Business Context and Reporting Period
The submitted filing is Histogenics Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017, not an Ocugen filing. Histogenics was a clinical-stage cell therapy company developing NeoCart, a cartilage-repair product candidate in a U.S. Phase 3 trial. Enrollment was completed in June 2017; management expected top-line data and a potential FDA Biologics License Application filing in the third quarter of 2018, subject to successful trial results.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $0.0 million in 2017 and 2016 | $0.0 million in 2017 and 2016 |
| Research and development expense | $3.5 million vs. $4.9 million | $12.2 million vs. $16.3 million |
| General and administrative expense | $2.2 million vs. $1.8 million | $6.7 million vs. $6.1 million |
| Net loss | $6.0 million vs. $9.3 million | $19.6 million vs. $25.3 million |
| Net loss attributable to common stockholders | $5.1 million vs. $9.2 million | $16.4 million vs. $25.2 million |
| Loss per common share | $0.23 vs. $0.70 | $0.74 vs. $1.90 |
| Net cash used in operating activities | Not presented for the quarter | $18.7 million vs. $19.8 million |
There was no revenue or operating profit, so gross and operating margins are not meaningful. Total operating expenses were $5.7 million for the quarter and $18.9 million for the nine-month period. The company reported an accumulated deficit of $201.4 million at September 30, 2017.
- Cash and cash equivalents were $10.8 million, and marketable securities were $1.8 million, for total cash and liquid investments of approximately $12.6 million.
- Total liabilities were $20.6 million, including a $13.9 million warrant liability, $3.0 million of accrued expenses due to Intrexon, and $0.3 million of current equipment-loan obligations.
- Stockholders’ equity was negative $4.8 million at September 30, 2017, compared with positive equity of $13.6 million at December 31, 2016.
- Cash used in investing activities was $2.0 million, primarily reflecting purchases of marketable securities of $8.0 million, partly offset by maturities of $6.2 million.
- Financing activities used $0.4 million in the first nine months of 2017, compared with $27.2 million provided in the comparable 2016 period from the private placement.
Material Changes Versus the Prior Comparable Period
- Quarterly research and development expense declined 29%, primarily because of lower collaboration, consulting, temporary labor, clinical trial, repairs and maintenance, and patient recruitment costs.
- Nine-month research and development expense declined 25%, mainly due to lower collaboration and consulting costs, patient recruitment, salaries, clinical trial costs, materials, and facility expenses.
- General and administrative expense increased 26% for the quarter and 9% for the nine-month period, driven by higher salary-related, consulting, repairs and maintenance, facility, and stock-based compensation costs.
- Net loss improved primarily because the 2016 period included $3.1 million of warrant expense related to the private placement. The 2017 period included a $0.7 million unfavorable change in the fair value of the warrant liability for the nine months.
- Cash used in operations improved by $1.1 million, but the company had no comparable financing proceeds in 2017. Cash and cash equivalents fell from $31.9 million at December 31, 2016 to $10.8 million at September 30, 2017.
- Common shares outstanding increased to 22.8 million from 20.6 million at December 31, 2016. Potential dilution included approximately 3.8 million shares issuable upon conversion of Series A preferred stock and 13.6 million shares subject to warrants.
Guidance, Outlook, Risks, and Unusual Items
- Management expected total operating expenses to be lower over the next four quarters, with research and development spending declining as the NeoCart Phase 3 trial progressed and general and administrative spending remaining broadly consistent.
- Existing cash, cash equivalents, and marketable securities were expected to fund operations only through approximately the middle of 2018. The filing states that this created substantial doubt about the company’s ability to continue as a going concern.
- Additional capital was expected to be required to complete the BLA process, expand manufacturing, commercialize NeoCart if approved, and advance other product candidates. Potential financing could dilute existing holders or impose additional debt obligations and covenants.
- Key execution risks included failure of the Phase 3 trial, FDA rejection or delay of the BLA, additional clinical requirements, manufacturing technology transfer and raw-material comparability requirements, production capacity, reimbursement, market acceptance, competition, intellectual-property protection, and dependence on third-party suppliers and service providers.
- The warrant liability was measured using a Level 3 Monte Carlo valuation and totaled $13.9 million at September 30, 2017. Changes in its fair value may cause substantial quarter-to-quarter earnings volatility.
- The company was in compliance with its equipment-loan covenants. It had $0.3 million outstanding at September 30, 2017, with scheduled maturities through May 2018.
- Licensing arrangements included potential approval and commercial milestones, royalties, and other contingent payments, including a $3.0 million FDA-approval payment under the Hydrogel License and a $0.3 million FDA-approval payment under the Stanford license.
- Management reported effective disclosure controls and procedures as of September 30, 2017 and no material changes in internal control over financial reporting.
Most Important Facts to Verify
- Verify the issuer identity: the supplied filing is for Histogenics Corporation, whereas the request identifies Ocugen, Inc.
- Verify whether the reported cash runway through mid-2018 and the going-concern disclosure remained accurate after the filing date.
- Verify subsequent NeoCart Phase 3 results, FDA interactions, BLA filing status, and any manufacturing comparability requirements.
- Verify subsequent equity, debt, strategic, or other financing transactions and their dilution effects.
- Verify the status and valuation impact of the $13.9 million warrant liability and the outstanding preferred-stock conversion and warrant shares.
- Verify the effect of potential licensing milestones, royalties, Intrexon obligations, and other contingent commitments on future cash needs.