Event of Default, the Lender may accelerate the December 2022 Note such that all amounts thereunder become immediately due and payable, and interest shall accrue at a rate of 22% annually until paid. Under the December 2022 Note, “Conversion Price” means, prior to a Major Trigger Event, $2.00 per share (subject to adjustment for stock splits and stock combinations), and following a Major Trigger Event, the lesser of (i) $2.00 per share (subject to adjustment for stock splits and stock combinations), and (ii) 90% multiplied by the lowest closing bid price of the Company’s common stock in the three trading days prior to the date on which the conversion notice is delivered. If the Conversion Price is below $0.1756 per share, the Company will be required to satisfy a conversion notice from the Lender in cash. Subject to certain exceptions, while the December 2022 Note is outstanding, the Lender will have a consent right on any future variable rate transactions or any debt and a 10% participation right in any future debt or equity financings. In December 2023, we amended the December 2022 Note to change the maturity date of the December 2022 Note to April 1, 2024 to allow time to negotiate the terms to further extend the maturity of the December 2022 Note. We paid a one-time cash fee of $475,000 to the Lender. No other terms of the December 2022 Note were amended.
Funding Requirements
We plan to focus in the near term on supporting the review of our BLA submission for ONS-5010 with the FDA and to prepare for the potential launch of LYTENAVATM, if approved, 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 initiate commercialization of ONS-5010 if, among other things, the FDA does not approve our BLA when we expect, or at all, or if we are not able to secure sufficient funding of our expected post-launch commercial costs.
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 the marketing and development of our lead product candidate and any other product candidates we may choose to pursue.
We do not believe our existing cash and cash equivalents as of September 30, 2023 of $23.4 million are sufficient to fund our operations through one year from the Form 10-K filing date as a result of the costs associated with initiating the planned NORSE EIGHT clinical trial and the April 1, 2024 maturity date of the December 2022 Note, as amended in December 2023. We are currently in discussions with the holder of the December 2022 Note to further extend the maturity of the December 2022 Note. However, there can be no assurance that we will be successful in further extending the maturity date. The terms of a further extension could include additional interest or other fees, or a change in the conversion price that could increase the number of shares that need to be issued to satisfy a conversion of the December 2022 Note. We are currently assessing the costs to conduct the additional study and will need to secure additional funding to complete the study. 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 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
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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. Further, due to current market volatility, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. There are no assurances that we will be successful in obtaining an adequate level of financing for the commercialization of ONS-5010 or the development of 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.
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.
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.
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Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our prepaid and 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 prepaid and 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
● 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. In many instances 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 recognizing 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 prepaid and accrued research and development expenses.
Recently Issued Accounting Pronouncements
There have been no other accounting pronouncements issued but not yet adopted by us which are expected to have a material impact on our consolidated financial position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
As a “Smaller Reporting Company”, this Item and the related disclosure is not required.
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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 (PCAOB ID 185) 92
Consolidated Balance Sheets 94
Consolidated Statements of Operations 95
Consolidated Statements of Stockholders’ Equity (Deficit) 96
Consolidated Statements of Cash Flows 97
Notes to Consolidated Financial Statements 98
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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, 2023 and 2022, the related consolidated statements of operations, stockholders’ equity, 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, 2023 and 2022, 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 and has an accumulated deficit, 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Evaluation of prepaid and accrued research and development expenses
As discussed in Note 3 to the consolidated financial statements, 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, as well as regulatory compliance costs. At the end of each reporting period, the Company compares the payments made to third-party service providers to the estimated progress towards 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 related to these costs.
We identified the evaluation of prepaid and accrued research and development expenses for contract manufacturing organizations (CMOs) used by the Company for supply and manufacturing of pre-clinical and clinical trial materials and commercial materials, including manufacturing validation batches, as a critical audit matter. Specifically, evaluating the sufficiency of audit evidence obtained over associated costs incurred for the services provided by the CMOs required especially subjective auditor judgment due to the nature of evidence available regarding progress towards completion of underlying phases within the statements of work.
The following are the primary procedures we performed to address this critical audit matter. We examined (1) statements of work, (2) payments, and (3) communications received from the CMOs related to the status of underlying phases within the statements of work, and compared them to the Company's schedules of costs incurred as of year-end. We also confirmed the status of underlying phases within the statements of work directly with the CMOs. We assessed the sufficiency of audit evidence obtained related to prepaid and accrued research and development expenses related to statements of work with the CMOs by evaluating the cumulative results of the audit procedures.
/s/ KPMG LLP
We have served as the Company’s auditor since 2015.
Philadelphia, Pennsylvania
December 22, 2023
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Outlook Therapeutics, Inc.
Consolidated Balance Sheets
September 30,
Assets
Current assets:
Operating lease right-of-use assets, net 26,172 70,360
Current liabilities:
Current portion of finance lease liabilities 4,267 11,751
Current portion of operating lease liabilities — 26,995
Finance lease liabilities — 4,267
Commitments and contingencies (Note 8)
Convertible preferred stock:
Total convertible preferred stock — —
Stockholders’ (deficit) equity:
See accompanying notes to consolidated financial statements
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Outlook Therapeutics, Inc.
Consolidated Statements of Operations
Year ended September 30,
Operating expenses:
Loss on equity method investment 10,998 48,730
Change in fair value of promissory notes 3,756,000 882,903
Change in fair value of warrant liability (50,919) (465,780)
Per share information:
Net loss per share of common stock, basic and diluted $ (0.24) $ (0.31)
See accompanying notes to consolidated financial statements
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Outlook Therapeutics, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
Stockholders’ Equity (Deficit)
Common Stock Additional Accumulated Total Stockholders’
Shares Amount Paid-in Capital Deficit Equity (Deficit)
Stock-based compensation expense — — 7,710,804 — 7,710,804
Stock-based compensation expense — — 5,547,019 — 5,547,019
See accompanying notes to consolidated financial statements.
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Outlook Therapeutics, Inc.
Consolidated Statements of Cash Flows
Year ended September 30,
OPERATING ACTIVITIES
Change in fair value of promissory notes 3,756,000 882,903
Change in fair value of warrant liability (50,919) (465,780)
Loss on equity method investment 10,998 48,730
Interest paid on debt (1,158,609) —
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 2,616,925 (3,092,811)
Other assets (208,203) —
Operating lease liabilities (26,995) (42,854)
FINANCING ACTIVITIES
Proceeds from exercise of common stock warrants — 188,100
Proceeds from exercise of stock options — 17,750
Payments of finance lease obligations (11,751) (26,464)
Supplemental disclosure of cash flow information:
Cloud computing implementation costs in accrued expenses $ 29,500 $ —
Supplemental schedule of non-cash financing activities:
Deferred offering costs amortization $ 141,600 $ 42,575
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. (“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 biopharmaceutical company focused on developing and commercializing ONS-5010, an ophthalmic formulation of bevacizumab for use in retinal indications. The Company is based in Iselin, New Jersey.
In fiscal year 2022, the Company submitted a Biologics License Application (“BLA”), and received confirmation from the U.S. Food and Drug Administration (“FDA”) that the BLA had been accepted for filing with a goal date of August 29, 2023 for a review decision by the FDA. On August 29, 2023, the Company received a Complete Response Letter (CRL) in which the FDA concluded it could not approve the BLA during this review cycle due to several chemical, manufacturing and control, or CMC, issues, open observations from pre-approval manufacturing inspections, and a lack of substantial evidence. At subsequent Type A meetings with the FDA, the Company learned that the FDA requires the successful completion of an additional adequate and well-controlled clinical trial evaluating ONS-5010, as well as additional requested CMC data indicated in the CRL to approve ONS-5010 for use in wet age related macular degeneration (“wet AMD”). Additionally, the Company submitted a Marketing Authorization Application (MAA) with the European Medicines Agency (EMA), which has been validated for review with an estimated decision date expected in early 2024.
2. Liquidity
The Company has incurred recurring losses and negative cash flows from operations since its inception and has an accumulated deficit of $467,918,186 as of September 30, 2023. As of September 30, 2023, the Company had $36,763,381 of principal, accrued interest and exit fees due under an unsecured convertible promissory note issued in December 2022 (the “December 2022 Note”), maturing on April 1, 2024, as amended. As a result, there is 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.
Management does not believe that the Company’s existing cash and cash equivalents as of September 30, 2023 are sufficient to fund the Company’s operations through one year from the Form 10-K filing date as a result of the costs associated with initiating the planned NORSE EIGHT clinical trial and the April 1, 2024 maturity date of the December 2022 Note. Management is currently assessing the costs to conduct NORSE EIGHT and will need to secure additional funding to complete the study. Additional financing will be needed by the Company to fund its operations in the future and to commercially launch ONS-5010 and develop any other product candidates. Management is currently evaluating different strategies to obtain the required funding for future operations. These strategies may also include, but are not limited to, proceeds from potential licensing and/or marketing arrangements or collaborations with pharmaceutical or other companies, the issuance of equity securities, the issuance of additional debt, and revenues from potential future product sales, if any. In addition, the Company is in discussions to further extend the maturity date of the December 2022 Note beyond April 1, 2024. The terms of the further extension could include additional interest or other fees, or a change in the conversion price that could increase the number of shares that need to be issued to satisfy a conversion of the December 2022 Note. However, there can be no assurance that these future funding efforts will be successful or that we will be successful in further extending the maturity date of the December 2022 Note.
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 successfully begin marketing of its
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OUTLOOK THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
product candidates or complete revenue-generating partnerships with other companies; (iii) the success of its research and development; (iv) the development of competitive therapies by other biotechnology and pharmaceutical companies; and, ultimately, (v) regulatory approval and market acceptance of the Company’s proposed future products.
3. Basis of Presentation and Summary of Significant Accounting Policies
Basis of presentation
The accompanying 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 statements of operations as they occur.
Cash and cash equivalents
Cash and cash equivalents include cash-on-hand and demand deposits with financial institutions and other short-term investments with maturities of less than three months when acquired and convertible to known cash amounts. At September 30, 2023 and 2022, the Company’s cash equivalents consist of a money market account.
Equity method investment
The Company accounts for equity investments where it owns a non-controlling interest, but has the ability to exercise significant influence, under the equity method of accounting. Under the equity method of accounting, the original cost of the investment is adjusted for the Company’s share of equity in the earnings or loss of the equity investee and reduced by dividends and distributions of capital received, unless the fair value option is elected, in which case the investment balance is marked to fair value each reporting period and the impact of changes in fair value of the equity investment are reported in earnings. The Company has not elected the fair value option. The Company assesses its investment for other-than-temporary impairment when events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable and recognize an impairment loss to adjust the investment to its then-current fair value.
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.
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OUTLOOK THERAPEUTICS, INC.
Notes to Consolidated Financial Statements
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.
At September 30, 2023 and 2022, the Company’s financial instruments included cash, accounts payable, accrued expenses, convertible notes and warrant liabilities. The carrying amount of accounts payable, and accrued expenses approximates fair value due to the short-term maturities of these instruments.
Fair Value Option
The Company elected the fair value option to account for the December 2022 Note. Refer to Note 7 for further details on the December 2022 Note. The fair value of the December 2022 Note is estimated using a binomial lattice model, which evaluates the payouts under hold, convert or call decisions. Significant estimates in the binomial lattice model include the Company’s stock price, volatility, risk-free rate of return, and credit-adjusted discount rate.
Leases
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, 2023.
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
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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.
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 12. 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.
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 development expense as acquired in-process research and development if the technology licensed has not reached technological feasibility and has no alternative future use.
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, performance-based stock options and units, and 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 losses.
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Notes to Consolidated Financial Statements
The following potentially dilutive securities have been excluded from the computation of diluted weighted-average shares outstanding as of September 30, 2023 and 2022, as they would be antidilutive:
As of September 30,
Performance-based stock units 2,470 2,470
Recently issued accounting pronouncements
There have been no accounting pronouncements issued but not yet adopted by the Company which are expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
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
Unsecured convertible promissory note $ — $ — $ 35,551,000
Warrant liability — — 6,219
(Level 1) (Level 2) (Level 3)
Liabilities
Unsecured convertible promissory note $ — $ — $ —
Warrant liability — — 57,138
Total $ — $ — $ 57,138
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 the December 2022 Note for the years ended September 30, 2023 and 2022:
Unsecured Convertible
Promissory Note Warrants
Change in fair value — (465,780)
Fair value at issuance date 31,820,000 —
Conversion of accrued interest to common stock shares (25,000) —
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Notes to Consolidated Financial Statements
As further described in Note 7, the Company elected the fair value option to account for the December 2022 Note. The fair value of the December 2022 Note is estimated using a binomial lattice model, which evaluates the payouts under hold, convert or call decisions. Significant estimates in the binomial lattice model include the Company’s stock price, volatility, risk-free rate of return, and credit-adjusted discount rate.
The fair value of the December 2022 Note as of September 30, 2023 was estimated using a binomial lattice model with the following assumptions:
Term (years) 0.3
Stock price $ 0.22
Volatility 71.0 %
Risk-free rate 5.5 %
Dividend yield — %
Credit-adjusted discount rate 22.8 %
The warrants issued in connection with convertible senior secured notes originally issued pursuant to a certain Note and Warrant Purchase Agreement dated December 22, 2017, 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 weighted-average assumptions:
September 30,
Risk-free interest rate 5.30 % 4.23 %
Remaining contractual term of warrants (years) 1.4 2.4
Expected volatility 158.3 % 92.5 %
Annual dividend yield — % — %
Fair value of common stock (per share) $ 0.22 $ 1.22
5. Equity Method Investment
In connection with the execution of a stock purchase agreement with Syntone Ventures LLC (“Syntone Ventures”), the U.S. based affiliate of Syntone Technologies Group Co. Ltd. (“Syntone PRC”) on May 22, 2020, the Company and Syntone PRC entered into a joint venture agreement pursuant to which they agreed to form a People’s Republic of China (“PRC”) joint venture, Beijing Syntone Biopharma Ltd (“Syntone JV”), that is 80% owned by Syntone PRC and 20% owned by the Company. As the Company can exert significant influence over, but does not control, Syntone JV’s operations through voting rights or representation on Syntone JV’s board of directors, the Company accounts for this investment using the equity method of accounting. Upon formation of Syntone JV in April 2021, the Company entered into a royalty-free license with Syntone JV for the development, commercialization and manufacture of ONS-5010 in the greater China market, which includes Hong Kong, Taiwan and Macau.
The Company made the initial investment of $900,000 in June 2020 and is committed to making capital contributions to Syntone JV of approximately $2,100,000, based upon the development plan contemplated in the license agreement. The maximum exposure to a loss as a result of the Company’s involvement in Syntone JV is limited to the initial investment and the future capital contributions totaling approximately $2,100,000.
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6. Accrued Expenses
Accrued expenses consists of:
September 30,
7. Debt
Debt consists of:
September 30,
Unsecured promissory note — 11,114,518
Less: unamortized loan costs — (199,503)
Long-term debt $ — $ —
December 2022 Note
On December 22, 2022, the Company entered into a Securities Purchase Agreement and issued the December 2022 Note with a face amount of $31,820,000 to Streeterville Capital, LLC (the “Lender”), the holder of the Company’s unsecured promissory note issued in November 2021 (the “November 2021 Note”). The December 2022 Note has an original issue discount of $1,820,000. The Company received net proceeds of $18,052,461 upon the closing on December 28, 2022 after deducting the Lender’s transaction costs in connection with the issuance and a full payment of the remaining outstanding principal and accrued interest on the November 2021 Note. The November 2021 Note was cancelled upon repayment. See below for additional disclosures relating to November 2021 Note.
The December 2022 Note bears interest at 9.5% per annum and matures on January 1, 2024. The December 2022 Note contains customary covenants, including a restriction on the Company’s ability to pledge certain of the Company’s assets, subject to certain exceptions, without the Lender’s consent. Beginning on April 1, 2023, the Lender has the right to convert the December 2022 Note at the Conversion Price (as defined below). The principal amount and conversion price of the December 2022 Note are subject to adjustment upon certain triggering events. In addition, the Company has the right to convert all or any portion of the outstanding balance under the December 2022 Note into shares of common stock at the Conversion Price if certain conditions have been met at the time of conversion, including if at any time after the six-month anniversary of the closing date, the daily volume-weighted average price of the common stock on Nasdaq equals or exceeds $2.50 per share (subject to adjustments for stock splits and stock combinations) for a period of 30 consecutive trading days. Payments may be made by the Company (i) in cash, (ii) in shares of common stock, with the number of shares being equal to the portion of the applicable payment amount divided by the Conversion Price (as defined below), or (iii) a combination of cash and shares of common stock. Any payments made by the Company in cash, including prepayments or repayment at maturity, will be subject to an additional fee of 7.5%. Upon the occurrence of certain events described in the December 2022 Note, including, among others, the Company’s failure to pay amounts due and payable under the December 2022 Note, events of insolvency or bankruptcy, failure to observe covenants contained in the Securities Purchase Agreement and the December 2022 Note, breaches of representations and warranties in the Securities Purchase
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Notes to Consolidated Financial Statements
Agreement, and the occurrence of certain transactions without the Lender’s consent (each such event, a “Trigger Event”), the Lender shall have the right, subject to certain exceptions, to increase the balance of the December 2022 Note by 10% for a Major Trigger Event (as defined in the December 2022 Note) and 5% for a Minor Trigger Event (as defined in the December 2022 Note). If a Trigger Event is not cured within ten (10) trading days of written notice thereof from the Lender, it will result in an event of default (such event, an “Event of Default”). Following an Event of Default, the Lender may accelerate the December 2022 Note such that all amounts thereunder become immediately due and payable, and interest shall accrue at a rate of 22% annually until paid. Under the December 2022 Note, “Conversion Price” means, prior to a Major Trigger Event, $2.00 per share (subject to adjustment for stock splits and stock combinations), and following a Major Trigger Event, the lesser of (i) $2.00 per share (subject to adjustment for stock splits and stock combinations), and (ii) 90% multiplied by the lowest closing bid price of the Company’s common stock in the three trading days prior to the date on which the conversion notice is delivered. If the Conversion Price is below $0.1756 per share, the Company will be required to satisfy a conversion notice from the Lender in cash. Subject to certain exceptions, while the December 2022 Note is outstanding, the Lender will have a consent right on any future variable rate transactions or any debt and a 10% participation right in any future debt or equity financings. In December 2023, the December 2022 Note was amended to change the mauturity date of the December 2022 Note to April 1, 2024 to allow time to further negotiate a longer extension of maturity of the December 2022 Note. The Company paid a one-time cash fee of $475,000 to the Lender. No other terms of the December 2022 Note were amended.
The Company elected to account for the December 2022 Note at fair value (Note 4) and was not required to bifurcate the conversion option as a derivative and as a result the original issue discount of $1,820,000 and debt issuance costs were written off upon election to fair value and accounted for as interest. During the year ended September 30, 2023, the Company recognized $2,074,964 of interest expense related to original issue discount of $1,820,000 and other third party debt issuance costs of $254,964.
November 2021 Note
On November 16, 2021, the Company received $10,000,000 in net proceeds from the issuance of an unsecured promissory note (the “November 2021 Note”) with a face amount of $10,220,000. Debt issuance costs totaling $820,000 were recorded as debt discount and are deducted from the principal in the accompanying consolidated balance sheets. The debt discount was amortized as a component of interest expense over the term of the underlying debt using the effective interest method. The note bore interest at a rate of 9.5% per annum compounding daily and was set to mature on January 1, 2023. The Company could prepay all or a portion of the note at any time by paying 105% of the outstanding balance elected for pre-payment.
As discussed above, the November 2021 Note was cancelled using proceeds from the December 2022 Note issued to the same lender. The total repayment was $11,947,539, which represented 105% of the outstanding balance and included $1,158,609 of interest expense. The transaction has been accounted for as an extinguishment of the November 2021 Note. As a result, the Company recorded a loss on debt extinguishment of $577,659, which included $8,729 of unamortized debt discount, and prepayment fees of $568,930.
During the years ended September 30, 2023 and 2022, the Company recognized $454,866 and $1,655,340, respectively, of interest expense related to the unsecured promissory notes, of which $190,775 and $646,299, respectively, are related to the amortization of debt discount.
November 2020 Note
On November 5, 2020, the Company received $10,000,000 in net proceeds from the issuance of an unsecured promissory note (the “November 2020 Note”) with a face amount of $10,220,000, which was amended in November 2021 and became convertible. Debt issuance costs totaling $228,032 were recorded as debt discount and were deducted from the principal. The debt discount was amortized as a component of interest expense over the 14-month term of the underlying debt using the effective interest method. The November 2020 Note bore interest at a rate of 7.5% per annum and was due to mature
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Notes to Consolidated Financial Statements
January 1, 2022. On November 16, 2021, the Company entered into a note amendment, which, among other things, (i) extended the maturity date to January 1, 2023, (ii) increased the interest rate from 7.5% per annum to 10% per annum beginning on January 1, 2022, and (iii) provided for the lender’s right to redeem some or all of the outstanding balance of the note for shares of the Company’s common stock beginning July 1, 2022, subject to certain limitations. The amendment was accounted for as an extinguishment of the November 2020 Note. As a result, the Company recorded a loss on debt extinguishment of $1,025,402, which is the difference between the fair value of the amended promissory note and the net carrying value of the November 2020 Note, which included $26,488 of unamortized debt discount and lender fees of $552,633. The amended promissory note included redemption options whereby beginning on July 1, 2022, the holder had the option to redeem up to $2,000,000 of outstanding principal and accrued and unpaid interest per calendar month for shares of the Company’s common stock at a redemption price equal to 75% of the lowest closing bid price in the three trading days immediately preceding the date the holder delivers written notice. The Company elected to account for the amended promissory note at fair value (Note 4) and was not required to bifurcate the redemption options as derivatives.
The Company prepaid the note in full on June 30, 2022 by paying 105% of the outstanding balance. The total payment was $12,934,484, which included interest of $1,546,038.
Paycheck Protection Program term loan
On May 4, 2020, the Company received $904,200 in proceeds from a loan granted pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relies, and Economic Securites (“CARES”) Act. The PPP term loan was evidenced by a promissory note containing the terms and conditions for repayment of the PPP term loan. The PPP term loan provided for an initial six-month deferral of payments and any amount owed on the loan had a two-year maturity (May 2022), with an interest rate of 1% per annum. Commencing October 15, 2021, the Company began 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 loan was fully repaid on May 2, 2022. Interest expense on the PPP loan for the year ended September 30, 2022 was $2,718.
8. 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
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Notes to Consolidated Financial Statements
party may also terminate the related agreement under designated circumstances if the Selexis Technology infringes third-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 $328,192 (based on an exchange rate on September 30, 2023 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 claiming $3,000,000 in damages. On March 30, 2021, the Company entered into a confidential settlement agreement with Liomont, and the complaint was dismissed on April 11, 2021. The Company agreed to make an initial settlement payment of $625,000 that was paid in April 2021; and an additional payment of $750,000, which was paid in April 2022. There are no remaining future financial obligations.
On November 3, 2023, a securities class action lawsuit was filed against the Company and certain of its officers in the United States District Court for the District of New Jersey. The class action complaint alleges violations of the Securities Exchange Act of 1934, as amended, or the Exchange Act, in connection with allegedly false and misleading statements made by the Company related to the Company’s BLA during the period from December 29, 2022 through August 29, 2023. The complaint alleges, among other things, that the Company violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 by failing to disclose that there was an alleged lack of evidence supporting ONS-5010 as a treatment for wet AMD and that we and/or our manufacturing partner had deficient CMC controls for ONS-5010, which remained unresolved at the time the Company’s BLA was re-submitted to the FDA and, as a result, the FDA was unlikely to approve the Company’s BLA, and that the Company’s stock price dropped when such information was disclosed. The plaintiffs in the class action complaint seek damages and interest, and an award of reasonable costs, including attorneys’ fees.
The pending lawsuit and any other related lawsuits are subject to inherent uncertainties, and the actual defense and disposition costs will depend upon many unknown factors. The outcome of the pending lawsuit and any other related lawsuits is necessarily uncertain. The Company could be forced to expend significant resources in the defense of the pending lawsuit and any additional lawsuits, and the Company may not prevail. In addition, the Company may incur substantial legal fees and costs in connection with such lawsuits. The Company currently is not able to estimate the possible cost to us from these matters, as the pending lawsuit is currently at an early stage, and the Company cannot be certain how long it may take to resolve the pending lawsuit or the possible amount of any damages that the Company may be required to pay. Such amounts could be material to the Company’s financial statements if it does not prevail in the defense of the pending lawsuit and any other related lawsuits, or even if it does prevail. The Company has not established any reserve for any potential liability relating to the pending lawsuit and any other related lawsuits. It is possible that the Company could, in the future, incur judgments or enter into settlements of claims for monetary damages.
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Notes to Consolidated Financial Statements
Leases
Corporate office
In March 2021, the Company entered into a three-year term corporate office lease in Iselin, New Jersey which commenced on April 23, 2021.
Equipment leases
The Company has equipment leases with terms between 12 and 36 months and has recorded those leases as finance leases. The equipment leases bear interest between 4.0% and 13.0% per annum.
Certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include minimum payments that the Company is obligated to make under the non-cancelable initial terms of the leases as the renewal terms are at the Company’s option. Lease expense is recorded as research and development or general and administrative based on the use of the leased asset.
The components of lease cost for the years ended September 30, 2023 and 2022 were as follows:
Year ended September 30,
Lease cost:
Amortization of right-of-use assets $ — $ —
Interest on lease liabilities 1,399 3,141
Amounts reported in the consolidated balance sheets for leases where the Company is the lessee were as follows:
September 30,
Operating leases:
Operating lease liabilities — 26,995
Finance leases:
Right-of-use asset $ — $ —
Weighted-average remaining lease term (years):
Operating leases 0.6 1.6
Finance leases 0.3 1.3
Weighted-average discount rate:
Operating leases 7.5% 7.5%
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Notes to Consolidated Financial Statements
Other information related to leases for the years ended September 30, 2023 and 2022 are as follows:
Year ended September 30,
Cash paid for amounts included in the measurement of lease obligations:
Operating cash flows from finance leases $ 1,399 $ 3,141
Operating cash flows from operating leases 27,675 46,652
Financing cash flows from finance leases 11,751 26,464
Future minimum payments under noncancelable leases at September 30, 2023 are as follows for the years ending September 30:
Finance leases
Total undiscounted lease payments 4,383
Less: Imputed interest 116
Total lease obligations $ 4,267
Employee Benefit Plan
The Company maintains a defined contribution 401(k) plan (the “Plan”) in which employees may contribute up to 100% of their salary and bonus, subject to statutory maximum contribution amounts. The Company matches 100% of the first 3% of employee contributions. The Company assumes all administrative costs of the Plan. For the years ended September 30, 2023 and 2022, the expense relating to the matching contribution was $136,914 and $83,266, respectively.
9. Stockholders’ Equity
Common stock
On March 29, 2023, following receipt of stockholder approval at the Company’s 2023 annual meeting of stockholders, the number of authorized shares of common stock under the Company’s Certificate of Incorporation was increased from 325,000,000 shares to 425,000,000 shares.
In December 2022, in a registered direct equity offering to certain institutional and accredited investors, including GMS Ventures and Investments (“GMS Ventures”), the Company’s largest stockholder, the Company issued 28,460,831 shares of common stock at a purchase price per share of $0.8784 for $23,208,679 in net proceeds after payment of placement agent fees and other offering costs. GMS Ventures purchased an aggregate of 14,230,418 shares of common stock in the registered direct equity offering. In connection with the registered direct equity offering, the Company issued to M.S. Howells & Co., the placement agent, warrants to purchase up to an aggregate of 515,755 shares of common stock at an exercise price of $1.05 per share, which warrants have a three-year term.
In November 2021, the Company issued 46,000,000 shares of common stock in an underwritten public offering at a purchase price per share of $1.25 for $53,968,057 in net proceeds after payment of underwriter discounts and commissions and other underwriter offering costs. GMS Ventures, the Company’s largest stockholder and strategic partner, purchased an aggregate of 16,000,000 shares of common stock in the public offering at the public offering price per share. In connection with the underwritten public offering, the Company issued the underwriter warrants to purchase up to an aggregate of 2,100,000 shares of common stock at an exercise price of $1.5625 per share, which warrants have a five-year term.
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Notes to Consolidated Financial Statements
Each share of common stock entitles the holder to one vote on all matters submitted to a vote of the Company’s stockholders. Subject to preferences that may apply to any outstanding preferred stock, holders of common stock are entitled to receive ratably any dividends that the Company’s board of directors may declare out of funds legally available for that purpose on a non-cumulative basis. No dividends had been declared through September 30, 2023.
H.C. Wainwright & Co. At-the-Market Offering Agreement
On March 26, 2021, the Company entered into an At-the-Market Offering Agreement with H.C. Wainwright & Co., as sales agent (“Wainwright”), (the “Wainwright ATM Agreement” or the “Wainwright ATM Offering”), under which the Company may issue and sell shares of its common stock from time to time through Wainwright as sales agent. The Company filed a prospectus supplement, dated March 26, 2021, with the Securities and Exchange Commission pursuant to which the Company may offer and sell shares of common stock having an aggregate offering price of up to up to $40,000,000 from time to time through Wainwright. The Company incurred financing costs of $197,654 which were capitalized and were being reclassified to additional paid in capital on a pro rata basis when the Company sold common stock under the Wainwright ATM Offering. As of September 30, 2022, $119,422 of such deferred costs are included in other assets on the consolidated balance sheets.
Under the Wainwright ATM Offering, the Company paid Wainwright a commission equal to 3.0% of the aggregate gross proceeds of any sales of common stock under the Wainwright ATM Agreement. The Company terminated the Wainwright ATM Agreement effective May 15, 2023. As a result, the Company wrote off unamortized deferred costs under the Wainwright ATM Agreement. During the year ended September 30, 2023, the Company sold 895,391 shares of common stock under the Wainwright ATM Offering and generated $1,089,105 in net proceeds after paying fees to Wainwright of $38,799.
During the year ended September 30, 2022, the Company sold 4,808,269 shares of common stock under the Wainwright ATM Offering and generated $8,339,247 in net proceeds after paying fees to Wainwright of $279,821.
BTIG, LLC At-the-Market Offering Agreement
On May 16, 2023, the Company entered into the BTIG ATM Offering, under which the Company may issue and sell shares of its common stock having an aggregate offering price of up to $100,000,000 from time to time through BTIG. The Company incurred financing costs of $353,688, which were capitalized and are being reclassified to additional paid in capital on a pro rata basis when the Company sells common stock under the BTIG ATM Offering. As of September 30, 2023, $331,512 of such deferred costs are included in other assets on the consolidated balance sheets.
Under the BTIG ATM Agreement, the Company pays BTIG a commission equal to 3.0% of the aggregate gross proceeds of any sales of common stock under the BTIG ATM Agreement. The offering of common stock pursuant to the BTIG ATM Agreement will terminate upon the earlier of (i) the sale of all common stock subject to the BTIG ATM Agreement or (ii) termination of the BTIG ATM Agreement in accordance with its terms.
During the year ended September 30, 2023, the Company sold 3,578,223 shares of common stock under the BTIG ATM Offering and generated $6,080,088 in net proceeds after paying fees to BTIG and other issuance costs of $188,044.
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Notes to Consolidated Financial Statements
Common stock warrants
As of September 30, 2023, the Company had the following warrants outstanding to acquire shares of its common stock:
Shares of
common stock
issuable upon
exercise of Exercise Price
Expiration Date warrants Per Share