Opus Genetics, Inc. 10-Q

Item 1A. Risk Factors. Investing in our stock involves a high degree of risk. You should carefully consider the following discussion of risk factors in its entirety. In addition to the other information set forth in this report, you should carefully consider the factors set forth in the Risk Factors section of our 2019 Form 10-K, as well as other information contained in the 2019 Form 10-K and in other reports we file with the SEC. Our business is subject to risks arising from the ongoing COVID-19 pandemic. The outbreak of COVID-19, which the World Health Organization declared a pandemic in March 2020, has spread across the globe and has led to disruption in the global economy and the biopharmaceutical industry . COVID-19 poses the risk that we or our employees, licensees, and other partners may be prevented from or restricted in conducting business activities for an indefinite period of time, including due to spread of the disease within these groups or due to restrictions on business and social distancing guidelines that may be requested or mandated by governmental authorities. We currently have four employees and are dependent on the efforts of our President and Chief Executive Officer, Douglas J. Swirsky, and other key professionals. The loss of Mr. Swirsky or any of our other key professionals as a result of illness or otherwise in connection with the COVID-19 pandemic could materially and adversely affect our business and our prospects. In addition, as the COVID-19 pandemic continues to disrupt the economy, our future access to capital on favorable terms and our ability to consummate the Merger may be adversely impacted. 38 Table of Contents The extent to which the COVID-19 pandemic impacts our business, financial condition and results of operations as well as on our ability to consummate the Merger is highly uncertain and will depend on various factors, including the duration and scope of the pandemic, restrictions on business and social distancing guidelines that may be requested or mandated by governmental authorities, the other actions that may be taken to contain its impact , and our access to additional capital. If the Merger is not completed, we may not be able to otherwise obtain adequate liquidity to fund our operations, meet our obligations, and continue as a going concern. Our board of directors may decide to pursue a dissolution and liquidation. In such an event, there can be no assurances as to the amount or timing of available cash left, if any, to distribute to our stockholders after paying our debts and other obligations and setting aside funds for reserves. While we have entered into the Merger Agreement, the Closing may be delayed or may not occur at all and there can be no assurance that the Merger will deliver the anticipated benefits we expect or enhance stockholder value. If the Merger is not completed and the Merger Agreement is terminated under certain circumstances, we may be required to pay Ocuphire a termination fee of $750,000. Even if a termination fee is not payable in connection with a termination of the Merger Agreement, we will have incurred significant fees and expenses, which must be paid whether or not the Merger is completed. We believe our cash on hand will be sufficient to cover our cash flow requirements for our current activities for at least the next 12 months from the date of this Quarterly Report on Form 10-Q , assuming the Merger does not close , and if for any reason the Merger does not close, we would need to raise additional capital to continue to fund the further development of our product candidates and our operations thereafter. We have based our cash sufficiency estimates on our current business plan and our assumptions may prove to be wrong. We could utilize our available capital resources sooner than we currently expect, and we could need additional funding sooner than currently anticipated. Additionally, the process of advancing early stage product candidates and testing product candidates in clinical trials is costly, and the timing of progress in these clinical trials is uncertain. Even if we raise sufficient funds and decide to continue the development of our product candidates, our ability to successfully transition to profitability will be dependent upon achieving a level of product sales adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities. Failure to secure any necessary financing in a timely manner and on favorable terms or the failure of the Merger to be consummated in a timely manner would require us to delay or abandon clinical development plans. If, for any reason, the Merger does not close, our board of directors may elect to, among other things, attempt to complete another strategic transaction like the Merger, attempt to sell or otherwise dispose of our various assets, resume our research and development activities and continue to operate our business. Any of these alternatives would be costly and time-consuming and would require that we obtain additional funding. We expect that it would be difficult to secure financing in a timely manner, on favorable terms or at all. We can make no assurances that we would be able to obtain additional financing or find a partner and close an alternative transaction on terms that are as favorable or more favorable than the terms set forth in the Merger Agreement or that any such alternatives are possible or would be successful, if pursued. To the extent that we seek and are able to raise additional capital through the sale of equity or convertible debt securities, our stockholders’ ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect their rights as a common stockholder. Debt financing or preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through strategic transactions or marketing, distribution, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. Even if we are able to pursue such alternatives, the failure to complete the Merger may result in negative publicity and/or a negative impression of us in the investment community, could significantly harm the market price of our common stock and may affect our relationship with employees and other partners in the business community. 39 Table of Contents If our board of directors were to decide to dissolve and liquidate our assets, we would be required to pay all of our debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash left, if any, to distribute to stockholders after paying our debts and other obligations and setting aside funds for reserves. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation. If a dissolution and liquidation were pursued, our board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, our stockholders would likely lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of our company. We do not believe that our current expenses are indicative of the costs we may incur in the future in connection with the development and commercialization of any product candidate if we consummate the Merger or raise additional capital to continue our operations. Our future funding requirements will depend on many factors, including: • our ability to consummate the Merger; • the level of development and commercialization efforts of BioSense and HaiChang and the receipt of milestone and other payments, if any, from such parties under their respective agreements with us; • the scope, rate of progress and cost of our preclinical and clinical trials for any product candidate in our future pipeline and results of future clinical trials; • the cost and timing of regulatory filings and approvals for any product candidates that successfully complete clinical trials; • the timing and nature of any additional strategic transactions that we undertake, including potential partnerships, if the Merger is not consummated; • the effect of competing technological and market developments; • the cost incurred in responding to actions by activist stockholders; and • the cost of filing, prosecuting, defending and enforcing our intellectual property rights. Our shelf registration statement on Form S-3 expired in July 2020. Even if we file a new shelf registration statement with the SEC, the amounts available under the shelf registration statement will be significantly limited as long as our public float remains below $75 million, which, given our currently depressed stock price, limits our ability to obtain meaningful funding through a shelf registration statement at this time, although we could still raise funds through a registration statement on Form S‑1 or through private placements. Our stockholders may not receive any payment on the CVRs and the CVRs may otherwise expire valueless. In addition, the tax treatment of CVRs is uncertain. 40 Table of Contents The right of our stockholders to receive any future payment on or derive any value from the CVRs will be contingent solely upon the achievement of the events specified in the CVR Agreement within the time periods specified in the CVR Agreement and the consideration received being greater than the amounts permitted to be retained or deducted by us under the CVR Agreement. We may not be able to grant, sell or transfer our rights to our pre-Closing intellectual property during the 10-year period after the Closing, and we may not receive any future payments pursuant to the BioSense License and Assignment Agreement or HaiChang License Agreement after the Closing. If these events are not achieved for any reason within the time periods specified in the CVR Agreement or the consideration received is not greater than the amounts permitted to be retained or deducted by us, no payments will be made under the CVRs, and the CVRs will expire valueless. Following the Effective Time of the Merger, neither us nor Ocuphire will have any obligation to support the development of any of our pre-Closing product candidates or to undertake any effort or expend any resource to divest or otherwise monetize our pre-Closing intellectual property or to otherwise maximize the likelihood or amount of any CVR payment. Following the Closing, we may, at any time and in our sole and absolute discretion, discontinue any and all further efforts to develop, divest or otherwise monetize any or all of our pre-Closing intellectual property. Furthermore, the CVRs will be unsecured obligations of the combined company and all payments under the CVRs, all other obligations under the CVR Agreement and the CVRs and any rights or claims relating thereto will be subordinated in right of payment to the prior payment in full of all current or future senior obligations of the combined company. Finally, the U.S. federal income tax treatment of the CVRs is unclear. There is no legal authority directly addressing the U.S. federal income tax treatment of the receipt of, and payments on, the CVRs, and there can be no assurance that the Internal Revenue Service would not assert, or that a court would not sustain, a position that could result in adverse U.S. federal income tax consequences to holders of the CVRs. Our securityholders may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with the Merger and the Pre-Merger Financing. If the combined company is unable to realize the full strategic and financial benefits currently anticipated from the Merger, our stockholders will have experienced substantial dilution of their ownership interests, including as a result of the investment of certain institutional healthcare investors, accredited investors and certain directors and officers of Ocuphire of a total of $21.15 million in cash to fund the combined company following the Merger (the “ Pre-Merger Financing”), without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the Merger and the Pre-Merger Financing. Failure to complete the Merger may result in us paying a termination fee to the other party and could significantly harm the market price of our common stock and negatively affect our future business and operations. If the Merger is not completed and the Merger Agreement is terminated under certain circumstances, we may be required to pay Ocuphire a termination fee of $750,000. Even if a termination fee is not payable in connection with a termination of the Merger Agreement, we will have incurred significant fees and expenses, which must be paid whether or not the Merger is completed. Further, if the Merger is not completed, it could significantly harm the market price of our common stock and raise serious doubts as to our ability to continue as an entity. In addition, if the Merger Agreement is terminated and our board of directors determines to seek another business combination, there can be no assurance that either we will be able to find a partner and close an alternative transaction on terms that are as favorable or more favorable than the terms set forth in the Merger Agreement. 41 Table of Contents The Merger may be completed even though certain events occur prior to the Closing that materially and adversely affect us or Ocuphire. The Merger Agreement provides that either we or Ocuphire can refuse to complete the Merger if there is a material adverse change affecting the other party between June 17, 2020, the date of the Original Merger Agreement, and the Closing. However, certain types of changes do not permit either party to refuse to complete the Merger, even if such change could be said to have a material adverse effect on us or Ocuphire, including: • general business, economic or political conditions affecting the industries in which we or Ocuphire, as applicable, operate; • any natural disaster or any acts of war, armed hostilities or terrorism; • changes in financial, banking or securities markets; • any change in our stock price or trading volume excluding any underlying effect that may have caused such change, unless such effect is otherwise exempt from causing a material adverse effect under the Merger Agreement; • any change in, or any compliance with or action taken for the purpose of complying with, applicable laws or U.S. GAAP, or interpretations thereof; • continued losses from operations or decreases in our cash balances; and • the taking of any action, or failure to take action, by us or Ocuphire required to comply with the terms of the Merger Agreement. If adverse changes occur and we still complete the Merger, the market price of the combined company’s common stock may suffer. This in turn may reduce the value of the Merger to our stockholders. The market price of our common stock following the Merger may decline as a result of the Merger. The market price of our common stock may decline as a result of the Merger for a number of reasons, including if: • investors react negatively to the prospects of the combined company’s product candidates, business and financial condition following the Merger; • the effect of the Merger on the combined company’s business and prospects is not consistent with the expectations of financial or industry analysts; or • the combined company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial or industry analysts. During the pendency of the Merger, we may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses. Covenants in the Merger Agreement impede our ability to make acquisitions, subject to certain exceptions relating to fiduciary duties, or to complete other transactions that are not in the ordinary course of business pending completion of the Merger. As a result, if the Merger is not completed, we may be at a disadvantage to our competitors during such period. In addition, while the Merger Agreement is in effect, we are generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a Merger, sale of assets, or other business combination outside the ordinary course of business with any third party, subject to certain exceptions relating to fiduciary duties. Any such transactions could be favorable to our stockholders. 42 Table of Contents Certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement. The terms of the Merger Agreement prohibit us from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when our board of directors determines in good faith that an unsolicited alternative takeover proposal is or is reasonably likely to lead to a superior takeover proposal and that failure to cooperate with the proponent of the proposal would be reasonably likely to be inconsistent with our board’s fiduciary duties. Any such transactions could be favorable to such party’s stockholders. In addition, if we terminate the Merger Agreement under certain circumstances, including terminating because of our decision to enter into definitive agreement with respect to a superior offer, we would be required to pay a termination fee of $750,000 to Ocuphire. This termination fee described above may discourage third parties from submitting alternative takeover proposals to our stockholders. We are substantially dependent on our remaining employees to facilitate the consummation of the Merger. As of June 30, 2020, we had only four full-time employees. our ability to successfully complete the Merger depends in large part on our ability to retain certain remaining personnel. Despite our efforts to retain these employees, one or more may terminate their employment with us on short notice. The loss of the services of certain employees could potentially harm our ability to consummate the Merger, to run our day-to-day business operations, as well as to fulfill our reporting obligations as a public company. The pendency of the Merger could have an adverse effect on the trading price of our common stock and our business, financial condition and prospects. The pendency of the Merger could disrupt our business in many ways, including: • the attention of our remaining management and employees may be directed toward the completion of the Merger and related matters and may be diverted from our day-to-day business operations; and • third parties may seek to terminate or renegotiate their relationships with us as a result of the Merger, whether pursuant to the terms of their existing agreements with us or otherwise. Should they occur, any of these matters could adversely affect the trading price of our common stock or harm our business, financial condition and prospects. If we fail to comply with the continued listing standards of the Nasdaq Capital Market, our common stock could be delisted. If it is delisted, our common stock and the liquidity of our common stock would be impacted. The continued listing of our common stock on Nasdaq is contingent on our continued compliance with a number of listing standards. There is no assurance that we will remain in compliance with these standards. Delisting from Nasdaq would adversely affect our ability to consummate the Merger, raise additional financing through the public or private sale of equity securities, significantly affect the ability of investors to trade our securities and negatively affect the value and liquidity of our common stock. Delisting also could limit our strategic alternatives and attractiveness to potential counterparties and have other negative results, including the potential loss of employee confidence, the loss of institutional investors or interest in business development opportunities. Moreover, we committed in connection with the sale of securities to use commercially reasonable efforts to maintain the listing of our common stock during such time that certain warrants are outstanding. 43 Table of Contents Lawsuits have been filed, and other lawsuits may be filed, against us and members of our board of directors challenging the Merger, and an adverse ruling in any such lawsuit may delay or prevent the completion of the Merger or result in an award of damages against us. On July 31, 2020, a putative stockholder class action was filed in the Court of Chancery of the State of Delaware styled Stahlman v. Rexahn Pharmaceuticals, Inc., et al., Case No. 2020-0639. Additionally, on August 3, 2020, a putative stockholder class action was filed in the United States District Court for the District of Delaware styled Thompson v. Rexahn Pharmaceuticals, Inc., et al. , Case No. 1:20-cv-01036-UNA (D. Del). On August 7, 2020, a putative stockholder class action was filed in the United States District Court for the Southern District of New York styled Manes v. Rexahn Pharmaceuticals, Inc., et al., Case No. 1:20-cv-06227 (S.D.N.Y.). The Stockholder Actions assert claims against us and the Individual Defendants. The Stahlman and Manes complaints allege that the Individual Defendants breached their fiduciary duties owed to our stockholders. The Thompson and Manes complaints allege that we and the Individual Defendants violated Section 14(a) of the Exchange Act, and Rule 14a-9 promulgated thereunder, by failing to disclose in the Registration Statement certain information regarding, among other things, financial projections for us and Ocuphire, the valuation analyses performed by our financial advisor, Oppenheimer & Co., Inc., in support of its fairness opinion and the process leading to the execution of the Merger Agreement. The Thompson and Manes complaints also allege that the Individual Defendants violated Section 20(a) of the Exchange Act, as control persons who had the ability to prevent the Proxy Statement from being false and misleading. The Stockholder Actions seek, among other things, an injunction preventing consummation of the Merger, an award of damages, and an award of costs and expenses, including attorneys’ fees. On August 6, 2020, another party sent a letter to our counsel demanding that we and the Individual Defendants amend the Registration Statement to provide additional disclosures that the party alleges were improperly omitted from the Registration Statement in violation of Sections 14(a) and 20(a) of the Exchange Act, including certain information regarding financial data and the background and process leading to the execution of the Merger Agreement (the “Demand Letter”). We and the Individual Defendants intend to vigorously defend against the Stockholder Actions and the Demand Letter. Additional lawsuits arising out of or relating to the Merger Agreement or the Merger may be filed in the future. The results of complex legal proceedings are difficult to predict and could delay or prevent the completion of the Merger. The existence of litigation relating to the Merger could impact the likelihood of obtaining stockholder approval of the Merger. Moreover, the pending litigation is, and any future additional litigation could be, time consuming and expensive and could divert management’s attention away from its regular business. 44 Table of Contents Item 6. Exhibits. Exhibit No. Description *2.1 Agreement and Plan of Merger, dated as of June 17, 2020, by and among the Company, Merger Sub and Ocuphire. 2.2 First Amendment to Agreement and Plan of Merger and Reorganization, dated as of June 29, 2020, by and among the Company, Merger Sub and Ocuphire, filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on July 1, 2020 is incorporated herein by reference . 4.1 Form of Series A/B Warrants, filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on July 1, 2020 is incorporated herein by reference . *10.1 Form of CVR Agreement, by and among the Company, the CVR Representative, and the Rights Agent, as filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 19, 2020 is incorporated herein by reference. *10.2 Form of Ocuphire Voting Agreement, by and among Ocuphire, the Company and certain stockholders of Ocuphire, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 19, 2020 is incorporated herein by reference . 10.3 Form of Lock-Up Agreement, by and among the Company, Ocuphire and certain stockholders of Rexahn and Ocuphire, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on June 19, 2020 is incorporated herein by reference . *10.4 Amended and Restated Securities Purchase Agreement, dated as of June 29, 2020, by and among the Company, Ocuphire and the investors party thereto, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 1, 2020 is incorporated herein by reference . 10.5 Form of Financing Lock-Up Agreement, by and among the Company, Ocuphire, and the investors party thereto, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on July 1, 2020 is incorporated herein by reference . 10.6 Form of Leak-Out Agreement, by and between the Company and the investors party thereto, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on July 1, 2020 is incorporated herein by reference . *10.7 Warrant Exchange Agreement, dated July 31, 2020, by and between the Company and Armistice Capital Master Fund Ltd, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 3, 2020 is incorporated herein by reference. 31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) / 15d-14(a). 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101 The following materials from Rexahn Pharmaceuticals, Inc.’s Quarterly Report on Form 10-Q, formatted in Extensible Business Reporting Language (“XBRL”): (i) Condensed Balance Sheet; (ii) Condensed Statement of Operations; (iii) Condensed Statement of Comprehensive Loss; (iv) Condensed Statement of Stockholders’ Equity; (v) Condensed Statement of Cash Flows; and (vi) Notes to the Financial Statements. * Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request. 45 Table of Contents 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. REXAHN PHARMACEUTICALS, INC. (Registrant) By: /s/ Douglas J. Swirsky Date: August 14, 2020 Douglas J. Swirsky Chief Executive Officer and President (principal executive, financial and accounting officer) 46