Item 1. Financial Statements
Item 1.
Financial Statements
Rocket Pharmaceuticals, Inc.
Consolidated Balance Sheets
(in thousands, except per share amounts)
June 30,
December 31,
2020
2019
Assets
(unaudited)
Current assets:
Cash and cash equivalents
$
163,203
$
185,383
Investments
86,600
118,732
Prepaid expenses and other assets
5,633
3,639
Total current assets
255,436
307,754
Property and equipment, net
14,314
29,521
Goodwill
30,815
30,815
Restricted cash
1,525
1,525
Deposits
455
455
Operating lease right-of-use assets
1,270
2,051
Finance lease right-of-use asset
49,250
-
Total assets
$
353,065
$
372,121
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses
$
18,245
$
17,352
Operating lease liabilities, current
819
957
Finance lease liabilities, current
1,621
-
Total current liabilities
20,685
18,309
Convertible notes, net of unamortized discount
46,228
45,049
Operating lease liabilities, non-current
706
1,443
Finance lease liabilities, non-current
18,900
-
Other liabilities
23
23
Total liabilities
86,542
64,824
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $ 0.01 par value, authorized 5,000,000 shares:
Series A convertible preferred stock; 300,000 shares designated as Series A; 0 shares issued and outstanding
-
-
Series B convertible preferred stock; 300,000 shares designated as Series B; 0 shares issued and outstanding
-
-
Common stock, $ 0.01 par value, 120,000,000 shares authorized; 55,170,003 and 54,773,061 shares issued and 55,170,003 and 54,769,030 shares outstanding at June 30, 2020 and December 31, 2019, respectively
551
548
Treasury stock, at cost, 0 and 4,031 common shares at June 30, 2020 and December 31, 2019,respectively
-
( 53
)
Additional paid-in capital
498,590
489,925
Accumulated other comprehensive loss
229
20
Accumulated deficit
( 232,847
)
( 183,143
)
Total stockholders' equity
266,523
307,297
Total liabilities and stockholders' equity
$
353,065
$
372,121
The accompanying notes are an integral part of these consolidated financial statements.
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Rocket Pharmaceuticals, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
Revenue
$
-
$
-
$
-
$
-
Operating expenses:
Research and development
16,731
13,989
33,687
29,126
General and administrative
6,828
4,403
13,990
8,211
Total operating expenses
23,559
18,392
47,677
37,337
Loss from operations
( 23,559
)
( 18,392
)
( 47,677
)
( 37,337
)
Research and development incentives
-
-
-
250
Interest expense
( 1,786
)
( 1,544
)
( 3,360
)
( 3,148
)
Interest and other income, net
429
941
1,395
1,542
Accretion of discount on investments
( 124
)
315
( 62
)
562
Net loss
$
( 25,040
)
$
( 18,680
)
$
( 49,704
)
$
( 38,131
)
Net loss per share attributable to common stockholders - basic and diluted
$
( 0.45
)
$
( 0.38
)
$
( 0.90
)
$
( 0.81
)
Weighted-average common shares outstanding - basic and diluted
55,158,459
49,267,247
55,020,789
47,206,480
The accompanying notes are an integral part of these consolidated financial statements.
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Rocket Pharmaceuticals, Inc.
Consolidated S tatements of Comprehensive Loss
(in thousands)
(unaudited)
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
Net loss
$
( 25,040
)
$
( 18,680
)
$
( 49,704
)
$
( 38,131
)
Other comprehensive loss
Net unrealized gain on investments
304
233
209
271
Total comprehensive loss
$
( 24,736
)
$
( 18,447
)
$
( 49,495
)
$
( 37,860
)
The accompanying notes are an integral part of these consolidated financial statements.
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Rocket Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equity
For the Three and Six Months Ended June 30, 2020 and 2019
(in thousands except share amounts)
(unaudited)
Accumulated
Additional
Other
Total
Common Stock
Treasury
Paid-In
Comprehensive
Accumulated
Stockholders'
Shares
Amount
Stock
Capital
Income/(Loss)
Deficit
Equity
Balance at December 31, 2019
54,773,061
$
548
$
( 53
)
$
489,925
$
20
$
( 183,143
)
$
307,297
Issuance of common stock pursuant to exercise of stock options
386,974
3
-
( 3
)
-
-
-
Share repurchase
( 3,000
)
-
-
( 72
)
-
-
( 72
)
Sale of treasury stock
-
-
53
-
-
-
53
Issuance of treasury stock pursuant to exercise of stock options
-
-
( 429
)
-
-
-
( 429
)
Unrealized comprehensive loss on investments
-
-
-
-
( 95
)
-
( 95
)
Share-based compensation
-
-
-
3,961
-
-
3,961
Net loss
-
-
-
-
-
( 24,664
)
( 24,664
)
Balance at March 31, 2020
55,157,035
551
( 429
)
493,811
( 75
)
( 207,807
)
286,051
Issuance of common stock pursuant to exercise of stock options
12,968
-
-
290
-
-
290
Sale of treasury stock
-
-
538
-
-
-
538
Issuance of treasury stock pursuant to exercise of stock options
-
-
( 109
)
-
-
-
( 109
)
Unrealized comprehensive gain on investments
-
-
-
-
304
-
304
Share-based compensation
-
-
-
4,489
-
-
4,489
Net loss
-
-
-
-
-
( 25,040
)
( 25,040
)
Balance at June 30, 2020
55,170,003
$
551
-
$
498,590
$
229
$
( 232,847
)
$
266,523
Accumulated
Additional
Other
Total
Common Stock
Treasury
Paid-In
Comprehensive
Accumulated
Stockholders'
Shares
Amount
Stock
Capital
Income/(Loss)
Deficit
Equity
Balance at December 31, 2018
45,194,736
$
452
$
( 668
)
$
300,253
$
( 127
)
$
( 105,873
)
$
194,037
Issuance of common stock pursuant to exercise of stock options
19,701
-
-
-
-
-
-
Stock repurchase
-
-
( 725
)
( 2
)
-
-
( 727
)
Retirement of treasury stock
( 100,000
)
( 1
)
1,393
( 1,392
)
-
-
-
Unrealized comprehensive gain on investments
-
-
-
-
38
-
38
Share-based compensation
-
-
-
3,180
-
-
3,180
Net loss
-
-
-
-
-
( 19,451
)
( 19,451
)
Balance at March 31, 2019
45,114,437
$
451
-
$
302,039
$
( 89
)
$
( 125,324
)
$
177,077
Issuance of common stock, net of issuance costs
5,175,000
52
-
86,028
-
-
86,080
Issuance of common stock pursuant to exercise of stock options
42,998
-
-
-
-
-
-
Net exercise of options
-
-
( 344
)
-
-
-
( 344
)
Unrealized comprehensive gain on investments
-
-
-
-
233
-
233
Share-based compensation
-
-
-
4,138
-
-
4,138
Net loss
-
-
-
-
-
( 18,680
)
( 18,680
)
Balance at June 30, 2019
50,332,435
503
( 344
)
392,205
144
( 144,004
)
248,504
The accompanying notes are an integral part of these consolidated financial statements.
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Rocket Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended June 30,
2020
2019
Operating Activities:
Net loss
$
( 49,704
)
$
( 38,131
)
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of discount on convertible notes
1,416
1,733
Depreciation and amortization expense
242
204
Write down of property and equipment
62
-
Stock-based compensation
8,450
7,319
Accretion of discount on investments
63
( 503
)
Changes in operating assets and liabilities:
Prepaid expenses and other assets
( 2,522
)
( 2,398
)
Accounts payable and accrued expenses
( 3,188
)
( 2,265
)
Operating lease liabilities
( 94
)
( 40
)
Finance lease liability
997
-
Net cash used in operating activities
( 44,278
)
( 34,081
)
Investing activities:
Purchases of investments
( 56,436
)
( 140,336
)
Proceeds from maturities of investments
88,714
49,936
Payments made to acquire right of use asset
( 2,731
)
-
Purchases of property and equipment
( 7,115
)
( 7,305
)
Purchases of internal use software
( 368
)
-
Net cash provided by (used in) investing activities
22,064
( 97,705
)
Financing activities:
Proceeds from sale of treasury stock
591
-
Issuance of common stock, net of issuance costs
287
86,080
Issuance of common stock, pursuant to exercise of stock options
3
-
Common stock repurchase
( 72
)
( 727
)
Payment of withholding tax on option exercise
( 538
)
-
Convertible notes refinancing costs to the lender
( 237
)
-
Net cash provided by financing activities
34
85,353
Net change in cash, cash equivalents and restricted cash
( 22,180
)
( 46,433
)
Cash, cash equivalents and restricted cash at beginning of period
186,908
112,791
Cash, cash equivalents and restricted cash at end of period
$
164,728
$
66,358
Supplemental disclosure of non-cash financing and investing activities:
Accrued purchases of property and equipment
$
3,958
$
716
Accrued purchases of internal use software
$
122
$
-
Retirement of treasury stock
$
-
$
1,395
Net exercise of options
$
-
$
344
Unrealized gain on investments
$
209
$
271
Finance lease right of use asset and lease liability
$
20,179
$
-
Reclassification of construction in process of finance right of use asset
$
26,465
$
-
Supplemental cash flow information:
Cash paid for interest
$
1,495
$
1,495
The accompanying notes are an integral part of these consolidated financial statements
.
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ROCKET PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements
( in thousands, except per share data)
(Unaudited)
1.
Nature of Business
Rocket Pharmaceuticals, Inc., together with its subsidiaries (collectively “Rocket”, the “Company” or “we”) is a clinical-stage, multi-platform biotechnology company focused on the development of first , only and best-in-class gene therapies, with direct on-target mechanism of action and clear clinical endpoints, for rare and devastating diseases. The Company has four clinical-stage ex vivo lentiviral vector (“LVV”) programs currently enrolling patients in the United States (“U.S.”) and Europe for Fanconi Anemia (“FA”), a genetic defect in the bone marrow that reduces production of blood cells or promotes the production of faulty blood cells, Leukocyte Adhesion Deficiency-I (“LAD-I ” ), a genetic disorder that causes the immune system to malfunction, Pyruvate Kinase Deficiency (“PKD”), a rare red blood cell autosomal recessive disorder that results in chronic non-spherocytic hemolytic anemia and Infantile Malignant Osteopetrosis (“IMO”), a genetic disorder characterized by increased bone density and bone mass second ary to impaired bone resorption. Of these, both the Phase 2 FA program and the Phase 1 / 2 LAD-I program are in registration-enabling studies in the U.S. and Europe. In addition, in the U.S. the Company has a clinical stage in vivo adeno-associated virus (“AAV”) program for Danon disease, a multi-organ lysosomal-associated disorder leading to early death due to heart failure. The Company has global commercialization and development rights to all of these product candidates under royalty-bearing license agreements. Additional work in the discovery stage for an FA CRISPR/CAS 9 program as well as a gene therapy program for the less common FA subtypes C and G is ongoing.
2.
Risks and Liquidity
The Company has not generated any revenue and has incurred losses since inception. The Company’s operations are subject to certain risks and uncertainties, including, among others, uncertainty of drug candidate development, technological uncertainty, uncertainty regarding patents and proprietary rights, lack of commercial manufacturing experience, a lack of marketing or sales capability or experience, dependency on key personnel, compliance with government regulations and the need to obtain additional financing. In addition, there are possible additional delays that could result from the COVID- 19 situation. Drug candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure and extensive compliance-reporting capabilities.
The Company’s five product candidates are in clinical development. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary government approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies.
The Company’s consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company has experienced negative cash flows from operations and had an accumulated deficit of $ 232.8 million as of June 30, 2020. As of June 30, 2020, the Company had $ 249.8 million of cash, cash equivalents and investments. Rocket expects such resources will be sufficient to fund its operating expenses and capital expenditure requirements into the second quarter of 2022.
In the longer term, the future viability of the Company is dependent on its ability to generate cash from operating activities or to raise additional capital to finance its operations. The Company’s failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies.
3.
Basis of Presentation, Principles of Consolidation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2019 included in the Annual Report on Form 10 -K filed with the Securities and Exchange Commission (“SEC”) on March 6, 2020 (“ 2019 Form 10 -K”). The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of June 30, 2020 and the results of its operations and its cash flows for the three and six months ended June 30, 2020 and 2019. The financial data and other information disclosed in these consolidated notes related to the three and six months ended June 30, 2020 and 2019 are unaudited. The results for the three and six months ended June 30, 2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020 and any other interim periods or any future year or period.
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Principles of Consolidation
The consolidated financial statements represent the consolidation of the accounts of the Company and its subsidiaries in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). All intercompany accounts have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include but are not limited to goodwill impairment, the accrual of research and development (“R&D”) expenses, the valuation of equity transactions and stock-based awards. Changes in estimates and assumptions are reflected in reported results in the period in which they become known. Actual results could differ from those estimates.
Significant Accounting Policies
The significant accounting policies used in the preparation of these consolidated financial statements for the three and six months ended June 30, 2020 are consistent with those disclosed in Note 3 to the consolidated financial statements in the 2019 Form 10 -K, except as noted below.
Cash, Cash Equivalents and Restricted Cash
Cash, cash equivalents and restricted cash consists of bank deposits, certificates of deposit and money market accounts with financial institutions. Cash equivalents are carried at cost which approximates fair value due to their short-term nature and which the Company believes do not have a material exposure to credit risk. The Company considers all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. The Company’s cash and cash equivalent accounts, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.
Restricted cash consists of deposits collateralizing letters of credit issued by a bank in connection with the Company’s finance and operating leases (see Note 11 “Commitments and Contingencies” for additional disclosures) and a deposit collateralizing a letter of credit issued by a bank supporting the Company’s Corporate Credit Card. Cash, cash equivalents and restricted cash consist of the following:
June 30,
2020
December 31,
2019
Cash and cash equivalents
$
163,203
$
185,383
Restricted cash
1,525
1,525
$
164,728
$
186,908
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018 - 13 (“ASU 2018 - 13 ”), Fair Value Measurement - Disclosure Framework (Topic 820) . The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company adopted this guidance on January 1, 2020. The adoption of ASU 2018 - 13 had no impact on the Company as the Company does not have Level 3 investments.
There were no other recent accounting standards that impacted the Company for the three months ended June 30, 2020.
4.
Fair Value of Financial Instruments
Items measured at fair value on a recurring basis are the Company’s investments. The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy:
Fair Value Measurements as of
June 30, 2020 Using:
Level 1
Level 2
Level 3
Total
Assets:
Money market mutual funds (included in cash and cash equivalents)
$
143,298
$
-
$
-
$
143,298
United States Treasury securities
15,575
-
-
15,575
Corporate Bonds
-
63,069
-
63,069
Municipal Bonds
-
6,000
-
6,000
Agency Bonds
-
1,956
-
1,956
Investments
15,575
71,025
-
86,600
$
158,873
$
71,025
$
-
$
229,898
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Fair Value Measurements as of
December 31, 2019 Using:
Level 1
Level 2
Level 3
Total
Assets:
Money market mutual funds (included in cash and cash equivalents)
$
72,114
$
-
$
-
$
72,114
Cash
7,542
-
-
7,542
79,656
-
-
79,656
United States Treasury securities
75,464
-
-
75,464
Government Bonds
-
8,000
-
8,000
Corporate Bonds
-
29,268
-
29,268
Municipal Bonds
-
6,000
-
6,000
Investments
75,464
43,268
-
118,732
$
155,120
$
43,268
$
-
$
198,388
The Company classifies its money market mutual funds and U.S. Treasury securities as Level 1 assets under the fair value hierarchy, as these assets have been valued using quoted market prices in active markets without any valuation adjustment. The Company classifies its Government, Corporate, Municipal and Agency Bonds as Level 2 assets as these assets are not traded in an active market and have been valued through a third -party pricing service based on quoted prices for similar assets.
The fair value of the 2021 Convertible Notes as of June 30, 2020 was $ 5.4 million . The fair value of the 2022 Convertible Notes as of June 30, 2020 was $ 47.2 million (see Note 7) .
5.
Property and Equipment
The Company’s property and equipment consisted of the following:
June 30,
2020
December 31,
2019
Laboratory equipment
$
12,691
$
1,910
Computer equipment
176
179
Furniture and fixtures
1,847
273
Leasehold improvements
29
29
Internal use software
712
226
Construction costs in progress
-
27,809
15,455
30,426
Less: accumulated depreciation
( 1,141
)
( 905
)
$
14,314
$
29,521
Construction costs in progress as of December 31, 2019 comprised costs associated with the build out of the Company’s research, manufacturing and office facility in Cranbury, NJ. See Note 11 “Commitments and Contingencies” for the treatment of construction costs as part of the right of use asset as of June 30, 2020. During the three and six months ended June 30, 2020, the Company recognized $ 0.1 million and $ 0.2 million of depreciation expense, respectively. During the three and six months ended June 30, 2019, the Company recognized $ 0.1 million and $ 0.2 million of depreciation expense, respectively.
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6.
Accounts Payable and Accrued Expenses
At June 30, 2020 and December 31, 2019, the Company’s accounts payable and accrued expenses consisted of the following:
June 30,
December 31,
2020
2019
Research and development
$
9,166
$
7,418
Property and equipment
3,958
4,424
Employee compensation
2,072
2,588
Accrued interest
1,252
1,241
Government grant payable
576
562
Professional fees
784
553
Internal use software
122
226
Other
315
340
$
18,245
$
17,352
7.
Convertible Notes
On January 4, 2018, in connection with its reverse merger with Inotek Pharmaceuticals, Corporation (“Inotek”), the Company assumed the obligations of Inotek under its outstanding convertible notes, with an aggregate principal amount of $ 52.0 million, (the “2021 Convertible Notes”). The 2021 Convertible Notes were issued in 2016 and mature on August 1, 2021 (the “Maturity Date”). The 2021 Convertible Notes are unsecured, and accrue interest at a rate of 5.75 % per annum and interest is payable semi-annually on February 1 and August 1 of each year. Each holder of the 2021 Convertible Notes (“Holder”) has the option until the close of business on the second business day immediately preceding the Maturity Date to convert all, or any portion, of the 2021 Convertible Notes held by it at a conversion rate of 31.1876 shares of the Company’s common stock per $ 1.00 principal amount of 2021 Convertible Notes (the “Conversion Rate”) which is $ 32.08 per share. The Conversion Rate is subject to adjustment from time to time upon the occurrence of certain events, including the issuance of stock dividends and payment of cash dividends.
The Company, at its option, may redeem for cash all or any portion of the 2021 Convertible Notes if the last reported sale price of a share of the Company’s common stock is equal to or greater than 200 % of the Conversion Rate for the 2021 Convertible Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending within the five trading days immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100 % of the principal amount of the 2021 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The 2021 Convertible Notes are considered a hybrid financial instrument consisting of a fixed interest rate “host” and various embedded features that required evaluation as potential embedded derivatives under FASB ASC 815, Derivatives and Hedging (“ASC 815”). Based on the nature of the host instrument and the embedded features, management concluded that none of the conversion, put and redemption features required bifurcation and separate accounting from the host instrument. The Company determined that the Additional Interest was an embedded derivative that contains non-credit related events of default. As a result, the Additional Interest feature required bifurcation and separate accounting under ASC 815. Based on the amount of Additional Interest that would be owed and the likelihood of occurrence, the Company estimated the fair value of the Additional Interest feature to be insignificant upon issuance and as of June 30, 2020 and December 31, 2019. As of June 30, 2020, the stated interest rate was 5.75%, and the effective interest rate was 15.3 %.
Convertible Notes Exchange Agreement
On February 20, 2020 and June 5, 2020, the Company entered into separate, privately negotiated exchange agreements (the “Exchange Agreements”) with certain holders of the 2021 Convertible Notes. Pursuant to the Exchange Agreements, on February 20, 2020, the Company exchanged approximately $ 39.35 million aggregate principal amount of the 2021 Convertible Notes (representing approximately 76 % of the aggregate outstanding principal amount of the 2021 Convertible Notes) for (a) approximately $ 39.35 million aggregate principal amount of 6.25 % Convertible Senior Notes due August 2022 (the “2022 Convertible Notes”) (an exchange ratio equal to 1.00 2022 Convertible Note per exchanged 2021 Convertible Note) and (b) $ 119,416 in cash to pay the accrued and unpaid interest on the exchanged 2021 Convertible Notes from February 1, 2020, to February 20, 2020, the closing date of the February 20, 2020 exchange transactions. Additionally, the Company repurchased 3,000 shares of its common stock that have been retired for an aggregate amount of $ 71,670 from certain holders of the 2021 Convertible Notes participating in the exchange transactions in privately negotiated, private transactions.
Also pursuant to the Exchange Agreements, on June 12, 2020, the Company exchanged $ 7.5 million aggregate principal amount of the 2021 Convertible Notes for (a) $ 7.5 million aggregate principal amount of its newly issued 6.25 % Convertible Senior Notes due 2022 (an exchange ratio equal to 1.00 2022 Convertible Notes per exchanged 2021 Convertible Notes) and (b) approximately $ 11,000 in cash to pay the accrued and unpaid interest on the exchanged 2021 Convertible Notes from, and including, February 1, 2020, to, but excluding, the closing date of the exchange transaction, adjusted to take into account the unearned accrued interest on the 2022 Convertible Notes from, and including, February 20, 2020, to, but excluding, the closing date of the exchange transaction.
The 2022 Convertible Notes were issued in a private placement exempt from registration in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the “ Securities Act ”). The 2022 Convertible Notes issued in the exchange transaction were issued as additional notes pursuant to the Indenture, dated as of August 5, 2016, between the Company and Wilmington Trust, National Association, as trustee, as supplemented by the Second Supplemental Indenture, dated as of February 20, 2020, governing the 2022 Convertible Notes. After giving effect to the issuance of the additional 2022 Convertible Notes and the exchange of the 2021 Notes pursuant to the exchange transaction, $ 46.85 million aggregate principal amount of the 2022 Convertible Notes remains issued and outstanding and $ 5.15 million aggregate principal amount of the 2021 Convertible Notes remains issued and outstanding.
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The conversion rate for the 2022 Convertible Notes is initially 31.1876 shares of the Company’s common stock per 1.00 principal amount of 2022 Convertible Notes, which is equivalent to an initial conversion price of approximately $ 32.06 per share of common stock, and is subject to adjustment under the terms of the 2022 Convertible Notes. The Company may redeem for cash all or any portion of the 2022 Convertible Notes, at its option, if the last reported sale price of its common stock is equal to or greater than 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending within the five trading days immediately preceding the date on which the Company provides written notice of redemption. The 2022 Convertible Notes Indenture contains customary terms and covenants and events of default. As of June 30, 2020, the stated interest rate was 6.25 %, and the effective interest rate was 15.3 %.
The exchange transactions were accounted for as a modification of the 2021 Convertibles Notes and have been accounted for based on ASC 470-50 Modifications and Extinguishments. The remaining outstanding principal of the 2021 Convertible Notes will be accounted for consistent with the original accounting assessment. The Company incurred $ 1.6 million of costs in connection with the February 2020 exchange and $ 0.3 million of costs in connection with the June 2020 exchange transaction which have been included in G&A expenses in the consolidated financial statements for the three and six months ended June 30, 2020. Costs incurred of $ 0.1 million in connection with the February exchange transaction and $ 0.1 million in connection with the June exchange transaction that were paid directly to the creditors have been included as a debt discount and is being amortized over the life of the 2022 Convertible Notes.
The table below summarizes the carrying value of the 2021 Convertible Notes as of June 30, 2020:
June 30, 2020
Principal amount
$
5,150
Discount
( 490
)
Carrying value as of June 30, 2020
$
4,660
Accretion of the 2021 Convertible Notes discount was $ 0.2 million and $ 0.8 million for the three and six months ended June 30, 2020, respectively. Accretion of the 2021 Convertible Notes discount was $ 0.8 million and $ 1.7 million for the three and six months ended June 30, 2019, respectively .
The table below summarizes the carrying value of the 2022 Convertible Notes as of June 30, 2020:
June 30, 2020
Principal amount
$
46,850
Discount
( 5,282
)
Carrying value as of June 30, 2020
$
41,568
Accretion of the 2022 Convertible Notes discount was $ 0.5 million and $ 0.6 million for the three and six months ended June 30, 2020, respectively.
8.
Stock Based Compensation
Stock Option Valuation
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The weighted average assumptions that the Company used in the Black-Scholes pricing model to determine the fair value of the stock options granted to employees, non-employees and directors were as follows:
Six Months Ended June 30,
2020
2019
Risk-free interest rate
1.27
%
2.57
%
Expected term (in years)
5.84
5.79
Expected volatility
77.39
%
74.99
%
Expected dividend yield
0.00
%
0.00
%
Exercise price
$
21.56
$
15.01
Fair value of common stock
$
21.56
$
15.01
The Company recognizes compensation expense for only the portion of awards that are expected to vest.
The following table summarizes stock option activity for the six months ended June 30, 2020 under the Second Amended and Restated 2014 Stock Option and Incentive Plan:
Number of
Shares
Weighted
Average
Exercise
Price
Weighted
Average
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Outstanding as of December 31, 2019
9,763,541
$
5.95
6.96
$
164
Granted
1,491,296
21.56
9.55
Exercised
( 417,512
)
1.71
7
Cancelled
( 60,512
)
17.27
Outstanding as of June 30, 2020
10,776,813
$
8.21
6.92
$
139
Options vested and exercisable as of June 30, 2020
7,814,535
$
4.43
6.09
$
129
Options unvested as of June 30, 2020
2,962,278
$
18.18
9.11
The weighted average grant-date fair value per share of stock options granted during the six months ended June 30, 2020 and 2019 was $ 14.29 and $ 9.90 , respectively.
The total fair value of options vested during the six months ended June 30, 2020 and 2019 was $ 30.0 million and $ 35.7 million, respectively.
Stock-Based Compensation
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
Research and development
$
1,679
$
2,252
$
3,414
$
3,818
General and administrative
2,810
1,886
5,036
3,500
Total share based compensation expense
$
4,489
$
4,138
$
8,450
$
7,318
As of June 30, 2020, the Company had an aggregate of $ 31.6 million of unrecognized stock-based compensation expense, which is expected to be recognized over the weighted average period of 1.97 years.
9.
Stockholders’ Equity
The Company has 14,102 warrants outstanding as of June 30, 2020, convertible into 14,102 shares of common stock at an exercise price of $ 24.82 per share, and expiring on June 28, 2023 .
On December 12, 2019, the Company recorded treasury stock of $ 0.1 million for shares withheld to pay the payroll tax liability of an option exercise which was remitted in January 2020.
As of March 31, 2020, the Company recorded treasury stock of $ 0.4 million for the shares withheld to pay the payroll tax liability of an option exercise which was remitted in June 2020.
As of June 30, 2020, the Company recorded treasury stock of $ 0.1 million for the shares withheld to pay the payroll tax liability of option exercises which were remitted in June 2020 .
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10.
Net Loss Per Share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows:
Three Months Ended June 30,
Six Months Ended June 30,
2020
2019
2020
2019
Numerator:
Net loss attributable to common stockholders
$
( 25,040
)
$
( 18,680
)
$
( 49,704
)
$
( 38,131
)
Denominator:
Weighted-average common shares outstanding - basic and diluted
55,158,459
49,267,247
55,020,789
47,206,480
Net loss per share attributable to common stockholders - basic and diluted
$
( 0.45
)
$
( 0.38
)
$
( 0.90
)
$
( 0.81
)
The Company excluded the following potential shares of common stock, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:
Three and Six Months Ended June 30,
2020
2019
Shares issuable upon conversion of the 2021 Convertible Notes
160,536
1,620,948
Shares issuable upon conversion of the 2022 Convertible Notes
1,460,412
-
Warrants exercisable for common shares
14,102
14,102
Options to purchase common shares
10,776,813
8,870,004
12,411,863
10,505,054
11.
Commitments and Contingencies
The Company determines if an arrangement is a lease at inception. Operating leases are included in the Company’s consolidated balance sheet as right-of-use assets from operating leases, current operating lease liabilities and long-term operating lease liabilities. Finance leases are included in the consolidated balance sheet as right-of-use assets from finance leases, and finance lease liabilities. Certain of the Company’s lease agreements contain renewal options; however, the Company does not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that the Company is reasonably certain of renewing the lease at inception or when a triggering event occurs. As the Company’s leases do not provide an implicit rate, the Company estimated the incremental borrowing rate in calculating the present value of the lease payments using an estimate of the Company’s collateralized borrowing rate for debt with a similar term. The Company has utilized its incremental borrowing rate based on the long-term borrowing costs of comparable companies in the biotechnology industry. Since the Company elected to account for each lease component and its associated non-lease components as a single combined lease component, all contract consideration was allocated to the combined lease component. Some of the Company’s lease agreements contain rent escalation clauses (including index-based escalations). The Company recognizes the minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. The Company will amortize this expense over the term of the lease beginning with the lease commencement date. Variable lease components represent amounts that are not fixed in nature and are not tied to an index or rate, and are recognized as incurred.
Finance Lease
The Company has a lease for a facility in Cranbury, New Jersey, consisting of 103,720 square feet of space including areas for offices, process development, research and development laboratories and 50,000 square feet will be dedicated to AAV Current Good Manufacturing Practice (cGMP) manufacturing facilities to support the Company’s pipeline. A smaller area within this facility was originally leased in August 2018, and the lease was amended in June 2019 to include the full building (such lease, as amended, the “NJ Lease Agreement”). The NJ Lease Agreement has a term of 15 years from September 1, 2019, with an option to renew for two consecutive five-year renewal terms.
Estimated rent payments for the NJ Lease Agreement are $ 1.2 million per annum, payable in monthly installments, depending upon the nature of the leased space, and subject to annual base rent increases of 3 %. The total commitment under the NJ Lease Agreement is estimated to be approximately $ 29.3 million over the 15-year term of the NJ Lease Agreement. The Company paid a cash security deposit of $ 0.3 million to the landlord in connection with the NJ Lease Agreement which has been reflected in deposits in the consolidated balance sheets as of June 30, 2020 and December 31, 2019. The Company entered into the lease prior to the building being available for use as the building construction was not complete.
The Company began making lease payments on September 1, 2019. At that time and as of December 31, 2019, the Company determined the lease commencement date had not occurred since the landlord improvements had not been completed. Prior to the lease commencement date, the lease payments were recorded as prepaid rent. The Company determined the lease commencement date was reached on March 15, 2020 when the construction of all landlord owned improvements had been substantially completed and when the Company began including its leasehold improvements on the balance sheet and move equipment into the space. Upon commencement of the NJ Lease Agreement, the Company recognized total right-of-use assets of $ 47.7 million, with a corresponding lease liability of $ 20.2 million. The Company reclassified $ 26.5 million of construction costs in progress and $ 1.1 million of prepaid rent as part of the right of use asset upon the lease commencement date o f March 15, 2020. During the three months ended June 30, 2020, the Company reclassified an additional $ 2.2 million of construction costs in progress as part of the right of use asset .
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Operating Leases
On March 31, 2016, the Company entered into a lease agreement for its office and laboratory space at the Alexandria Center for Life Sciences in New York, New York with an initial term ending on July 31, 2022 (the “NY Lease Agreement”). Effective May 31, 2020, the Company terminated the lease and recorded a loss on termination of $ 76 .
On June 7, 2018, the Company entered into a three year lease agreement for office space in the Empire State Building in New York, NY (the “ESB Lease Agreement”). In connection with the ESB Lease Agreement, the Company established an irrevocable standby letter of credit (the “Empire LOC”) with a bank for $ 0.9 million which expires on June 30, 2020 and is renewed automatically for a one year period until its expiration date of July 31, 2021 . The Empire LOC serves as the Company’s security deposit on the lease in which the landlord is the beneficiary. The Company has a certificate of deposit of $ 0.9 million with a bank as collateral for the Empire LOC which is classified as part of restricted cash in the consolidated balance sheets as of June 30, 2020 and December 31, 2019 .
On January 4, 2018, in connection with the Reverse Merger, the Company assumed an operating lease for Inotek’s former headquarters in Lexington, Massachusetts, with a term ending in February 2023 . In July 2018, the Company signed an agreement to sublease a portion of the Lexington, Massachusetts space and in September 2018, the Company signed an agreement to sublease the remaining portion of the Lexington, Massachusetts space. Rental income received under the sublease agreement totaled $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2020. Rental income under the same agreement was $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2019. These amounts are netted against rent expense in the consolidated statement of operations.
Rent expense was $ 0.3 million and $ 0.5 million for the three and six months ended June 30, 2020, respectively. Rent expense was $ 0.3 million and $ 0.5 million for the three and six months ended June 30, 2019, respectively.
The total restricted cash balance for the Company’s finance leases at June 30, 2020 and December 31, 2019 was $ 1.0 million.
Lease cost
June 30, 2020
Operating lease cost
$
407
Finance lease cost
Amortization of right of use assets
655
Interest on lease liablities
607
Total lease cost
$
1,668
The following table summarizes the maturity of the Company’s operating and finance lease liabilities on an undiscounted cash flow basis and a reconciliation to the operating and finance lease liabilities as of June 30, 2020:
Maturity of operating lease liabilities
June 30, 2020
2020
$
450
2021
682
2022
445
2023
75
Total lease payments
$
1,652
Less: interest
( 127
)
Total operating lease liabilities
$
1,525
Maturity of finance lease liability
June 30, 2020
2020
$
805
2021
1,644
2022
1,689
2023
1,736
2024
1,791
Thereafter
48,767
Total lease payments
$
56,432
Less: interest
( 35,911
)
Total finance lease liability
$
20,521
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Leases
June 30, 2020
Operating right-of-use assets
$
1,270
Operating current lease liabilities
819
Operating noncurrent lease liabilities
706
Total operating lease liabilities
$
1,525
Finance right-of-use assets
$
49,250
Finance current lease liability
1,621
Finance noncurrent lease liability
18,900
Total finance lease liability
$
20,521
Other information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
447
Cash flows from finance lease
$
265
Weighted-average remaining lease term - operating leases
2.2 years
Weighted-average remaining lease term - finance lease
24.2 years
Weighted-average discount rate - operating leases
7.77
%
Weighted-average discount rate - finance lease
8.96
%
Litigation
From time to time, the Company may be subject to other various legal proceedings and claims that arise in the ordinary course of its business activities. Although the results of litigation and claims cannot be predicted with certainty, the Company does not believe it is party to any other claim or litigation the outcome of which, if determined adversely to the Company, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.
Indemnification Arrangements
Pursuant to its bylaws and as permitted under Delaware law, the Company has indemnification obligations to directors, officers, employees or agents of the Company or anyone serving in these capacities. The maximum potential amount of future payments the Company could be required to pay is unlimited. The Company has insurance that reduces its monetary exposure and would enable it to recover a portion of any future amounts paid. As a result, the Company believes that the estimated fair value of these indemnification commitments is minimal.
Throughout the normal course of business, the Company has agreements with vendors that provide goods and services required by the Company to run its business. In some instances, vendor agreements include language that requires the Company to indemnify the vendor from certain damages caused by the Company’s use of the vendor’s goods and/or services. The Company has insurance that would allow it to recover a portion of any future amounts that could arise from these indemnifications. As a result, the Company believes that the estimated fair value of these indemnification commitments is minimal.
12.
Agreements Related to Intellectual Property
The Company has various license and research and collaboration arrangements. The transactions principally resulted in the acquisition of rights to intellectual property which is in the preclinical phase and has not been tested for safety or feasibility. In all cases, the Company did not acquire tangible assets, processes, protocols or operating systems. The Company expenses the acquired intellectual property rights as of the acquisition date on the basis that the cost of intangible assets purchased from others for use in research and development activities has no alternative future uses.
13.
Strategic Research Collaboration
On May 16, 2018, the Company and the Stanford University School of Medicine (“Stanford University”) entered into a strategic collaboration agreement to support the advancement of FA and PKD gene therapy research. Under the terms of the collaboration agreement, Stanford University is the lead clinical trial research center in the U.S. for the FA registrational trial and the lead U.S. site for PKD clinical trials. The project will also separately evaluate the potential for non-myeloablative, non-genotoxic antibody-based conditioning regimens as a future development possibility that may be applied across bone marrow-derived disorders. In addition, the Company agreed to support expansion of Stanford University’s Laboratory for Cell and Gene Therapy (“LCGM”) in order to further enhance the development of the Company’s internal pipeline. The Company agreed to contribute up to $ 3.5 million for the LCGM expansion of which $ 1.4 million was due upon execution of the collaboration agreement and the remaining $ 2.1 million balance is due upon the achievement of certain milestones. In January 2019, the Company and Stanford University signed a Clinical Trial Agreement for the treatment of FA and upon signing of the Clinical Trial Agreement, the second milestone of $ 1.4 million for the LGCM became due and was expensed and paid. During the six months ended June 30, 2020, the remaining milestone under this collaboration agreement was met and the Company expensed and paid the final milestone payment of $ 0.7 million .
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14.
CIRM Grant
On April 30, 2019, the California Institute for Regenerative Medicine (“CIRM”) awarded the Company up to $ 6.5 million under a CLIN2 grant award to support the clinical development of gene therapy for LAD-I. Proceeds from the grant will help fund clinical trial costs as well as manufactured drug product for Phase I/II patients enrolled at the U.S. clinical site, University of California, Los Angeles (“UCLA”) Mattel Children’s Hospital, led by principal investigator Donald Kohn, M.D., UCLA Professor of Microbiology, Immunology and Molecular Genetics, Pediatrics (Hematology/Oncology), Molecular and Medical Pharmacology and member of the Eli and Edythe Broad Center of Regenerative Medicine and Stem Cell Research at UCLA. In 2019, we received the first two grants from CIRM in the aggregate of $ 1.2 million, based on eligible costs incurred under the grant. The CIRM grant reimbursements are accrued as an offset against R&D expenses as reimbursable expenses are incurred. On July 1, 2020, the Company received the next cash advance from CIRM of $ 1.6 million. As of June 30, 2020, the Company recorded a receivable and reduction of R&D expenses of $ 1.6 million for the reimbursable expenses incurred for the three months ended June 30, 2020 .
15.
Related Party Transactions
During March 2018, the Company entered into a consulting agreement with a member of the Board of Directors for strategic and corporate consulting services to be provided to the Company. This agreement was terminated in 2019. The Company incurred expenses of $ 0 and $ 4 during the three and six months ended June 30, 2020 and 2019, respectively relating to services provided under this consulting agreement.
During April 2018, the Company entered into an agreement with a member of the Board of Directors for business development consulting services. Payments for the services under the agreement are $ 27.5 per quarter, and the Company may terminate the agreement with 14 days’ notice. The Company incurred expenses of $ 27.5 during the three months ended June 30, 2020 and 2019, and incurred expenses of $ 55 during the six months ended June 30, 2020 and 2019 , relating to services provided under this agreement.
In June 2020, the Company entered into a consulting agreement with a member of the Board of Directors for pipeline development, new asset evaluation, and corporate strategy. In lieu of cash for services to be provided under the consulting agreement during its one-year term, the Company granted the board member options to purchase 9,784 options with a fair value of $ 119 .
16.
401(k) Savings Plan
The Company has a defined contribution savings plan (the “Plan”) under Section 401(k) of the Internal Revenue Code of 1986. This Plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the Plan may be made at the discretion of the Company’s Board of Directors. The Company has elected to the safe harbor match of 4 % of employee contributions to the Plan, subject to certain limitations. The Company’s matching contribution for the three and six months ended June 30, 2020 was $ 87 and $ 186 , respectively. The Company’s matching contribution for the three and six months ended June 30, 2019 was $ 44 and $ 125 , respectively.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.