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Item 7. Management’s Discussion and Analysis

2021-03-01 compared with 2020-03-06 · 191 added, 276 removed, 120 unchanged (80% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, related notes and other

financial information included elsewhere in this Annual Report.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements, related notes and other financial information included elsewhere in this Annual Report.

This discussion contains forward-looking statements that involve risks and uncertainties such as our plans, objectives, expectations, and intentions.

Our actual results could differ

materially from those discussed in these forward looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” included elsewhere in this

Annual Report.

Our actual results could differ materially from those discussed in these forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in “Risk Factors” included elsewhere in this Annual Report.

Unless otherwise indicated, references to the terms the “combined company,” “Rocket,” the “Company,” “we,” “our” and “us” refer to Rocket Pharmaceuticals, Inc.

(formerly known as Inotek

Pharmaceuticals Corporation) and its subsidiaries.

(formerly known as Inotek Pharmaceuticals Corporation) and its subsidiaries.

The term “Rocket Ltd” refers to privately-held Rocket Pharmaceuticals, Ltd.

prior to its merger with Rome Merger Sub, a wholly owned subsidiary of Rocket Pharmaceuticals, Inc.

The term “Inotek”

refers to Inotek Pharmaceuticals Corporation and its subsidiaries prior to the reverse merger.

The term “Inotek” refers to Inotek Pharmaceuticals Corporation and its subsidiaries prior to the reverse merger.

For accounting purposes, the reverse merger is treated as a “reverse acquisition” under U.S.

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Accordingly, the historical financial information included in this Annual Report, unless otherwise indicated or as the context otherwise requires, is that of Rocket Ltd prior to the reverse merger.

Rocket Pharmaceuticals, Inc., together with its subsidiaries (collectively, “Rocket” or the “Company”), is a clinical-stage, multi-platform biotechnology company focused on the development of

first or best-in-class gene therapies, with direct on-target mechanism of action and clear clinical endpoints, for rare and devastating pediatric diseases.

The Company has clinical-stage lentiviral vector (“LVV”) programs currently undergoing

clinical testing 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 and Pyruvate Kinase Deficiency (“PKD”), a rare red blood cell autosomal recessive disorder that results in chronic non-spherocytic hemolytic anemia.

FA has been in clinical stage

testing in the European Union (“EU”) since 2016, and in the United States (“U.S.”) since the first quarter of 2019.

Rocket received investigational new drug (“IND”) clearance for both FA and LAD-I in late 2018 and PKD in the third quarter of 2019.

Rocket also has a pre-clinical stage LVV program for Infantile Malignant Osteopetrosis (“IMO”), a genetic disorder characterized by increased bone density and bone mass secondary to impaired bone resorption.

In addition, the Company has a clinical

stage 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 its product

candidates under royalty-bearing license agreements, with the exception of the CRISPR/Cas9 development program for which the Company currently only has development rights.

We are 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.

We have four clinical-stage ex vivo lentiviral vector (“LVV”) programs.

These include programs 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 secondary 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 United States (“U.S.”) and Europe (“EU”).

In addition, in the U.S., we have 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.

We have global commercialization and development rights to all of these product candidates under royalty-bearing license agreements.

Additional work on a gene therapy program for the less common FA subtypes C and G is ongoing.

Recent Developments

On April 18, 2019, we completed a public offering of 5,175,000 shares of common stock, which includes the full exercise of the underwriters’ option to purchase an additional 675,000 shares of our

common stock, at a public offering price of $17.50 per share.

The gross proceeds to Rocket from the public offering were approximately $90.6 million, after deducting $4.5 million of offering costs, commissions, legal and other expenses for net

proceeds from the offering of $86.1 million.

On April 30, 2019, the CIRM awarded us 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.

On July 1, 2019, we

received the first grant from CIRM of $0.8 million and on October 15, 2019, we received the second grant of $0.4 million, based on eligible costs incurred under the grant.

On December 10, 2019, we completed a public offering of 4,393,000 shares of common stock, which includes the full exercise of the underwriters’ option to purchase an additional

573,000 shares of our common stock, at a public offering price of $22.25 per share.

The gross proceeds to us from the public offering were approximately $97.7 million, after deducting $6.1 million of offering costs, commissions, legal and other

expenses for net gross proceeds from the offering of $91.7 million.

On February 10, 2020, we entered into separate, privately negotiated exchange agreements (the “Exchange Agreements”) with certain holders of our outstanding 5.75% Convertible Senior Notes due 2021 (the “Old Notes”) to

extend the maturity date by one year.

Pursuant to the Exchange Agreements, we exchanged approximately $39.4 million aggregate principal amount of the Old Notes (which represents approximately 76% of the aggregate outstanding principal amount of the

Old Notes) for (a) approximately $39.4 million aggregate principal amount of 6.25% Convertible Senior Notes due 2022 (the “New Notes”) (an exchange ratio equal to 1.00 New Notes per exchanged Old Notes) and (b) $119,416 in cash to pay the accrued

and unpaid interest on the exchanged Old Notes from, and including, February 1, 2020, to, but excluding, the closing date of the exchange transactions.

The New Notes were issued in private placements exempt from registration in reliance on Section

4(a) (2) of the Securities Act of 1933, as amended (the “Securities Act”).

Upon completion of the exchange transactions, approximately $12.7 million aggregate principal amount of Old Notes remained outstanding.

The exchange transactions closed on

February 20, 2020.

On February 20, 2020 and June 5, 2020, we 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, we 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) $0.1 million 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, we repurchased 3,000 shares of its common stock that have been retired for an aggregate amount of $72 from certain holders of the 2021 Convertible Notes participating in the exchange transactions in privately negotiated, private transactions.

On June 12, 2020, we entered into an exchange agreement (substantially in the form of the exchange agreement we entered into with holders in prior exchange transactions for our 2021 Convertible Notes with holders of the 2021 Convertible Notes, wherein we exchanged $7.5 million aggregate principal amount of the 2021 Convertible Notes for (a) $7.5 million aggregate principal amount of the 2022 Convertible Notes (an exchange ratio equal to 1.00 2022 Convertible Notes per exchanged 2021 Convertible Note) and (b) approximately $11 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.

On November 12, 2020, the CIRM awarded Rocket up to $3.7 million under a CLIN2 grant award to support the clinical development of its lentiviral vector (LVV)-based gene therapy, RP-L401, for the treatment of IMO.

We received a $1.1 million cash advance on January 4, 2021 related to the CIRM IMO award and recorded a receivable, included in prepaid and other assets in the consolidated balance sheet, and a reduction of research and development expenses of $0.9 million.

On December 14, 2020, we completed a public offering of 5,339,286 shares of common stock, which includes the full exercise of the underwriters’ option to purchase an additional 696,428 shares of our common stock, at a public offering price of $56.00 per share.

The gross proceeds to Rocket from the public offering were approximately $299.0 million before deducting $18.2 million of offering costs, commissions, legal and other expenses for net proceeds from the offering of $280.8 million.

In December, 2020, $8.5 million principal amount, representing a carrying value of $7.6 million of the 2022 Convertible Notes were converted into 298,562 shares of common stock.

Financial Overview

Since our inception, we have devoted substantially all of our resources to organizing and staffing the company, business planning, raising capital, acquiring or discovering product candidates and

securing related intellectual property rights, conducting discovery, R&D activities for our product candidates and planning for potential commercialization.

We do not have any products approved for sale and have not generated any revenue from

product sales.

Since our inception, we have devoted substantially all of our resources to organizing and staffing the company, business planning, raising capital, acquiring or discovering product candidates and securing related intellectual property rights, conducting discovery, R&D activities for our product candidates and planning for potential commercialization.

We do not have any products approved for sale and have not generated any revenue from product sales.

From inception through December 31, 2020, we raised net cash proceeds of approximately $654.1 million from investors through both equity and convertible debt financing to fund operating activities.

To date, we have not generated any revenue from any sources, including from product sales, and we do not expect to generate any revenue from the sale of products in the near future.

development efforts for product candidates are successful and result in regulatory approval or license agreements with third parties, we may generate revenue in the future from product sales.

If our development efforts for product candidates are successful and result in regulatory approval or license agreements with third parties, we may generate revenue in the future from product sales.

Research and Development Expenses

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expenses incurred under agreements with research institutions that conduct R&D activities including, process development, preclinical, and clinical activities on our behalf;

costs related to process development, production of preclinical and clinical materials, including fees paid to contract manufacturers and manufacturing input costs for use in internal manufacturing

costs related to process development, production of preclinical and clinical materials, including fees paid to contract manufacturers and manufacturing input costs for use in internal manufacturing processes;

consultants supporting process development and regulatory activities;

costs related to in-licensing of rights to develop and commercialize our product candidate portfolio.

We recognize external development costs based on contractual payment schedules aligned with program activities, invoices for work incurred, and milestones which correspond with costs incurred by

the third parties.

We recognize external development costs based on contractual payment schedules aligned with program activities, invoices for work incurred, and milestones which correspond with costs incurred by the third parties.

Nonrefundable advance payments for goods or services to be received in the future for use in R&D activities are recorded as prepaid expenses.

Our direct R&D expenses are tracked on a program-by-program basis for product candidates and consist primarily of external costs, such as research collaborations and third party manufacturing

agreements associated with our preclinical research, process development, manufacturing, and clinical development activities.

Our direct R&D expenses are tracked on a program-by-program basis for product candidates and consist primarily of external costs, such as research collaborations and third-party manufacturing agreements associated with our preclinical research, process development, manufacturing, and clinical development activities.

Our direct R&D expenses by program also include fees incurred under license agreements.

Our personnel, non-program and

unallocated program expenses include costs associated with activities performed by our internal R&D organization and generally benefit multiple programs.

Our personnel, non-program and unallocated program expenses include costs associated with activities performed by our internal R&D organization and generally benefit multiple programs.

These costs are not separately allocated by product candidate and consist primarily of:

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Our R&D 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

in one or more product candidates, advance preclinical programs to clinical programs, and prepare regulatory filings for product candidates.

We cannot determine with certainty the duration and costs to complete current or future clinical studies of product candidates or if, when, or to what extent we will generate revenues from the

commercialization and sale of any of its product candidates that obtain regulatory approval.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development.

As a result, we expect that R&D expenses will increase substantially over the next several years as we increase personnel costs, including stock-based compensation, support ongoing clinical studies, seek to achieve proof-of-concept in additional product candidates, advance preclinical programs to clinical programs, and prepare regulatory filings for product candidates.

We cannot determine with certainty the duration and costs to complete current or future clinical studies of product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of its product candidates that obtain regulatory approval.

We may never succeed in achieving regulatory approval for any of our product candidates.

The duration, costs, and timing of clinical studies and

development of product candidates will depend on a variety of factors, including:

The duration, costs, and timing of clinical studies and development of product candidates will depend on a variety of factors, including:

the scope, rate of progress, and expense of ongoing as well as any clinical studies and other R&D activities that we undertake;

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the timing and receipt of any regulatory approvals.

We expect R&D expenses to increase for the foreseeable future as we continue to invest in R&D activities related to developing product candidates, including investments in manufacturing, as

our programs advance into later stages of development and as we conduct additional clinical trials.

The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development

of product candidates is highly uncertain.

As a result, we are unable to determine the duration and completion costs of R&D projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product

We expect R&D expenses to increase for the foreseeable future as we continue to invest in R&D activities related to developing product candidates, including investments in manufacturing, as our programs advance into later stages of development and as we conduct additional clinical trials.

The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of product candidates is highly uncertain.

As a result, we are unable to determine the duration and completion costs of R&D projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

Our future R&D expenses will depend on the clinical success of our product candidates, as well as ongoing assessments of the commercial potential of such product candidates.

In addition, we

cannot forecast with any degree of certainty which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital

requirements.

In addition, we cannot forecast with any degree of certainty which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

We expect our R&D expenses to increase in future periods for the foreseeable future as we seek to complete development of our product candidates.

The successful development and commercialization of our product candidates is highly uncertain.

This is due to the numerous risks and uncertainties associated with product development and

commercialization, including the uncertainty of:

This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

the scope, progress, outcome and costs of our clinical trials and other R&D activities;

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the timing, receipt and terms of any marketing approvals.

A change in the outcome of any of these variables with respect to the development of our product candidates that we may develop could mean a significant change in the costs and timing associated

with the development of our product candidates.

For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently contemplate for the completion of clinical

development of any of our product candidates that we may develop 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 of that product candidate.

A change in the outcome of any of these variables with respect to the development of our product candidates that we may develop could mean a significant change in the costs and timing associated with the development of our product candidates.

For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently contemplate for the completion of clinical development of any of our product candidates that we may develop 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 of that product candidate.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefit costs for personnel, including stock-based compensation and travel expenses for our employees in executive,

operational, finance, legal, business development, and human resource functions.

In addition, other significant general and administrative expenses include professional fees for legal, consulting, investor and public relations, auditing and tax

services as well as other expenses for rent and maintenance of facilities, insurance and other supplies used in general and administrative activities.

We expect general and administrative expenses to increase for the foreseeable future due to

anticipated increases in headcount to support the continued advancement of our product candidates.

We also anticipate that as we continue to operate as a public company with increasing complexity, we will continue to incur increased accounting,

audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses.

General and administrative expenses consist primarily of salaries and related benefit costs for personnel, including stock-based compensation and travel expenses for our employees in executive, operational, finance, legal, business development, and human resource functions.

In addition, other significant general and administrative expenses include professional fees for legal, consulting, investor and public relations, auditing and tax services as well as other expenses for rent and maintenance of facilities, insurance and other supplies used in general and administrative activities.

We expect general and administrative expenses to increase for the foreseeable future due to anticipated increases in headcount to support the continued advancement of our product candidates.

We also anticipate that as we continue to operate as a public company with increasing complexity, we will continue to incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses.

Interest Expense

Interest expense is related to Rocket’s 2021 Convertible Notes, which mature in August 2021, a substantial amount of which were exchanged in February 2020 for 6.25% Convertible Senior Notes due

Interest expense is related to the 2021 Convertible Notes, which mature in August 2021, and the 2022 Convertible Notes, which mature in August 2022, as well as the financing lease obligation for our Cranbury, NJ facility.

Interest Income

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Interest and other income net

(Amortization of premium) accretion of discount on investments - net

Total other expense, net

Research and Development Expenses

R&D expenses increased $47.8 million to $106.4 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

The increase was primarily the result of an increase in new research agreements totaling $26.5 million in non-cash expenses , an increase in manufacturing consumables of $5.5 million, an increase in compensation expense of $6.2 million due to increased R&D headcount;

an increase in clinical trials expense of $3.9 million, an increase in amortization expense related to the Cranbury, NJ lease of $1.7 million, and an increase in lab supplies of $2.0 million, offset by the CIRM grant of $1.1 million which was offset against LAD-1 R&D expenses, and a decrease in research agreements of $0.6 million primarily due to the $1.4 million license payment for the Stanford University’s Laboratory for Cell and Gene Therapy (“LCGM”) facility made in 2019.

General and Administrative Expenses

G&A expenses increased $10.4 million to $27.9 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

The increase in G&A expenses was primarily driven by fees of $2.0 million incurred in connection with the February and June 2020 convertible notes exchange, an increase in non-cash stock compensation expense of $4.2 million, an increase in compensation and benefits of $2.5 million due to increased G&A headcount and an increase in office and administrative expense of $1.0 million due primarily to increased insurance expense for the year ended December 31, 2020 as compared to 2019.

Other Income (Expense), Net

Other income (expense), net was $5.4 million for the year ended December 31, 2020 compared to other income (expense), net of $1.1 million for the year ended December 31, 2019.

The change was primarily due to a decrease in interest income related to our investments of $2.8 million due to lower interest rates, an increase in interest expense of $1.0 million, and a decrease in research and development incentives due to the receipt of the New York City biotech tax credit in 2019, which was phased out by New York City and did not reoccur in 2020.

Comparison of the Years Ended December 31, 2019 and 2018

The following table summarizes our results of operations for the years ended December 31, 2019 and 2018:

(in thousands)

For the Years Ended December 31,

Operating expenses:

Research and development

General and administrative

Total operating expenses

Loss from operations

Research and development incentives

Interest expense

Interest and other income net

Accretion of discount on investments

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R&D expenses increased $5.4 million to $58.6 million for the year ended December 31, 2019 compared to the year ended December 31, 2018.

The increase in R&D expenses was primarily a result

of increases in clinical trial expenses of $6.3 million, an increase in compensation expense of $2.9 million due to increased R&D headcount, an increase in research agreements of $1.7 million, offset by a decrease in license expense of $5.6

million primarily due to the $7.0 million REGENXBIO Inc.

The increase in R&D expenses was primarily a result of increases in clinical trial expenses of $6.3 million, an increase in compensation expense of $2.9 million due to increased R&D headcount, an increase in research agreements of $1.7 million, offset by a decrease in license expense of $5.6 million primarily due to the $7.0 million REGENXBIO Inc.

license fee paid in 2018 which did not reoccur in 2019.

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G&A expenses decreased $0.4 million to $17.5 million for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Rocket incurred certain one-time stock

compensation and severance termination expenses in Q-1, 2018 of $5.3 million related to the reverse merger with Inotek.

Excluding the $5.3 million one-time reverse merger related G&A expenses incurred in 2018,

G&A expenses would have increased $5.0 million primarily due to an increase in stock compensation expense of $4.5 million and G&A compensation expense of $1.0 million, offset by a decrease in legal fees of $0.5 million.

Rocket incurred certain one-time stock compensation and severance termination expenses in Q-1, 2018 of $5.3 million related to the reverse merger with Inotek.

Excluding the $5.3 million one-time reverse merger related G&A expenses incurred in 2018, G&A expenses would have increased $5.0 million primarily due to an increase in stock compensation expense of $4.5 million and G&A compensation expense of $1.0 million, offset by a decrease in legal fees of $0.5 million.

Other Income (Expense), Net

Other income (expense), net was $1.1 million for the year ended December 31, 2019 compared to other income (expense), net of $3.4 million for the year ended December 31, 2018.

The change was

primarily due to an increase in interest income of $1.7 million and an increase in accretion income of $0.4 million.

The increase in interest income for the year ended December 31, 2019, was due to the Company’s investment portfolio which increased

primarily due to the proceeds from financings and higher interest rates reflected in the first half of 2019.

The change was primarily due to an increase in interest income of $1.7 million and an increase in accretion income of $0.4 million.

The increase in interest income for the year ended December 31, 2019, was due to the Company’s investment portfolio which increased primarily due to the proceeds from financings and higher interest rates reflected in the first half of 2019.

Liquidity and Capital Resources

The Company has not generated any revenue and has incurred losses since inception.

Operations of the Company are subject to certain risks and uncertainties, including, among

others, uncertainty of drug candidate development, technological uncertainty, uncertainty regarding patents and proprietary rights, having no commercial manufacturing experience, marketing or sales capability or experience, dependency on key

personnel, compliance with government regulations and the need to obtain additional financing.

Drug candidates currently under development will require significant additional R&D efforts, including extensive preclinical and clinical testing and

regulatory approval, prior to commercialization.

We have not generated any revenue and have incurred losses since inception.

Operations of the Company are subject to certain risks and uncertainties, including, among others, uncertainty of drug candidate development, technological uncertainty, uncertainty regarding patents and proprietary rights, having no commercial manufacturing experience, marketing or sales capability or experience, dependency on key personnel, compliance with government regulations and the need to obtain additional financing.

Drug candidates currently under development will require significant additional R&D 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 drug candidates are in the development and clinical stage.

There can be no assurance that the Company’s R&D 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

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.

Our drug candidates are in the development and clinical stage.

There can be no assurance that our R&D will be successfully completed, that adequate protection for our 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 our product development efforts are successful, it is uncertain when, if ever, we will generate significant revenue from product sales.

We operate in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies.

Our 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.

Rocket has incurred net losses and negative cash flows from its operations each year since inception.

Rocket incurred net losses of $77.3 million and $74.5 million for the years ended December 31, 2019 and 2018,

respectively.

The Company has experienced negative cash flows from operations and has an accumulated deficit of $183.1 million as of December 31, 2019.

As of December 31, 2019, the Company has $304.1 million of cash, cash equivalents and

Rocket expects such resources would be sufficient to fund its operating expenses and capital expenditure requirements into 2022.

Rocket incurred net losses of $139.7 million, $77.3 million, and $74.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.

We have experienced negative cash flows from operations and has an accumulated deficit of $322.8 million as of December 31, 2020.

As of December 31, 2020, we had $482.7 million of cash, cash equivalents and investments.

Rocket expects such resources would be sufficient to fund its operating expenses and capital expenditure requirements into the second half of 2023.

Rocket has funded its operations primarily through the sale of its equity and debt securities.

On April 18, 2019, the Company completed a public offering of 5,175,000 shares of common stock, which includes the full exercise of the underwriters’ option to purchase an

additional 675,000 shares of our common stock, at a public offering price of $17.50 per share.

The net proceeds to Rocket from the public offering were approximately $86.1 million, after deducting $4.5 million of offering costs, commissions, legal

and other expenses from the gross proceeds from the offering of $90.6 million.

On April 30, 2019, CIRM awarded Rocket 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

On July 1, 2019, we

received the first grant from CIRM of $0.8 million and on October 15, 2019, we received the second grant of $0.4 million, based on eligible costs incurred under the grant.

On December 10, 2019, the Company completed a public offering of 4,393,000 shares of common stock, which includes the full exercise of the underwriters’ option to purchase an

additional 573,000 shares of our common stock, at a public offering price of $22.25 per share.

The net proceeds to Rocket from the public offering were approximately $91.7 million, after deducting $6.1 million of offering costs, commissions, legal

and other expenses from the gross proceeds from the offering of $97.7 million.

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.

additional funds by issuing equity securities, our stockholders will experience dilution.

Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to

incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation or asset sale transactions.

Any debt financing or additional equity that we raise may contain terms

that are not favorable to us or our stockholders.

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.

In the longer term, our future viability is dependent on its ability to generate cash from operating activities or to raise additional capital to finance its operations.

If we raise additional funds by issuing equity securities, our stockholders will experience dilution.

Any future debt financing into which we enter may impose upon us additional covenants that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our common stock, make certain investments and engage in certain merger, consolidation, or asset sale transactions.

Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders.

Our failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies.

Convertible Notes Payable

On January 4, 2018, in connection with the reverse merger with Inotek, Inotek’s obligations under its outstanding convertible notes, with an aggregate principal value of $52.0 million, were assumed

by the Company (the “2021 Convertible Notes”).

On January 4, 2018, in connection with the reverse merger with Inotek, Inotek’s obligations under its outstanding convertible notes, with an aggregate principal value of $52.0 million, were assumed by us (the “2021 Convertible Notes”).

The 2021 Convertible Notes were issued in 2016 and mature on August 1, 2021 (“Maturity Date”).

The 2021 Convertible Notes are unsecured, 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 a 2021 Convertible Note (the “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 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 “Old Notes”).

(a) approximately $39.4 million aggregate principal amount of 6.25% Convertible Senior Notes due 2022 (the “New Notes”) (an exchange ratio equal to 1.00 New Notes per exchanged Old Note) and (b) $119,416 in cash to pay the accrued and unpaid

interest on the exchanged Old Notes from, and including, February 1, 2020, to, but excluding, the closing date of the exchange transactions.

The New Notes were issued in private placements exempt from registration in reliance on Section 4(a) (2) of

the Securities Act.

Upon completion of the exchange transactions, approximately $12.7 million aggregate principal amount of Old Notes remained outstanding.

The exchange transactions closed on February 20, 2020.

The conversion rate for the New Notes will initially be 31.1876 shares of the Company’s common stock per $1,000 principal amount of 2022 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 New Notes.

The Company may redeem for cash all or any portion of the 2022 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 Notes Indenture contains customary terms and covenants and events of default.

The 2021 Convertible Notes are unsecured, 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 a 2021 Convertible Note (the “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 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.

On February 20, 2020 and June 5, 2020, we entered into separate, privately negotiated exchange agreements (the “Exchange Agreements”) with certain holders of the 2021 Convertible Notes.

Also pursuant to the Exchange Agreements, on June 12, 2020, we exchanged $7.5 million aggregate principal amount of the 2021 Convertible Notes for (a) $7.5 million aggregate principal amount of its newly issued 2022 Convertible Notes (an exchange ratio equal to 1.00 2022 Convertible Notes per exchanged 2021 Convertible Notes) and (b) approximately $11 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.

In December, 2020, $8.5 million principal amount, representing a carrying value of $7.6 million of the 2022 Convertible Notes were converted into 298,562 shares of common stock.

The conversion rate for the 2022 Convertible Notes is initially 31.1876 shares of our common stock per $1,000 principal amount of 2022 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 New Notes.

We may redeem for cash all or any portion of the 2022 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 we provides written notice of redemption.

The 2022 Convertible Notes Indenture contains customary terms and covenants and events of default.

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

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Net Cash Used in Operating Activities

During the year ended December 31, 2019, operating activities used $64.7 million of cash, primarily resulting from our net loss of $77.3 million and net changes in our operating assets and

liabilities of $3.7 million, partially offset by net non-cash charges of $16.3 million, including stock-based compensation expense of $13.4 million and accretion of discount on convertible notes of $3.6 million.

Changes in Rocket’s operating assets

and liabilities for the year ended December 31, 2019 consisted of a decrease in accounts payable and accrued expenses of $2.7 million and an increase in prepaid expenses and other assets of $0.9 million.

During the year ended December 31, 2018, operating activities used $53.8 million of cash, primarily resulting from our net loss of $74.5 million and net changes in our operating assets and

liabilities of $4.4 million, partially offset by net non-cash charges of $16.3 million, including stock-based compensation expense of $13.6 million and accretion of discount on convertible notes of $3.1 million.

Changes in Rocket’s operating assets

and liabilities for the year ended December 31, 2018 consisted of an increase in accounts payable and accrued expenses of $5.9 million, offset by an increase in prepaid expenses and other assets of $1.5 million.

During the year ended December 31, 2020, operating activities used $74.6 million of cash, primarily resulting from our net loss of $139.7 million and net changes in our operating assets and liabilities of $15.0 million, partially offset by net non-cash charges of $50.0 million, including expenses in connection with the issuance of warrant of $26.6 million, stock-based compensation expense of $18.6 million and accretion of discount on convertible notes of $2.8 million.

Changes in our operating assets and liabilities for the year ended December 31, 2020 consisted of an increase in finance lease liability of $5.6 million, an increase in accounts payable and accrued expenses of $6.4 million and an increase in prepaid expenses and other assets of $1.5 million.

During the year ended December 31, 2019, operating activities used $64.7 million of cash, primarily resulting from our net loss of $77.3 million and net changes in our operating assets and liabilities of $3.7 million, partially offset by net non-cash charges of $16.3 million, including stock-based compensation expense of $13.4 million and accretion of discount on convertible notes of $3.6 million.

Changes in our operating assets and liabilities for the year ended December 31, 2019 consisted of a decrease in accounts payable and accrued expenses of $2.7 million and an increase in prepaid expenses and other assets of $0.9 million.

During the year ended December 31, 2018, operating activities used $53.8 million of cash, primarily resulting from our net loss of $74.5 million and net changes in our operating assets and liabilities of $4.4 million, partially offset by net non-cash charges of $16.3 million, including stock-based compensation expense of $13.6 million and accretion of discount on convertible notes of $3.1 million.

Changes in our operating assets and liabilities for the year ended December 31, 2018 consisted of an increase in accounts payable and accrued expenses of $5.9 million, offset by an increase in prepaid expenses and other assets of $1.5 million.

Net Cash Used in Investing Activities

During the year ended December 31, 2019, net cash outflow of investing activities was $39.0 million, consisting primarily of purchases of property and equipment which is considered construction in

progress of $23.3 million related primarily to our Cranbury, New Jersey facility, and investment purchases of $184.3 million offset by proceeds of $168.6 million from the maturities of investments.

During the year ended December 31, 2018, net cash outflow of investing activities was $5.3 million, consisting primarily of investment purchases of $141.1 million and purchases of property and

equipment of $1.5 million, offset by $76.3 million of cash acquired in connection with the reverse merger, and $61.3 million from the maturities of investments.

During the year ended December 31, 2020, net cash outflow of investing activities was $96.6 million, consisting of proceeds of $141.8 million from the maturities of investments, offset by purchases of investments of $209.3 million, purchases of property and equipment of $20.6 million, and payments made to acquire right of use asset of $8.5 million.

During the year ended December 31, 2019, net cash outflow of investing activities was $39.0 million, consisting primarily of purchases of property and equipment which is considered construction in progress of $23.3 million related primarily to our Cranbury, New Jersey facility, and investment purchases of $184.3 million offset by proceeds of $168.6 million from the maturities of investments.

During the year ended December 31, 2018, net cash outflow of investing activities was $5.3 million, consisting primarily of investment purchases of $141.1 million and purchases of property and equipment of $1.5 million, offset by $76.3 million of cash acquired in connection with the reverse merger, and $61.3 million from the maturities of investments.

Net Cash Provided by Financing Activities

During the year ended December 31, 2020, net cash provided by financing activities was $283.0 million, consisting primarily of proceeds from the issuance of common stock for $280.8 million.

On December 14, 2020, we completed a public offering of 5,339,286 shares of common stock, which included the full exercise of the underwriters’ option to purchase an additional 696,428 shares of our common stock, at a public offering price of $56.00 per share.

The net proceeds to Rocket from the December 2020 public offering were approximately $280.8 million.

During the year ended December 31, 2019, net cash provided by financing activities was $177.8 million, consisting of proceeds from the issuance of common stock for $177.8 million.

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The net proceeds to Rocket from the April 2019 public offering were approximately $86.1 million.

On December 10, 2019, the Company

completed a public offering of 4,393,000 shares of common stock.

On December 10, 2019, we completed a public offering of 4,393,000 shares of common stock.

The net proceeds to Rocket from the December 2019 public offering were approximately $91.7 million.

During the year ended December 31, 2018, net cash provided by financing activities was $153.5 million, consisting primarily of proceeds from the issuance of common stock.

26, 2018, we completed a public offering of common stock and received net proceeds of approximately $78.5 million.

On January 26, 2018, we completed a public offering of common stock and received net proceeds of approximately $78.5 million.

On November 30, 2018, we completed a public offering of common stock and received net proceeds of $74.1 million.

Contractual Commitments

The following table summarizes our principal contractual commitments, excluding open orders that support normal operations, as of December 31, 2020 ( in thousands ):

Obligations Expiring by Period

Capital (Finance) Leases

Operating Lease Obligations

2021 Convertible Notes

2022 Convertible Notes

Off-Balance Sheet Arrangements

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

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, or the JOBS Act.

For as long as we continue to be an emerging growth company, we

may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section

404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and

stockholder approval of any golden parachute payments not previously approved.

We will cease to be an emerging growth company as of December 31, 2020.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies.

have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, are subject to the same new or revised accounting standards as other public companies that are not emerging growth

Critical Accounting Policies and Estimates

Business combinations are accounted for under the acquisition method.

The total cost of an acquisition is allocated to the underlying identifiable net assets, based on their respective estimated

fair values as of the acquisition date.

future cash inflows and outflows, discount rates, asset lives and market multiples, among other items.

The total cost of an acquisition is allocated to the underlying identifiable net assets, based on their respective estimated fair values as of the acquisition date.

Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items.

Assets acquired and liabilities assumed are recorded at their estimated fair values.

The excess of the purchase price over the estimated fair

values of the net assets acquired is recorded as goodwill.

The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

Goodwill is tested for impairment annually as of December 31, or more frequently when events or changes in circumstances indicate that the asset might be impaired.

such events or circumstances include, but are not limited to, a significant adverse change in legal or business climate, an adverse regulatory action or unanticipated competition.

We have one segment and one reporting unit and as such reviews

goodwill for impairment at the consolidated level.

Examples of such events or circumstances include, but are not limited to, a significant adverse change in legal or business climate, an adverse regulatory action or unanticipated competition.

We have one segment and one reporting unit and as such review’s goodwill for impairment at the consolidated level.

When testing goodwill, we have the option to first assess qualitative factors for reporting units that carry goodwill.

The qualitative assessment includes assessing the totality of relevant events

and circumstances that affect the fair value or carrying value of the reporting unit.

These events and circumstances include macroeconomic conditions, industry and competitive environment conditions, overall financial performance, reporting unit

specific events and market considerations.

We may also consider recent valuations of the reporting unit, including the magnitude of the difference between the most recent fair value estimate and the carrying value, as well as both positive and

adverse events and circumstances, and the extent to which each of the events and circumstances identified may affect the comparison of a reporting unit’s fair value with its carrying value.

If the qualitative assessment results in a conclusion

that it is more likely than not that the fair value of a reporting unit exceeds the carrying value, then no further testing is performed for that reporting unit.

In January 2017, the FASB issued ASU No.

The qualitative assessment includes assessing the totality of relevant events and circumstances that affect the fair value or carrying value of the reporting unit.

These events and circumstances include macroeconomic conditions, industry and competitive environment conditions, overall financial performance, reporting unit specific events and market considerations.

We also consider recent valuations of the reporting unit, including the magnitude of the difference between the most recent fair value estimate and the carrying value, as well as both positive and adverse events and circumstances, and the extent to which each of the events and circumstances identified may affect the comparison of a reporting unit’s fair value with its carrying value.

If the qualitative assessment results in a conclusion that it is more likely than not that the fair value of a reporting unit exceeds the carrying value, then no further testing is performed for that reporting unit.

As of January 1, 2018, we early adopted ASU No.

2017-04, “Intangibles- Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment”, an amendment to simplify the subsequent quantitative

measurement of goodwill by eliminating step two from the goodwill impairment test.

We early adopted this guidance as of January 1, 2018.

An entity will recognize an impairment charge for the amount by which the carrying amount of a reporting unit

exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

We performed the qualitative assessment of Rocket’s goodwill and determined that it is more likely than not that the fair value of a reporting unit

exceeds the carrying value of the reporting unit.

As a result, we have determined there was no goodwill impairment for the years ended December 31, 2019 and 2018.

Simplifying the Test for Goodwill Impairment”, an amendment to simplify the subsequent quantitative measurement of goodwill by eliminating step two from the goodwill impairment test.

An entity will recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

An entity still has the option to perform the qualitative test for a reporting unit to determine if the quantitative impairment test is necessary.

We performed the qualitative assessment of its goodwill and determined that it is more likely than not that the fair value of a reporting unit exceeds the carrying value of the reporting unit.

As a result, we have determined there was no goodwill impairment as of and for the years ended December 31, 2020, 2019 and 2018.

Impairment of Long-Lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable.

We conducted our long-lived asset impairment

analyses in accordance with ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.”ASC 360-10-15 requires us to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of

other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows.

If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the

amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

We conducted our long-lived asset impairment analyses in accordance with ASC 360-10-15, Impairment or Disposal of Long-Lived Assets.”ASC 360-10-15 requires us to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows.

If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

There is no impairment of long-lived assets as of and for the years ended December 31, 2020, 2019 and 2018.

Accrued Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our accrued research and development expenses.

This process involves reviewing open

contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been

invoiced or otherwise notified of the actual costs.

This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs.

The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met;

however, some require advanced payments.

make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time.

Examples of estimated accrued research and development expenses include fees

We make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time.

Examples of estimated accrued research and development expenses include fees paid to:

CROs in connection with performing R&D services on our behalf;

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vendors related to product manufacturing, development and distribution of clinical supplies.

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage non-clinical

studies and clinical trials on our behalf.

We base our expenses related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage non-clinical studies and clinical trials on our behalf.

The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows.

There may be instances in which payments made to our vendors will

exceed the level of services provided and result in a prepayment of the clinical expense.

There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense.

Payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones.

accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and level of effort to be expended in each period.

If the actual timing of the performance of services or

the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly.

Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services

performed relative to the actual status and timing of services performed may vary and may result in us reporting expenses that are too high or too low in any particular period.

In accruing service fees, we estimate the time period over which services will be performed, enrollment of patients, number of sites activated and level of effort to be expended in each period.

If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly.

Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting expenses that are too high or too low in any particular period.

Fair Value Measurements

We are required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values.

Standard Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures , establishes a hierarchy of inputs used when available.

Observable inputs are inputs that market participants would use in

pricing the asset or liability based on market data obtained from sources independent of our company.

Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability

and are developed based on the best information available in the circumstances.

The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment

credit quality.

FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a hierarchy of inputs used when available.

Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of us.

Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.

The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality.

The three levels of the fair value hierarchy are described below:

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date;

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3—Valuations that require inputs that reflect our own assumptions that are both significant to the fair value measurement and unobservable.

Level 3—Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.

Accordingly, the degree

of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value

The fair value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, deposits, accounts payable and accrued expenses approximate their respective carrying

values due to the short-term nature of these instruments.

The fair value of the 2021 Convertible Notes as of December 31, 2019 was approximately $54.5 million.

The Company’s assets and liabilities measured at fair value on a recurring basis include

its short and long term investments.

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 and Municipal 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.

Accordingly, the degree of judgment exercised by us in determining fair value is greatest for instruments categorized in Level 3.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The fair value of our financial instruments, including cash and cash equivalents, restricted cash, deposits, accounts payable and accrued expenses approximate their respective carrying values due to the short-term nature of these instruments.

Stock-Based Compensation

We measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award.

That cost is recognized on a straight-line basis

over the period during which the employee is required to provide service in exchange for the award.

The fair value of options on the date of grant is calculated using the Black-Scholes option pricing model based on key assumptions such as stock

price, expected volatility and expected term.

Our estimates of these assumptions are primarily based on historical data, peer company data and judgment regarding future trends and factors.

We issue stock-based awards to employees and non-employees, generally in the form of stock options and restricted stock units.

We account for stock-based compensation awards in accordance with FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”).

ASC 718 requires all stock-based payments, including grants of stock options and restricted stock units and modifications to existing stock options, to be recognized in the consolidated statements of operations and comprehensive loss based on their fair values.

We measure the compensation expense of employee and nonemployee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date.

That cost is recognized on a straight-line basis over the period during which the employee and nonemployee is required to provide service in exchange for the award.

The fair value of options on the date of grant is calculated using the Black-Scholes option pricing model based on key assumptions such as stock price, expected volatility and expected term.

We estimate these assumptions are primarily based on the trading price of the Company’s stock, historical data, peer company data and judgment regarding future trends and factors.

We classify stock-based compensation expense in its statement of operations in the same manner in which the award recipient’s payroll costs and services are classified or in which the award recipient’s service payments are classified.

The Company recognizes compensation expense for at least the portion of awards that are vested.

Forfeitures are accounted for as they occur.

Effective July 1, 2018, we adopted ASU No.

2018-07, Compensation—Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which expands the scope of Topic 718 to include stock-based payment awards to nonemployees.

As a result, stock-based awards granted to consultants and non-employees are accounted for in the same manner as awards granted to employees and directors as described above.

Prior to the adoption of ASU 2018-07, for stock-based awards granted to consultants and non-employees, we recognized compensation expense over the period during which services are rendered by such consultants and non-employees until completed.

At the end of each financial reporting period prior to completion of the service, the estimated fair value of these awards was re-measured using the then-current fair value of our common stock and updated assumption inputs in the Black-Scholes option-pricing model.

Recent Accounting Pronouncements

The Company adopted ASU 2016-02, Leases (“ASU 2016-02”), as amended, on January 1, 2019, which supersedes the prior leasing guidance and

upon adoption, requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months.

Leases are classified as either finance or operating, with classification affecting the

pattern of expense recognition in the income statement.

Upon the adoption of the guidance, operating leases were capitalized on the balance sheet at the present value of lease payments.

The balance sheet amount recorded for existing leases at the

date of adoption of ASU 2016-02 was calculated using an estimate of the Company’s collateralized borrowing rate for debt with a similar term.

In adopting ASU 2016-02, the Company elected the available package of practical expedients which allows the Company to not reassess previous accounting conclusions around whether arrangements are or contain leases, the

classification of leases, and the treatment of initial direct costs.

The Company also made an accounting policy election to utilize the short-term lease exemption, whereby leases with a term of 12 months or less will not follow the recognition and

measurement requirements of the new standard.

Upon adoption in 2019, the Company recognized total right-of-use assets of $2.6 million, with corresponding liabilities of $3.1 million on the 2019 consolidated balance sheets, including the

reclassification of $0.5 million from deferred rent to right-of-use assets.

See Note 13 “Commitments and Contingencies” for lease policy note and additional disclosures.

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.

We adopted this guidance on January 1, 2020.

The adoption of ASU 2018-13 had no impact on us as we do not have Level 3 investments.

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 362):

Measurement of Credit Losses on Financial Statements (“ASU 2016-13”).

The new standard requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses.

It also limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases.

The targeted transition relief standard allows filers an option to irrevocably elect the fair value option of ASC 825-10, Financial Instruments-Overall, applied on an instrument-by-instrument basis for eligible instruments.

The new standard became effective beginning January 1, 2021.

We are currently evaluating the potential impact ASU 2016-13, and related updates, will have on its financial position and results of operations upon adoption, however ASU 2016-13 is not expected to have a material impact.

Quantitative and Qualitative Disclosures about Market Risks

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Item 7. Management’s Discussion and Analysis