Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and notes included in Part I
“Financial Information”, Item I “Financial Statements” of this Quarterly Report on Form 10-Q (the “Report”) and the audited financial statements and related footnotes included in our Annual Report on Form 10-K for the year ended December 31,
2020.
Forward-Looking Statements
Certain statements contained in this Report are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give current expectations or forecasts of future events or our future financial or operating performance. We
may, in some cases, use words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, and similar expressions that
convey uncertainty of future events or outcomes to identify these forward-looking statements.
These forward-looking statements reflect our management’s beliefs and views with respect to future events, are based on estimates and assumptions as of the date of this Report and are subject to
risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in these forward-looking statements. We discuss many of these risks in greater detail under Part I, Item 1A “Risk
Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and subsequent reports filed with or furnished to the Securities and Exchange Commission (the “SEC”). Moreover, we operate in a very competitive and rapidly changing
environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Any forward-looking statement made by us in this Report speaks only as of the date hereof or as of the date specified herein. We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable laws or regulations.
Overview
Ocuphire is a clinical-stage ophthalmic biopharmaceutical company focused primarily on developing and commercializing therapies for the treatment of several eye disorders. Ocuphire’s pipeline
currently includes two small molecule product candidates targeting front and back of the eye indications.
Its lead product candidate, Nyxol® Eye Drops (“Nyxol”), is a once-daily eye drop formulation of phentolamine mesylate
designed to reduce pupil diameter and improve visual acuity. As a result, Nyxol can potentially be used for the treatment of multiple indications such as dim light or night vision disturbances (“NVD”), reversal of pharmacologically-induced
mydriasis (which refers to the use of pharmacological agents to dilate the pupil for office-based eye exams) and presbyopia (a gradual, age-related loss of the eyes’ ability to focus on nearby objects). Ocuphire management believes this
multiple indication potential represents a significant market opportunity. Nyxol has been studied across three Phase 1, five Phase 2, and one Phase 3 trials totaling over 500 patients and has demonstrated promising clinical data for use in
multiple ophthalmic indications. Ocuphire initiated a Phase 3 trial for reversal of pharmacologically-induced mydriasis (“RM”) in the fourth quarter of 2020 and reported positive top-line results within four months on March 15, 2021. Ocuphire
initiated a Phase 2 trial in combination with low dose pilocarpine for presbyopia (VEGA-1) in the first quarter of 2021 and reported positive top-line results on June 30, 2021. The company is evaluating further the VEGA-1 results and designing
pivotal Phase 3 trials (VEGA-2/3) to be conducted in the first half of 2022. Ocuphire also initiated a Phase 3 trial (LYNX-1) for the treatment of NVD in the fourth quarter of 2020 and top-line data for this study are expected to be reported in
early 2022. Building on the positive results of the MIRA-2 Phase 3 trial for Nyxol, a second Phase 3 registration trial (MIRA-3) and a small pediatric study (MIRA-4) are planned to start in the second half of 2021, with results expected in
early 2022. Assuming successful and timely completion of these RM trials, Ocuphire anticipates submitting a New Drug Application (“NDA”) for Nyxol to the U.S. Food and Drug Administration (“FDA”) in late 2022 under the 505(b)(2) pathway.
Ocuphire’s second product candidate, APX3330, is a twice-a-day oral tablet designed to target multiple pathways relevant to retinal and choroidal (the vascular layer of the eye) vascular diseases
such as diabetic retinopathy (“DR”) and diabetic macular edema (“DME”) which, if left untreated, can result in permanent visual acuity loss and eventual blindness. DR is a disease resulting from diabetes in which chronically elevated blood sugar
levels cause progressive damage to blood vessels in the retina. DME is a severe form of DR which involves leakage of protein and fluid into the macula, the central portion of the retina, causing swelling and damage. Prior to Ocuphire’s
in-licensing of the product candidate, APX3330 had been studied by third parties in six Phase 1 and five Phase 2 trials totaling over 440 patients for inflammatory and oncology indications, and had demonstrated promising evidence of tolerability,
pharmacokinetics, durability, and target engagement. Ocuphire initiated enrollment for the Phase 2 trial (ZETA-1) for APX3330 in April 2021 for the treatment of patients with DR, including moderately severe non-proliferative DR (“NPDR”) and mild
proliferative DR (“PDR”), as well as patients with DME without loss of central vision. Top-line data for this study are expected to be reported in 2022. Ocuphire has also in-licensed APX2009 and APX2014, which are additional second-generation
product candidates and analogs of APX3330.
Merger with Rexahn
On November 5, 2020, Rexahn Pharmaceuticals, Inc., or Rexahn, now known as Ocuphire Pharma, Inc., completed its reverse merger or, the Merger, with what was then known as “Ocuphire Pharma, Inc.,”
or Private Ocuphire, in accordance with the terms of the Agreement and Plan of Merger and Reorganization dated as of June 17, 2020, as amended on June 29, 2020 (“Merger Agreement”). Rexahn’s shares of common stock listed on The Nasdaq Capital
Market, previously trading through the close of business on November 5, 2020 under the ticker symbol “REXN,” commenced trading on The Nasdaq Capital Market, under the ticker symbol “OCUP,” on November 6, 2020.
Immediately following the Merger, Private Ocuphire became a wholly-owned subsidiary of Rexahn. Upon consummation of the Merger, Rexahn adopted the business plan of Private Ocuphire.
Although Rexahn was the legal acquirer and issued shares of its common stock to effect the Merger with Ocuphire, Ocuphire was considered the accounting acquirer. In accordance with the accounting
guidance under Accounting Standards Update (“ASU”) 2017-01, the Merger was accounted for as an asset acquisition. Accordingly, the assets and liabilities of Rexahn were recorded as of the Closing at the purchase price of the accounting acquirer,
Ocuphire. Ocuphire allocated the total purchase price among the individual assets acquired on a fair value basis or carrying value as appropriate. A final determination of these estimated fair values was based on the actual net tangible assets of
Rexahn that existed as of the date of the completion of the transaction. As of the Closing, the net assets of Rexahn were recorded at their acquisition-date relative fair values in the consolidated financial
statements of Ocuphire and the reported operating results prior to the Merger are those of Private Ocuphire.
Pursuant to the Merger Agreement, the number of shares of common stock issued to Private Ocuphire’s stockholders for each share of Ocuphire’s common stock outstanding immediately prior to the
Merger was calculated using an exchange ratio (“Exchange Ratio”) of 1.0565 shares of Common Stock for each share of Private Ocuphire common stock.
Strategic Outlook
As part of its strategy, Ocuphire will continue to explore opportunities to acquire additional ophthalmic assets and to seek strategic partners for late-stage development, regulatory preparation
and commercialization in key global markets. To date, Ocuphire’s primary activities have been conducting research and development activities, planning clinical trials, performing business and financial planning, recruiting personnel and raising
capital. Ocuphire does not have any products approved for sale and has not generated any significant amounts of revenue. Ocuphire does not expect to generate significant revenues until, and unless, the FDA or other regulatory authorities approve
Nyxol or APX3330 and Ocuphire successfully commercializes its product candidates. Until such time, if ever, as Ocuphire can generate substantial product revenue, Ocuphire expects to finance its cash needs through a combination of equity and debt
financings as well as collaborations, strategic alliances and licensing arrangements. Through June 30, 2021, Ocuphire has funded its operations primarily through equity financings that totaled $40.2 million in gross proceeds, of which $21.15
million was received in connection with the Merger, net cash at Rexahn, a minor amount of license fee payments earned under license agreements related to Rexahn’s RX-3117 drug compound, and through the issuance of convertible notes in private
placements that totaled $8.5 million in gross proceeds. Ocuphire’s net losses were $46.2 million and $4.7 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, Ocuphire had an accumulated deficit of $78.8
million. Ocuphire anticipates that its expenses will increase substantially as it:
|
•
|
continues clinical trials for Nyxol, APX3330 and for any other product candidate in its future pipeline;
|
|
•
|
continues preclinical studies for Nyxol, APX3330 and for any other product candidate in its future pipeline;
|
|
•
|
develops additional product candidates that it identifies, in-licenses or acquires;
|
|
•
|
seeks regulatory approvals for any product candidates that successfully complete clinical trials;
|
|
•
|
contracts to manufacture its product candidates;
|
|
•
|
establishes on its own or with partners, a sales, marketing and distribution infrastructure to commercialize any products for which Ocuphire may obtain regulatory approval;
|
|
•
|
maintains, expands and protects its intellectual property portfolio;
|
|
•
|
hires additional staff, including clinical, scientific, operational and financial personnel, to execute its business plan;
|
|
•
|
adds operational, financial and management information systems and personnel, including personnel to support its product development and potential future commercialization efforts; and
|
|
•
|
continues to operate as a public company.
|
Ocuphire’s net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of its preclinical studies, clinical trials and its expenditures on other
research and development activities as well as level of license fee payments received under license agreements in connection with the former Rexahn drug compounds.
Recent Developments
Clinical and CMC Milestones
In June, the Company announced successful results from the VEGA-1 Phase 2 trial of Nyxol plus low-dose pilocarpine (LDP) for the
treatment of presbyopia. The trial met its primary endpoint of 3 lines of near vision improvement and multiple key secondary endpoints such as fast onset of action and durability with statistical significance and a favorable safety profile
(including no headaches).
In the quarter, the Company also submitted an EOP2 CMC Meeting request and received formal guidance from the FDA for the 0.75% Nyxol
preservative-free, blow-filled-seal commercial product.
COVID-19
With the resurgence of COVID-19 cases, Ocuphire may likely continue to experience disruptions in its manufacturing, supply chain,
research and development operations, clinical enrollment, regulatory process, financial position, and financing terms. The global outbreak of COVID-19 continues to rapidly evolve. Although Ocuphire cannot estimate the length or gravity of the
impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on Ocuphire’s results of future operations, financial position, and liquidity over the next 12 or more months.
Change of Transfer Agent
Effective April 9, 2021, the Company appointed American Stock Transfer & Trust Company, LLC (“AST”) as its transfer agent and registrar. All of the Company’s registered shares of common
stock were transferred from Olde Monmouth Stock Transfer Co. to AST.
Financial Operations Overview
Collaborations Revenue
Collaborations revenue to date was derived from fees earned from a license agreement with BioSense Global LLC (“BioSense”) in connection with the Rexahn
RX-3117 drug compound. We anticipate that we may earn additional revenues stemming from additional milestone and royalty payments from this or other related license agreements related to Rexahn’s legacy drug compounds; however, the attainment of
milestones or level of sales required to earn royalty payments is highly uncertain.
To date, outside of the limited collaborations revenue referenced above, Ocuphire does not expect to generate significant revenue unless or until it obtains regulatory approval of and
commercializes Nyxol or APX3330. If Ocuphire fails to complete the development of Nyxol, APX3330, or any other product candidate it may pursue in the future, in a timely manner, or fails to obtain regulatory approval, Ocuphire’s ability to
generate future revenue would be compromised.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based compensation costs, for personnel in functions not directly
associated with research and administrative activities. Other significant costs include insurance coverage for directors and officers and other property and liability exposures, legal fees relating to intellectual property and corporate matters,
professional fees for accounting and tax services, and other services provided by business consultants. Ocuphire anticipates that its general and administrative expenses will significantly increase in the future to support its continued research
and development activities and costs associated with operating as a public company. These increases will include increased costs related to the hiring of additional personnel and fees for legal and professional services as well as other
public-company related costs.
Research and Development Expenses
To date, Ocuphire’s research and development expenses have related primarily to the clinical stage development of Nyxol. Research and development expenses consist of costs incurred in performing
research and development activities, including compensation and benefits for research and development employees and costs for consultants, costs associated with preclinical studies and clinical trials, regulatory activities, manufacturing
activities to support clinical activities, license fees, nonlegal patent costs, fees paid to external service providers that conduct certain research and development, and an allocation of overhead expenses. Research and development costs are
expensed as incurred and costs incurred by third parties are expensed as the contracted work is performed. Ocuphire accrues for costs incurred as the services are being provided by monitoring the status of the study or project, and the invoices
received from its external service providers. Ocuphire adjusts its accrual as actual costs become known. Research and development activities are central to Ocuphire’s business model.
Ocuphire expects that Nyxol and APX3330 will have higher development costs during their later stages of clinical development, as compared to costs incurred during their earlier stages of
development, primarily due to the increased size and duration of the later-stage clinical trials. Ocuphire expects its research and development expenses to significantly increase over the next several years. However, it is difficult for Ocuphire
to determine with certainty the duration, costs and timing to complete its current or future preclinical programs and clinical trials of Nyxol, APX3330, and other product candidates. The duration, costs and timing of clinical trials and
development of Nyxol, APX3330 and other product candidates will depend on a variety of factors that include, but are not limited to, the following:
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•
|
per patient trial costs;
|
|
•
|
the number of patients that participate in the trials;
|
|
•
|
the number of sites included in the trials;
|
|
•
|
the countries in which the trials are conducted;
|
|
•
|
the length of time required to enroll eligible patients;
|
|
•
|
the number of doses that patients receive;
|
|
•
|
the drop-out or discontinuation rates of patients;
|
|
•
|
potential additional safety monitoring or other studies requested by regulatory agencies;
|
|
•
|
the duration of patient follow-up;
|
|
•
|
the phase of development of the product candidate;
|
|
•
|
arrangements with contract research organizations and other service providers; and
|
|
•
|
the efficacy and safety profile of the product candidates.
|
Acquired In-Process Research and Development Expenses
Ocuphire includes costs to acquire or in-license product candidates as acquired in-process research and development expenses. These costs are immediately expensed provided that the payments do
not also represent processes or activities that would constitute a “business” as defined under accounting standards generally accepted in the United States of America (“U.S. GAAP”) or provided that the product candidate has not achieved
regulatory approval for marketing and, absent obtaining such approval, has no alternative future use. Royalties owed on future sales of any licensed product will be expensed in the period the related revenues are recognized. The costs associated
with the Merger and the Apexian Sublicense Agreement were recorded as acquired in-process research and development expenses (“IPR&D”).
Interest Expense
Interest expense consists of interest costs related to the Ocuphire convertible notes and was attributed to interest on principal and to amortization of debt discount while these instruments were
outstanding. The Ocuphire convertible notes had an annual interest rate of 8%.
Fair Value Change in Derivative and Warrant Liabilities
The fair value change in derivative and warrant liabilities includes the change in the fair value of the warrant liabilities and the premium conversion derivatives during the period the premium
conversion derivatives and warrant liabilities are outstanding.
Other Income
Other income includes interest earned from cash and cash equivalent investments and reimbursements in connection with grants and other sources.
Provision for Income Taxes
Provision for income taxes consists of federal and state income taxes in the United States, as well as deferred income taxes and changes in related valuation allowance reflecting the net tax
effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Currently, there is no provision for income taxes, as Ocuphire has incurred
operating losses to date, and a full valuation allowance has been provided on the net deferred tax assets as of June 30, 2021 and December 31, 2020.
Results of Operations
Comparison of the Three Months Ended June 30, 2021 and 2020
The following table summarizes Ocuphire’s operating results for the periods indicated (in thousands):
|
|
For the Three Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Collaborations revenue
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
3,408
|
|
|
|
551
|
|
|
|
2,857
|
|
Research and development
|
|
|
3,829
|
|
|
|
711
|
|
|
|
3,118
|
|
Total operating expenses
|
|
|
7,237
|
|
|
|
1,262
|
|
|
|
5,975
|
|
Loss from operations
|
|
|
(7,137
|
)
|
|
|
(1,262
|
)
|
|
|
(5,875
|
)
|
Interest expense
|
|
|
—
|
|
|
|
(689
|
)
|
|
|
689
|
|
Fair value change in warrant liabilities and premium conversion derivatives
|
|
|
|
|
|
|
(919
|
)
|
|
|
919
|
|
Gain on note extinguishment
|
|
|
—
|
|
|
|
1,260
|
|
|
|
(1,260
|
)
|
Other income
|
|
|
1
|
|
|
|
6
|
|
|
|
(5
|
)
|
Loss before income taxes
|
|
|
(7,136
|
)
|
|
|
(1,604
|
)
|
|
|
(5,532
|
)
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(7,136
|
)
|
|
$
|
(1,604
|
)
|
|
$
|
(5,532
|
)
|
Collaborations Revenue
Collaborations revenue was $0.1 million for the three months ended June 30, 2021. Revenue during the period was derived from the license agreement with BioSense related to certain technology
transfers. There was no collaborations revenue recognized during the comparable prior year period.
General and Administrative Expenses
General and administrative expenses for the three months ended June 30, 2021 were $3.4 million compared to $0.6 million for the
three months ended June 30, 2020. The $2.9 million increase was attributable to an increase primarily in administrative employee headcount, stock-based compensation, insurance, legal and settlement costs, and costs associated with operating as
a public company subsequent to the reverse merger in the current period. General and administrative expenses included $0.3 million and $0.2 million in stock-based compensation expense during the three months ended June 30, 2021 and 2020,
respectively.
Research and Development Expenses
Research and development expenses for the three months ended June 30, 2021 were $3.8 million compared to $0.7 million for the three months ended June 30, 2020. The $3.1 million increase was
primarily attributable to four new clinical trials and manufacturing activities for Nyxol and APX3330 as well as regulatory, preclinical and other development activities. Research and development expenses also included $0.2 million in stock-based
compensation expense during the three months ended June 30, 2021 and 2020.
Interest Expense
Non-cash interest expense for the three months ended June 30, 2020 of $0.7 million was comprised of interest on principal and amortization of debt discounts related to Ocuphire convertible notes. There was no
interest expense during the current year period.
Fair Value Change in Warrant Liabilities and Premium Conversion Derivatives
The fair value change in warrant liabilities and premium conversion derivatives was an expense of $0.9 million for the three months ended June 30, 2020 attributed to the change in fair value for the premium
conversion derivatives due primarily to fluctuations in the fair value of Ocuphire common stock and the number of potential shares of common stock issuable upon conversion of the underlying Ocuphire convertible notes that were outstanding during
the period. The fair value change in warrant liabilities and premium conversion derivatives during the three months ended June 30, 2021 was under $1,000, related to Rexahn Warrants.
Gain on Note Extinguishment
Non-cash gain on note extinguishment for the three months ended June 30, 2020 was $1.3 million as a result of the Note Conversion Agreement (as defined and further described below). The Note
Conversion Agreement was deemed to be a substantial modification to the Ocuphire convertible notes (as defined below), and as such, the Company recorded the modification as a note extinguishment. There were no convertible notes outstanding during
the three month period ended June 30, 2021.
Other Income
During the three months ended June 30, 2021 and 2020, Ocuphire had other income of $1,000 and $6,000, respectively. Other income during the three months ended June 30, 2021
consisted primarily of interest income from our cash and cash equivalent investments. Other income during the three months ended June 30, 2020 consisted of interest income from our cash and cash equivalent deposits of $2,000 and $4,000 received
from a grant from the U.S. Small Business Administration for economic relief stemming from the COVID-19 pandemic.
Comparison of the Six Months Ended June 30, 2021 and 2020
The following table summarizes Ocuphire’s operating results for the periods indicated (in thousands):
|
|
For the Six Months Ended
June 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Collaborations revenue
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
5,112
|
|
|
|
942
|
|
|
|
4,170
|
|
Research and development
|
|
|
7,311
|
|
|
|
929
|
|
|
|
6,382
|
|
Acquired in‑process research and development
|
|
|
—
|
|
|
|
2,126
|
|
|
|
(2,126
|
)
|
Total operating expenses
|
|
|
12,423
|
|
|
|
3,997
|
|
|
|
8,426
|
|
Loss from operations
|
|
|
(12,323
|
)
|
|
|
(3,997
|
)
|
|
|
(8,326
|
)
|
Interest expense
|
|
|
—
|
|
|
|
(1,243
|
)
|
|
|
1,243
|
|
Fair value change in warrant liabilities and premium conversion derivatives
|
|
|
(33,829
|
)
|
|
|
(721
|
)
|
|
|
(33,108
|
)
|
Gain on note extinguishment
|
|
|
—
|
|
|
|
1,260
|
|
|
|
(1,260
|
)
|
Other income
|
|
|
2
|
|
|
|
9
|
|
|
|
(7
|
)
|
Loss before income taxes
|
|
|
(46,150
|
)
|
|
|
(4,692
|
)
|
|
|
(41,458
|
)
|
Provision for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(46,150
|
)
|
|
$
|
(4,692
|
)
|
|
$
|
(41,458
|
)
|
Collaborations Revenue
Collaborations revenue was $0.1 million for the six months ended June 30, 2021. Revenue during the period was derived from the license agreement with BioSense related to certain technology
transfers. There was no collaborations revenue recognized during six months ended June 30, 2020.
General and Administrative Expenses
General and administrative expenses for the six months ended June 30, 2021 were $5.1 million compared to $0.9 million for the six
months ended June 30, 2020. The $4.2 million increase was attributable to an increase primarily in administrative employee headcount, stock-based compensation, professional services, insurance, legal and settlement costs, and costs associated
with operating as a public company subsequent to the reverse merger in the current period. General and administrative expenses included $0.5 million and $0.2 million in stock-based compensation expense during the six months ended June 30, 2021
and 2020, respectively.
Research and Development Expenses
Research and development expenses for the six months ended June 30, 2021 were $7.3 million compared to $0.9 million for the six months ended June 30, 2020. The $6.4 million increase was primarily
attributable to four new clinical trials and manufacturing activities for Nyxol and APX3330 as well as regulatory, preclinical and other development activities. Research and development expenses also included $0.5 million and $0.2 million in
stock-based compensation expense during the six months ended June 30, 2021 and 2020, respectively.
Acquired In-Process Research and Development Expenses
On January 21, 2020, Ocuphire entered into a sublicense agreement with Apexian for continued research and development and potential commercialization of its lead product, APX3330 (the “Apexian
Sublicense Agreement”). Ocuphire issued 891,422 shares (as adjusted for the Exchange Ratio) of its common stock to Apexian related to the Apexian Sublicense Agreement. The fair value of the common stock issued to Apexian was $2.1 million and was
recorded as IPR&D expense during the six months ended June 30, 2020. Accounting standards require that the fair value of IPR&D with no alternative future use be charged to expense on the acquisition date. There were no IPR&D costs in
the current year period.
Interest Expense
Non-cash interest expense for the six months ended June 30, 2020 of $1.2 million was comprised of interest on principal and amortization of debt discounts related to Ocuphire convertible notes. There was no interest
expense during the current year period.
Fair Value Change in Warrant Liabilities and Premium Conversion Derivatives
The fair value change in warrant liabilities and premium conversion derivatives was an expense of $33.8 million for the six months ended June 30, 2021 compared to an expense of $0.7 million for
the six months ended June 30, 2020. The $33.1 million change was due primarily to the issuance of the Series A Warrants in connection with the Pre-Merger Financing in November 2020 and to the fluctuations in Ocuphire’s common stock fair value and
the number of potential shares of common stock issuable upon conversion of the underlying Ocuphire warrant liabilities and convertible notes that were outstanding during the relevant periods. Upon the February 3, 2021 effective date of the Waiver
Agreements, the Series A Warrants were reclassified to equity and are no longer subject to remeasurement.
Gain on Note Extinguishment
Non-cash gain on note extinguishment for the six months ended June 30, 2020 was $1.3 million as a result of the Note Conversion Agreement (as defined and further described below). The Note Conversion Agreement was
deemed to be a substantial modification to the Ocuphire convertible notes (as defined below), and as such, the Company recorded the modification as a note extinguishment.
Other Income
During the six months ended June 30, 2021 and 2020, Ocuphire had other income of $2,000 and $9,000, respectively. Other income during the six months ended June 30, 2021
consisted of primarily of interest income from our cash and cash equivalent investments. Other income during the six months ended June 30, 2020 consisted of interest income from our cash and cash equivalent investments of $5,000 and $4,000
received from a grant from the U.S. Small Business Administration for economic relief stemming from the COVID-19 pandemic.
Liquidity and Capital Resources
Capital Resources
As of June 30, 2021, Ocuphire’s principal sources of liquidity consisted of cash and cash equivalents of $24.2 million. Ocuphire’s cash and cash equivalents are invested primarily in cash
deposits at a large, long-standing financial institution.
Ocuphire has not generated any revenue and anticipates that it will continue to incur losses for the foreseeable future. Future capital requirements depend on many factors, including whether the
Company:
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continues clinical trials and preclinical studies for Nyxol, APX3330 and for any other product candidate in its future pipeline;
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develops additional product candidates that it identifies, in-licenses or acquires;
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seeks regulatory approvals for any product candidates that successfully complete clinical trials;
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contracts to manufacture its product candidates;
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establishes on its own or with partners, a sales, marketing and distribution infrastructure to commercialize any products for which it may obtain regulatory approval;
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maintains, expands and protects its intellectual property portfolio;
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hires additional staff, including clinical, scientific, operational and financial personnel, to execute its business plan;
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adds operational, financial and management information systems and personnel, including personnel to support its product development and potential future commercialization efforts; and
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continues to operate as a public company.
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Historical Capital Resources
Ocuphire’s primary source of cash to fund Ocuphire’s operations has been from various equity offerings in the amount of $40.2 million and the issuance of convertible notes subsequent to the
Ocuphire’s incorporation in April 2018 in the amount of $8.5 million, inclusive of the promissory notes exchanged for Ocuphire convertible notes.
Registered Direct Offering
On June 4, 2021, the Company entered into a placement agency agreement with A.G.P./Alliance Global Partners (“AGP”). Pursuant to the terms of the placement agency agreement, AGP on June 8, 2021
sold of an aggregate of 3,076,923 shares of the Company’s common stock and warrants to purchase 1,538,461 shares of the Company’s common stock (the “RDO Warrants”) at an offering price of $4.875 per one Share and 0.50 RDO Warrants, for gross
proceeds of approximately $15,000,000, before deducting AGP’s fees and related offering expenses in the amount of approximately $1.1 million. The purchase agreement contains customary representations, warranties and agreements by the Company,
customary conditions to closing, indemnification obligations of the Company, other obligations of the parties and termination provisions.
The RDO Warrants have an exercise price of $6.09 per share and are exercisable upon the initial issuance date of June 8, 2021, and will expire five years following the initial
exercise date. Subject to limited exceptions, a holder of a RDO Warrant will not have the right to exercise any portion of its RDO Warrants if the holder, together with its affiliates, would
beneficially own in excess of 4.99% (or, at the election of a holder prior to the date of issuance, 9.99%) of the number of shares of common stock outstanding immediately after giving effect to such exercise; provided, however, that upon
prior notice to the Company, the holder may increase or decrease the beneficial ownership limitation, provided further that in no event shall the beneficial ownership limitation exceed 9.99%.
The offering of the Securities was made pursuant to the Company’s effective shelf registration statement on Form S-3.
At-The-Market Program
On February 4, 2021, Ocuphire filed a Form S-3 shelf registration under the Securities Act which was declared effective by the SEC on February 12, 2021 (the “2021 Shelf”)
under which the Company may offer and sell, from time to time in its sole discretion, securities having an aggregate offering price of up to $125 million. In connection with the 2021 Shelf, on March 11, 2021, Ocuphire entered into a Capital on
DemandTM Sales Agreement with JonesTrading Institutional Services LLC (“JonesTrading”) under which the Company may offer and sell, from time to time at its sole
discretion, to or through JonesTrading, acting as agent and/or principal, shares of its common stock having an aggregate offering price of up to $40 million (the “2021 ATM”). During the three and six months ended June 30, 2021, 900,943 shares
were sold under the 2021 ATM for gross proceeds in the amount of approximately $4.1 million.
Pre-Merger Financing
Securities Purchase Agreement
On June 17, 2020, Ocuphire, Rexahn and certain investors entered into a Securities Purchase Agreement, which was amended and restated in its entirety on June 29, 2020 (as amended and restated,
the “Securities Purchase Agreement”). Pursuant to the Securities Purchase Agreement, the investors invested a total of $21.15 million in cash, including $300,000 invested by directors of Private Ocuphire and one director of Rexahn, upon closing
of the Merger (the “Pre-Merger Financing”). Pursuant to the Pre-Merger Financing, (i) Ocuphire issued and sold to the investors shares of Private Ocuphire common stock (the “Initial Shares”) which converted pursuant to the exchange ratio in the
Merger into an aggregate of approximately 1,249,996 shares (the “Converted Initial Shares”) of common stock, (ii) Ocuphire deposited into escrow, for the benefit of the Investors, additional shares of Private Ocuphire common stock (the
“Additional Shares”) which converted pursuant to the exchange ratio in the Merger into an aggregate of approximately 3,749,992 shares of common stock (the “Converted Additional Shares”), which Converted Additional Shares were delivered (or became
deliverable) to the investors on November 19, 2020, and (iii) the Company agreed to issue to each investor on the tenth trading day following the consummation of the Merger (x) Series A Warrants representing the right to acquire shares of common
stock equal to the sum of (A) the Converted Initial Shares purchased by the investor, (B) the Converted Additional Shares delivered or deliverable to the investor, without giving effect to any limitation on delivery contained in the Securities
Purchase Agreement and (C) the initial number of shares of common stock, if any, underlying the Series B Warrants issued to the Investor and (y) additional warrants to purchase shares of common stock.
Waiver Agreements
Effective February 3, 2021, each investor that invested in the Pre-Merger Financing (each, a “Holder”) entered into a Waiver Agreement with the Company (collectively, the “Waiver Agreements”).
Pursuant to the Waiver Agreements, the Holders and the Company agreed to waive certain rights, finalize the exercise price and number of Series A Warrants and Series B Warrants, eliminate certain financing restrictions, extend the term of certain
leak-out agreements, and, in the case of certain Holders, grant certain registration rights for the shares underlying the warrants.
The Waiver Agreements provide for the permanent waiver of the full ratchet anti-dilution provisions, contained in the Series A Warrants (as certain of the anti-dilution provisions had
previously caused liability accounting treatment for the Series A Warrants). Upon the effective date of the Waiver Agreement, the Series A Warrants were reclassified to equity.
Pursuant to the Waiver Agreements, the number of shares underlying all of the Series B Warrants was fixed to 1,708,334 in the aggregate with respect to all Holders.
Series A Warrants
The Series A Warrants were issued on November 19, 2020 at an initial exercise price of $4.4795 per share, were immediately exercisable upon issuance and have a term of five years from the date of
issuance. The Series A Warrants are exercisable for 5,665,838 shares of common stock in the aggregate (without giving effect to any limitation on exercise contained therein). As of June 30, 2021, 5,665,838 Series A Warrants were still
outstanding.
At issuance, the Series A Warrants contained certain provisions that could have resulted in a downward adjustment of the initial exercise price and an upward adjustment in the number of shares
underlying the warrants if Ocuphire were to have issued or sold, or made an agreement to issue or sell, any shares of common stock for a price lower than the exercise price then in effect. Pursuant to the terms of the Waiver Agreements, these
provisions are no longer in effect.
Series B Warrants
The Series B Warrants have an exercise price of $0.0001, were exercisable upon issuance and will expire on the day following the later to occur of (i) the Reservation Date (as defined therein),
and (ii) the date on which the investor’s Series B Warrants have been exercised in full (without giving effect to any limitation on exercise contained therein) and no shares remain issuable thereunder. The Series B Warrants were initially
exercisable for 665,836 shares of Common Stock in the aggregate (without giving effect to any limitation on exercise contained therein) and ultimately became exercisable for 1,708,334 shares of Common Stock upon execution of the Waiver
Agreements. As of June 30, 2021, 78,700 Series B Warrants were still outstanding.
At issuance, the Series B Warrants contained certain provisions that could have resulted in the issuance of additional Series B Warrants depending on the dollar volume-weighted average prices of
a share of Common Stock during a 45-trading day Reset Period. Pursuant to the terms of the Waiver Agreements, those provisions are no longer in effect.
Ocuphire Convertible Notes
From May 2018 through March 2020, Ocuphire issued convertible notes (the “Ocuphire convertible notes”) for aggregate gross proceeds of $8.5 million, inclusive of the promissory notes exchanged
for Ocuphire convertible notes. The final closing of the Ocuphire convertible notes occurred on March 10, 2020. The Ocuphire convertible note had an interest an interest rate of 8% per annum. On November 4, 2020, all of Ocuphire’s outstanding notes were converted into 977,128 shares of Ocuphire common stock as adjusted for the Exchange Ratio in connection with the completion of the Merger.
The original Convertible Note Purchase Agreement (the “Note Purchase Agreement”) was dated May 25, 2018. Under the original terms of the Note Purchase Agreement, the Ocuphire convertible notes
were payable on demand on July 31, 2019 unless converted earlier pursuant to their terms. Such conversion would automatically occur if Ocuphire (i) completed an initial public offering (“IPO”), (ii) completed a change in control (“CIC”), (iii)
completed a sale and issuance of its capital stock resulting in gross proceeds to Ocuphire of at least $5.0 million (“Qualified Financing”), or (iv) completed a reverse merger transaction (“Reverse Merger”), each a “Conversion Event”. Upon a
Conversion Event, the Ocuphire convertible notes would have automatically converted into the following:
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Qualified Financing or IPO: An amount of shares of Ocuphire common stock equal to 135% of the Note Value divided by the per share price of Ocuphire
common stock issued to purchasers in the Qualified Financing or IPO.
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CIC: An amount of shares of Ocuphire common stock equal to 200% of the Note Value divided by the per share price of Ocuphire common stock based on the
valuation of such CIC.
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Reverse Merger: Either (i) shares of Ocuphire common stock issued in the Reverse Merger or (ii) equity securities of the Reverse Merger counterparty, in an amount equal to 135% of the Note Value
divided by the per share price at which such shares were issued to either stockholders of Ocuphire or stockholders of the Reverse Merger counterparty.
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The Note Purchase Agreement was amended and restated on January 22, 2019 (the “Amended and Restated Mezz Note Purchase Agreement”). Under the Amended and Restated Mezz Note Purchase Agreement,
the demand date of the Ocuphire convertible notes was extended to December 31, 2019 and the conversion provisions under the Ocuphire convertible notes were restated such that, upon a Conversion Event, the Ocuphire convertible notes would have
automatically converted into the following:
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IPO: An amount of shares of Ocuphire common stock equal to the greater of: (i) 150% of the Note Value divided by the per share price of Ocuphire common
stock issued to purchasers in the IPO, and (ii) 100% of the Note Value divided by the per share price of $10.37.
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CIC: An amount of shares of Ocuphire common stock equal to the greater of: (i) 200% of the Note Value divided by the per share price of Ocuphire common
stock based on the valuation of such CIC, and (ii) 100% of the Note Value divided by the per share price of $10.37.
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Qualified Financing: An amount of shares of Ocuphire common stock equal to 150% of the Note Value divided by the per share price of Ocuphire common
stock issued to purchasers in the Qualified Financing.
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Reverse Merger: Either shares of Ocuphire common stock issued in the Reverse Merger or equity securities of the Reverse Merger counterparty, in an amount equal to the greater of: (i) 150% of the
Note Value divided by the per share price at which such shares were issued to either stockholders of Ocuphire or stockholders of the Reverse Merger counterparty, and (ii) 100% Note Value divided by the per share price of $10.37.
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The Amended and Restated Mezz Note Purchase Agreement was further amended on November 20, 2019 (the “First Amendment”). The terms under the First Amendment reflect the current terms in effect for
the Ocuphire convertible notes as of the date of this proxy statement/prospectus/information statement, except as further amended by the Note Conversion Agreement (defined below). The First Amendment extended the demand date of the Ocuphire
convertible notes from December 31, 2019 to September 30, 2020, and changed the basis of interest from a 360-day year, 30-day month basis to a 365-day year basis. In addition, the First Amendment increased the automatic conversion factor applied
to the Note Value to 175% in the event of an IPO, Qualified Financing or Reverse Merger and removed the fixed conversion option provision of $10.37 per share in the event of an IPO, CIC or Reverse Merger.
On June 8, 2020, holders of the Ocuphire convertible notes entered into the Note Conversion Agreement with Ocuphire (the “Note Conversion Agreement”). The Note Conversion Agreement provided that
prior to the consummation of the merger, following the Rexahn special meeting, all of the Ocuphire convertible notes would automatically convert into an amount of shares of Ocuphire common stock equal to 175% of the Note Value divided by the
Fully Diluted Shares. “Fully Diluted Shares” for this purpose means as of the Conversion Date the sum of the following: (1) all of the issued outstanding shares of Ocuphire common stock; and (2) the aggregate number of shares of Ocuphire common
stock reserved for issuance under all outstanding options or other awards under equity incentive plans of Ocuphire in effect as of the date of conversion.
The Note Conversion Agreement further provided that upon the issuance of shares of Ocuphire common stock in the conversion, each convertible note would be cancelled and extinguished without the
need for surrender of such notes and all obligations of Ocuphire, including any obligations for payment of principal and interest on the convertible notes, would be unconditionally and irrevocably discharged.
Cash Flows
The following table summarizes Ocuphire’s cash flows for the periods indicated (in thousands):
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For the Six Months Ended
June 30,
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2021
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2020
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Net cash used in operating activities
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$
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(10,140
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)
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$
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(1,383
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)
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Net cash provided by (used in) investing activities
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—
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—
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Net cash provided by financing activities
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17,975
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700
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Net increase (decrease) in cash and cash equivalents
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$
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7,835
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$
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(683
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)
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Cash Flow from Operating Activities
For the six months ended June 30, 2021, cash used in operating activities of $10.1 million was attributable to a net loss of $46.2 million, partially offset by $36.4 million in non-cash operating
expenses and a net change of $(0.4) million in Ocuphire’s net operating assets and liabilities. The non-cash expenses consisted of the fair value change in the warrant liabilities of $33.8 million, a share settlement with certain investors in the
amount of $1.6 million, stock-based compensation of $1.0 million and depreciation expense of $2,000. The change in operating assets and liabilities was primarily attributable to a decrease in Ocuphire’s accrued liabilities, on net basis, offset
in part by a decrease in prepaid expenses and an increase in accounts receivable associated with the fluctuations of Ocuphire’s operating expenses and in connection with operating as a public company post-Merger.
For the six months ended June 30, 2020, cash used in operating activities of $1.4 million was attributable to a net loss of $4.7 million, partially offset by $3.2 million in non-cash expenses and
a net change of $0.1 million in Ocuphire’s net operating assets and liabilities. The non-cash expenses consisted of the fair value of common shares issued related to IPR&D in the amount of $2.1 million, interest and discount amortization
related to the Ocuphire convertible notes of $1.2 million, fair value change in the premium conversion derivatives of $0.7 million, gain on note extinguishment ($1.2) million related to the Note Conversion Agreement, $0.4 million related to
stock-based compensation and depreciation expense of $6,000. The change in operating assets and liabilities was primarily attributable to a decrease in prepaid expenses offset partially by a net decrease in accounts payable and accrued expenses
associated with the fluctuations of Ocuphire’s operating expenses.
Cash Flow from Investing Activities
There were no sources or uses from investing activities during the periods presented.
Cash Flow from Financing Activities
Net cash provided by financing activities during the six months ended June 30, 2021 was $18.0 million in connection with proceeds received from both the Registered Direct Offering and 2021 ATM
net of issuance costs.
Net cash provided by financing activities during the six months ended June 30, 2020 was $0.7 million consisting of proceeds from the issuance of the Ocuphire convertible notes, offset partially
by deferred offering costs of $0.1 million.
Liquidity and Capital Resource Requirements
Ocuphire has no significant sources of revenue to sustain its present activities. Ocuphire does not expect to generate significant revenue until, and unless, the FDA or other regulatory
authorities approve Nyxol or APX3330 and Ocuphire successfully commercializes its product candidates. Until such time, if ever, as Ocuphire can generate substantial product revenue, it expects to finance its cash needs through a combination of
equity and debt financings as well as collaborations, strategic alliances and licensing arrangements. Ocuphire does not have any committed external source of funds. To the extent that Ocuphire raises additional capital through the sale of equity
or convertible debt securities, the ownership interest of Ocuphire’s stockholders will be diluted, and the terms of these securities may include liquidation, warrants, or other preferences that adversely affect your rights as a common
stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting Ocuphire’s ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
If Ocuphire raises additional funds through collaborations, strategic alliances or licensing arrangements with pharmaceutical partners, Ocuphire may have to relinquish valuable rights to its technologies, future revenue streams or grant licenses
on terms that may not be favorable to Ocuphire. If Ocuphire is unable to raise additional funds through equity or debt financings or through collaborations, strategic alliances or licensing arrangements when needed, Ocuphire may be required to
delay, limit, reduce or terminate its product development, future commercialization efforts, or grant rights to develop and market its product candidates that Ocuphire would otherwise prefer to develop and market itself.
Future Capital Requirements
Ocuphire’s independent registered public accounting firm included an explanatory paragraph in its report on Ocuphire’s financial statements as of and for the years ended December 31, 2020 and
2019, noting the existence of substantial doubt about Ocuphire’s ability to continue as a going concern. This uncertainty arose from management’s review of Ocuphire’s results of operations and financial condition and its conclusion that, based on
Ocuphire’s operating plans, Ocuphire did not have sufficient existing working capital to sustain operations through December 31, 2021. Since the issuance of the independent registered public accounting firm’s report, Ocuphire has raised $18.0
million, net of offering expenses, through the sale of common stock in the Registered Direct Offering and the 2021 ATM. To continue to fund operations, Ocuphire will need to raise capital. Ocuphire may obtain additional financing in the future
through the issuance of common stock, through other equity or debt financings or through collaborations or partnerships with other companies. Ocuphire may not be able to raise additional capital on terms acceptable to it, or at all, and any
failure to raise capital as and when needed could compromise Ocuphire’s ability to execute on its business plan.
The development of Nyxol and APX3330 is subject to numerous uncertainties, and Ocuphire has based its operating plans on assumptions that may prove to be substantially different than what
Ocuphire currently anticipates, which could result in cash resources being used sooner than Ocuphire currently expects. Additionally, the process of advancing early-stage product candidates and testing product candidates in clinical trials is
costly, and the timing of progress in these clinical trials is uncertain. Ocuphire’s ability to successfully transition to profitability will be dependent upon achieving a level of product sales adequate to support its cost structure. Ocuphire
may not ever achieve profitability or generate positive cash flow from operating activities.
Contractual Obligations and Commitments
Facility Lease
Ocuphire leases a facility under a non-cancellable operating lease that commenced on June 8, 2019 and expires on December 31, 2021, as amended, for a base rent in the amount of $3,000 per month.
Additionally, Ocuphire was leasing 5,466 square feet of office space in Rockville, Maryland previously occupied by Rexahn for a base rent of approximately $13,000 per month. The Rockville, Maryland lease expired in June 2021.
Apexian Sublicense Agreement
On January 21, 2020, Ocuphire entered into the Apexian Sublicense Agreement, pursuant to which it obtained exclusive worldwide patent and other intellectual property rights that constitute a
Ref-1 Inhibitor program relating to therapeutic applications to treat disorders related to ophthalmic and diabetes mellitus conditions. The lead compound in the Ref-1 Inhibitor program is APX3330, which Ocuphire intends to develop as an oral
tablet therapeutic to treat DR and diabetic macular edema, and potentially wet age-related macular degeneration.
In connection with the Apexian Sublicense Agreement, Ocuphire issued 891,422 shares (as adjusted for the Exchange Ratio) of Private Ocuphire common stock to Apexian and certain of Apexian’s
affiliates. The share issuance transaction was recorded in the amount of $2.1 million as IPR&D expense during the six months ended June 30, 2020 based on the fair market value of the common shares issued since no processes or activities that
would constitute a “business” were acquired and none of the rights and underlying assets acquired had alternative future uses or reached a stage of technological feasibility. Ocuphire also paid the balance remaining of $0.4 million of Ref-1
Inhibitor program costs to Apexian following the Company’s listing on a major stock exchange.
Ocuphire agreed to make one-time milestone payments under the Apexian Sublicense Agreement for each of the first ophthalmic indication and the first diabetes mellitus indication. These milestone
payments include (i) payments for specified developmental and regulatory milestones (including completion of the first Phase 2 trial and the first Phase 3 pivotal trial in the United States, and filing and achieving regulatory approval from the
FDA for the first New Drug Application for a compound) totaling up to $11 million in the aggregate and (ii) payments for specified sales milestones of up to $20 million in the aggregate, which net sales milestone payments are payable once, upon
the first achievement of such milestone.
Lastly, Ocuphire also agreed to make royalty payments equal to a single-digit percentage of its net sales of products covered by the patents under the Apexian Sublicense Agreement. None of the
milestone or royalty payments were triggered as of the date of this proxy statement/prospectus/information statement.
Other Commitments
In the course of normal operations, Ocuphire entered into cancellable purchase commitments with its suppliers for various key research, clinical and manufacturing services. The purchase
commitments covered by these arrangements are subject to change based on Ocuphire’s research and development efforts.
Critical Accounting Policies
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require us to make estimates and judgments that can affect the
reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the periods presented. We believe that the estimates and judgments upon which we rely are
reasonably based upon information available to us at the time that we make these estimates and judgments. To the extent that there are material differences between these estimates and actual results, our financial results will be affected. The
accounting policies that reflect our more significant estimates and judgments and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results are described in Note 1 — “Company Description
and Summary of Significant Accounting Policies ” to our condensed consolidated financial statements included in “Part 1, Item 1 – Financial Statements” in this Report.
There were no additional material changes to our critical accounting policies or estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included in our Annual Report on Form 10-K for the year ended December 31, 2020.
During the three months ended June 30, 2021, we began recognizing collaborations revenue derived from the license agreements. As a result, we added the following critical accounting policies
below:
Allowances for Doubtful Accounts
We record a provision for doubtful accounts, when appropriate, based on historical experience and a detailed assessment of the collectability of its accounts receivable. In estimating the
allowance for doubtful accounts, we consider, among other factors, the aging of the accounts receivable, its historical write-offs, the credit worthiness of each customer, and general economic conditions. Account balances are charged off against
the allowance when we believe that it is probable that the receivable will not be recovered. Actual write-offs may be in excess of our estimated allowance.
Revenue Recognition
We follow the provisions of ASC 606, Revenue from Contracts with Customers. The guidance provides a unified model to determine how revenue is recognized.
We have entered into license agreements which have revenue recognition implications.
In determining the appropriate amount of revenue to be recognized, we perform the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of
whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation
of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) we satisfy each performance obligation.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. Performance obligations may include license
rights, development services, and services associated with regulatory submission and approval processes. Significant management judgment is required to determine the level of effort required under an arrangement and the period over which we
expect to complete our performance obligations under the arrangement. If we cannot reasonably estimate when our performance obligations are either completed or become inconsequential, then revenue recognition is deferred until we can reasonably
make such estimates. Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method.
As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price of each performance obligation identified in the
contract. We use key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory
success. We allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance obligation.
Licenses of intellectual property: If the license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize
revenues from non-refundable, up-front fees allocated to the license when the license is transferred to the customer, and the customer can use and benefit from the license. For licenses that are bundled with other promises, we utilize judgment to
assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of
recognizing revenue from non-refundable, up-front fees. We evaluate the measure of progress each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
Milestone payments: At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and estimate the amount to
be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission) is included in the
transaction price. Milestone payments that are not within our control, such as approvals from regulators, are not considered probable of being achieved until those approvals are received. When our assessment of probability of achievement changes
and variable consideration becomes probable, any additional estimated consideration is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised goods or service underlying each performance
obligation and recorded as revenue based upon when the customer obtains control of each element.
Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we
recognize revenue at the later of (a) when the related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Recent Accounting Pronouncements
Refer to Note 1- “Company Description and Summary of Significant Accounting Policies” to our condensed consolidated financial statements included in “Part 1, Item 1 – Financial Statements” in
this Report for a discussion of recently issued accounting pronouncements.
Off-Balance Sheet Arrangements
None.