See the accompanying notes to the unaudited condensed consolidated financial statements.
See the accompanying notes to the unaudited condensed consolidated financial statements.
See the accompanying notes to the unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
1. Description of Business
Ocera
Therapeutics, Inc. (the Company), is a clinical stage biopharmaceutical company targeting acute and clinical orphan liver disease. The Companys initial focus is on the development and commercialization of
OCR-002
(ornithine phenylacetate) in both intravenous and oral formulations for the treatment and prevention of hepatic encephalopathy (HE). HE is a serious complication of liver cirrhosis, or liver
failure, marked by mental changes including confusion, impaired motor skills, disorientation in time and space, and, in its more severe form, stupor, coma and even death.
OCR-002
is a novel molecule, which functions as an ammonia scavenger and which the Company believes is
the only direct ammonia scavenger currently in clinical development for the treatment and prevention of HE.
OCR-002
has been granted orphan drug designation and Fast Track status by the FDA for the treatment
of hyperammonemia and resultant HE in patients with acute liver failure and
acute-on-chronic
liver disease. Orphan drug designation is given to a drug candidate intended
to treat a rare disease or condition that affects fewer than 200,000 individuals in the United
States. OCR-002
has also been granted orphan drug designation in the European Union for the treatment of
acute liver failure. Fast Track designation is available for certain new drug products if they are intended to treat a serious or life-threatening disease or condition and demonstrate the potential to address unmet medical needs for the disease or
condition. Fast Track designation does not change the standards for approval but may expedite the development or approval process.
On July 15, 2013, Terrapin Acquisition, Inc., a Delaware corporation (Merger Sub), a wholly owned subsidiary of Tranzyme,
Inc., a Delaware corporation (Tranzyme), completed its merger (the Merger) with and into Ocera Therapeutics, Inc., a private Delaware corporation (Private Ocera). Private Ocera was considered the acquiring company
in the Merger for accounting purposes. In connection with the Merger, the combined company changed its name to Ocera Therapeutics, Inc., and the name of Private Ocera was changed to Ocera Subsidiary, Inc. (Ocera Subsidiary).
The Company has a limited operating history and the sales and income potential of its business and market are unproven. As of
September 30, 2017, the Company has an accumulated deficit of $177.4 million and has experienced net losses each year since its inception. The Company anticipates that it will continue to incur net losses into the foreseeable future and
will need to raise additional capital as it continues the development and commercialization of
OCR-002.
The Companys cash and cash equivalents may not be sufficient to fund its operations into the second
quarter of 2018. These factors raise substantial doubt about the Companys ability to continue as a going concern within twelve months following the date of the filing of this Form
10-Q.
The
Companys ability to continue as a going concern and finance operations beyond its current resources will depend heavily on the value investors see in the data from previous clinical trials of
OCR-002
and
favorable results from any future clinical trials of
OCR-002
the Company may conduct.
Further, as
discussed in Note 10, on November 2, 2017, the Company announced that it had entered into a definitive agreement to be acquired by an affiliate of Mallinckrodt plc (Mallinckrodt). Should the proposed acquisition not be completed,
the Company plans to fund its operations by raising additional capital through collaboration, licensing or similar arrangements, private and public equity offerings or debt financing, or a combination thereof. Additional financing may not be
available when the Company needs it or may not be available on terms that are favorable to the Company. Collaboration, licensing or similar arrangements may require the Company to relinquish valuable rights to its potential products or proprietary
technologies. To the extent that the Company raises additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms may include liquidation or other
preferences that adversely affect the rights of existing stockholders. Debt financing, as is the case with the Companys loan facility, results in increased fixed payment obligations and may involve agreements that include covenants limiting or
restricting the Companys ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. Without additional funds, the Company may be forced to delay, scale back or eliminate some of its research
and development activities or operations and potentially delay product development of
OCR-002.
The condensed consolidated financial statements included in this report have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of
8
business. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of the uncertainty related to the Companys ability to continue as a going concern.
2.
Summary of Significant Accounting Policies
Basis of Accounting
The accompanying unaudited condensed consolidated financial statements of the Company and its wholly-owned subsidiary have been prepared in
accordance with United States of America generally accepted accounting principles (U.S. GAAP) for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. For interim reporting,
the financial statements and related notes do not include all information and footnotes required by U.S. GAAP for annual reports. This quarterly report should be read in conjunction with the consolidated financial statements included in the
Companys Annual Report on Form
10-K
for the year ended December 31, 2016.
Unaudited Interim
Financial Information
The accompanying interim condensed consolidated financial statements and related disclosures are unaudited, have
been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for a fair statement of the results of operations
for the periods presented. The
year-end
condensed consolidated balance sheets were derived from audited consolidated financial statements, but do not include all disclosures required by U.S. GAAP for complete
financial statements. The consolidated results of operations for any interim period are not necessarily indicative of the results to be expected for the full year or for any other future year or interim period.
Use of Estimates
The preparation of financial statements in conformity with the U.S. GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents may include money market funds, various deposit accounts, commercial paper and reverse repurchase agreements with original maturities of three months or less.
Recent Accounting Pronouncements
Occasionally, new accounting standards are issued or proposed by the Financial Accounting Standards Board (the FASB), or other
standards-setting bodies, that the Company adopts by the effective date specified within the standard.
(i) New Accounting Updates Recently Adopted
In March 2016, the FASB issued Accounting Standards Update (ASU)
No. 2016-09,
Improvements to Employee Share-Based Payment Accounting (Topic 718), Compensation - Stock Compensation. The ASU simplifies several aspects of the accounting for share-based payments,
including the income tax consequences, changing the threshold to qualify for equity classification to the employees maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that
are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for
tax-withholding
purposes. The Company adopted this ASU during the first quarter of 2017, and as a result of the adoption, the Company recognized additional deferred tax assets of $0.3 million. There was
no change to beginning retained earnings for previously unrecognized tax benefits, as the increase to deferred tax assets was fully offset by an increase to the valuation allowance as the Company determined that it was not more likely than not that
the Company will realize the benefit of these deferred tax assets. The Company has elected to maintain its practice of estimating forfeitures when recognizing expense for share-based payment awards.
9
(ii) Recent Accounting Updates Not Yet Effective
In May 2017, the FASB issued ASU No.
2017-09, Compensation-Stock
Compensation (Topic 718),
Scope of Modification Accounting. ASU
No. 2017-09
provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. The ASU does
not change the accounting for modifications, but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are
considered
non-substantive.
The standard will become effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted.
ASU 2017-09 is
to be applied on a prospective basis to an award modified on or after the adoption date. The Company is currently evaluating the impact of the adoption of this standard on its
consolidated financial statements.
In January 2017, the FASB issued ASU No.
2017-04, Simplifying
the Test for Goodwill Impairment, which removes the second step of the
two-step
goodwill impairment test. Under ASU
No. 2017-04,
an entity will apply a
one-step
quantitative test and record the amount of goodwill impairment as the excess of a reporting units carrying amount over
its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU
No. 2017-04
does not amend the optional qualitative assessment of goodwill impairment. Additionally, an
entity should consider income tax effects from any
tax-deductible
goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU
No. 2017-04
is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019; early adoption is permitted for interim or annual goodwill impairment tests
performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this standard and does not expect the adoption of this guidance will have a material impact on its consolidated financial
statements.
In August 2016, the FASB issued ASU No.
2016-15, Classification
of Certain Cash
Receipts and Cash Payments, which aims to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and other Topics. ASU
No. 2016-15
is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2017. The Company continues to assess the potential impact of this standard, but currently
does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
In February 2016, the
FASB issued ASU No.
2016-02, Leases,
to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of
key information about leasing arrangements. The standard will become effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The guidance is required to be adopted at the earliest period
presented using a modified retrospective approach. In September 2017, the FASB issued ASU
No. 2017-13, Revenue
Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases
(Topic 840), and Leases (Topic 842), which provided additional implementation guidance on the previously issued ASU. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In May 2014, the FASB issued ASU No.
2014-09, Revenue
from Contracts with
Customers.
The standards core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. The standard will become effective for the Company beginning in the first quarter of 2018. Early adoption is permitted in 2017. Entities have the option of using either a full retrospective or a
modified retrospective approach to adopt this new guidance. In March and April 2016, the FASB issued ASU
No. 2016-08
Revenue From Contracts With Customers: Principal vs. Agent Considerations and ASU
No. 2016-10
Revenue From Contracts with Customers: Identifying Performance Obligations and Licensing to provide supplemental adoption guidance and clarification to ASU
No. 2014-09.
In September 2017, the FASB issued ASU
No. 2017-13, Revenue
Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606),
Leases (Topic 840), and Leases (Topic 842), which provided additional implementation guidance on the previously issued ASU. The Company plans to adopt this guidance as of January 1, 2018, using the modified retrospective method and is in
the process of evaluating its arrangements where it has licensed or sold intellectual property. The Company has not yet completed its full assessment, but currently does not expect the adoption of this standard to have a material impact on its
condensed consolidated financial statements.
10
The Company reviewed all other recently issued accounting pronouncements and concluded that they
were either not applicable or not expected to have a significant impact to the condensed consolidated financial statements. Additionally, the adoption of the accounting pronouncement this year did not have an impact on the Companys
consolidated financial position or results of operations.
3. Fair Value Measurements
The following tables present information about the Companys financial assets measured at fair value on a recurring basis and indicate the
fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. As a basis for categorizing inputs, the Company uses a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value
from market-based assumptions to entity specific assumptions:
Level
1:
Inputs which include quoted prices in
active markets for identical assets or liabilities;
Level
2:
Inputs, other than level 1 that are observable,
either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities; and
Level
3:
Unobservable inputs that are supported by little or no market
activity, which require the reporting entity to develop its own assumptions.
No transfers between levels have occurred during the periods
presented.
Assets measured at fair value on a recurring basis as of September 30, 2017 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Money market funds
|
|
$
|
14,352
|
|
|
$
|
14,352
|
|
|
$
|
|
|
|
$
|
|
|
The estimated fair value of the Companys notes payable, considering level 2 inputs, approximates their
carrying value based upon the borrowing terms and conditions available to the Company at September 30, 2017.
Assets measured at fair
value on a recurring basis as of December 31, 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Money market funds
|
|
$
|
24,593
|
|
|
$
|
24,593
|
|
|
$
|
|
|
|
$
|
|
|
Commercial paper
|
|
|
1,498
|
|
|
|
|
|
|
|
1,498
|
|
|
|
|
|
Corporate debt securities
|
|
|
2,251
|
|
|
|
|
|
|
|
2,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
28,342
|
|
|
$
|
24,593
|
|
|
$
|
3,749
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated fair value of the Companys notes payable, considering level 2 inputs, approximates their
carrying value based upon the borrowing terms and conditions available to the Company at December 31, 2016.
11
4. Balance Sheet Components
Investments
The following table
summarizes the Companys cash equivalents as of September 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
(In Years)
|
|
Amortized Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated Fair
Value
|
|
Money market funds
|
|
n/a
|
|
$
|
14,352
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,352
|
|
The following table summarizes the Companys cash equivalents and marketable securities as of
December 31, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
(In Years)
|
|
|
Amortized Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Estimated Fair
Value
|
|
Money market funds
|
|
|
n/a
|
|
|
$
|
24,593
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,593
|
|
Commercial paper
|
|
|
1 or less
|
|
|
|
1,498
|
|
|
|
|
|
|
|
|
|
|
|
1,498
|
|
Corporate debt securities
|
|
|
1 or less
|
|
|
|
2,251
|
|
|
|
|
|
|
|
|
|
|
|
2,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash equivalents and marketable securities
|
|
|
|
|
|
$
|
28,342
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At each reporting date, the Company reviews its investments for impairment to determine if the unrealized
losses are other-than-temporary. The Company had no other-than-temporary impairments on these securities as of September 30, 2017 and December 31, 2016. Realized gains or losses on
available-for-sale
securities were immaterial for the periods presented. The Company does not intend to and believes it is not more likely than not that it will be required to sell these securities before
their maturities.
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Research and development
|
|
$
|
888
|
|
|
$
|
1,519
|
|
Compensation and related expenses
|
|
|
876
|
|
|
|
1,124
|
|
Professional services
|
|
|
315
|
|
|
|
102
|
|
Principal payment due on notes payable
|
|
|
316
|
|
|
|
|
|
Interest expense on notes payable
|
|
|
271
|
|
|
|
69
|
|
Other
|
|
|
21
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
2,687
|
|
|
$
|
2,839
|
|
|
|
|
|
|
|
|
|
|
5. Notes Payable
On July 30, 2015, the Company and Ocera Subsidiary entered into a Loan and Security Agreement (the Loan Agreement) with Oxford
Finance LLC (Oxford) and Silicon Valley Bank (SVB), collectively, the Lenders. The Loan Agreement provides for up to $20.0 million in new term loans (the Term Loan Facility), $10.0 million of
which was funded on July 30, 2015. The remaining $10.0 million was not drawn and expired at December 31, 2016 due to
non-achievement
of certain financial and clinical milestones.
The annual interest rate for the initial $10.0 million funding is 8.275%. Loan payments were interest-only until February 1, 2017,
followed by 30 equal monthly payments of principal and interest through the scheduled maturity date of August 1, 2019. In addition, a final payment equal to 3% of the aggregate amount drawn will be due at maturity or on earlier repayment. If
the Company prepays all or a portion of the loans, a prepayment fee of between 1% and 3% of the principal amount prepaid will also be due depending on the timing of the prepayment.
The Company received net proceeds of $9.7 million after fees and expenses from the Term Loan Facility. These fees and expenses are being
accounted for as a debt discount and classified within notes payable on the Companys condensed consolidated balance sheets. Related legal and consulting fees are presented in the condensed consolidated
12
balance sheets as a direct deduction from the carrying amount of notes payable, consistent with the debt discount. The debt discount, issuance costs and the final payment are being amortized or
accreted as interest expense over the term of the loan using the effective interest method.
In connection with the Loan Agreement, the
Company issued to the Lenders, warrants to purchase an aggregate of 97,680 shares of the Companys common stock at an exercise price of $4.10 per share. The Company recorded $0.3 million for the warrants as debt discount within notes
payable and an increase to additional
paid-in
capital on the Companys balance sheet. As of September 30, 2017, the warrants remained outstanding and exercisable. The debt discount is being amortized
as interest expense over the term of the loan using the effective interest method.
The Term Loan Facility is secured by substantially all
of the Companys assets and the assets of Ocera Subsidiary, Inc., except that the collateral does not include any intellectual property held by the Company or Ocera Subsidiary, Inc. However, pursuant to the terms of a negative pledge
arrangement, the Company has agreed not to encumber any of the intellectual property of the Company or its subsidiaries. The Loan Agreement contains customary representations, warranties and covenants by the Company, which limit the Companys
ability to convey, sell, lease, transfer, assign or otherwise dispose of certain of our assets; engage in any business other than the businesses the Company currently engages in or reasonably related thereto; liquidate or dissolve; make certain
management changes; undergo certain change of control events; create, incur, assume, or be liable with respect to certain indebtedness; grant certain liens; pay dividends and make certain other restricted payments; make certain investments; enter
into any material transactions with any affiliates, with certain exceptions; make payments on any subordinated debt; and permit certain of the Companys subsidiaries to maintain, own or otherwise hold any material assets or conduct any business
operations other than as disclosed to the Lenders. In addition, subject to certain exceptions, the Company and Ocera Subsidiary, Inc., are required to maintain with SVB their respective primary deposit accounts, securities accounts and commodity
accounts.
The Loan Agreement also contains customary indemnification obligations and customary events of default, including, among other
things, failure to fulfill certain of the Companys obligations under the Loan Agreement, the occurrence of a material adverse change in the Companys business, operations, or condition (financial or otherwise), a material impairment of
the prospect of repayment of any portion of the loan, or a material impairment in the perfection or priority of the Lenders lien in the collateral or in the value of such collateral. In the event of default by the Company under the Loan
Agreement, the Lenders would be entitled to exercise their remedies thereunder, including the right to accelerate the debt, upon which the Company may be required to repay all amounts then outstanding under the Loan Agreement, which could harm the
Companys financial condition. The Company was in compliance with all applicable covenants set forth in the Loan Agreement as of September 30, 2017 and December 31, 2016. The principal and related interest payments due under the Loan
Agreement have been classified as current liabilities at September 30, 2017 due to the considerations discussed in Note 1 and the assessment that a material adverse change under the Loan Agreement is not within the Companys control. The
Company has not been notified of an event of default by the Lenders as of the date of the filing of this Form
10-Q.
The Company recorded interest expense related to the Term Loan Facility of $0.2 million and $0.3 during the three months ended
September 30, 2017 and 2016, respectively. Interest expense of $0.8 million were recorded during each of the nine months ended September 30, 2017 and 2016. The annual effective interest rate on the note payable, including the
amortization of the debt discounts and accretion of the final payment, is 11.72%.
13
Future principal payments under the Loan Agreement as of September 30, 2017 were as follows
(in thousands):
|
|
|
|
|
Years ending December 31,
|
|
|
|
2017 (for the remaining three months) (1)
|
|
$
|
639
|
|
2018
|
|
|
4,022
|
|
2019
|
|
|
2,871
|
|
|
|
|
|
|
Total principal payments
|
|
|
7,532
|
|
Unamortized discount on notes payable
|
|
|
(159
|
)
|
|
|
|
|
|
Notes payable, balance
|
|
$
|
7,373
|
|
|
|
|
|
|
(1)
|
Amount does not include the principal amount payable at September 30, 2017, which was included in accrued liabilities (Note 4).
|
Future interest payments under the Loan Agreement as of September 30, 2017 amounted to $0.9 million.
6. Stockholders Equity
On
May 15, 2015, the Company entered into a sales agreement (the Sales Agreement) with Cowen and Company, LLC (Cowen), pursuant to which the Company may issue and sell shares of its common stock having aggregate sales
proceeds of up to $25.0 million from time to time through an at the market equity program under which Cowen acts as sales agent.
During the nine months ended September 30, 2017, the Company sold an aggregate of 2,889,015 shares of common stock under the Sales
Agreement, at an average price of approximately $1.55 per share, for net proceeds of $4.3 million after deducting commissions and other transaction costs. As of September 30, 2017, $9.3 million of common stock remained available to be
sold under the Sales Agreement, subject to certain conditions specified therein.
In September 2017, the Company issued a total of 4,083
shares of common stock pursuant to the cashless exercise of certain warrants at an exercise price of $0.67 per share. In March 2017, the Company issued 20,794 shares of common stock pursuant to the cashless exercise of certain warrants at an
exercise price of $0.67 per share.
7. Stock-Based Compensation
On July 15, 2013, in connection with the Merger, the Company assumed the existing Tranzyme 2011 Stock Option and Incentive Plan, which has
since been amended and restated and is now referred to as the Ocera Therapeutics, Inc. Fourth Amended and Restated 2011 Stock Option and Incentive Plan (the 2011 Plan). The 2011 Plan provides for the granting of incentive stock options,
nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock units (RSUs), performance stock awards, performance cash awards and other stock awards to employees, officers, directors and consultants.
The Company recognized stock-based compensation expense within the condensed consolidated statements of operations and comprehensive loss
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Research and development
|
|
$
|
246
|
|
|
$
|
139
|
|
|
$
|
712
|
|
|
$
|
516
|
|
General and administrative
|
|
|
601
|
|
|
|
864
|
|
|
|
2,180
|
|
|
|
2,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
847
|
|
|
$
|
1,003
|
|
|
$
|
2,892
|
|
|
$
|
3,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2017, there was unrecognized stock-based compensation expense of $3.9 million,
which the Company expects to recognize over a weighted average period of 2.03 years.
14
Stock Options
Stock-based compensation expense for stock options is estimated at the grant date based on the fair-value using the Black-Scholes option
pricing model. The fair value of employee stock options is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of all stock options granted was estimated using the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2017
|
|
|
2016
|
|
2017
|
|
|
2016
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rates
|
|
|
|
%
|
|
0.59% - 1.39%
|
|
|
|
%
|
|
0.59% - 1.97%
|
Expected term in years
|
|
|
|
|
|
0.95 - 4.43
|
|
|
|
|
|
0.95 - 8.14
|
Expected volatility
|
|
|
|
%
|
|
73% - 87%
|
|
|
|
%
|
|
73% - 94%
|
Restricted Stock Units
On June 20, 2017, the Company granted its
non-employee
directors 75,000 RSUs. The RSUs shall vest
in full on the earlier of the one year anniversary of the grant or the next annual meeting of shareholders, subject to the recipients continued service as a director of the Company on each vesting date.
On March 29, 2017, the Company granted 1,065,000 RSUs to certain employees and consultants. The RSUs vest according to the following
schedule: 50% of the RSUs vests on December 31, 2017 and the remainder vests on December 31, 2018, in each case subject to the recipients continued employment or service on each vesting date.
8. Net Loss Per Share
Basic net loss per
share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common
stock equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. Potentially dilutive securities which include outstanding warrants, stock options and restricted stock units have been excluded
from the computation of diluted net loss per share as their effect would be anti-dilutive. For all periods presented, basic and diluted net loss were the same.
The following table presents the computation of net loss per share (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,269
|
)
|
|
$
|
(7,125
|
)
|
|
$
|
(19,085
|
)
|
|
$
|
(21,742
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding used to compute net loss per share, basic and
diluted
|
|
|
26,511,064
|
|
|
|
22,096,610
|
|
|
|
25,663,158
|
|
|
|
21,532,953
|
|
Net loss per share of common stock, basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.24
|
)
|
|
$
|
(0.32
|
)
|
|
$
|
(0.74
|
)
|
|
$
|
(1.01
|
)
|
15
The following potentially dilutive common shares outstanding were excluded from the computation
of diluted net loss per share for the periods presented as the effect of their inclusion would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
2017
|
|
|
2016
|
|
Common stock warrants
|
|
|
863,686
|
|
|
|
1,003,984
|
|
Common stock options
|
|
|
3,644,856
|
|
|
|
3,587,622
|
|
Restricted stock units
|
|
|
1,140,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive securities
|
|
|
5,648,542
|
|
|
|
4,591,606
|
|
|
|
|
|
|
|
|
|
|
16
9. Commitments and Contingencies
From time to time, the Company may be involved in disputes, including litigation, relating to claims arising out of operations in the normal
course of business. Any of these claims could subject the Company to costly legal expenses and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, its insurance carriers may deny
coverage or its policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on the Companys condensed consolidated results of
operations and financial position. Additionally, any such claims, whether or not successful, could damage the Companys reputation and business. The Company is currently not a party to any legal proceedings, the adverse outcome of which, in
managements opinion, individually or in the aggregate, would have a material adverse effect on the Companys condensed consolidated results of operations or financial position.
UCL Business PLC
In December 2008, the
Company licensed rights to
OCR-002
from UCL Business PLC, an entity affiliated with the University College London (UCL), for the exclusive worldwide rights to develop and commercialize
OCR-002
and related technologies for any use. The agreement was amended in July 2011, February 2013, July 2015 and October 2017. Pursuant to the October 2017 amendment, the Company made a
non-refundable
payment of $0.5 million in October 2017, which shall be credited against the future milestone payments related to clinical and regulatory events for
OCR-002.
The Company may be required to make future milestone payments to UCL totaling up to $19.5 million upon the achievement of various milestones related to clinical and regulatory events for
OCR-002.
The Company may also be required to pay milestone payments totaling up to $35.0 million upon the achievement of various milestones related to future net sales of
OCR-002.
The Company is also obligated to pay tiered royalties in the low to
mid-single
digits on potential future net sales of the licensed product candidate.
Purchase Commitments
As of
September 30, 2017, the Company had $0.2 million in clinical contractual commitments that have not been recognized as a liability on the condensed consolidated balance sheets and are
non-cancelable.
Rent
The following is a schedule of
non-cancelable
future minimum payments for operating leases as of September 30, 2017 (in thousands):
|
|
|
|
|
Years ending December 31,
|
|
|
|
2017 (for the remaining three months)
|
|
$
|
99
|
|
2018
|
|
|
109
|
|
2019 and beyond
|
|
|
8
|
|
|
|
|
|
|
Total future minimum payments for operating leases
|
|
$
|
216
|
|
|
|
|
|
|
10. Subsequent events
Merger Agreement
On November 1,
2017, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with MAK LLC, a Delaware limited liability company (Parent), MEH Acquisition Co., a Delaware Corporation and a direct wholly-owned
subsidiary of Parent (Purchaser), and for limited purposes, Mallinckrodt plc, an Irish public limited company and the ultimate parent entity of Parent and Purchaser (Mallinckrodt).
Pursuant to the terms and subject to the conditions of the Merger Agreement, Purchaser commenced a tender offer (the Offer) on
November 9, 2017 to acquire all of the outstanding shares of the Companys common stock (the Shares), at an offer price of (i) $1.52 per Share in cash (approximately $42 million in the aggregate) (the Closing
Amount), plus (ii) one
non-transferable
contingent value right per Share (each, a CVR), which represents the contractual right under a Contingent Value Rights Agreement (the CVR
Agreement) to be entered into among Parent, Continental Transfer & Trust Company, as rights agent (the Rights Agent), and for limited purposes, Mallinckrodt, at or prior to the time that Purchaser accepts for payment all
Shares tendered (and not validly withdrawn) pursuant to the Offer (the Offer Acceptance Time) to receive one
17
or more payments in cash potentially totaling up to $2.58 per CVR (approximately $75 million in the aggregate) (the Contingent Consideration), contingent upon the achievement of
certain milestones (one CVR together with the Closing Amount, or any higher amount per Share paid pursuant to the Offer, the Offer Price), in each case without any interest thereon and subject to any required tax withholdings. As a
result, the maximum amount payable pursuant to the Merger Agreement is $4.10 per Share.
The obligation of Purchaser to purchase Shares
tendered in the Offer is subject to the satisfaction or waiver of a number of conditions set forth in the Merger Agreement, including (i) that there shall have been validly tendered and not validly withdrawn Shares that, considered together
with all other Shares, if any, beneficially owned by Parent and affiliated entities, represent one more Share than 50% of the total number of Shares outstanding at the time of the expiration of the Offer (calculated on a fully-diluted basis in
accordance with the Merger Agreement) (the Minimum Condition), and (ii) those other conditions set forth in Annex I to the Merger Agreement.
The Offer will initially expire at one minute after 11:59 p.m. Eastern Time on December 8, 2017. Purchaser may, in its discretion and
without the consent of the Company, extend the Offer on one or more occasions in accordance with the terms set forth in the Merger Agreement and the applicable rules and regulations of the Securities and Exchange Commission (the SEC).
Purchaser is not required to extend the Offer beyond the earlier to occur of the valid termination of the Merger Agreement and the Outside Date (as defined below) (the Extension Deadline). Purchaser may not terminate the Offer, or permit
the Offer to expire, prior to the Extension Deadline without the prior written consent of the Company.
As soon as practicable following
the Offer Acceptance Time and upon the terms and subject to the conditions set forth in the Merger Agreement and in accordance with Section 251(h) of the Delaware General Corporation Law, Purchaser will merge with and into the Company, with the
Company surviving as a wholly-owned subsidiary of Parent (the Merger), without a meeting or vote of stockholders of the Company. At the effective time of the Merger (the Effective Time), the Shares not purchased pursuant to
the Offer (other than Shares held by the Company, Parent, its affiliated entities or by stockholders of the Company who have perfected their statutory rights of appraisal under Delaware law) will each be converted into the right to receive the Offer
Price.
In addition, at the Effective Time, each option to purchase Shares (a Company Stock Option) that is then outstanding
and unexercised, whether or not vested and with respect to which the applicable exercise price per Share is less than the Closing Amount (each, an In the Money Company Stock Option), will be cancelled and converted into the right of the
holder of such In the Money Company Stock Option to receive, for each Share underlying such In the Money Company Stock Option, (i) an amount in cash equal to the excess, if any, of the Closing Amount over the applicable exercise price for such
Share, and (ii) one CVR.
At the Effective Time, each Company Stock Option other than an In the Money Company Stock Option that is
outstanding and unexercised, whether or not vested (each, an Out of the Money Company Stock Option), will be cancelled and converted into the right to receive one or more cash payments, if any, from Parent with respect to each Share
subject to the Out of the Money Company Stock Option upon each date that a payment would be required to a holder of a CVR under the terms of the CVR Agreement (each such date, a Milestone Payment Date), equal to (i) the amount by
which the Per Share Value Paid (as defined in the Merger Agreement) exceeds the exercise price payable per Share subject to such Out of the Money Company Stock Option, less (ii) the amount of all payments previously paid with respect to such
Out of the Money Company Stock Option. Notwithstanding the foregoing, any Out of the Money Options with an exercise price per Share equal to or greater than $4.10 will be cancelled at the Effective Time without any consideration payable therefor.
At the Effective Time, each restricted stock unit (RSU), whether vested or unvested, that is outstanding immediately prior to
the Effective Time, shall become fully vested and shall be cancelled and converted at the Effective Time into the right of the holder of such RSU to receive, for each Share underlying such RSU, (i) an amount in cash, equal to the Closing Amount
and (ii) one CVR.
In addition, at the Effective Time, each warrant to purchase Shares (a Company Warrant), that is
outstanding and unexercised immediately prior to the Effective Time shall be cancelled and converted into the right of the holder of such Company Warrant to receive, for each Share underlying such Company Warrant, (i) an amount in cash equal to
the excess, if any, of the Closing Amount over the applicable exercise price for such Share, and (ii) one (1) CVR. As of the Effective Time, any Company Warrant with respect to which the applicable exercise price per Share is greater than
the Closing Amount shall be cancelled without any consideration payable therefor (the Cancelled Warrants).
The Merger
Agreement includes representations, warranties and covenants of the parties customary for a transaction of this nature. Among other things, until the earlier of the termination of the Merger Agreement or the Effective Time, the Company has agreed to
operate its business in the ordinary course consistent with past practice and has agreed to certain other
18
operating covenants, as set forth more fully in the Merger Agreement. The Merger Agreement also prohibits the Companys ability to solicit, initiate, knowingly facilitate or knowingly
encourage any proposals relating to alternative transactions and restricts the Companys ability to furnish information to, or participate in any discussions or negotiations with, any third party with respect to any such transaction, subject to
certain limited exceptions.
In the event the Offer Acceptance Time occurs on or before December 31, 2017 and the Companys cash
and cash equivalents are insufficient to pay and fully discharge the Indebtedness (as defined in the Merger Agreement) and Transaction Expenses (as defined in the Merger Agreement) on or prior to Closing (the Closing Shortfall) by more
than $250,000, the aggregate amount payable pursuant to the first occurring Milestone Payment (as defined below) shall be reduced by the full amount of the Closing Shortfall. In the event the Offer Acceptance Time occurs after the December 31,
2017 and the Indebtedness and Transaction Expenses due and payable as if the Closing were to occur on December 31, 2017 exceed the Companys aggregate balance of cash and cash equivalents as of December 31, 2017 by more than $250,000
(the Measurement Date Shortfall), the first occurring Milestone Payment shall be reduced by the full amount of the Measurement Date Shortfall.
The board of directors of the Company has unanimously adopted resolutions recommending that the Companys stockholders accept the Offer
and tender their Shares to Purchaser pursuant to the Offer.
The Merger Agreement may be terminated under certain circumstances, including
in specified circumstances in connection with superior proposals, or if the transaction is not consummated by the Outside Date. Upon the termination of the Merger Agreement, under specified circumstances, the Company will be required to pay Parent a
termination fee of $1,680,000.
In addition, subject to the terms of the Merger Agreement, either the Company or Parent may terminate the
Merger Agreement, at any time prior to the Offer Acceptance Time, if the Merger has not been consummated prior to 5:00 p.m., Eastern Time, on May 1, 2018 (the Outside Date).
During the three and nine months ended September 30, 2017, the Company incurred transaction expenses related to the merger of
$0.4 million, which are included in general and administrative expenses. The Company will owe $0.8 million payable to our financial advisor subject to the consummation of the Merger.
Tender and Support Agreement
Concurrently with the execution and delivery of the Merger Agreement, each director and executive officer of the Company, and certain
stockholders affiliated with such directors and executive officers (each a Tendering Stockholder), entered into a Tender and Support Agreement (the Tender Agreement) with Parent and Purchaser, pursuant to which each Tendering
Stockholder agreed, among other things, to tender his, her or its Shares and Company Stock Options that are exercised prior to the Offer Acceptance Time, if any (collectively, the Subject Shares), pursuant to the Offer and, if necessary,
vote his, her or its Subject Shares against any other acquisition proposal, including any superior proposal, and against any other proposed action, agreement or transaction involving the Company that is intended, or would reasonably be likely, to
prevent, materially impede, materially delay or otherwise materially and adversely affect or prevent the consummation of the Offer, the Merger or any other transaction contemplated by the Merger Agreement.
Contingent Value Rights Agreement
At or
prior to the Offer Acceptance Time, Parent and Mallinckrodt will enter into the CVR Agreement with the Rights Agent governing the terms of the Contingent Consideration. As provided in the Merger Agreement, each share of Company common stock
outstanding (other than certain excluded shares) and each share underlying an In the Money Company Stock Option, Company Warrant (other than Cancelled Warrants) and RSU immediately prior to the Effective Time, or the Offer Acceptance Time in the
case of a share of Company common stock validly tendered pursuant to the Offer, will be converted automatically into the right to receive, in addition to the Closing Amount, one CVR, which represents the right to receive the Contingent Consideration
if the milestones set forth below are achieved on or before December 31, 2029. The amounts of each of the payments under the CVR will be determined by dividing the aggregate milestone payment amounts set forth below, if achieved (as may be
reduced by any payments to certain holders of Out of the Money Company Options or in the event of a Closing Shortfall or Measurement Date Shortfall, if any, each such aggregate milestone payment as may be adjusted, a Milestone Payment),
by the number of CVRs outstanding on the Record Date (as defined in the CVR Agreement).
19
|
|
|
IV Milestone
. Parent will be obligated to pay an aggregate amount equal to $10,000,000 upon the enrollment of the first patient in a Phase 3 clinical trial of an intravenous formulation of the Product (as defined
in the CVR Agreement) by Parent, any of its affiliates or their respective licensee or sublicensee with respect to rights to develop or commercialize the Product.
|
|
|
|
Oral Milestone
. Parent will be obligated to pay an aggregate amount equal to $15,000,000 upon the enrollment of the first patient in a Phase 3 clinical trial of an oral formulation of the Product by Parent, any
of its affiliates or their respective licensee or sublicensee with respect to rights to develop or commercialize the Product.
|
|
|
|
Product Sales Milestone
. Parent will be obligated to pay an aggregate amount equal to $50,000,000 upon the first occurrence of the achievement of cumulative Product Sales (as defined in the CVR Agreement) in
excess of $500,000,000, by Parent, its affiliates and any other Selling Entity (as defined in the CVR Agreement) and any successors, assigns and transferees.
|
The right to the Contingent Consideration as evidenced by the CVR Agreement is a contractual right only and will not be transferable, except
in the limited circumstances specified in the CVR Agreement. The CVRs will not be evidenced by a certificate or other instrument and will not be registered or listed for trading. The CVRs will not have any voting or dividend rights and will not
represent any equity or ownership interest in Parent, Purchaser, the Company or any of their affiliates. There can be no assurance that any of the milestones set forth above will be achieved or that any holders of CVRs will receive payments with
respect thereto.
Amendment to Bylaws
On November 1, 2017, the board of directors of the Company approved an amendment to the bylaws of the Company (as amended, the
Bylaws) to explicitly provide that the Court of Chancery of the State of Delaware (or, in case such court does not have jurisdiction, the Federal District Court for the District of Delaware or other competent state court of the State of
Delaware) will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of
the Company to the Company or the Companys stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law or the certificate of incorporation or Bylaws, or (iv) any action
asserting a claim against the Company governed by the internal affairs doctrine. This amendment was effective upon adoption by the board of directors of the Company.