Business Context and Reporting Period
This filing is Histogenics Corporation’s unaudited Form 10-Q for the three months ended March 31, 2019. Although the request identifies Ocugen, Inc., the filing registrant is Histogenics Corporation, which subsequently entered into a proposed merger with Ocugen.
Histogenics was a clinical-stage restorative cell therapy company focused primarily on NeoCart, an investigational cartilage-repair product. After NeoCart’s Phase 3 trial failed to meet its primary endpoint and the FDA indicated that an additional Phase 3 trial would be required, Histogenics discontinued development and began pursuing strategic alternatives.
Financial Highlights
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No change |
| Research and development expense | $1.6 million | $3.3 million | Down 52% |
| General and administrative expense | $2.9 million | $2.8 million | Up 4% |
| Restructuring expense | $2.8 million | $0 | New expense |
| Asset impairment loss | $0.8 million | $0 | New expense |
| Operating loss | $8.1 million | $6.1 million | Higher loss |
| Net loss | $9.4 million | $14.8 million | Loss improved |
| Net loss attributable to common stockholders | $9.4 million | $14.4 million | Loss improved |
| Basic and diluted loss per share | $0.12 loss | $0.52 loss | Improved |
| Cash used in operating activities | $8.5 million | $3.3 million provided | Adverse change |
The company had no product revenue and had never generated product revenues. The change in fair value of the warrant liability produced a $1.4 million expense in Q1 2019 versus an $8.8 million expense in Q1 2018, materially affecting the year-over-year net loss comparison.
- Cash and cash equivalents at March 31, 2019 were $7.4 million; cash, cash equivalents and restricted cash totaled $7.5 million.
- Accumulated deficit was $226.2 million, compared with $216.8 million at December 31, 2018.
- Total liabilities were $20.4 million and stockholders’ deficit was $5.5 million at March 31, 2019.
- Lease liabilities totaled $8.0 million following adoption of the new lease accounting standard.
- Deferred revenue remained $10.0 million, representing the upfront MEDINET payment that had not been recognized as revenue.
- The company had no traditional term debt outstanding in the balance sheet presented, but had significant lease obligations and accrued obligations.
Material Changes Versus the Prior Comparable Period
- Research and development spending declined by $1.7 million as NeoCart development was suspended and operations were reduced.
- Restructuring charges of approximately $2.8 million were recorded in the financial statements, while management’s discussion describes approximately $3.8 million of severance-related expenses; the filing text does not clearly reconcile the difference.
- The company terminated substantially all employees, leaving one employee and a limited number of consultants to support the proposed merger or a wind-down.
- Operating cash flow changed from $3.3 million provided in Q1 2018 to $8.5 million used in Q1 2019. The prior-year amount benefited from receipt of the $10.0 million MEDINET upfront payment, which was recorded as deferred revenue.
- Common shares outstanding increased from 62.0 million at December 31, 2018 to 94.6 million at March 31, 2019, primarily due to warrant exercises.
- Warrant liability declined from $2.5 million to $0.01 million after warrant exercises and fair-value changes.
- The company adopted ASC 842 for leases on January 1, 2019, recognizing a $6.4 million right-of-use asset and $8.0 million of lease liabilities.
Merger, Outlook, Risks and Unusual Items
On April 5, 2019, Histogenics entered into a stock-for-stock merger agreement with Ocugen, announced April 8, 2019. Former Ocugen equity holders were expected to own approximately 90% of the combined company, while pre-merger Histogenics stockholders were expected to own approximately 10%, subject to adjustments that could provide Histogenics stockholders with up to an additional 5% based on specified cash and transaction factors.
Completion was subject to stockholder approvals, Nasdaq listing, customary representations and covenants, and other closing conditions. If terminated under specified circumstances, termination fees of up to $0.6 million payable by Histogenics or $0.7 million payable by Ocugen could apply, with certain expense reimbursement obligations also possible.
- Management stated that existing cash was expected to fund operations only into the middle of 2019 and that substantial doubt existed regarding the company’s ability to continue as a going concern.
- If the merger were delayed or not completed, Histogenics could require additional financing, pursue another strategic transaction, sell or license NeoCart assets, or dissolve and liquidate.
- On April 30, 2019, Histogenics terminated its Waltham lease, paid $1.3 million, and expected to record an additional $0.5 million loss in Q2 2019.
- On May 8, 2019, it agreed to terminate its Lexington lease, paid $0.3 million, and allowed the landlord to retain a $0.1 million security deposit.
- On May 8, 2019, it agreed to sell substantially all NeoCart-related assets to Medavate for $6.5 million, subject to consummation of the Ocugen merger.
- Nasdaq had notified Histogenics that it failed to meet the $1.00 minimum bid-price requirement. The company requested a hearing and faced potential delisting; it also had a separate deficiency concerning the $35 million market-value requirement.
- The company identified a material weakness in internal control over financial reporting involving complex and unusual transactions, including warrant valuation and accounting for the Intrexon termination liability. Remediation was not yet complete.
- The MEDINET agreement remained wholly unperformed, with $10.0 million of deferred revenue. Management anticipated termination in 2019, which could result in recognition of the deferred amount, but timing and completion were uncertain.
Most Important Facts to Verify
- Whether the Ocugen merger was completed, terminated, or amended, and the final ownership percentages and exchange ratio.
- Whether the $6.5 million NeoCart asset sale closed and whether proceeds were received.
- Actual cash burn and liquidity after lease termination payments, merger expenses, and other wind-down costs.
- Whether Nasdaq granted continued listing or whether Histogenics was delisted.
- The final treatment and timing of the $10.0 million MEDINET deferred revenue balance.
- Whether the identified material weakness in internal controls was remediated.
- The amount ultimately available to Histogenics stockholders if the merger failed and the company pursued liquidation.