Business Context and Reporting Period
This Form 10-Q was filed by Histogenics Corporation, not Ocugen, Inc., for the quarter and six months ended June 30, 2019. Histogenics was a clinical-stage cell-therapy company focused primarily on NeoCart, an investigational cartilage-repair product. After its Phase 3 trial failed to meet the primary endpoint and the FDA indicated that an additional Phase 3 trial would be required, Histogenics discontinued NeoCart development and shifted its focus to a proposed merger with Ocugen.
The interim financial statements are unaudited and prepared under U.S. GAAP. Histogenics reported no product revenue and had not generated product revenue since inception.
Financial Highlights
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $0.0 million in 2019 and 2018 | $0.0 million in 2019 and 2018 |
| Research and development expense | $0.4 million vs. $4.5 million | $2.0 million vs. $7.7 million |
| General and administrative expense | $2.6 million vs. $2.8 million | $5.5 million vs. $5.6 million |
| Restructuring expense | $0.0 million vs. $0.0 million | $2.8 million vs. $0.0 million |
| Net loss | $3.2 million vs. $3.8 million | $12.7 million vs. $18.6 million |
| Net loss per share | $0.03 vs. $0.13 | $0.14 vs. $0.64 |
| Operating cash flow | Not separately provided | $(11.5) million vs. $(1.9) million |
Six-month net loss attributable to common stockholders was $12.6 million, compared with $18.1 million in the prior-year period. The lower per-share loss primarily reflects the increase in weighted-average shares outstanding following warrant exercises and other equity activity.
Balance Sheet, Liquidity and Capitalization
- Cash and cash equivalents were $2.8 million at June 30, 2019, compared with $15.5 million at December 31, 2018.
- Total assets were $3.2 million, versus $17.4 million at year-end 2018.
- Total liabilities were $11.9 million, including $10.0 million of deferred revenue, $1.1 million accrued expenses due to Intrexon, and a $15 thousand warrant liability.
- Stockholders’ deficit was $8.7 million at June 30, 2019, compared with a deficit of $0.5 million at December 31, 2018. Accumulated deficit was $229.5 million.
- Cash, cash equivalents and restricted cash decreased by $12.9 million during the first six months of 2019. Financing cash use included $1.8 million paid to extinguish lease obligations, partially offset by $0.3 million from warrant exercises.
- The company had no material conventional debt balance reported on the June 30 balance sheet, although it had contractual obligations and liabilities associated with leases, licenses, deferred revenue and related parties.
Material Changes Versus the Prior Comparable Period
- Research and development expense declined 74% for the first six months, reflecting discontinuation of NeoCart development and the related operating reductions.
- Histogenics recorded $2.8 million of employee severance expense and a $0.8 million impairment charge in the first six months of 2019.
- All employees were terminated by May 2019; former executives and other personnel remained as consultants to support the merger or potential wind-down.
- The company vacated its Waltham and Lexington facilities, paid $1.8 million to settle lease obligations and recorded a $0.3 million loss on extinguishment.
- Warrants were exercised after their exercise prices were reduced to $0.01, generating approximately $0.3 million of cash proceeds in aggregate. The number of common shares outstanding increased to 94.6 million from 62.0 million at December 31, 2018.
- The change in fair value of the warrant liability produced a $1.4 million expense in the first six months of 2019, compared with a $5.3 million expense in the prior-year period. These non-cash changes materially affected reported results.
- The $10.0 million upfront payment received from MEDINET remained deferred revenue because the underlying contract was wholly unperformed. The filing indicated that the liability was expected to be eliminated through purchase accounting if the merger and related asset sale closed.
Merger, Outlook, Risks and Unusual Items
Histogenics entered into a stock-for-stock merger agreement with Ocugen on April 5, 2019, amended June 14, 2019. The transaction contemplated that Ocugen equity holders would receive approximately 83% of Histogenics before the planned financing and approximately 86.24% after the approximately $25 million pre-merger financing, while existing Histogenics securityholders would retain approximately 13.76% on the stated fully diluted basis. The transaction required stockholder approvals, regulatory and listing conditions and other customary closing conditions.
Histogenics also agreed to sell substantially all NeoCart-related assets to Medavate for $6.5 million, conditioned on completion of the merger. Management expected the merger to close in the third quarter of 2019. If the merger failed or was delayed, the company stated that it would need additional financing or another strategic transaction and might be required to wind down or dissolve.
Management disclosed substantial doubt about the company’s ability to continue as a going concern. Existing cash was expected to fund projected needs only through the anticipated merger closing. The company had no product revenue, expected continuing losses and did not believe it could raise sufficient capital on reasonable terms to restart NeoCart development.
- Nasdaq granted continued listing through September 30, 2019 to allow completion of the merger, but the company remained deficient under minimum bid-price and market-value-of-listed-securities requirements.
- The company reported ineffective disclosure controls and a material weakness in internal controls over complex and unusual transactions, including warrant valuation and accounting for the Intrexon termination liability. Remediation procedures had begun but were not yet fully operational.
- Potential merger termination fees were up to $0.6 million payable by Histogenics or $0.7 million payable by Ocugen, depending on the circumstances; expense reimbursement obligations could also apply.
- The merger exchange ratio was not adjustable for changes in Histogenics’ stock price, creating valuation and dilution risk for both parties.
- Completion of the merger, the $25 million financing and the $6.5 million Medavate asset sale were not assured.
Facts Investors Should Verify
- Whether the Ocugen merger, pre-merger financing and Medavate asset sale closed, and the final ownership percentages and exchange ratio.
- Whether Histogenics retained Nasdaq listing status and satisfied the combined company’s initial listing requirements.
- The company’s post-June 30, 2019 cash balance, financing activity, merger-related expenses and any changes to going-concern disclosures.
- Final treatment of the $10.0 million MEDINET deferred-revenue liability and the NeoCart assets.
- Whether the disclosed internal-control material weakness was fully remediated and whether any financial statement adjustments were subsequently required.
- The number of shares, warrants, options and other securities outstanding after the merger and financing, including the dilution effect on legacy Histogenics holders.