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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to

Commission File No. 001-37759

OUTLOOK THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

-

Delaware

 

38-3982704

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

111 S. Wood Avenue, Unit #100

Iselin, New Jersey

 

08830

(Address of principal executive offices)

 

(Zip Code)

(609619-3990

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock

OTLK

Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes                No        

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes                No        

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.        

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  No

The number of shares of the registrant’s common stock, $0.01 par value per share, outstanding as of May 13, 2024 was 23,405,637.

Table of Contents

Outlook Therapeutics, Inc.

Table of Contents

    

Page
Number

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

1

Consolidated Balance Sheets as of March 31, 2024 and September 30, 2023

1

Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2024 and 2023

2

Consolidated Statements of Stockholders’ (Deficit) Equity for the Three and Six Months Ended March 31, 2024 and 2023

3

Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2024 and 2023

4

Notes to Unaudited Interim Consolidated Financial Statements

5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3. Quantitative and Qualitative Disclosures About Market Risk

35

Item 4. Controls and Procedures

35

PART II. OTHER INFORMATION

36

Item 1. Legal Proceedings

36

Item 1A. Risk Factors

36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3. Defaults Upon Senior Securities

36

Item 4. Mine Safety Disclosures

36

Item 5. Other Information

36

Item 6. Exhibits

37

SIGNATURES

38

In this report, unless otherwise stated or as the context otherwise requires, references to “Outlook Therapeutics,” “Outlook,” “the Company,” “we,” “us,” “our” and similar references refer to Outlook Therapeutics, Inc. and its consolidated subsidiaries. The Outlook logo, LYTENAVA and other trademarks or service marks of Outlook Therapeutics, Inc. appearing in this report are the property of Outlook Therapeutics, Inc. This report also contains registered marks, trademarks and trade names of other companies. All other trademarks, registered marks and trade names appearing in this report are the property of their respective holders. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this report, including statements regarding our future financial condition, business strategy and plans, and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potentially,” “seek,” “should,” “will,” “would,” or the negative of these terms or similar expressions in this report.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” contained in our Annual Report on Form 10-K for the year ended September 30, 2023, filed with the Securities and Exchange Commission (“SEC”) on December 22, 2023, including, among other things, risks associated with:

the initiation, timing, progress and results of our clinical trials of our lead product candidate, ONS-5010;
our reliance on our contract manufacturing organizations and other vendors;
whether the results of our clinical trials will be sufficient to support domestic or global regulatory approvals;
our ability to obtain and maintain regulatory approval for ONS-5010 in the United States and other markets;
our expectations regarding the potential market size and the size of the patient populations for our product candidates, if approved, for commercial use;
our ability to fund our working capital requirements, and our expectations regarding our current cash resources;
the rate and degree of market acceptance of our current and future product candidates, including our commercialization strategy and manufacturing capabilities for ONS-5010;
the implementation of our business model and strategic plans for our business and product candidates;
developments or disputes concerning our intellectual property or other proprietary rights;
our ability to maintain and establish collaborations or obtain additional funding;
our expectations regarding government and third-party payor coverage and reimbursement;
our ability to compete in the markets we serve;
the factors that may impact our financial results; and
our estimates regarding the sufficiency of our cash resources and our need for additional funding.

These risks are not exhaustive. Additional factors could harm our business and financial performance, such as risks associated with the current macroeconomic environment, including as a result of the impacts of inflation, high interest rates, current or potential future bank failures or ongoing overseas conflict. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors, 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, or implied by, any forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Unless required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. We qualify all of the forward-looking statements in this report by these cautionary statements.

ii

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Outlook Therapeutics, Inc.

Consolidated Balance Sheets

(unaudited)

March 31, 2024

    

September 30, 2023

Assets

Current assets:

Cash and cash equivalents

$

47,229,109

$

23,391,982

Prepaid expenses and other current assets

10,556,696

7,587,216

Total current assets

57,785,805

30,979,198

Operating lease right-of-use assets, net

3,739

26,172

Equity method investment

765,885

793,932

Other assets

473,241

501,299

Total assets

$

59,028,670

$

32,300,601

Liabilities, convertible preferred stock and stockholders’ deficit

Current liabilities:

Unsecured convertible promissory note

$

44,745,000

$

35,551,000

Finance lease liabilities

4,267

Accounts payable

4,363,235

6,574,523

Accrued expenses

3,115,390

2,745,740

Income taxes payable

1,856,629

1,856,629

Total current liabilities

54,080,254

46,732,159

Warrant liability

139,184,543

6,219

Total liabilities

193,264,797

46,738,378

Commitments and contingencies (Note 8)

Convertible preferred stock:

Series A convertible preferred stock, par value $0.01 per share: 1,000,000 shares authorized, no shares issued and outstanding

Series A-1 convertible preferred stock, par value $0.01 per share: 200,000 shares authorized, no shares issued and outstanding

Total convertible preferred stock

Stockholders’ deficit:

Preferred stock, par value $0.01 per share: 7,300,000 shares authorized, no shares issued and outstanding

Series B convertible preferred stock, par value $0.01 per share: 1,500,000 shares authorized, no shares issued and outstanding

Common stock, par value $0.01 per share; 60,000,000 shares authorized; 22,012,827 and 13,012,833 shares issued and outstanding at March 31, 2024 and September 30, 2023, respectively

220,128

130,128

Additional paid-in capital

458,929,113

453,350,281

Accumulated deficit

(593,385,368)

(467,918,186)

Total stockholders' deficit

(134,236,127)

(14,437,777)

Total liabilities, convertible preferred stock and stockholders' deficit

$

59,028,670

$

32,300,601

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

1

Table of Contents

Outlook Therapeutics, Inc.

Consolidated Statements of Operations

(unaudited)

Three months ended March 31, 

Six months ended March 31, 

    

2024

    

2023

    

2024

    

2023

Operating expenses:

Research and development

$

13,508,934

$

544,948

$

18,038,292

$

10,407,372

General and administrative

5,431,041

6,292,982

11,224,805

12,118,586

18,939,975

6,837,930

29,263,097

22,525,958

Loss from operations

(18,939,975)

(6,837,930)

(29,263,097)

(22,525,958)

Loss (income) on equity method investment

30,595

16,965

28,047

(4,540)

Interest expense (income), net

3,084,035

(187,794)

2,895,358

2,260,797

Loss on extinguishment of debt

577,659

Change in fair value of promissory notes

8,519,153

3,000

9,512,153

3,000

Warrant related expenses (Note 9)

34,097,568

34,097,568

Change in fair value of warrant liability

49,614,817

(18,615)

49,668,159

(48,875)

Loss before income taxes

(114,286,143)

(6,651,486)

(125,464,382)

(25,313,999)

Income tax expense

2,800

2,800

2,800

2,800

Net loss

$

(114,288,943)

$

(6,654,286)

$

(125,467,182)

$

(25,316,799)

Per share information:

Net loss per share of common stock, basic and diluted

$

(8.01)

$

(0.52)

$

(9.20)

$

(2.09)

Weighted average shares outstanding, basic and diluted

14,270,289

12,833,330

13,638,126

12,093,889

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Outlook Therapeutics, Inc.

Consolidated Statements of Stockholders’ (Deficit) Equity

(unaudited)

Stockholders' Deficit

Common Stock

Additional Paid-in

Accumulated

Total Stockholders'

    

Shares

    

Amount

    

Capital

    

Deficit

    

Deficit

Balance at October 1, 2023

13,012,833

 

$

130,128

 

$

453,350,281

 

$

(467,918,186)

$

(14,437,777)

Stock-based compensation expense

1,272,611

1,272,611

Net loss

(11,178,239)

(11,178,239)

Balance at December 31, 2023

13,012,833

130,128

454,622,892

(479,096,425)

(24,343,405)

Sale of common stock, net of issuance costs

8,571,423

85,714

85,714

Issuance of common stock in connection with conversion of convertible promissory note

428,571

4,286

2,995,714

3,000,000

Stock-based compensation expense

1,310,507

1,310,507

Net loss

(114,288,943)

(114,288,943)

Balance at March 31, 2024

22,012,827

$

220,128

$

458,929,113

$

(593,385,368)

$

(134,236,127)

Stockholders' Equity

Common Stock

Additional Paid-in

Accumulated

Total Stockholders'

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balance at October 1, 2022

11,365,528

$

113,655

$

417,558,434

$

(408,935,518)

$

8,736,571

Sale of common stock, net of issuance costs

1,467,802

14,678

24,277,482

24,292,160

Stock-based compensation expense

1,392,393

1,392,393

Net loss

(18,662,513)

(18,662,513)

Balance at December 31, 2022

12,833,330

128,333

443,228,309

(427,598,031)

15,758,611

Stock-based compensation expense

1,383,405

1,383,405

Net loss

(6,654,286)

(6,654,286)

Balance at March 31, 2023

12,833,330

$

128,333

$

444,611,714

$

(434,252,317)

$

10,487,730

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Outlook Therapeutics, Inc.

Consolidated Statements of Cash Flows

(unaudited)

Six months ended March 31, 

    

2024

    

2023

OPERATING ACTIVITIES

Net loss

$

(125,467,182)

$

(25,316,799)

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

56,390

21,779

Loss on extinguishment of debt

577,659

Non-cash interest expense

2,681,847

2,529,830

Stock-based compensation

2,583,118

2,775,798

Change in fair value of promissory notes

9,512,153

3,000

Warrant related expenses (Note 9)

34,097,568

Change in fair value of warrant liability

49,668,159

(48,875)

Loss (income) on equity method investment

28,047

(4,540)

Interest paid on debt

(1,158,609)

Changes in operating assets and liabilities:

Prepaid expenses and other current assets

(2,969,480)

713,199

Other assets

(5,899)

Operating lease liabilities

(23,066)

Accounts payable

(2,827,195)

128,263

Accrued expenses

342,868

2,786,497

Net cash used in operating activities

(32,299,606)

(17,015,864)

FINANCING ACTIVITIES

Proceeds from the sale of common stock and warrants to purchase common stock, net of issuance costs

56,141,000

24,297,734

Proceeds from debt

30,000,000

Payments of finance lease obligations

(4,267)

(5,686)

Repayment of debt

(10,220,000)

Payment of financing costs

(823,894)

Net cash provided by financing activities

56,136,733

43,248,154

Net increase in cash and cash equivalents

23,837,127

26,232,290

Cash and cash equivalents at beginning of period

23,391,982

17,396,812

Cash and cash equivalents at end of period

$

47,229,109

$

43,629,102

Supplemental disclosure of cash flow information:

Cash paid for interest

$

475,000

$

1,159,008

Supplemental schedule of non-cash financing activities:

Convertible promissory note converted into common stock

$

3,000,000

$

Recognition of warrant liability

$

89,510,165

$

Common stock issuance costs in accounts payable and accrued expenses

$

642,689

$

Deferred offering costs amortization

$

$

5,573

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

1.     Organization and Description of Business

Outlook Therapeutics, Inc. (“Outlook” or the “Company”) was incorporated in New Jersey on January 5, 2010, started operations in July 2011, reincorporated in Delaware by merging with and into a Delaware corporation in October 2015 and changed its name to “Outlook Therapeutics, Inc.” in November 2018. The Company is a biopharmaceutical company focused on developing and commercializing ONS-5010, an ophthalmic formulation of bevacizumab for use in retinal indications. The Company is based in Iselin, New Jersey.

In the fourth quarter of calendar 2023, the Company agreed to conduct an additional adequate and well-controlled clinical trial following discussions with the U.S. Food and Drug Administration (“FDA”) in support of the Company’s Biologics License Application (“BLA”) for ONS-5010. In December 2023, the Company submitted a Special Protocol Assessment (“SPA”) to the FDA for this study (NORSE EIGHT) seeking confirmation that, if successful, it will address the FDA’s requirement for a second adequate and well-controlled clinical trial to support its planned resubmission of the ONS-5010 BLA. In January 2024, the Company received confirmation that the FDA has reviewed and agreed upon the NORSE EIGHT trial protocol pursuant to the SPA and that, if the NORSE EIGHT trial is successful, it would satisfy the FDA’s requirement for a second adequate and well-controlled clinical trial to address fully the clinical deficiency identified in the Complete Response Letter (“CRL”). The first subject was enrolled in NORSE EIGHT in January 2024.  In addition, through a Type A meeting and additional interactions, the Company has identified the approaches needed to resolve the chemistry, manufacturing and controls (“CMC”) comments in the CRL.

Separately, in October 2022 the Company submitted a Marketing Authorization Application (“MAA”), for ONS-5010 with the European Medicines Agency (“EMA”). On December 22, 2022, the Company’s MAA was validated for review by the EMA. In March 2024, the EMA’s Committee for Medicinal Products for Human Use (“CHMP”) was completed with a positive opinion issued on March 22, 2024. A related positive decision by the European Commission is estimated to be received in the second quarter of calendar 2024. ONS-5010 is the Company’s sole product candidate in active development.

2.    Liquidity

The Company has incurred recurring losses and negative cash flows from operations since its inception and has an accumulated deficit of $593,385,368 as of March 31, 2024, which raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited interim consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The unaudited interim consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

On April 15, 2024, in a private placement with Syntone Ventures, LLC (“Syntone”), the Company issued 714,286 shares of common stock and accompanying warrants to purchase 1,071,429 shares of common stock for $5,000,000 in gross proceeds pursuant to a securities purchase agreement entered in January 2024. The warrants have an exercise price of $7.70 per share of common stock and will expire on April 15, 2029.

Management does not believe that the existing cash and cash equivalents as of March 31, 2024, combined with the proceeds from the Syntone private placement in April 2024, are sufficient to fund the Company’s operations through one year from the date of this Quarterly Report on Form 10-Q. As a result, there is substantial doubt about the Company’s ability to continue as a going concern and additional financing will be needed by the Company to fund its operations in the future and to commercially develop ONS-5010 and to develop any other product candidates. Management is currently evaluating different strategies to obtain the required funding for future operations, including but not limited to, continuing to access capital through at-the-market offering agreements (refer to Note 9 for further details), proceeds from potential licensing and/or marketing arrangements or collaborations with pharmaceutical or other companies, the issuance of equity securities, the issuance of additional debt, and revenues from potential future product sales, if any. There can be no assurance that these future funding efforts will be successful.

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

However, management does believe that the existing cash and cash equivalents as of March 31, 2024, combined with $5,000,000 of gross proceeds from the Syntone private placement that closed in April 2024, when combined with the expected proceeds from the full exercise of warrants to purchase shares of common stock (subject to meeting the requirements for calling the associated warrants), would be sufficient to support the Company’s operations through 2025. For further details on the warrants to purchase shares of common stock, refer to Note 9. The Company’s consolidated financial statements do not include any adjustments that might be necessary if it is unable to continue as a going concern.

The Company’s future operations are highly dependent on a combination of factors, including (i) the timely and successful completion of additional financing discussed above; (ii) the Company’s ability to successfully begin marketing of its product candidates or complete revenue-generating partnerships with other companies; (iii) the success of its research and development; (iv) the development of competitive therapies by other biotechnology and pharmaceutical companies; and, ultimately, (v) regulatory approval and market acceptance of the Company’s proposed future products.

3.     Basis of Presentation and Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited interim consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Any reference in these notes to applicable guidance is meant to refer to GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

In the opinion of management, the accompanying unaudited interim consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of March 31, 2024 and its results of operations for the three and six months ended March 31, 2024 and 2023, cash flows for the six months ended March 31, 2024 and 2023, and stockholders’ equity for the three and six months ended March 31, 2024 and 2023. Operating results for the six months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2024. The unaudited interim consolidated financial statements presented herein do not contain all of the required disclosures under GAAP for annual consolidated financial statements. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes as of and for the year ended September 30, 2023 included in the Company’s Annual Report on Form 10-K filed with the SEC on December 22, 2023.

Reverse stock-split

Effective on March 14, 2024, the Company amended its amended and restated certificate of incorporation to implement a one-for-twenty reverse stock split of its common stock. As a result of the reverse stock split, the Company made corresponding adjustments to the share amounts under its employee incentive plans, outstanding options, and common stock warrant agreements with third parties. The disclosure of common shares and per common share data in the accompanying consolidated financial statements and related notes reflect the reverse stock split for all periods presented.

Use of estimates

The preparation of the unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the unaudited interim consolidated financial statements, such as the current macroeconomic environment, including as a result of inflation, high interest rates or ongoing overseas conflict, actual results may materially vary from these estimates. Estimates and assumptions are periodically reviewed, and the

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

effects of revisions are reflected in the unaudited interim consolidated financial statements in the period they are determined to be necessary.

Net loss per share

Basic and diluted net loss per common share is determined by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period.

For purposes of calculating diluted loss per common share, the denominator includes both the weighted average common shares outstanding and the number of common stock equivalents if the inclusion of such common stock equivalents would be dilutive. Potentially dilutive securities include convertible debt, warrants, performance-based stock options and units, stock options and non-vested restricted stock unit (“RSU”) awards using the treasury stock method. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares due to the Company’s loss.

The following table sets forth the computation of basic loss per share and diluted loss per share:

Three months ended March 31, 

Six months ended March 31, 

    

2024

    

2023

    

2024

    

2023

Net loss attributable to common stockholders

$

(114,288,943)

$

(6,654,286)

$

(125,467,182)

$

(25,316,799)

Common stock shares outstanding (weighted average)

14,270,289

12,833,330

13,638,126

12,093,889

Basic and diluted net loss per share

$

(8.01)

$

(0.52)

$

(9.20)

$

(2.09)

The following potentially dilutive securities (in common stock equivalents) have been excluded from the computation of diluted weighted-average shares outstanding as of March 31, 2024 and 2023, as they would be antidilutive:

As of March 31, 

    

2024

    

2023

Performance-based stock units

123

123

Performance-based stock options

669,000

95,000

Stock options

1,959,565

1,103,242

Common stock warrants

13,136,193

366,410

Convertible debt

2,304,391

(i)

815,262

(ii)

(i)The calculation for potentially dilutive securities pertaining to convertible debt is as follows: $12,000,000 of outstanding principal and accrued interest as of March 31, 2024, is converted at a rate of $7.00, and the remaining amount is converted based on a fixed conversion price of $40.00 per share, which is subject to change as described in Note 7.
(ii)The potentially dilutive securities related to convertible debt are calculated based on a fixed conversion price of $40.00 per share, which is subject to change as described in Note 7.

Recently issued accounting pronouncements

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. ASU 2023-07, which is applicable to entities with a single reportable segment and will primarily require enhanced disclosures about significant segment expenses and enhanced disclosures in interim periods. The guidance in ASU 2023-07 will be applied retrospectively and is effective for annual reporting periods in fiscal years beginning after December 15, 2023 and interim reporting periods in fiscal years beginning after December 31, 2024, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2023-07 will have on its consolidated financial statements and disclosures.

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. ASU 2023-09 which is intended to improve income tax disclosure requirements by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) the disaggregation of income taxes paid by jurisdiction. The guidance makes several other changes to the income tax disclosure requirements. The guidance in ASU 2023-09 will be effective for annual reporting periods in fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact that the adoption of ASU 2023-09 will have on its consolidated financial statements and disclosures.

4.     Fair Value Measurements

Certain assets and liabilities are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

The following table presents the Company’s liabilities that are measured at fair value on a recurring basis:

March 31, 2024

    

(Level 1)

    

(Level 2)

    

(Level 3)

Liabilities

Unsecured convertible promissory note

$

$

$

44,745,000

Warrant liability

139,184,543

Total

$

$

$

183,929,543

September 30, 2023

(Level 1)

    

(Level 2)

    

(Level 3)

Liabilities

Unsecured convertible promissory note

$

$

$

35,551,000

Warrant liability

6,219

Total

$

$

$

35,557,219

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the warrant liability and unsecured convertible promissory note for the six months ended March 31, 2024:

Unsecured Convertible

    

Promissory Note

    

Warrants

Balance at October 1, 2023

$

35,551,000

$

6,219

Issued in connection with sale of common stock

89,510,165

Promissory note maturity extension fee added to outstanding balance

2,681,847

Principal and accrued interest converted to common stock

(3,000,000)

Change in fair value

9,512,153

49,668,159

Balance at March 31, 2024

$

44,745,000

$

139,184,543

As further described in Note 7, the Company elected the fair value option to account for an unsecured convertible promissory note issued in December 2022 (the “December 2022 Note”). The fair value of the December 2022 Note is estimated using a binomial lattice model, which evaluates the payouts under hold, convert or call decisions. Significant estimates in the binomial lattice model include the Company’s stock price, volatility, risk-free rate of return, and credit-adjusted discount rate.

The fair value of the December 2022 Note was estimated using a binomial lattice model with the following assumptions:

March 31, 2024

September 30, 2023

Term (years)

1.3

0.3

Stock price

$

11.94

$

4.40

Volatility

167.0

%  

71.0

%

Risk-free rate

4.9

%

5.5

%

Dividend yield

%

%

Credit-adjusted discount rate

21.7

%

22.8

%

The warrants issued in connection with the convertible senior secured notes originally issued pursuant to that certain Note and Warrant Purchase Agreement dated December 22, 2017 and warrants issued in connection with a private placement that closed on March 18, 2024 are classified as liabilities on the accompanying unaudited interim consolidated balance sheets. The warrants related to the  Note and Warrant Purchase Agreement dated December 22, 2017 are classified as liabilities as the warrants include cash settlement features at the option of the holders under certain circumstances. The warrants issued in connection with a private placement that closed on March 18, 2024 are classified as liabilities as the Company assessed that they are not indexed to the Company’s own stock and must be classified as liabilities. For further details on the evaluation refer to Note 9.

The above warrant liabilities are revalued each reporting period with the change in fair values recorded in the accompanying consolidated statements of operations until the warrants are exercised or expire. The fair values of the warrant liabilities are estimated using the Black-Scholes option pricing model using the following weighted average assumptions:

    

March 31, 2024

September 30, 2023

Risk-free interest rate

4.21

%  

5.30

%

Remaining contractual term of warrants (years)

5.0

1.4

Expected volatility

135.4

%

158.3

%

Annual dividend yield

%

%

Fair value of common stock (per share)

$

11.94

$

4.40

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

5. Equity Method Investment

In connection with the execution of a stock purchase agreement with Syntone Ventures LLC, the United States-based affiliate of Syntone Technologies Group Co. Ltd. (“Syntone PRC”) on May 22, 2020, the Company and Syntone PRC entered into a joint venture agreement pursuant to which they agreed to form a People’s Republic of China (“PRC”) joint venture, Beijing Syntone Biopharma Ltd (“Syntone JV”), that is 80% owned by Syntone PRC and 20% owned by the Company. As the Company can exert significant influence over, but does not control, Syntone JV’s operations through voting rights or representation on Syntone JV’s board of directors, the Company accounts for this investment using the equity method of accounting. Upon formation of Syntone JV in April 2021, the Company entered into a royalty-free license with Syntone JV for the development, commercialization and manufacture of ONS-5010 in the greater China market, which includes Hong Kong, Taiwan and Macau.

The Company made the initial investment of $900,000 in June 2020 and is committed to making capital contributions to Syntone JV of approximately $2,100,000, based upon the development plan contemplated in the license agreement. The maximum exposure to a loss as a result of the Company’s involvement in Syntone JV is limited to the initial investment and the future capital contributions totaling approximately $2,100,000.

6.     Accrued Expenses

Accrued expenses consists of:

    

March 31, 2024

September 30, 2023

Compensation

$

1,139,963

$

919,970

Professional fees

1,215,594

165,192

Research and development

544,562

1,234,192

Other accrued expenses

215,271

426,386

$

3,115,390

$

2,745,740

7.    Debt

Debt consists of:

    

March 31, 2024

    

September 30, 2023

Unsecured convertible promissory note (measured at fair value)

$

44,745,000

$

35,551,000

Less: current portion

(44,745,000)

(35,551,000)

Long-term debt

$

$

December 2022 Note

On December 22, 2022, the Company entered into a Securities Purchase Agreement and issued the December 2022 Note with a face amount of $31,820,000 to Streeterville Capital, LLC (the “Lender”), the holder of the Company’s unsecured promissory note issued in November 2021 (the “November 2021 Note”). The December 2022 Note has an original issue discount of $1,820,000. The Company received net proceeds of $18,052,461 upon the closing on December 28, 2022 after deducting the Lender’s transaction costs in connection with the issuance and a full payment of the remaining outstanding principal and accrued interest on the November 2021 Note. The November 2021 Note was cancelled upon repayment. See below for additional disclosures relating to November 2021 Note.

In December 2023, the Company extended the maturity of the December 2022 Note from January 1, 2024 to April 1, 2024. The Company incurred a $475,000 extension fee, which was expensed and included in interest expense in the unaudited interim consolidated statement of operations.

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

The December 2022 Note bore interest at 9.5% per annum through April 1, 2024. The December 2022 Note contains customary covenants, including a restriction on the Company’s ability to pledge certain of the Company’s assets, subject to certain exceptions, without the Lender’s consent. Beginning on April 1, 2023, the Lender had the right to convert the December 2022 Note at the Conversion Price (as defined below). The principal amount and conversion price of the December 2022 Note were subject to adjustment upon certain triggering events. In addition, the Company had the right to convert all or any portion of the outstanding balance under the December 2022 Note into shares of common stock at the Conversion Price if certain conditions have been met at the time of conversion, including if at any time after the six-month anniversary of the closing date, the daily volume-weighted average price of the common stock on Nasdaq equals or exceeds $50.00 per share (subject to adjustments for stock splits and stock combinations) for a period of 30 consecutive trading days. Payments may be made by the Company (i) in cash, (ii) in shares of common stock, with the number of shares being equal to the portion of the applicable payment amount divided by the Conversion Price (as defined below), or (iii) a combination of cash and shares of common stock. Any payments made by the Company in cash, including prepayments or repayment at maturity, will be subject to an additional fee of 7.5%. Upon the occurrence of certain events described in the December 2022 Note, including, among others, the Company’s failure to pay amounts due and payable under the December 2022 Note, events of insolvency or bankruptcy, failure to observe covenants contained in the Securities Purchase Agreement and the December 2022 Note, breaches of representations and warranties in the Securities Purchase Agreement, and the occurrence of certain transactions without the Lender’s consent (each such event, a “Trigger Event”), the Lender shall have the right, subject to certain exceptions, to increase the balance of the December 2022 Note by 10% for a Major Trigger Event (as defined in the December 2022 Note) and 5% for a Minor Trigger Event (as defined in the December 2022 Note). If a Trigger Event is not cured within ten (10) trading days of written notice thereof from the Lender, it will result in an event of default (such event, an “Event of Default”). Following an Event of Default, the Lender may accelerate the December 2022 Note such that all amounts thereunder become immediately due and payable, and interest shall accrue at a rate of 22% annually until paid. Prior to April 1, 2024, under the December 2022 Note, “Conversion Price” meant, prior to a Major Trigger Event, $40.00 per share (subject to adjustment for stock splits and stock combinations), and following a Major Trigger Event, the lesser of (i) $40.00 per share (subject to adjustment for stock splits and stock combinations), and (ii) 90% multiplied by the lowest closing bid price of the Company’s common stock in the three trading days prior to the date on which the conversion notice is delivered. If the Conversion Price is below $3.51 per share, the Company will be required to satisfy a conversion notice from the Lender in cash. Subject to certain exceptions, while the December 2022 Note is outstanding, the Lender will have a consent right on any future variable rate transactions or any debt and a 10% participation right in any future debt or equity financings.

On January 22, 2024, the Company entered into an amendment to the December 2022 Note (the “Note Amendment”) with the Lender, which became effective on April 1, 2024 after satisfaction of certain conditions, including various required stockholder approvals and the closing of the private placement on March 18, 2024. The maturity of the December 2022 Note was extended to July 1, 2025. An extension fee of $2,681,847 (calculated as 7.5% of the outstanding balance of the December 2022 Note) was added to the outstanding balance on March 18, 2024. The extension fee was expensed in the quarter ended March 31, 2024 and included in interest expense in the unaudited interim consolidated statement of operations.

Under the Note Amendment, the initial conversion price with respect to $15,000,000 in aggregate principal amount of the December 2022 Note was changed to $7.00, the price per share in the private placement that closed on March 18, 2024. Effective April 1, 2024, the December 2022 Note bears interest at the prime rate (as published in the Wall Street Journal) plus 3% (subject to a floor of 9.5%) and the Company has an obligation to repay at least $3,000,000 of the outstanding balance of the December 2022 Note for each calendar quarter beginning with the second calendar quarter of 2024 (subject to adjustment for conversions by the Lender and to payment of an exit fee as set forth in the Note Amendment) and continuing until the December 2022 Note is repaid in full. As of March 31, 2024, the December 2022 Note was classified as current on the unaudited interim consolidated balance sheets as the Lender has the right to convert the December 2022 Note into equity until the entire outstanding balance has been paid off.

During the three and six months ended March 31, 2024, an aggregate of principal and accrued interest totaling $3,000,000 of the December 2022 Note was converted into 428,571 shares of the Company’s common stock.

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

The Company elected to account for the December 2022 Note at fair value (Note 4) and was not required to bifurcate the conversion option as a derivative and as a result the original issue discount of $1,820,000 and debt issuance costs were written off upon election to fair value and accounted for as interest. During the six months ended March 31, 2023, the Company recognized $2,074,964 of interest expense related to the December 2022 Note, consisting of the original issue discount of $1,820,000 and other third-party debt issuance costs of $254,964 as the Company elected the fair value option.

During the three and six months ended March 31, 2024, the Company recorded $3,156,847 of interest expense in both periods, respectively. This interest expense was associated with the fees incurred for extending the debt.

November 2021 Note

On November 16, 2021, the Company received $10,000,000 in net proceeds from the issuance of the November 2021 Note with a face amount of $10,220,000. Debt issuance costs totaling $820,000 were recorded as debt discount and were deducted from the principal. The debt discount was amortized as a component of interest expense over the term of the underlying debt using the effective interest method. The November 2021 Note bore interest at a rate of 9.5% per annum compounding daily and was set to mature on January 1, 2023. The Company could prepay all or a portion of the November 2021 Note at any time by paying 105% of the outstanding balance elected for pre-payment.

As discussed above, the November 2021 Note was cancelled using proceeds from the December 2022 Note issued to the same lender. The total repayment was $11,947,539, which represented 105% of the outstanding balance and included $1,158,609 of interest expense. The transaction has been accounted for as an extinguishment of the November 2021 Note. As a result, the Company recorded a loss on debt extinguishment of $577,659, which included $8,729 of unamortized debt discount, and prepayment fees of $568,930.

During the three and six months ended March 31, 2023, the Company recognized $418,388 and $454,866 of interest expense, respectively, related to the November 2021 Note of which $169,857 and $190,775, respectively, was related to the amortization of debt discount. During the three and six months ended March 31, 2024, no interest expense was recognized.

8.     Commitments and Contingencies

Litigation

On November 3, 2023, a securities class action lawsuit was filed against the Company and certain of its officers in the United States District Court for the District of New Jersey. The class action complaint alleges violations of the Securities Exchange Act of 1934, as amended, or the Exchange Act, in connection with allegedly false and misleading statements made by the Company related to the Company’s BLA during the period from December 29, 2022 through August 29, 2023. The complaint alleges, among other things, that the Company violated Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 by failing to disclose that there was an alleged lack of evidence supporting ONS-5010 as a treatment for wet AMD and that the Company and/or their manufacturing partner had deficient CMC controls for ONS-5010, which remained unresolved at the time the Company’s BLA was re-submitted to the FDA and, as a result, the FDA was unlikely to approve the Company’s BLA, and that the Company’s stock price dropped when such information was disclosed. The plaintiffs in the class action complaint seek damages and interest, and an award of reasonable costs, including attorneys’ fees.

The pending lawsuit and any other related lawsuits are subject to inherent uncertainties, and the actual defense and disposition costs will depend upon many unknown factors. The outcome of the pending lawsuit and any other related lawsuits is necessarily uncertain. The Company could be forced to expend significant resources in the defense of the pending lawsuit and any additional lawsuits, and the Company may not prevail. In addition, the Company may incur substantial legal fees and costs in connection with such lawsuits. The Company currently is not able to estimate the possible cost to it from these matters, as the pending lawsuit is currently at an early stage, and the Company cannot be certain how long it may take to resolve the pending lawsuit or the possible amount of any damages that the Company may be required

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

to pay. Such amounts could be material to the Company’s financial statements if it does not prevail in the defense of the pending lawsuit and any other related lawsuits, or even if it does prevail. The Company has not established any reserve for any potential liability relating to the pending lawsuit and any other related lawsuits. It is possible that the Company could, in the future, incur judgments or enter into settlements of claims for monetary damages.

Leases

Corporate office

In March 2021, the Company entered into a three-year term corporate office lease for its former corporate headquarters in Iselin, New Jersey that ended on April 30, 2024.

In March 2024, the Company entered into a five-year term corporate office lease for its new corporate headquarters in Iselin, New Jersey that commenced on May 1, 2024. The Company did not recognize a right-of-use asset and related operate lease liability as of March 31, 2024 because the lease had not commenced.

Equipment leases

As of March 31, 2024, all equipment leases had expired. The Company had equipment leases, with terms between 12 and 36 months, recorded as finance leases. The equipment leases bore interest between 4.0% and 13.0% per annum. Certain lease agreements contained provisions for future rent increases. Payments due under the lease contracts included minimum payments that the Company was obligated to make under the non-cancelable initial terms of the leases as the renewal terms are at the Company’s option. Lease expense was recorded as research and development or general and administrative based on the use of the leased asset.

The components of lease cost for the three and six months ended March 31, 2024 and 2023 are as follows:

Three months ended March 31, 

Six months ended March 31, 

    

2024

    

2023

    

2024

    

2023

Lease cost:

 

  

 

  

 

  

 

  

Amortization of right-of-use assets

$

$

$

$

Interest on lease liabilities

 

12

 

398

 

116

 

889

Total finance lease cost

 

12

 

398

 

116

 

889

Operating lease cost

 

11,217

 

11,216

 

22,433

 

22,433

Total lease cost

$

11,229

$

11,614

$

22,549

$

23,322

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

Amounts reported in the unaudited interim consolidated balance sheets for leases where the Company is the lessee are as follows:

March 31, 2024

    

September 30, 2023

Operating leases:

 

 

  

Right-of-use asset

$

3,739

$

26,172

Operating lease liabilities

 

 

Finance leases:

 

  

 

  

Right-of-use asset

$

$

Financing lease liabilities

 

 

4,267

Weighted-average remaining lease term (years):

 

  

 

  

Operating leases

0.1

0.6

Finance leases

 

 

0.3

Weighted-average discount rate:

 

  

 

  

Operating leases

7.5%

7.5%

Finance leases

 

 

13.0%

Other information related to leases for the six months ended March 31, 2024 and 2023 are as follows:

Six months ended March 31, 

    

2024

    

2023

Cash paid for amounts included in the measurement of lease obligations:

 

 

  

Operating cash flows from finance leases

$

116

$

889

Operating cash flows from operating leases

 

 

23,721

Financing cash flows from finance leases

 

4,267

 

5,686

As of March 31, 2024, there were no remaining future minimum lease payments under non-cancelable leases.

9.    Common Stock and Stockholders’ Equity

Common stock

On March 7, 2024, following receipt of stockholder approval at the Company’s 2024 annual meeting of stockholders, the number of authorized shares of common stock under the Company’s Certificate of Incorporation was increased from 21,250,000 shares to 60,000,000 shares.

On March 18, 2024, in a private placement (the “Private Placement”) pursuant to a securities purchase agreement entered in January 2024 with certain institutional and accredited investors, including GMS Ventures and Investments (“GMS Ventures”), the Company’s largest stockholder, the Company issued an aggregate of 8,571,423 shares of common stock and warrants to purchase an aggregate of 12,857,133 shares of common stock at a purchase price per share of $7.00 per share and accompanying warrant to purchase one and one-half shares of common stock for $55,498,311 in net proceeds after payment of placement agent fees and other offering costs. GMS Ventures purchased an aggregate of 2,305,714 shares of common stock and warrants to purchase an aggregate of 3,458,571 shares of common stock in the Private Placement. The Warrants have an exercise price of $7.70 per share of common stock and will expire on March 18, 2029.

The Company evaluated the equity classification for the common stock warrants and considered the conditions as prescribed within ASC 815-40, Derivatives and Hedging, Contracts in an Entity’s own Equity (“ASC 815-40”). The Company determined that the warrants did not meet the “fixed for fixed” settlement provision set forth in Step 2 of the indexation guidance and as a result they are not indexed to the Company’s own stock and must be classified as liabilities. The warrants were measured at fair value at issuance and recorded as a liability and will be remeasured to fair value at each subsequent reporting date, with changes in fair value recorded in current earnings. The net proceeds from the Private Placement were allocated first to the warrants at fair value, with the residual amount recorded as common stock at par

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

value. The Company will continue to classify such warrants as liabilities until they are exercised, expire, or are no longer required to be classified as liabilities.

As the fair value of the warrants upon issuance was more than the proceeds of the Private Placement, there are no proceeds allocated to additional paid in capital. The excess fair value of the warrants over the net proceeds was $34,097,568 in the aggregate and was recorded as warrant related expenses in the unaudited interim consolidated statement of operations.

In December 2022, in a registered direct equity offering to certain institutional and accredited investors, including GMS Ventures, the Company issued 1,423,041 shares of common stock at a purchase price per share of $17.568 for $23,208,679 in net proceeds after payment of placement agent fees and other offering costs. GMS Ventures purchased an aggregate of 711,520 shares of common stock in the registered direct equity offering. In connection with the registered direct equity offering, the Company issued to M.S. Howells & Co., the placement agent, warrants to purchase up to an aggregate of 25,787 shares of common stock at an exercise price of $21.00 per share, which warrants have a three-year term.

H.C. Wainwright & Co. At-the-Market Offering Agreement

On March 26, 2021, the Company entered into an At-the-Market Offering Agreement with H.C. Wainwright & Co., as sales agent (“Wainwright”) (the “Wainwright ATM Agreement” or the “Wainwright ATM Offering”), under which the Company could issue and sell shares of its common stock having an aggregate offering price of up to $40,000,000 from time to time through Wainwright. The Company incurred financing costs of $197,654, which were capitalized and reclassified to additional paid in capital on a pro rata basis when the Company sold common stock under the Wainwright ATM Offering.

Under the Wainwright ATM Agreement, the Company paid Wainwright a commission equal to 3.0% of the aggregate gross proceeds of any sales of common stock under the Wainwright ATM Agreement. The Company terminated the Wainwright ATM Agreement effective May 15, 2023. As a result, the Company wrote off unamortized deferred costs under the Wainwright ATM Agreement effective as of the termination date.

No shares of common stock were sold under the Wainwright ATM Offering during the three months ended March 31, 2023. During the six months ended March 31, 2023, the Company sold 44,769 shares of common stock under the Wainwright ATM Offering and generated $1,089,105 in net proceeds. The Company paid fees to Wainwright and other issuance costs of $38,799.

BTIG, LLC At-the-Market Offering Agreement

On May 16, 2023, the Company entered into an At-the-Market Sales Agreement with BTIG, LLC (“BTIG”) as sales agent (as amended, the “BTIG ATM Agreement” or the “BTIG ATM Offering”), under which the Company may issue and sell shares of its common stock having an aggregate offering price of up to $100,000,000 from time to time through BTIG. The Company incurred financing costs of $353,688, which were capitalized and are being reclassified to additional paid in capital on a pro rata basis when the Company sells common stock under the BTIG ATM Offering. As of March 31, 2024, $331,512 of such deferred costs are included in other assets on the unaudited interim consolidated balance sheets.

Under the BTIG ATM Agreement, the Company pays BTIG a commission equal to 3.0% of the aggregate gross proceeds of any sales of common stock under the BTIG ATM Agreement. The offering of common stock pursuant to the BTIG ATM Agreement will terminate upon the earlier of (i) the sale of all common stock subject to the BTIG ATM Agreement or (ii) termination of the BTIG ATM Agreement in accordance with its terms.

No shares of common stock were sold under the BTIG ATM Offering during the three and six months ended March 31, 2024.

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Notes to Unaudited Interim Consolidated Financial Statements

Common stock warrants

As of March 31, 2024, shares of common stock issuable upon the exercise of outstanding warrants were as follows:

Shares of

common stock

issuable upon

exercise of

Exercise Price

Expiration Date

    

warrants

    

Per Share

December 22, 2024

(i)

13,850

$

240.00

February 24, 2025

8,642

$

25.40

April 13, 2025

(i)

7,284

$

240.00

May 31, 2025

(i)

3,121

$

240.00

June 22, 2025

9,563

$

30.38

December 28, 2025

25,787

$

21.00

January 28, 2026

12,576

$

25.00

February 2, 2026

93,238

$

25.00

November 23, 2026

104,999

$

31.25

March 18, 2029

(ii)

12,857,133

$

7.70

13,136,193

(i)The warrants were issued in connection with the convertible senior secured notes originally issued pursuant to the certain Note and Warrant Purchase Agreement dated December 22, 2017 and are classified as liabilities on the accompanying unaudited interim consolidated balance sheets, as the warrants include cash settlement features at the option of the holders under certain circumstances. Refer to Note 4 for fair value measurements disclosures.

(ii)The warrants were issued in connection with a private placement that closed on March 18, 2024 and are exercisable only for cash, except in limited circumstances, at any time after the date of issuance. The Company evaluated the warrants under ASC 815, Derivatives and Hedging, guidance and determined that the warrants did not meet Step 2 of the indexation, as a result they are not indexed to the Company’s own stock and must be classified as liabilities. Refer above for further details.

A holder of warrants may not exercise the warrant if the holder, together with its affiliates, would beneficially own more than a specified percentage of the outstanding common stock (4.99%, 9.99% or 19.99%, as applicable), immediately after giving effect to such exercise, which may be increased or decreased at the holders’ option (not to exceed 19.99%), effective 61 days after written notice to the Company. In addition, the Company may require the holders to cash exercise the warrants under certain circumstances as follows: (i) if the VWAP of the common stock equals or exceeds $1.00 per share (subject to adjustment in the event of stock splits, combinations or similar events, such as the reverse stock split implemented prior to Closing as discussed below) for 30 consecutive days (the “Stock Price Condition”) at any time after the Company publicly announces topline data from its NORSE EIGHT clinical trial evidencing satisfaction of the trial’s primary endpoints (the “NORSE EIGHT Announcement”), upon the consent of a majority of the members of the Company’s board of directors, the Company may require the holders to exercise up to 20% of the aggregate number of warrants issued to such holder on the issue date; and (ii) the Company may require up to the remainder of the warrants be exercised (A) if the Stock Price Condition is satisfied at any time after the Company publicly announces approval from the FDA of its BLA for ONS-5010, upon the consent of a majority of the members of the board of directors or (B) if the Stock Price Condition is satisfied at any time after the NORSE EIGHT Announcement, upon the unanimous consent of the members of the Company’s Board of Directors present at duly called meeting.

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Notes to Unaudited Interim Consolidated Financial Statements

10.  Stock-Based Compensation

2011 Equity Incentive Plan

The Company’s 2011 Equity Compensation Plan (the “2011 Plan”) provided for the Company to sell or issue restricted common stock, RSUs, performance-based awards (“PSUs”), cash-based awards or to grant stock options for the purchase of common stock to officers, employees, consultants and directors of the Company. The 2011 Plan was administered by the board of directors or, at the discretion of the board of directors, by a committee of the board. As of March 31, 2024, PSUs representing 123 shares of the Company’s common stock were outstanding under the 2011 Plan. Effective with the December 2015 adoption of the 2015 Equity Incentive Plan, (the “2015 Plan”), no future awards under the 2011 Plan will be granted.

2015 Equity Incentive Plan

In December 2015, the Company adopted the 2015 Plan. The 2015 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, RSU awards, performance stock awards and other forms of equity compensation to Company employees, directors and consultants. The aggregate number of shares of common stock authorized for issuance pursuant to the Company’s 2015 Plan is 2,503,677. As of March 31, 2024, there were no shares available for grant under the 2015 Plan.

Stock options and RSUs are granted under the Company’s 2015 Plan and generally vest over a period of one to four years from the date of grant and, in the case of stock options, have a term of 10 years. The Company recognizes the grant date fair value of each option and RSU over its vesting period.

The Company recorded stock-based compensation expense in the following expense categories of its unaudited interim consolidated statements of operations for the three and six months ended March 31, 2024 and 2023:

Three months ended March 31, 

Six months ended March 31, 

2024

    

2023

    

2024

    

2023

Research and development

$

236,960

$

322,268

$

468,376

$

612,924

General and administrative

1,073,547

1,061,137

2,114,742

2,162,874

$

1,310,507

$

1,383,405

$

2,583,118

$

2,775,798

Stock options

As of March 31, 2024, options to purchase common stock of the Company outstanding under the 2015 Plan were as follows:

Weighted

Average

Weighted

Remaining

Number of

Average

Contractual

Aggregate

    

Shares

    

Exercise Price

    

Term (Years)

    

Intrinsic Value

Balance at October 1, 2023

1,197,774

$

28.72

Granted

799,729

6.70

Forfeited

(29,605)

27.93

Expired

(8,333)