Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read this section in conjunction with our unaudited interim consolidated financial statements and related notes included in Part I. Item 1 of this report and our audited consolidated financial statements and related notes thereto and management’s discussion and analysis of financial condition and results of operations for the years ended September 30, 2019 and 2018 included in our Annual Report on Form 10-K for the year ended September 30, 2019, filed with the Securities and Exchange Commission, or SEC, on December 19, 2019.
Forward-Looking Statements
This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are identified by words such as “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should,” “would,” “potentially” or the negative of these terms or similar expressions in this report. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. These forward-looking statements are subject to certain risks and uncertainties that could cause a difference include, but are not limited to, those discussed under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2019, filed with the SEC on December 19, 2019, and elsewhere in this report. See “Special Note Regarding Forward-Looking Statements.” Forward-looking statements are based on our management’s current beliefs and assumptions and based on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments.
Overview
We are a late clinical-stage biopharmaceutical company working to develop 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 as the first and only approved bevacizumab in the United States, Europe, Japan and other markets for the treatment of wet age-related macular degeneration, or wet AMD, diabetic macular edema, or DME, and branch retinal vein occlusion, or BRVO.
ONS-5010 (LYTENAVA (bevacizumab-vikg)) is an investigational ophthalmic formulation of bevacizumab under development to be administered as an intravitreal injection for the treatment of wet AMD and other retinal diseases. Bevacizumab is a full-length, humanized anti-VEGF (Vascular Endothelial Growth Factor) recombinant monoclonal antibody, or mAb, that inhibits VEGF and associated angiogenic activity. The study design for our Phase 3 clinical program to evaluate ONS-5010 as an ophthalmic formulation of bevacizumab was reviewed at an end of Phase 2 meeting with the FDA in April 2018, and we filed our investigational new drug application, or IND, with the FDA in the first quarter of calendar 2019.
Our Phase 3 program for ONS-5010 in wet AMD involves two clinical trials, which we refer to as NORSE 1 and NORSE 2, evaluating ONS-5010 against ranibizumab (LUCENTIS). Enrollment in the NORSE 1 trial is complete with 61 patients enrolled at nine trial sites in Australia. The endpoint for NORSE 1 has been changed from the difference in mean change from baseline visual acuity to the proportion of participants who gain at least 15 letters in the best corrected visual acuity, or BCVA, at 11 months for ONS-5010 dosed on a monthly basis compared to LUCENTIS dosed using the alternative PIER clinical trial dosing regimen of three monthly doses followed by quarterly dosing. This change was made with agreement from the FDA and now aligns with the endpoint for our NORSE 2 study. While not designed as a pivotal study, NORSE 1 is one of two studies agreed upon with the FDA in April 2018 and will provide initial safety and efficacy data relating to ONS-5010 in wet AMD patients. We expect to report top line data from NORSE 1 in August 2020. The ongoing COVID-19 pandemic is not expected to impact the completion of the NORSE 1 trial at this time. See “—Impacts of the COVID-19 Pandemic” below for more information.
The NORSE 2 study began enrolling wet AMD patients in July 2019. NORSE 2 is expected to enroll a total of approximately 220 patients at more than 40 clinical trial sites and is being conducted in the United States. The primary
endpoint for NORSE 2 is the difference in proportion of participants who gain at least 15 letters in BCVA at 11 months for ONS-5010 dosed on a monthly basis compared to LUCENTIS dosed using the alternative PIER clinical trial dosing regimen. NORSE 2 continues to screen, enroll and treat patients, subject to additional COVID-19 safety protocols for both patients and staff at trial sites. Due to these additional safety protocols, some sites temporarily shut down and patient enrollment slowed. Due to local conditions at the various clinical trial sites, which have varying degrees of “shelter-in-place” and other similar government orders mandating various restrictions, enrollment in NORSE 2 is expected to be completed no later than the end of August 2020. Enrollment patterns in NORSE 2 are approaching pre-COVID-19 pandemic rates.
Subsequent to the completion of enrollment in NORSE 2 in 2020, we plan to initiate the NORSE 3 clinical trial. NORSE 3 is an open-label safety study that will be conducted to ensure the adequate number of safety exposures to ONS-5010 are available for the initial regulatory filings. Approximately 180 patients are expected to be enrolled in several different vascular and inflammatory retinal diseases where an anti-VEGF drug can be used as a therapeutic option. Patients in NORSE 3 will receive four doses of ONS-5010 over three months.
In addition to NORSE 1 and NORSE 2 for wet AMD, we have received agreements from the FDA on three Special Protocol Assessments, or SPAs, for three additional registration clinical trials for our ongoing Phase 3 program for ONS-5010. These SPAs cover the protocols for NORSE 4, a registration clinical trial to treat branch retinal vein occlusion or BRVO, and NORSE 5 and NORSE 6, two registration clinical trials to treat diabetic macular edema, or DME.
Currently, the cancer drug Avastin (bevacizumab) is used off-label for the treatment of wet AMD and other retinal diseases such as DME and BRVO even though Avastin has not been approved by regulatory authorities for use in these diseases. If the ONS-5010 clinical program is successful, it will support our plans to submit for regulatory approval in multiple markets in 2021 including the United States, Europe and Japan, as well as other markets. Because there are no approved bevacizumab products for the treatment of retinal diseases in such major markets, we are developing ONS-5010 as a standard Biologics License Application, or BLA and not using the biosimilar drug development pathway 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 bevacizumab. Off-label use of bevacizumab is currently estimated to account for at least 50% of all wet AMD prescriptions in the United States.
Going Concern
Through March 31, 2020, we have funded substantially all of our operations with $251.7 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.
Our cash resources of $4.7 million as of March 31, 2020, the $3.3 million of proceeds from the sale of our New Jersey net operating losses, or NOLs, and research and development, or R&D, credits, and the $0.9 million proceeds from a loan granted pursuant to the Paycheck Protection Program, or PPP, of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, we received in May 2020, are expected to fund our operations through August 2020 excluding any unscheduled repayment of debt. To provide additional working capital, we continue to engage in active discussions with global and regional pharmaceutical companies for licensing and/or co-development rights to ONS-5010. If we are not successful in raising additional capital or entering into one or more licensing and/or co-development rights agreements, we may be required to, among other things, modify our clinical trial plans for ONS-5010 in additional indications, make reductions in our workforce, 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.
We do not have any products approved for sale and we have only generated revenue from our collaboration agreements. We have incurred operating losses and negative operating cash flows since inception and there is no assurance that we will ever achieve profitable operations, and if achieved, that profitable operations will be sustained. Our net loss for the six months ended March 31, 2020 was $22.3 million. In addition, development activities, clinical and preclinical testing and commercialization of our product candidates will require significant additional financing.
In December 2019, we received approval from the New Jersey Economic Development Authority’s Technology Business Tax Certificate Transfer Program to sell approximately $3.6 million of our unused New Jersey NOLs and R&D credits. We received approximately $3.3 million of proceeds from the sale of the New Jersey NOLs and R&D credits in May 2020.
In February 2020, we raised approximately $9.2 million of net proceeds through the sale of shares of our common stock in a public offering, and the sale of warrants and common stock in concurrent private placements. In addition, on March 19, 2020, following stockholder approval, the termination of the strategic license agreement with MTTR, LLC, or MTTR, became effective, as did the consulting agreements entered into with each of the four principals of MTTR, including two of our executive officers, Mr. Terry Dagnon and Mr. Jeff Evanson. Accordingly, our monthly payments have been reduced from $105,208 under the MTTR strategic license to approximately $90,000 per the consulting agreements.
In April 2020, the holder of our outstanding convertible senior secured notes began exchanging the outstanding principal and accrued interest from those notes for shares of our common stock per their terms. The holder exchanged $831,932 of principal and accrued interest for an aggregate 1,626,456 shares of our common stock between April 1, 2020 and May 13, 2020.
On May 4, 2020, we received $0.9 million in proceeds from a loan granted pursuant to the PPP of the CARES Act and on May 6, 2020, we terminated our lease for office space in Cranbury, New Jersey and will use space, as needed, at our warehouse in Monmouth Junction, New Jersey as our corporate headquarters. We expect that the termination of the Cranbury office lease will reduce our cash needs by approximately $14.0 million over the remaining life of the original lease, through February 2028.
We have incurred recurring losses and negative cash flows from operations since inception and had a stockholders’ deficit at March 31, 2020 of $20.5 million. As of March 31, 2020, we had substantial indebtedness that included $7.8 million outstanding aggregate principal amount and accrued interest of senior secured notes that mature on December 31, 2020 and $3.6 million of unsecured notes that are due on demand. We will need to raise substantial additional capital to fund our planned future operations, commence clinical trials, receive approval for and commercialize ONS-5010, or to develop other product candidates. We plan to finance our future operations with a combination of proceeds from potential licensing and/or marketing arrangements with pharmaceutical companies, the issuance of equity securities, 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. These matters raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Capital Structure Changes
In December 2019, we also began implementing additional steps to improve our balance sheet and simplify our capitalization structure, which carried into the second fiscal quarter of 2020.
On December 23, 2019, we amended the terms of our outstanding 15-month warrants and five-year warrants issued April 12, 2019, which originally had an exercise price of $2.90 per share and had anti-dilution price protection features. As amended, the exercise price of all outstanding warrants was reduced to $0.2320 per share and the exercise period was amended such that all of the warrants issued April 2019 expired at 5:00 P.M., Eastern time on December 24, 2019. As a result of this amendment, such warrants to purchase an aggregate of 10,408,250 shares of common stock issued April 2019 were exercised in full for an aggregate 8,327,642 shares pursuant to the amended terms and are no longer outstanding. Of these exercised warrants, 10,157,050 were exercised pursuant to the net exercise provisions therein, as amended.
On January 27, 2020, we also amended the exercise price of our outstanding warrants to purchase an aggregate 4,657,852 shares of our common stock (originally issued in October 2017, May 2018 and June 2018), all of which were held by BioLexis Pte. Ltd., or BioLexis, our controlling stockholder, to $0.232 per share (from $7.20 to $7.80 per share). BioLexis exercised all such warrants for a cash payment of approximately $1.1 million on January 29, 2020.
In addition, on March 19, 2020, our stockholders approved an agreement with BioLexis dated January 27, 2020, whereby we agreed to amend the terms of our Series A-1 Preferred Convertible Preferred Stock, par value $0.01 per share, or the Series A-1 Preferred, and the issuance of our common stock pursuant to such amended terms, and BioLexis agreed to promptly convert its shares of Series A-1 Preferred pursuant to such amended terms, and in any event, within five business days of stockholder approval thereof. As amended, the effective conversion rate was increased from $18.89797 per share to $431.03447263 per share, which, resulted in the issuance of 29,358,621 shares upon conversion of the 68,112 shares of Series A-1 Preferred outstanding on March 23, 2020. The Series A-1 Preferred ranked senior to our common equity and had protective provisions, as well as a redemption premium of $37.5 million and a liquidation preference of $40.9 million, all of which were eliminated upon the conversion to common stock.
Impacts of the COVID-19 Pandemic
We continue to monitor the ongoing COVID-19 global pandemic, which has resulted in travel and other restrictions to reduce the spread of the disease. Although, to date, we have experienced only minor disruptions due to the ongoing COVID-19 pandemic, we have experienced slight delays in our ongoing clinical trials, including in patient enrollment and recruitment due to local clinical trial site protocols designed to protect staff and patients. However, given our current infrastructure needs and current strategy, we were able to transition to remote working with limited impact on productivity, as shelter-in-place and other types of local and state orders were imposed. All clinical and chemistry, manufacturing and control, or CMC, activities are currently active for both NORSE 1 and NORSE 2. We have confirmed with the Ophthalmic Division of the FDA that it considers both approved and investigational treatments for sight-threatening conditions such as wet AMD not to be elective, and that as such they should continue during the COVID-19 restrictions. We now expect our U.S. based NORSE 2 clinical trial to complete enrollment by August 2020, instead of May 2020 as previously reported. Our Australian based NORSE 1 clinical trial remains unaffected with the planned top line data release on schedule for August 2020. The initial disruptions to our NORSE 2 clinical trial sites appear to have been overcome and enrollment patterns are approaching pre COVID-19 pandemic levels.
The safety, health and well-being of all patients, medical staff and our internal and external teams is paramount and is our primary focus. As shelter-in-place rules are lifted across the country we are aware that the potential exists for further disruptions to our projected timelines. We are in close communication with our clinical teams and key vendors and are prepared to take action should the pandemic worsen and impact our business in the future.
The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of any impacts the evolving COVID-19 pandemic may have on our business, operations, financial position and our clinical and regulatory activities. See also the section titled “Risk Factors” herein for additional information on risks and uncertainties related to the ongoing COVID-19 pandemic. To the extent the evolving effects of the COVID-19 pandemic adversely affect our business and financial condition, it may also have the effect of heightening many of the other risks and uncertainties described under “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2019 that we filed with the SEC on December 19, 2019.
Collaboration, License and Strategic Partnership 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.
MTTR, LLC - ONS 5010
In February 2018, we entered into a strategic partnership agreement with MTTR, LLC, or MTTR, to advise on regulatory, clinical and commercial strategy and assist in obtaining approval of ONS-5010, our bevacizumab therapeutic product candidate for ophthalmic indications. Under the terms of the agreement, we paid MTTR a $58,333 monthly consulting fee through December 2018. Beginning January 2019, the monthly fee increased to $105,208 per month, and then, after launch of ONS-5010 in the United States, was to have increased to $170,833 per month (the amount of which would have been reduced by 50% in the event net sales of ONS-5010 were below a certain threshold million per year). We also agreed to pay MTTR a tiered percentage of the net profits of ONS-5010 ranging in the low- to mid-teens, with the ability to credit
monthly fees paid to MTTR. In March 2018, we amended the MTTR agreement and agreed to pay a one-time fee of $268,553 to MTTR by September 2020 if certain regulatory milestones are achieved earlier than anticipated.
In June 2019, we entered into a further amendment of our strategic partnership agreement with MTTR pursuant to which we increased the aggregate monthly payments to MTTR under the existing agreement from $105,208 to $170,724 through December 2019 by adding an additional monthly retainer of $115,916, and an offset of $50,000 to the existing monthly retainer while the additional monthly retainer is in effect.
On January 27, 2020, we entered into a termination agreement and mutual release with MTTR to terminate the strategic partnership agreement. Pursuant to the agreement, we agreed (x) to issue to the four principals of MTTR (who include two of our named executive officers, Messrs. Dagnon and Evanson), an aggregate of 7,244,739 shares of our common stock, subject to stockholder approval, (y) to enter into consulting agreements with each of the four principals setting forth the terms of his respective compensation arrangement, and (z) to pay MTTR a one-time settlement fee of $110,000, upon effectiveness of the agreement. The termination agreement became effective upon stockholder approval of the share issuance, which occurred at our annual stockholders meeting on March 19, 2020.
As contemplated by the termination agreement, on January 27, 2020, we also entered into consulting agreements directly with each of the four principals of MTTR setting forth the terms of each respective compensation arrangement, as well as providing for certain transfer restrictions and repurchase rights applicable to the shares of our common stock to be issued pursuant thereto. The consulting agreements also became effective on March 19, 2020 following stockholder approval of the share issuances in the consulting agreements. The consulting agreements include the payment of monthly fees for services based on an agreed number of hours, and provide that the issued shares may generally not be sold until the earlier of (i) six months following FDA approval of ONS-5010, (ii) the date we publicly announce not to pursue development of ONS-5010, (iii) a “Change of Control” as defined therein or (iv) January 2025, subject to limited exceptions, including a pro rata exception if BioLexis disposes of any of its shares to an unaffiliated third party for consideration. We also have the right to repurchase such shares for $0.01 per share if the consultant terminates his agreement other than for good reason (as defined therein), or we terminate the agreement for cause (as defined therein). The repurchase right also lapses in tiered percentages (15%-40%) tied to completion of enrollment of our NORSE 2 clinical trial of ONS-5010 by certain dates. It also lapses as to 50% or 100% of the shares if we enter into agreements pertaining to ONS-5010 that meet certain value thresholds, or our share price meets certain predefined targets. The repurchase right also lapses as to 100% of the shares upon the earliest to occur of (i) filing of the BLA for ONS-5010, (ii) termination of the agreement by the consultant for good reason (as defined therein) or by us other than for cause (as defined therein), (iii) in the event of disability (as defined therein), or (iv) upon a “Change of Control” as defined therein.
MTTR and its four principals under the strategic partnership agreements and the subsequent individual consulting agreements earned an aggregate $780,771 and $580,911 during the six months ended March 31, 2020 and 2019, respectively, which includes monthly consulting fees and expense reimbursement. During the three and six months ended March 31, 2020, we recognized compensation expense related to the issuance of the restricted stock to the MTTR principals of $78,984.
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.
As of March 31, 2020, we have paid Selexis an aggregate of approximately $0.5 million under the commercial license agreements.
Components of our Results of Operations
Collaboration Revenue
To date, we have derived revenue only from activities pursuant to our emerging market collaboration and licensing agreements related to our inactive biosimilar development program. We have not generated any revenue from commercial product sales. For the foreseeable future, we expect all of our revenue, if any, will be generated from our collaboration and licensing agreements. If any of our product candidates currently under development are approved for commercial sale, we may generate revenue from product sales, or alternatively, we may choose to select a collaborator to commercialize our product candidates.
We consider milestones payments from our collaboration agreements as a form of variable consideration that results in such amounts being recognized over the estimated performance period. All remaining deferred revenue under our collaboration agreements was fully recognized in fiscal 2019 as all future development would be completed by our partners without any further assistance by us.
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:
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expenses incurred under agreements with contract research organizations, or CROs, as well as investigative sites and consultants that conduct our preclinical studies and clinical trials;
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expenses incurred by us directly, as well as under agreements with contract manufacturing organizations, or CMOs, for manufacturing scale-up expenses and the cost of acquiring and manufacturing preclinical and clinical trial materials and commercial materials, including manufacturing validation batches;
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outsourced professional scientific development services;
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employee-related expenses, which include salaries, benefits and stock-based compensation;
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payments made under a third-party assignment agreement, under which we acquired intellectual property;
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expenses relating to regulatory activities, including filing fees paid to regulatory agencies;
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laboratory materials and supplies used to support our research activities; and
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allocated expenses, utilities and other facility-related costs.
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The successful development of our product candidates is highly uncertain. At this time, we cannot reasonably estimate or know the nature, timing and costs of the efforts that will be necessary to complete the remainder of the development of, or when, if ever, material net cash inflows may commence from any of our other product candidates. This uncertainty is due to the numerous risks and uncertainties associated with the duration and cost of clinical trials, which vary significantly over the life of a project as a result of many factors, including:
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the number of clinical sites included in the trials;
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the length of time required to enroll suitable patients;
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the number of patients that ultimately participate in the trials;
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the number of doses patients receive;
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the duration of patient follow-up;
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the results of our clinical trials;
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the establishment of commercial manufacturing capabilities;
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the receipt of marketing approvals; and
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the commercialization of product candidates.
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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. Product commercialization will take several years and millions of dollars in development costs.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size, complexity and duration of later-stage clinical trials.
General and Administrative Expenses
General and administrative expenses consist principally of salaries and related costs for personnel in executive, administrative, finance and legal functions, including stock-based compensation, travel expenses and recruiting expenses. Other general and administrative expenses include facility related costs, patent filing and prosecution costs and professional fees for business development, legal, auditing and tax services and insurance costs.
We anticipate that our general and administrative expenses will increase if and when we believe a regulatory approval of a product candidate appears likely, and we anticipate an increase in payroll and expense as a result of our preparation for commercial operations, particularly as it relates to the sales and marketing of our product.
Interest Expense
Interest expense consists of cash paid and non-cash interest expense related to our senior secured notes, and unsecured notes with current and former stockholders, equipment loans, capital lease and other finance obligations.
Loss on Extinguishment of Debt
Loss on extinguishment of debt consists of modifications to senior secured notes that are deemed to be substantially different from the existing notes.
Change in fair value of redemption feature
Change in fair value of the redemption feature reflects the change in the fair value of the embedded derivative contained in the new senior secured notes issued in December 2019, as a result of the fact that such notes were convertible into a variable number of shares of our common stock and at a discount that is deemed to be substantial. This embedded derivative was recorded at fair value and is subject to re-measurement at each balance sheet date until our obligations under the new senior secured notes are satisfied.
Change in Fair Value of Warrant Liability
Warrants to purchase our common stock that were issued in conjunction with the convertible senior secured notes originally issued December 2017 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. During the six months ended March 31, 2020 and 2019, we recorded income of $0.2 million and $0.3 million, respectively, related to the decrease in the fair value of our common stock warrant liability associated with the warrants issued in connection with the senior secured notes originally issued December 2017 which resulted from a decrease in the price of our common stock.
Income Taxes
On December 11, 2019, we received approval from the New Jersey Economic Development Authority’s Technology Business Tax Certificate Transfer Program to sell approximately $3.6 million of our unused New Jersey NOLs and R&D credits. We received approximately $3.3 million of proceeds from the sale of the New Jersey NOLs and R&D credits in May 2020.
Since inception, we have not recorded any U.S. federal or state income tax benefits (excluding the sale of New Jersey state NOLs and R&D credits) for the net losses we have incurred in each year or on our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of September 30, 2019, we had federal and state NOL carryforwards of $202.7 million and $71.8 million, respectively that will begin to expire in 2030 and 2037, respectively. As of September 30, 2019, we had federal foreign tax credit carryforwards of $2.4 million available to reduce future tax liabilities, which begin to expire starting in 2023. As of September 30, 2019, we also had federal research and development tax credit carryforwards of $7.0 million, which begin to expire in 2032.
In general, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its NOLs to offset future taxable income. We have not completed a study to assess whether an ownership change has occurred in the past. Our existing NOLs may be subject to limitations arising from previous ownership changes, and if we undergo an ownership change, our ability to utilize NOLs could be further limited by Section 382 of the Code. Future changes in our stock ownership, some of which are outside of our control, could result in an ownership change under Section 382 of the Code. Our NOLs are also subject to international regulations, which could restrict our ability to utilize our NOLs.
Furthermore, our ability to utilize NOLs of companies that we may acquire in the future, if any, may be subject to limitations. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire or otherwise be unavailable to offset future income tax liabilities.
Results of Operations
Comparison of Three Months Ended March 31, 2020 and 2019
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Three months ended March 31,
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2020
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2019
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Change
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Collaboration revenues
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$
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$
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641,140
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$
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(641,140)
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Operating expenses:
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Research and development
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4,383,214
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5,935,884
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(1,552,670)
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General and administrative
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1,957,175
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1,849,158
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108,017
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Impairment of property and equipment
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423,328
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561,735
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(138,407)
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6,763,717
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8,346,777
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(1,583,060)
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Loss from operations
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(6,763,717)
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(7,705,637)
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941,920
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Interest expense, net
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696,151
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1,053,877
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(357,726)
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Loss on extinguishment of debt
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—
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183,554
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(183,554)
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Change in fair value of redemption feature
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(1,759,037)
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—
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(1,759,037)
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Change in fair value of warrant liability
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(764)
|
|
|
1,301,728
|
|
|
(1,302,492)
|
Net loss
|
|
$
|
(5,700,067)
|
|
$
|
(10,244,796)
|
|
$
|
4,544,729
|
Collaboration Revenues
The following table sets forth a summary of revenue recognized from our collaboration and licensing agreements for the three months ended March 31, 2020 and 2019, all of which was from the recognition of deferred revenues under such agreements:
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2020
|
|
2019
|
IPCA Collaboration
|
|
$
|
—
|
|
$
|
128,007
|
Liomont Collaboration
|
|
|
—
|
|
|
84,414
|
Huahai Collaboration
|
|
|
—
|
|
|
371,427
|
BioLexis Collaboration
|
|
|
—
|
|
|
57,292
|
|
|
$
|
—
|
|
$
|
641,140
|
There were no collaboration revenues for the three months ended March 31, 2020 as compared to $0.6 million for the three months ended March 31, 2019. The decrease is due to the full recognition of IPCA Laboratories Limited, or IPCA, Liomont, S.A. de C.V., or Liomont, and Zhejiang Huahai Pharmaceutical Co., Ltd., or Huahai, deferred revenue during the fourth quarter of fiscal 2019, after we determined that we had no further performance obligations on these collaboration arrangements.
Research and Development Expenses
The following table summarizes our research and development expenses by functional area for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2020
|
|
2019
|
ONS-5010 development
|
|
$
|
3,610,551
|
|
$
|
2,622,113
|
Compensation and related benefits
|
|
|
285,368
|
|
|
1,511,822
|
Stock-based compensation
|
|
|
41,148
|
|
|
120,763
|
Other research and development
|
|
|
446,147
|
|
|
1,681,186
|
Total research and development expenses
|
|
$
|
4,383,214
|
|
$
|
5,935,884
|
Research and development expenses for the three months ended March 31, 2020 decreased by $1.6 million compared to the three months ended March 31, 2019. The decrease is primarily due to our decision in 2019 to outsource the commercial manufacturing and remaining development for the ONS-5010 program, resulting in lower compensation and related benefits, of an aggregate of $1.3 million (including stock-based compensation) and other research and development expenses of $1.2 million. This reduction in expenses was partially offset by an increase in ONS-5010 development costs of $1.0 million as the ONS-5010 program advanced into the NORSE 2 clinical trial in July 2019.
General and Administrative Expenses
The following table summarizes our general and administrative expenses by type for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2020
|
|
2019
|
Professional fees
|
|
$
|
768,785
|
|
$
|
649,355
|
Compensation and related benefits
|
|
|
(74,257)
|
|
|
430,126
|
Stock-based compensation
|
|
|
263,391
|
|
|
146,979
|
Facilities, fees and other related costs
|
|
|
999,256
|
|
|
622,698
|
Total general and administrative expenses
|
|
$
|
1,957,175
|
|
$
|
1,849,158
|
General and administrative expenses for the three months ended March 31, 2020 decreased by $0.1 million compared to the three months ended March 31, 2019. The decrease was primarily due to lower compensation and related benefits of $0.4 million resulting from reversal of previously accrued compensation cost. This reduction in expenses was primarily
offset by increased facilities and other general administrative costs of $0.4 million due to the reallocation of facilities costs to administrative functions upon the closure of our manufacturing and laboratory capabilities in 2019.
Impairment of Property and Equipment
During the three months ended March 31, 2020, we recorded an impairment charge of $0.4 million primarily due to the write-off of assets held for sale after we determined that the carrying amount of these assets was not recoverable as result of the May 2020 termination of our remaining lease for office, manufacturing and laboratory space in Cranbury, New Jersey and relocation of our corporate headquarters to our warehouse space in Monmouth Junction, New Jersey.
During the three months ended March 31, 2019, we wrote off certain construction in progress and laboratory equipment with a carrying amount of $0.6 million. We determined that the carrying amount of these assets was not recoverable and was less than the fair value less the cost to sell due to change in our operations to focus solely on developing and commercializing ONS-5010.
Interest Expense
Interest expense decreased by $0.4 million to $0.7 million for the three months ended March 31, 2020 as compared to $1.1 million for the three months ended March 31, 2019. The decrease was primarily due to repayment of notes in fiscal 2019.
Debt Extinguishment
We recorded a loss on extinguishment of debt of $0.2 million during the three months ended March 31, 2019 in connection with a forbearance and exchange agreement in March 2019 pursuant to which a third party purchased two stockholder notes previously issued in an aggregate original principal amount of $1.0 million with an aggregate outstanding balance of $1.9 million, including accrued interest. There was no debt extinguishment during the three months ended March 31, 2020.
Comparison of Six Months Ended March 31, 2020 and 2019
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended March 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
Change
|
Collaboration revenues
|
|
$
|
—
|
|
$
|
1,708,738
|
|
$
|
(1,708,738)
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
10,230,516
|
|
|
12,007,406
|
|
|
(1,776,890)
|
General and administrative
|
|
|
4,293,899
|
|
|
4,753,146
|
|
|
(459,247)
|
Impairment of property and equipment
|
|
|
423,328
|
|
|
2,911,138
|
|
|
(2,487,810)
|
|
|
|
14,947,743
|
|
|
19,671,690
|
|
|
(4,723,947)
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(14,947,743)
|
|
|
(17,962,952)
|
|
|
3,015,209
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
1,293,816
|
|
|
2,174,726
|
|
|
(880,910)
|
Loss on extinguishment of debt
|
|
|
8,060,580
|
|
|
183,554
|
|
|
7,877,026
|
Change in fair value of redemption feature
|
|
|
(1,796,982)
|
|
|
—
|
|
|
(1,796,982)
|
Change in fair value of warrant liability
|
|
|
(202,142)
|
|
|
(334,592)
|
|
|
132,450
|
Net loss
|
|
$
|
(22,303,015)
|
|
$
|
(19,986,640)
|
|
$
|
(2,316,375)
|
Collaboration Revenues
The following table sets forth a summary of revenue recognized from our collaboration and licensing agreements for the six months ended March 31, 2020 and 2019, all of which was from the recognition of deferred revenues under such agreements:
|
|
|
|
|
|
|
|
|
Six months ended March 31,
|
|
|
2020
|
|
2019
|
IPCA Collaboration
|
|
$
|
—
|
|
$
|
256,014
|
Liomont Collaboration
|
|
|
—
|
|
|
183,828
|
Huahai Collaboration
|
|
|
—
|
|
|
742,854
|
BioLexis Collaboration
|
|
|
—
|
|
|
526,042
|
|
|
$
|
—
|
|
$
|
1,708,738
|
There were no collaboration revenues for the six months ended March 31, 2020 as compared to $1.7 million for the six months ended March 31, 2019. The decrease is due to the full recognition of IPCA, Liomont, and Huahai, deferred revenue during the fourth quarter of fiscal 2019, after we determined that we had no further performance obligations on these collaboration arrangements.
Research and Development Expenses
The following table summarizes our research and development expenses by functional area for the six months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
Six months ended March 31,
|
|
|
2020
|
|
2019
|
ONS-5010 development
|
|
$
|
8,372,766
|
|
$
|
4,993,082
|
Compensation and related benefits
|
|
|
692,671
|
|
|
3,396,471
|
Stock-based compensation
|
|
|
148,938
|
|
|
211,972
|
Other research and development
|
|
|
1,016,141
|
|
|
3,405,881
|
Total research and development expenses
|
|
$
|
10,230,516
|
|
$
|
12,007,406
|
Research and development expenses for the six months ended March 31, 2020 decreased by $1.8 million compared to the six months ended March 31, 2019. The decrease is primarily due to our decision to outsource the commercial manufacturing and remaining development for the ONS-5010 program, which resulted in lower compensation and related benefits, of an aggregate of $2.8 million, and other research and development expenses of $2.4 million . This reduction in expenses was partially offset by an increase in ONS-5010 development costs of $3.4 million as the ONS-5010 program advanced into the NORSE 2 clinical trial in July 2019.
General and Administrative Expenses
The following table summarizes our general and administrative expenses by type for the six months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
Six months ended March 31,
|
|
|
2020
|
|
2019
|
Professional fees
|
|
$
|
1,720,233
|
|
$
|
2,130,329
|
Compensation and related benefits
|
|
|
354,068
|
|
|
591,307
|
Stock-based compensation
|
|
|
515,078
|
|
|
928,059
|
Facilities, fees and other related costs
|
|
|
1,704,520
|
|
|
1,103,451
|
Total general and administrative expenses
|
|
$
|
4,293,899
|
|
$
|
4,753,146
|
General and administrative expenses for the six months ended March 31, 2020 decreased by $0.4 million compared to the six months ended March 31, 2019. The decrease was primarily due to an aggregate $0.6 million decrease in compensation and related benefits and stock-based compensation primarily from reversal of previously accrued compensation cost and lower stock options expense, plus reduced professional fees of $0.4 million, which decreased due to lower advisory
services fees. The reduction in expenses was partially offset by increase in facilities and other general administrative costs of $0.6 million due to the reallocation of facilities costs to administrative functions following our decision to outsource manufacturing and remaining development functions in 2019.
Impairment of Property and Equipment
During the six months ended March 31, 2020, we recorded an impairment charge of $0.4 million primarily due to the write-off of assets held for sale after we determined that the carrying amount of these assets was not recoverable as result of the May 2020 termination of our remaining lease for office, manufacturing and laboratory space in Cranbury, New Jersey and relocation of our corporate headquarters to our warehouse space in Monmouth Junction, New Jersey.
During the six months ended March 31, 2019, we wrote off certain construction in progress and laboratory equipment with a carrying amount of $2.9 million. We determined that the carrying amount of these assets as of March 31, 2019 was not recoverable and was less than the fair value less the cost to sell due to change in our operations to focus solely on developing and commercializing ONS-5010.
Interest Expense
Interest expense decreased by $0.9 million to $1.3 million for the six months ended March 31, 2020 as compared to $2.2 million for the six months ended March 31, 2019. The decrease was primarily due to repayment of notes in fiscal 2019.
Debt Extinguishment
During the six months ended March 31, 2020, we recorded a loss on extinguishment of $8.1 million in connection with the exchange of our old senior secured notes for new senior secured notes in December 2019. The new senior secured notes were considered substantially different from the old notes, as such they qualified for extinguishment accounting.
We recorded a loss on extinguishment of debt of $0.2 million during the six months ended March 31, 2019 in connection with a forbearance and exchange agreement in March 2019 pursuant to which a third party purchased two stockholder notes previously issued in an aggregate original principal amount of $1.0 million with an aggregate outstanding balance of $1.9 million, including accrued interest.
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 March 31, 2020, we have funded substantially all of our operations through the receipt of $251.7 million net proceeds from the issuance of our equity securities, debt securities and borrowings under debt 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.
In December 2019, we received approval from the New Jersey Economic Development Authority’s Technology Business Tax Certificate Transfer Program to sell approximately $3.6 million of our unused New Jersey NOLs and R&D credits. We received approximately $3.3 million of proceeds from the sale of the New Jersey NOLs and R&D credits in May 2020.
On February 26, 2020, we issued, in a registered direct offering, an aggregate of 7,598,426 shares of common stock and, in a concurrent private placement to the same investors, warrants to purchase up to an aggregate of 3,799,213 shares of common stock at a combined purchase price per share and accompanying warrant of $1.016 for approximately $6.7 million in net proceeds after payment of placement agent fees and other offering costs. In a concurrent private placement, on February 26, 2020, we issued 2,460,630 shares of common stock and warrants to purchase up to an aggregate of 1,230,315 shares of common stock to GMS Ventures and Investments, an affiliate of BioLexis, our controlling stockholder and strategic partner at a combined purchase price per share and accompanying warrant of $1.016 for approximately $2.5 million. The warrants issued in both concurrent private placements were exercisable immediately at an exercise price of $0.9535 per share and will expire four years from the issuance date. In connection with the registered direct offering and concurrent private placement of warrants to those investors, we issued placement agent warrants to purchase up to an aggregate of 531,890 shares of common stock, on substantially the same terms as the registered direct offering and concurrent private placement warrants, at an exercise price of $1.27 per share and a 5-year term.
On March 19, 2020, following stockholder approval, the termination of the strategic license agreement with MTTR, LLC, or MTTR, became effective, as did the consulting agreements entered into with each of the four principals of MTTR, including two of our executive officers, Mr. Terry Dagnon and Mr. Jeff Evanson. Accordingly, our monthly payments have been reduced from $105,208 under the MTTR strategic license to approximately $90,000 per the consulting agreements.
Commencing April 2020, and following stockholder approval in March 2020, the holder of the convertible senior secured notes issued December 2019 began exchanging the outstanding principal and accrued interest from those notes for our common stock per the terms of the notes. The holder exchanged $831,932 of outstanding principal and accrued interest for an aggregate 1,626,456 shares of our common stock between April 1, 2020 and May 13, 2020.
On May 4, 2020, we received $0.9 million in proceeds from a loan granted pursuant to the PPP of the CARES Act, or the PPP loan. The PPP loan is evidenced by a promissory note containing the terms and conditions for repayment of the PPP loan. In accordance with the requirements of the CARES Act, we intend to use the proceeds primarily for payroll costs, and to make lease and utility payments. The PPP loan is subject to the terms and conditions applicable to all loans made pursuant to the PPP as administered by the Small Business Administration, or SBA, under the CARES Act. The PPP loan provides for an initial six-month deferral of payments and any amount owed on the loan has a two-year maturity and bears interest at a rate of 1% per annum. We have the right to prepay any amounts outstanding under this loan at any time and from time to time, in whole or in part, without penalty.
As of March 31, 2020, we had a stockholders’ deficit of $20.5 million and a cash balance of $4.7 million. In addition, we have $7.8 million outstanding aggregate principal amount and accrued interest of senior secured notes that become due in December 2020, $3.6 million unsecured notes, which are due on demand as of such date. These matters 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 our product candidates currently in development. We will need substantial additional financing to fund our operations and to commercially develop our product candidates. 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 and 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.
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.
Funding Requirements
We plan to focus in the near term on advancing ONS-5010 through clinical trials to support the filing of a BLA with the FDA to support the generation of commercial revenues. We anticipate we will incur net losses and negative cash flow from operations for the foreseeable future. We may not be able to complete the development and initiate commercialization of ONS-5010 if, among other things, our clinical trials are not successful or if the FDA does not approve our application arising out of our current clinical trials when we expect, or at all.
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, legal and other regulatory expenses, and administrative and overhead costs. Our future funding requirements will be heavily determined by the resources needed to support development of our lead product candidate.
We believe our existing cash as of March 31, 2020 including proceeds from the sale of our New Jersey NOLs and R&D credits of approximately $3.3 million, and $0.9 million in proceeds from a loan granted pursuant to the PPP received in May 2020 will fund our operations through August 2020 excluding any unscheduled repayment of debt. 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 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. Our ability to raise additional funds may be adversely impacted by recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. If we raise additional capital through the sale of equity or convertible debt securities, your ownership will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a holder of our common stock. There are no assurances that we will be successful in obtaining an adequate level of financing for the development and commercialization of ONS-5010 or any other current or future product candidates. Alternatively, we will be required to, among other things, modify our clinical trial plans for ONS-5010 in additional indications, make reductions in our workforce, scale back our plans and place certain activities on hold, discontinue our development programs, liquidate all or a portion of our assets, and/or seek protection under the provisions of the U.S. Bankruptcy Code.
Cash Flows
The following table summarizes our cash flows for each of the periods presented:
|
|
|
|
|
|
|
|
|
Six months ended March 31,
|
|
|
2020
|
|
2019
|
Net cash used in operating activities
|
|
$
|
(13,756,734)
|
|
$
|
(16,040,794)
|
Net cash used in investing activities
|
|
|
—
|
|
|
(286,569)
|
Net cash provided by financing activities
|
|
|
10,394,129
|
|
|
14,765,440
|
Operating Activities.
During the six months ended March 31, 2020, we used $13.8 million of cash in operating activities resulting primarily from our net loss of $22.3 million, This use of cash was partially offset by $7.6 million of noncash items such as change in fair value of redemption feature, non-cash interest expense, stock-based compensation, change in fair value of warrant liability, loss on disposal of property and equipment, loss on extinguishment of debt and depreciation and amortization expense. The change in our operating assets and liabilities of $0.9 million was primarily to an increase in our accounts payable associated with our clinical trials and ONS 5010 development costs from September 30, 2019.
During the six months ended March 31, 2019, we used $16.1 million of cash in operating activities resulting from our net loss of $20.0 million and the change in our operating assets and liabilities of $2.5 million. This use of cash was partially offset by $6.4 million of noncash items such as non-cash interest expense, stock-based compensation, change in fair value of warrant liability, loss on disposal of property and equipment, loss on extinguishment of debt and depreciation and amortization expense. The change in our operating assets and liabilities was primarily due to payments of our accrued expenses from September 30, 2018 as well as the amortization of our deferred revenues from collaborations.
Investing Activities.
During the six months ended March 31, 2019, we used cash of $0.3 million in investing activities for the purchase of property and equipment.
Financing Activities.
During the six months ended March 31, 2020, net cash provided by financing activities was $10.4 million, primarily attributable to $9.5 million in net proceeds from the registered direct offering and concurrent private placements in February 2020 for an aggregate of 10,059,056 shares of our common stock and accompanying 5,029,528 warrants to purchase shares of our common stock. During the six months ended March 31, 2020, we received $1.1 million in net proceeds from common stock warrants exercised. We also made $0.2 million in debt and capital lease obligations payments.
During the six months ended March 31, 2019, net cash provided by financing activities was $14.8 million, primarily attributable to $19.8 million in net proceeds from the November 2018 BioLexis private placement. In November 2018 through February 2019, we closed the sale of this private placement for an aggregate of 2,680,390 shares of our common stock for gross cash proceeds of $20.0 million. We also made $5.0 million in debt and capital lease obligations payments.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2020.
Contractual Obligations and Commitments
Not applicable.
Critical Accounting Policies and Significant Judgments and Estimates
The Critical Accounting Policies and Significant Judgments and Estimates included in our Form 10-K for the fiscal year ended September 30, 2019, filed with the SEC on December 19, 2019, have not materially changed.
JOBS Act Accounting Election
The JOBS Act, permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act refers to controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Because there are inherent limitations in all control systems, a control system, no matter how well conceived and operated, can provide only reasonable, as opposed to absolute, assurance that the objectives of the control system are met. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective, at the reasonable assurance level, as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during our second fiscal quarter ended March 31, 2020.
Part II. Other Information
Item 1. Legal Proceedings
From time to time, we may become involved in litigation relating to claims arising from the ordinary course of business. Our management believes that there are currently no claims or actions pending against us, the ultimate disposition of which would have a material adverse effect on our results of operations, financial condition or cash flows.
Item 1A. Risk Factors
Except as stated below, there have been no material changes to our risk factors as previously disclosed in Part I, Item 1A. included in our Annual Report on Form 10‑K for the fiscal year ended September 30, 2019.
Our business could be adversely affected by the effects of health pandemics or epidemics, including the ongoing COVID-19 global pandemic, in regions where we or third parties on which we rely have significant manufacturing facilities, concentrations of clinical trial sites or other business operations, or materially affect our operations, including at our headquarters in New Jersey, which is currently subject to a state executive order mandating shelter-in-place, and at our clinical trial sites, as well as the business or operations of our manufacturers, CROs or other third parties with whom we conduct business.
Our business could be adversely affected by the effects of health pandemics or epidemics, including the ongoing of COVID-19 global pandemic, which was declared by the World Health Organization as a global pandemic, and is resulting in travel and other restrictions to reduce the spread of the disease, including a New Jersey executive order, and several other state and local orders across the country, which, among other things, direct individuals to shelter at their places of residence, direct businesses and governmental agencies to cease non-essential operations at physical locations, prohibit certain non-essential gatherings, and order cessation of non-essential travel. As a result of these recent developments, we have implemented work-from-home policies for all our employees. The effects of these orders, government-imposed quarantines and our work-from-home policies may negatively impact productivity, disrupt our business and could delay our ONS-5010 clinical programs and timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business, operating results and financial condition.
Quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at third-party manufacturing facilities in the United States and other countries, or the availability or cost of materials, which could disrupt our supply chain.
In addition, our ongoing clinical trials are being affected by the recent COVID-19 outbreak. Patient enrollment and recruitment is delayed due to local clinical trial site protocols designed to protect staff and patients from COVID-19 infection, and some patients may not be able to comply with clinical trial protocols if quarantines or other restrictions impede patient movement or interrupt healthcare services. Similarly, our ability to retain principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, could be disrupted, which would adversely impact our clinical trial operations.
The spread of COVID-19, which has caused a broad impact globally, may materially also adversely affect us economically. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic, may be difficult to assess or predict, it is currently resulting in significant disruption of global financial markets. This disruption, if sustained or recurrent, could make it more difficult for us to access capital, which could in the future negatively affect our liquidity. In
addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock.
The COVID-19 pandemic continues to rapidly evolve. The ultimate impact of the COVID-19 outbreak or a similar health pandemic or epidemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems or the global economy as a whole. These effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely.
In addition, to the extent the evolving effects of the COVID-19 pandemic adversely affect our business and financial condition, it may also have the effect of heightening many of the other risks and uncertainties described elsewhere in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2019, filed with the SEC on December 19, 2019.
Our common stock may be delisted from Nasdaq and begin trading in the over-the-counter markets if we are not successful in regaining compliance with Nasdaq’s continued listing standards, which may negatively impact the price of our common stock and our ability to access the capital markets.
On March 27, 2020, we received written notification from The Nasdaq Stock Market LLC, or Nasdaq, indicating that as of March 27, 2020, we were not in compliance with Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq Capital Market, as the minimum bid price of our listed securities was less than $1.00 per share for the previous 30 consecutive business days.
Under Nasdaq Listing Rule 5810(c)(3)(A), we have a period of 180 calendar days to regain compliance with the rule. However, as a result of COVID-19, effective April 16, 2020, Nasdaq tolled the compliance period through June 30, 2020, and as such, we have until December 7, 2020 to regain compliance with the minimum bid-price. To regain compliance, during this compliance period, the minimum bid price of our listed securities must close at $1.00 per share or more for a minimum of 10 consecutive trading days. If we are unable to regain compliance during the compliance period, we anticipate that we will receive a delisting determination from Nasdaq, following which we anticipate requesting a hearing to remain on The Nasdaq Capital Market. If granted, such request will ordinarily suspend such delisting determination until a decision by Nasdaq subsequent to the hearing. We intend to actively monitor the minimum bid price of our listed securities and, as appropriate, will consider available options to resolve the deficiencies and regain compliance with the Nasdaq Listing Rules, including effecting a reverse stock split.
If we are not successful in regaining compliance, we anticipate that our common stock would begin trading on the over-the-counter market. Delisting from Nasdaq and trading on the over-the-counter market could adversely affect the liquidity of our common stock. Stocks traded on the over-the-counter market generally have limited trading volume and exhibit a wider spread between the bid/ask quotation, as compared to securities listed on a national securities exchange. Consequently, you may not be able to liquidate your investment in the event of an emergency or for any other reason.
If our common stock is delisted from the Nasdaq, we could face significant material adverse consequences, including:
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A limited availability of market quotations for our common stock;
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A reduced amount of news and analyst coverage for our company;
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A decreased ability to issue additional securities or obtain additional financing in the future;
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Reduced liquidity for our stockholders;
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Potential loss of confidence by partners and employees; and
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Loss of institutional investor interest and fewer business development opportunities.
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Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
We have incurred substantial losses during our history and do not expect to become profitable in the near future, and we may never achieve profitability. Unused federal net operating losses,or NOLs, for taxable years beginning before January 1, 2018 may be carried forward to offset future taxable income, if any, until such unused NOLs expire. Under legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act, or the Tax Act, as modified by legislation enacted on March 27, 2020, entitled the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, federal NOLs incurred in taxable years beginning after December 31, 2017, can be carried forward indefinitely, but the deductibility of such federal
NOLs in taxable years beginning after December 31, 2020 is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to the Tax Act or the CARES Act.
In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a three-year period, the corporation’s ability to use its pre-change NOLs and other pre-change tax attributes (such as research tax credits) to offset its post-change income or taxes may be limited. We may have experienced ownership changes in the past and may experience ownership changes in the future as a result of subsequent shifts in our stock ownership (some of which shifts are outside our control). As a result, if we earn net taxable income, our ability to use our pre-change NOLs to offset such taxable income will be subject to limitations. Similar provisions of state tax law may also apply to limit our use of accumulated state tax attributes. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. As a result, even if we attain profitability, we may be unable to use a material portion of our NOLs and other tax attributes, which could adversely affect our future cash flows or results of operations.
We may not be entitled to forgiveness of our recently received Paycheck Protection Progam, or PPP, loan, and our application for the PPP loan could in the future be determined to have been impermissible or could result in damage to our reputation.
On May 4, 2020, we received proceeds of $0.9 million from a loan under the PPP of the CARES Act, which we intend to use to maintain payroll and make lease and utility payments. The PPP loan matures on May 2, 2022 and bears annual interest at a rate of 1% per annum. Commencing December 15, 2020, we are required to pay the lender equal monthly payments of principal and interest as required to fully amortize by May 2, 2022 any principal amount outstanding on the PPP loan as of December 15, 2020. A portion of the PPP loan may be forgiven upon documentation of expenditures in accordance with the Small Business Administration, or SBA, requirements and in compliance with the CARES Act. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, in accordance with the amortization schedule described above, and we cannot provide any assurance that we will be eligible for loan forgiveness or that any amount of the PPP loan will ultimately be forgiven by the SBA.
To obtain the PPP loan, we were required to certify, among other things, that the current economic uncertainty made the request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, our financial situation and access to alternative forms of capital, and believe that we satisfied all eligibility criteria, and that our receipt of the PPP loan is consistent with the broad objectives of the PPP. However, recent guidance stated that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the PPP has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that we satisfy all eligibility requirements for the PPP loan, we could be subject to penalties, including significant civil, criminal and administrative penalties, and be required to repay the PPP loan in its entirety if we were later determined to have violated any of the laws or governmental regulations that apply to us in connection with the loan, such as the False Claims Act, or it is otherwise determined that we were ineligible to receive the PPP loan. In addition, our receipt of the PPP loan may result in adverse publicity and damage to our reputation, and a review or audit by the SBA or other government entity or claims under the False Claims Act could consume significant financial and management resources.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit
Number
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Description
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3.1
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Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed with the SEC on May 19, 2016).
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3.2
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Certificate of Designation of Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed with the SEC on July 19, 2018).
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3.3
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Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed with the SEC on December 6, 2018).
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3.4
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Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed with the SEC on March 18, 2019).
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3.5
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Certificate of Amendment to the Certificate of Designation of Series A-1 Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed with the SEC on March 24, 2020).
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3.6
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Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant’s current report on Form 8-K filed with the SEC on May 19, 2016).
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3.7
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Amendment to the Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K filed with the SEC on November 29, 2016).
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10.1
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Amendment to Warrants to Purchase Common Stock between the Registrant and BioLexis Pte. Ltd., dated as of January 27, 2020 (incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed with the SEC on January 31, 2020).
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10.2
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Agreement to Amend Series A-1 Convertible Preferred between the Registrant and BioLexis Pte. Ltd., dated as of January 27, 2020 (incorporated by reference to Exhibit 10.2 to the Registrant’s current report on Form 8-K filed with the SEC on January 31, 2020).
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10.3
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Termination Agreement and Mutual Release between the Registrant and MTTR LLC, dated as of January 27, 2020 (incorporated by reference to Exhibit 10.3 to the Registrant’s current report on Form 8-K filed with the SEC on January 31, 2020).
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10.4** #
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Consulting Agreement between the Registrant and The Dagnon Group LLC, dated as of January 27, 2020 (incorporated by reference to Exhibit 10.4 to the Registrant’s current report on Form 8-K filed with the SEC on January 31, 2020).
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10.5** #
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Consulting Agreement between the Registrant and Scott Three Consulting, LLC, dated as of January 27, 2020 (incorporated by reference to Exhibit 10.5 to the Registrant’s current report on Form 8-K filed with the SEC on January 31, 2020).
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10.6
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Global Amendment, dated as of January 29, 2020 (incorporated by reference to Exhibit 10.6 to the Registrant’s current report on Form 8-K filed with the SEC on January 31, 2020).
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10.7
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Form of Securities Purchase Agreement, dated February 24, 2020, by and among the Registrant and the purchasers named therein (incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed with the SEC on February 24, 2020).
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10.8
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Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 to the Registrant’s current report on Form 8-K filed with the SEC on February 24, 2020).
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10.9
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Securities Purchase Agreement by and between the Registrant and GMS Ventures and Investments, dated February 24, 2020 (incorporated by reference to Exhibit 10.2 to the Registrant’s current report on Form 8-K filed with the SEC on February 24, 2020).
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10.10
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Form of warrant issued to GMS Ventures and Investments (incorporated by reference to Exhibit 4.2 to the Registrant’s current report on Form 8-K filed with the SEC on February 24, 2020).
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10.11
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Engagement letter dated December 10, 2019 by and between the Registrant and H.C. Wainwright & Co. LLC (incorporated by reference to Exhibit 10.3 to the Registrant’s current report on Form 8-K filed with the SEC on February 24, 2020).
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10.12
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Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.3 to the Registrant’s current report on Form 8-K filed with the SEC on February 24, 2020).
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* This certification is being furnished solely to accompany this Quarterly Report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
** Certain portions of this exhibit (indicated by “[***]”) have been omitted because they are both (i) not material and (ii) would be competitively harmful if publicly disclosed.
# Indicates management contract or compensatory plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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OUTLOOK THERAPEUTICS, INC.
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Date: May 15, 2020
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By:
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/s/ Lawrence A. Kenyon
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Lawrence A. Kenyon
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Chief Executive Officer and Chief Financial Officer
(Principal Executive, Accounting, and Financial Officer)
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