10-Q 1 brhc20052523_10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended March 31, 2023

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 Number: 001-36829

Rocket Pharmaceuticals, Inc.
(Exact name of registrant as specified in its charter)

Delaware
  
04-3475813
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)

9 Cedarbrook Drive, Cranbury, NJ
 
08512
(Address of principal executive office)
  
(Zip Code)

(609) 659-8001
(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, $0.01 par value per share
RCKT
Nasdaq Global Market

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 ☒

As of May 1, 2023, there were 80,461,335 shares of common stock, $0.01 par value per share, outstanding.

 
 
Page
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 

4

 
 

5

 
 

6

 
 

7

 
 

8

 
 

9
Item 2.
 22
Item 3.
 37
Item 4.
 37
PART II - OTHER INFORMATION
 
Item 1.
 38
Item 1A.
 38
Item 2.
 38
Item 3.
 38
Item 4.
 38
Item 5.
 38
Item 6.
 39

40

Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “aim,” “anticipate,” “believe,” “can,” “contemplate,” “continue,” “could,” “design,” “estimate,” “expect,” “future,” “intend,” “likely,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
•
federal, state, and non-U.S. regulatory requirements, including regulation of our current or any other future product candidates by the U.S. Food and Drug Administration (“FDA”);
 
•
the timing of and our ability to submit regulatory filings with the FDA and to obtain and maintain FDA or other regulatory authority approval of, or other action with respect to, our product candidates;
 
•
our competitors’ activities, including decisions as to the timing of competing product launches, pricing, and discounting;
 
•
whether safety and efficacy results of our clinical trials and other required tests for approval of our product candidates provide data to warrant progression of clinical trials, potential regulatory approval, or further development of any of our product candidates;
 
•
our ability to develop, acquire and advance product candidates into, enroll a sufficient number of patients into, and successfully complete, clinical studies, and our ability to apply for and obtain regulatory approval for such product candidates, within currently anticipated timeframes, or at all;
 
•
our ability to establish key collaborations and vendor relationships for our product candidates and any other future product candidates;
 
•
our ability to develop our sales and marketing capabilities or enter into agreements with third parties to sell and market any of our product candidates;
 
•
our ability to obtain additional funding to conduct our planned research and development efforts;
 
•
our ability to acquire additional businesses, form strategic alliances or create joint ventures and our ability to realize the benefit of such acquisitions, alliances, or joint ventures;
 
•
our ability to successfully develop and commercialize any technology that we may in-license or products we may acquire;
 
•
the development of our direct manufacturing capabilities for our AAV programs;
 
•
our ability to successfully operate in non-U.S. jurisdictions in which we currently or in the future do business, including compliance with applicable regulatory requirements and laws;
 
•
our ability to obtain and enforce patents to protect our product candidates, and our ability to successfully defend ourselves against unforeseen third-party infringement claims;
 
•
anticipated trends and challenges in our business and the markets in which we operate;
 
•
our estimates regarding our capital requirements; and
 
•
our ability to obtain additional financing and raise capital as necessary to fund operations or pursue business opportunities.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section incorporated by reference from our Annual Report for the year ended December 31, 2022, on Form 10-K, that could cause actual results or events to differ materially from the forward-looking statements that we make. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make or enter into.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results, performance, or achievements may be materially different from what we expect. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report on Form 10-Q also contains estimates, projections and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties and actual events, or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources. This Quarterly Report contains summaries of certain provisions contained in some of the documents described herein, but reference is made to the actual documents for complete information. All of the summaries are qualified in their entirety by the actual documents. Unless stated otherwise, references in this Quarterly Report to “us,” “we,” “our,” or our “Company” and similar terms refer to Rocket Pharmaceuticals, Inc.

3
PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements
Rocket Pharmaceuticals, Inc.
Consolidated Balance Sheets
($ in thousands, except shares and per share amounts)

    March 31,     December 31,  
   
2023
    
2022
 
  (unaudited)        
Assets
            
Current assets:
            
Cash and cash equivalents
  
$
64,579
    
$
140,517
  
Investments
    
266,505
      
215,877
  
Prepaid expenses and other current assets
    
6,949
      
7,666
  
Total current assets
    
338,033
      
364,060
  
Property and equipment, net
    
30,588
      
29,009
  
Goodwill
    
39,154
      
39,154
  
Intangible assets
    25,724       25,724  
Restricted cash
    
1,340
      
1,340
  
Deposits
    
459
      
608
  
Investments
    28,957       43,276  
Operating lease right-of-use assets
    
4,369
      
1,972
  
Finance lease right-of-use asset
    
46,133
      
46,664
  
Total assets
  
$
514,757
    
$
551,807
  
Liabilities and stockholders’ equity
                
Current liabilities:
                
Accounts payable and accrued expenses
  
$
28,609
    
$
36,660
  
Operating lease liabilities, current
    
849
      
773
  
Finance lease liability, current
    
1,748
      
1,736
  
Total current liabilities
    
31,206
      
39,169
  
Operating lease liabilities, non-current
    
3,506
      
1,088
  
Finance lease liability, non-current
    
19,294
      
19,269
  
Other liabilities
    
1,875
      
2,595
  
Total liabilities
    
55,881
      
62,121
  
Commitments and contingencies (Note 12)
            
                 
Stockholders’ equity:
                
Preferred stock, $0.01 par value, authorized 5,000,000 shares:
                
Series A convertible preferred stock; 300,000 shares designated as Series A; 0 shares issued and outstanding
    
-
      
-
  
Series B convertible preferred stock; 300,000 shares designated as Series B; 0 shares issued and outstanding
    
-
      
-
  
Common stock, $0.01 par value, 120,000,000 shares authorized; 80,412,194 and 79,123,312 shares issued and 80,409,623 and 79,120,741 shares outstanding at March 31, 2023 and December 31, 2022, respectively
    
804
      
791
  
Treasury stock, at cost, 2,571 common shares at March 31, 2023 and December 31, 2022, respectively
    (47 )     (47 )
Additional paid-in capital
    
1,230,319
      
1,203,074
  
Accumulated other comprehensive loss
    
(90
)
    
(357
)
Accumulated deficit
    
(772,110
)
    
(713,775
)
Total stockholders’ equity
    
458,876
      
489,686
  
Total liabilities and stockholders’ equity
  
$
514,757
    
$
551,807
  

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

4
Rocket Pharmaceuticals, Inc.
Consolidated Statements of Operations
($ in thousands, except shares and per share amounts)
(unaudited)

 
Three Months Ended March 31,
  
   
2023
    
2022
  
 
            
Revenue
  
$
-
    
$
-
  
 
                
Operating expenses:
                
Research and development
    
46,371
      
30,794
  
General and administrative
    
15,823
      
11,770
  
Total operating expenses
    
62,194
      
42,564
  
Loss from operations
    
(62,194
)
    
(42,564
)
Interest expense
    
(468
)
    
(464
)
Interest and other income, net
    
1,908
      
623
  
Accretion of discount and amortization of premium on investments, net
    
2,419
   
(577
)
Net loss
  
$
(58,335
)
  
$
(42,982
)
Net loss per share - basic and diluted
  
$
(0.73
)
  
$
(0.67
)
Weighted-average common shares outstanding - basic and diluted
    
79,453,519
      
64,509,721
  

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

5
Rocket Pharmaceuticals, Inc.
Consolidated Statements of  Comprehensive Loss
(in thousands)
(unaudited)

 
Three Months Ended March 31,
  
   
2023
    
2022
  
 
            
Net loss
  
$
(58,335
)
  
$
(42,982
)
Other comprehensive loss
                
Net unrealized gain (loss) on investments
    
272
   
(468
)
Total comprehensive loss
  
$
(58,063
)
  
$
(43,450
)

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

6
Rocket Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equity
For the Three Months Ended March 31, 2023 and 2022
(in thousands except share amounts)
(unaudited)

                      Accumulated              
                Additional    
Other
           Total  
   
Common Stock
     Treasury    
Paid-In
    
Comprehensive
     Accumulated
    Stockholders’  
   
Shares
    
Amount
     Stock    
Capital
    
Income/(Loss)
    
Deficit
    
Equity
  
Balance at December 31, 2022
    
79,123,312
    
$
791
     $ (47 )  
$
1,203,074
    
$
(357
)
  
$
(713,775
)
  
$
489,686
  
Issuance of common stock pursuant to exercise of stock options
    88,429       1       -       1,113       -       -       1,114  
Issuance of common stock pursuant to vesting of restricted stock units
    126,060       1       -       (1 )     -       -       -  
Issuance of common stock pursuant to exercise of warrants
    126,093       1       -       6       -       -       7  
Issuance of common stock pursuant to the at-the-market offering program, net of issuance costs
    948,300       10       -       17,212       -       -       17,222  
Unrealized comprehensive gain on investments
    
-
      
-
       -      
-
      
267
      
-
      
267
  
Stock-based compensation
    
-
      
-
       -      
8,915
      
-
      
-
      
8,915
  
Net loss
    
-
      
-
       -      
-
      
-
      
(58,335
)
    
(58,335
)
Balance at March 31, 2023
    
80,412,194
    
$
804
     $ (47 )  
$
1,230,319
    
$
(90
)
  
$
(772,110
)
  
$
458,876
  

                      Accumulated
             
                Additional     Other
          Total
 
   
Common Stock
     Treasury
    Paid-In     Comprehensive
    Accumulated
   
Stockholders’
  
    Shares     Amount
     Stock
    Capital     (Loss)
    Deficit     Equity
 
Balance at December 31, 2021
    
64,505,889
    
$
645
     $ -    
$
946,152
    
$
(161
)
  
$
(491,912
)
  
$
454,724
  
Issuance of common stock pursuant to exercise of stock options
    
16,168
      
-
       -      
76
      
-
      
-
      
76
  
Unrealized comprehensive loss on investments
    
-
      
-
       -      
-
      
(468
)
    
-
      
(468
)
Stock-based compensation
    
-
      
-
       -      
6,270
      
-
      
-
      
6,270
  
Net loss
    
-
      
-
       -      
-
      
-
      
(42,982
)
    
(42,982
)
Balance at March 31, 2022
    
64,522,057
    
$
645
     $
-    
$
952,498
    
$
(629
)
  
$
(534,894
)
  
$
417,620
  

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

7
Rocket Pharmaceuticals, Inc.
Consolidated Statements of  Cash Flows
(in thousands)
(unaudited)

 
Three Months Ended March 31,
  
   
2023
    
2022
  
Operating activities:
            
Net loss
  
$
(58,335
)
  
$
(42,982
)
Adjustments to reconcile net loss to net cash used in operating activities:
                
Depreciation and amortization of property and equipment
    
1,135
      
767
  
Amortization of finance lease right of use asset
    538       535  
Write down of property and equipment, net
     -       40  
Stock-based compensation
    
8,915
      
6,270
  
Amortization of premium and accretion of discount on investments, net
     (2,343 )     577  
Changes in operating assets and liabilities:
                
Prepaid expenses and other assets
    
866
      
(3,936
)
Accounts payable and accrued expenses
    
(7,750
)
    
(491
)
Operating lease liabilities
    
97
      
(33
)
Finance lease liability
    
37
      
45
  
Other liabilities
    
(720
)
    
(15
)
Net cash used in operating activities
    
(57,560
)
    
(39,223
)
Investing activities:
                
Purchases of investments
    
(96,034
)
    
(143,023
)
Proceeds from maturities of investments
    
62,335
      
81,983
  
Payments made to acquire right of use asset
     (7 )     -  
Purchases of property and equipment
    
(3,015
)
    
(1,955
)
Net cash used in investing activities
    
(36,721
)
    
(62,995
)
Financing activities:
                
Issuance of common stock, pursuant to exercise of stock options
    
1,114
      
76
  
Exercise of warrants
     7       -  
Issuance of common stock pursuant to the at-the-market offering program, net of issuance costs
     17,222       -  
Net cash provided by financing activities
    
18,343
      
76
  
Net change in cash, cash equivalents and restricted cash
    
(75,938
)
    
(102,142
)
Cash, cash equivalents and restricted cash at beginning of period
    
141,857
      
234,037
  
Cash, cash equivalents and restricted cash at end of period
  
$
65,919
    
$
131,895
  
                 
Supplemental disclosure of non-cash financing and investing activities:
                
Accrued purchases of property and equipment, ending balance
  
$
1,794
    
$
1,635
  
Unrealized gain (loss) on investments
  
$
267
    
$
(468
)

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

8
ROCKET PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements
($ in thousands, except share and per share data)
(Unaudited)

1.
Nature of Business


Rocket Pharmaceuticals, Inc. (“Rocket” or the “Company”) is a clinical-stage, multi-platform biotechnology company focused on the development of first, only and best in-class gene therapies, with direct on-target mechanism of action and clear clinical endpoints, for rare and devastating diseases. The Company has three clinical-stage ex vivo lentiviral vector (“LV”) programs. These include programs for Fanconi Anemia (“FA”), a genetic defect in the bone marrow that reduces production of blood cells or promotes the production of faulty blood cells, Leukocyte Adhesion Deficiency-I (“LAD-I”), a genetic disorder that causes the immune system to malfunction and Pyruvate Kinase Deficiency (“PKD”), a rare red blood cell autosomal recessive disorder that results in chronic non-spherocytic hemolytic anemia. Of these, both the Phase 2 FA program and the Phase 1/2 LAD-I program produced data read outs in 2022 and regulatory filings in the United States (“U.S.”) and Europe (“EU”) are anticipated in 2023. Additional work on a gene therapy program for the less common FA subtypes C and G is ongoing. In the U.S., the Company also has a clinical stage in vivo adeno-associated virus (“AAV”) program for Danon disease, a multi-organ lysosomal-associated disorder leading to early death due to heart failure. The Danon program is currently in an ongoing Phase 1 trial and pivotal Phase 2 study initiation expected in the second quarter of 2023. Additionally, the Company has an AAV vector program targeting Plakophilin-2 Arrhythmogenic Cardiomyopathy (“PKP2-ACM”), an inheritable cardiac disorder that is characterized by a progressive loss of cardiac muscle mass, severe right ventricular dilation, dysplasia, fibrofatty replacement of the myocardium and a high propensity to arrhythmias and sudden death. This program, also referred to as Pegasus, will be approaching IND submission in the second quarter of 2023. As a result of the Company’s acquisition of Renovacor Inc. (“Renovacor”) (see Note 14 “Renovacor Acquisition”), the Company is able to utilize recombinant AAV9-based gene therapy designed to slow or halt progression of BAG3 Dilated Cardiomyopathy (“DCM”), which is the most common form of cardiomyopathy and is characterized by progressive thinning of the walls of the heart resulting in enlarged heart chambers that are unable to pump blood. The Company has global commercialization and development rights to all of these product candidates under royalty-bearing license agreements.

2.
Risks and Liquidity


The Company has not generated any revenue and has incurred losses since inception. Operations of the Company are subject to certain risks and uncertainties, including, among others, uncertainty of drug candidate development, technological uncertainty, uncertainty regarding patents and proprietary rights, having no commercial manufacturing experience, marketing or sales capability or experience, dependency on key personnel, compliance with government regulations and the need to obtain additional financing. Drug candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure, and extensive compliance-reporting capabilities.
 

The Company’s product candidates are in the development and clinical stage. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary government approval or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies.
 

The Company’s consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities in the ordinary course of business. The Company has experienced negative cash flows from operations and had an accumulated deficit of $772.1 million as of March 31, 2023. As of March 31, 2023, the Company had $360.0 million of cash, cash equivalents and short-term and long-term investments. The Company expects such resources will be sufficient to fund the Company’s operating expenses and capital expenditure requirements into the first half of 2025.
 

On February 28, 2022, the Company entered into a sales agreement (the “Sales Agreement”), with Cowen and Company, LLC (“Cowen”), with respect to an at-the-market offering program pursuant to which the Company may offer and sell, from time to time at its sole discretion, shares of its common stock, par value $0.01 per share, having an aggregate offering price of up to $200 million (the “Shares”) through Cowen as its sales agent. Through March 31, 2023, the Company has sold 4.2 million shares of common stock for net proceeds of $63.8 million pursuant to the at-the-market offering program (see Note 8 “Stockholders’ Equity”), including 0.9 million shares for net proceeds of $17.2 million during the three months ended March 31, 2023.
 

In the longer term, the future viability of the Company is dependent on its ability to generate cash from operating activities or to raise additional capital to finance its operations. The Company’s failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies.

9
3.
Basis of Presentation, Principles of Consolidation and Summary of Significant Accounting Policies


Basis of Presentation


The accompanying unaudited interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2022 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 28, 2023 (“2022 Form 10-K”). The unaudited interim consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s consolidated financial position as of March 31, 2023 and the results of its operations and its cash flows for the three months ended March 31, 2023. The financial data and other information disclosed in these consolidated notes related to the three months ended March 31, 2023 and 2022 are unaudited. The results for the three months ended March 31, 2023 are not necessarily indicative of results to be expected for the year ending December 31, 2023 and any other interim periods or any future year or period.


Significant Accounting Policies



The significant accounting policies used in the preparation of these consolidated financial statements for the three months ended March 31, 2023 are consistent with those disclosed in Note 3 to the consolidated financial statements in the 2022 Form 10-K with most significant policies also being listed here.


Principles of Consolidation


The consolidated financial statements represent the consolidation of the accounts of the Company and its subsidiaries in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). All intercompany accounts have been eliminated in consolidation.


Use of Estimates


The preparation of the consolidated financial statements in conformity with U.S. 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 the reported amounts of expenses during the reporting period. Significant estimates and assumptions reflected in these consolidated financial statements include but are not limited to goodwill and intangible asset impairments, the accrual of research and development (“R&D”) expenses, the valuation of equity transactions and stock-based awards. Changes in estimates and assumptions are reflected in reported results in the period in which they become known. Actual results could differ from those estimates.


Cash, Cash Equivalents and Restricted Cash


Cash, cash equivalents and restricted cash consists of bank deposits, certificates of deposit and money market accounts with financial institutions. Cash equivalents are carried at cost which approximates fair value due to their short-term nature and which the Company believes do not have a material exposure to credit risk. The Company considers all highly liquid investments with maturities of three months or less from the date of purchase to be cash equivalents. The Company’s cash and cash equivalent accounts, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.


Restricted cash consists of deposits collateralizing letters of credit issued by a bank in connection with the Company’s operating leases (see Note 12 “Commitments and Contingencies” for additional disclosures) and a deposit collateralizing a letter of credit issued by a bank supporting the Company’s corporate credit card. Cash, cash equivalents and restricted cash consist of the following:

    March 31,     December 31,  
   
2023
    
2022
  
Cash and cash equivalents
  
$
64,579
    
$
140,517
  
Restricted cash
    
1,340
      
1,340
  
 
  
$
65,919
    
$
141,857
  


Concentrations of credit risk and off-balance sheet risk



Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents and available-for-sale securities. The Company maintains its cash and cash equivalent balances with high-quality financial institutions and, consequently, the Company believes that such funds are subject to minimal credit risk. The Company’s marketable securities consist of U.S. Treasury Securities, Commercial Paper and Corporate and Agency Bonds. The Company’s investment policy limits the amounts the Company may invest in any one type of investment and requires all investments held by the Company to be at least AA+/Aa1 rated, thereby reducing credit risk exposure.


10

Investments



Investments consist of investments in U.S. Treasury Securities, Commercial Paper and Corporate and Agency Bonds. Management determines the appropriate classification of these securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. The Company classifies its investments as available-for-sale pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 320, Investments—Debt and Equity Securities. Investments are recorded at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive income (loss) in stockholders’ equity and a component of total comprehensive loss in the consolidated statements of comprehensive loss, until realized. Realized gains and losses are included in investment income on a specific-identification basis. For the three months ended March 31, 2023, there were net unrealized gains on investments of $0.3 million. For the three months ended March 31, 2022, there were net unrealized losses on investments of $0.5 million.



Intangible Assets



Intangible assets related to in process research and development (“IPR&D”) projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time. IPR&D intangible assets which are determined to have had a drop in their fair value are adjusted downward and an expense is recognized in R&D expenses in the Consolidated Statements of Operations. These IPR&D intangible assets are tested at least annually or when a triggering event occurs that could indicate a potential impairment based on indicators including progress of R&D activities, changes in projected development of assets, and changes in regulatory environment and future commercial markets.



Fair Value Measurements



The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. FASB ASC 820, Fair Value Measurements and Disclosures, establishes a hierarchy of inputs used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The three levels of the fair value hierarchy are described below:


 
•
Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
 
•
Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
 
•
Level 3—Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable.



To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The fair value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, deposits, accounts payable and accrued expenses approximate their respective carrying values due to the short-term nature of most of these instruments.



Warrants



The Company accounts for stock warrants as either equity instruments, liabilities or derivative liabilities in accordance with ASC Topic 480, Distinguishing Liabilities from Equity (”ASC 480”) and/or ASC Topic 815, Derivatives and Hedging (”ASC 815”), depending on the specific terms of the warrant agreement. Liability-classified warrants are recorded at their estimated fair values at each reporting period until they are exercised, terminated, reclassified or otherwise settled. Changes in the estimated fair value of liability-classified warrants are included in interest and other income in the Company’s consolidated statement of operations.


11

Stock-Based Compensation



The Company measures the compensation expense of employee and non-employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost is recognized over the requisite service period of the awards on a straight-line basis with forfeitures recognized as they occur.



The Company classifies stock-based compensation expense in its consolidated statements of operations in the same manner in which the award recipient’s payroll costs and services are classified or in which the award recipient’s service payments are classified.


Income Taxes



In May 2022, the Company received a notice from the New York City Department of Finance regarding an audit of the  NYC Biotechnology Credit for the tax periods ended December 31, 2018 through December 31, 2020, which is ongoing as of March 31, 2023.


Recent Accounting Pronouncements
 

There were no recent accounting pronouncements that impacted the Company, or which had a significant effect on the consolidated financial statements.


4.
Fair Value of Financial Instruments


Items measured at fair value on a recurring basis are the Company’s investments. The following table sets forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy:


   
Fair Value Measurements as of
  
   
March 31, 2023 Using:
  
   
Level 1
    
Level 2
    
Level 3
    
Total
  
Assets:
                        
Cash equivalents:
                        
Money market mutual funds
  
$
31,353
    
$
-
    
$
-
    
$
31,353
  
      Corporate Bonds
    
-
      
3,778
      
-
      
3,778
  
      United States Treasury securities
    
7,670
      
-
      
-
      
7,670
  
     
39,023
      
3,778
      
-
      
42,801
  
                                 
Investments:
                                
Commercial Paper
    
-
      
5,147
      
-
      
5,147
  
United States Treasury securities
    
228,443
      
-
      
-
      
228,443
  
Corporate Bonds
    
-
      
54,159
      
-
      
54,159
  
Agency Bonds
    
-
      
7,713
      
-
      
7,713
  
     
228,443
      
67,019
      
-
      
295,462
  
                                 
Total assets
  
$
267,466
    
$
70,797
    
$
-
    
$
338,263
  
                                 
Liabilities:
                                
Warrant liability
  
$
-
    
$
-
    
$
815
    
$
815
  
Total liabilities
  
$
-
    
$
-
    
$
815
    
$
815
  


   
Fair Value Measurements as of
  
   
December 31, 2022 Using:
  
   
Level 1
    
Level 2
    
Level 3
    
Total
  
Assets:
                        
Cash equivalents:
                        
Money market mutual funds
  
$
90,527
    
$
-
    
$
-
    
$
90,527
  
Commercial Paper
    
-
      
3,899
      
-
      
3,899
  
United States Treasury Securities
    
3,848
      
-
      
-
      
3,848
  
Corporate Bonds
    
-
      
8,618
      
-
      
8,618
  
     
94,375
      
12,517
      
-
      
106,892
  
                                 
Investments:
                                
Commercial Paper
    
-
      
1,151
      
-
      
1,151
  
United States Treasury securities
    
189,444
      
-
      
-
      
189,444
  
Corporate Bonds
    
-
      
60,905
      
-
      
60,905
  
Agency Bonds
    
-
      
7,653
      
-
      
7,653
  
     
189,444
      
69,709
      
-
      
259,153
  
                                 
Total assets
  
$
283,819
    
$
82,226
    
$
-
    
$
366,045
  


 
Liabilities:
                        
Warrant liability
  
$
-
    
$
-
    
$
1,512
    
$
1,512
  
Total liabilities
  
$
-
    
$
-
    
$
1,512
    
$
1,512
  

12

The Company classifies its money market mutual funds and U.S. Treasury securities as Level 1 assets under the fair value hierarchy, as these assets have been valued using quoted market prices in active markets without any valuation adjustment. The Company classifies its Commercial Paper and Corporate and Agency Bonds as Level 2 assets as these assets are not traded in an active market and have been valued through a third-party pricing service based on quoted prices for similar assets.



The reconciliation of the Company’s warrant liability, which is recorded as part of Other Liabilities in the consolidated balance sheets, measured at fair value on a recurring basis using unobservable inputs (Level 3) is as follows:


   
Warrant Liability
  
Balance, December 31, 2022
  
$
1,512
  
Fair value adjustments
    
(697
)
Balance, March 31, 2023
  
$
815
  


The Company utilizes a Black-Scholes model to value the warrant liability (see Note 10 “Warrants”) at each reporting period, with changes in fair value recognized in the consolidated statements of operations. The estimated fair value of the warrant liability is determined using Level 3 inputs. Inherent in an options pricing model are assumptions related to expected share-price volatility, expected life, risk-free interest rate and dividend yield. The Company estimates the expected volatility of its common stock based on historical volatility of a peer group, considering the expected remaining life of the warrants. The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the valuation date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants is assumed to be equivalent to their remaining contractual term. The dividend rate is based on the historical rate, which the Company anticipates will remain at zero.



The fair value of the warrant liability has been estimated with the following assumptions:


   
March 31,
2023
    
December 31, 2022
  
Stock price
  
$
17.13
    
$
18.39
  
Exercise price
  
$
65.23
    
$
65.23
  
Expected volatility
    
67.38
%
    
71.25
%
Risk-free interest rate
    
4.04
%
    
4.14
%
Expected dividend yield
    
-
      
-
  
Expected life (years)
    
2.07
      
2.39
  
Fair value per warrant
  
$
1.32
    
$
2.45
  

5.
Property and Equipment, Net


The Company’s property and equipment consisted of the following:


    March 31,     December 31,  
    2023    
2022
  
Laboratory equipment
  
$
23,317
    
$
21,905
  
Machinery and equipment
    
11,443
      
11,326
  
Computer equipment
    
244
      
244
  
Furniture and fixtures
    
2,216
      
2,135
  
Leasehold improvements
    
1,694
      
589
  
Internal use software
    
1,903
      
1,903
  
 
    
40,817
      
38,102
  
Less: accumulated depreciation and amortization
    
(10,229
)
    
(9,093
)
 
  
$
30,588
    
$
29,009
  



During the three months ended March 31, 2023 and 2022, the Company recognized $1.1 million and $0.8 million of depreciation and amortization expense, respectively.

13

6.
Intangible Assets and Goodwill



The Company’s indefinite lived intangible assets consists of acquired IPR&D asset and a mice colony model received from the acquisition of Renovacor.



Intangible assets as of March 31, 2023 and December 31, 2022 are summarized as follows:


   
Gross
Carrying
Value
    
Accumulated Amortization
    
Intangible
Assets, Net
  
In process research & development
  
$
25,150
    
$
-
    
$
25,150
  
Mice colony model
    
574
      
-
      
574
  
Total intangible assets
  
$
25,724
    
$
-
    
$
25,724
  



The gross carrying value of intangible assets was due to the acquisition of Renovacor (see Note 14 “Renovacor Acquisition”).



The carrying value of Goodwill was $39.2 million as of March 31, 2023 and included $8.3 million as a result of the acquisition of Renovacor (see Note 14 “Renovacor Acquisition”).

7.
Accounts Payable and Accrued Expenses


As of March 31, 2023 and December 31, 2022, the Company’s accounts payable and accrued expenses consisted of the following:

    March 31,     December 31,  
   
2023
    
2022
  
Research and development
  
$
17,536
    
$
19,100
  
Employee compensation
    
4,199
      
10,006
  
Property and equipment
    
1,794
      
2,095
  
Professional fees
    
2,813
      
1,436
  
Acquisition related expenses     -       1,153  
Government grant payable
    
597
      
597
  
Other
    
1,670
      
2,273
  
 
  
$
28,609
    
$
36,660
  

8.
Stockholders’ Equity


At-the-Market Offering Program


On February 28, 2022, the Company entered into the Sales Agreement with Cowen with respect to an at-the-market offering program pursuant to which the Company may offer and sell, from time to time at its sole discretion, shares through Cowen as its sales agent. The shares to be offered and sold under the Sales Agreement, if any, will be offered and sold pursuant to the Company’s shelf registration statement on Form S-3. The Company filed a prospectus supplement with the SEC on February 28, 2022 in connection with the offer and sale of the shares pursuant to the Sales Agreement. The Company will pay Cowen a cash commission of 3.0% of gross proceeds from the sale of the shares pursuant to the Sales Agreement. The Company has provided Cowen with customary indemnification and contribution rights. The Company reimbursed Cowen for certain expenses incurred in connection with the Sales Agreement. Through March 31, 2023, the Company sold 4.2 million shares under the at-the-market offering program for gross proceeds of $65.8 million, less commissions of $2.0 million for net proceeds of $63.8 million. During the three months ended March 31, 2023, the Company sold 0.9 million shares under the at-the-market offering program for gross proceeds of $17.8 million, less commission of $0.6 million for net proceeds of $17.2 million.

14
9.
Stock Based Compensation


Stock Option Valuation



The weighted average assumptions that the Company used in the Black-Scholes pricing model to determine the fair value of the stock options granted to employees, non-employees and directors were as follows:

 
Three Months Ended March 31,
  
 
  
2023
    
2022
  
Risk-free interest rate
    
4.02
%
    
1.88
%
Expected term (in years)
    
5.88
      
5.86
  
Expected volatility
    
73.54
%
    
74.07
%
Expected dividend yield
    
0.00
%
    
0.00
%
Exercise price
  
$
20.17
    
$
17.85
  
Fair value of common stock
  
$
20.17
    
$
17.85
  


The following table summarizes stock option activity for the three months ended March 31, 2023, under the Second Amended and Restated 2014 Stock Option and Incentive Plan:

      Weighted   Weighted      
      Average   Average   Aggregate  
  Number of   Exercise   Contractual   Intrinsic  
  Shares   Price   Term (Years)   Value  
 
                
Outstanding as of December 31, 2022
    
13,138,870
    
$
14.52
      
5.46
    
$
118,767
  
Granted
    
1,792,097
      
20.36
      
6.86
          
Exercised
    
(88,429
)
    
12.59
              
631
  
Cancelled
    
(191,148
)
    
33.99
                  
Outstanding as of March 31, 2023
    
14,651,390
    
$
14.99
      
5.85
    
$
97,263
  
 
                                
Options vested and exercisable as of March 31, 2023
    
10,586,141
    
$
12.60
      
4.52
    
$
92,808
  
Options unvested as of March 31, 2023
    
4,065,249
    
$
21.24
      
9.32
     $ 4,455  



The weighted average grant-date fair value per share of stock options granted during the three months ended March 31, 2023, and 2022 was $13.50 and $11.60, respectively.


The total fair value of options vested during the three months ended March 31, 2023 and 2022 was $11.4 million and $12.5 million, respectively.


Restricted Stock Units (“RSU”)



The following table summarizes the Company’s RSU activity for the three months ended March 31, 2023:

     
Weighted
  
      Average  
 
Number of
  
Grant Date
  
  Shares  
Fair Value
  
         
Unvested as of December 31, 2022
    
992,874
    
$
16.49
  
Granted
    
764,204
      
20.23
  
Vested(1)
    
(126,145
)
    
17.37
  
Forfeited
    
(8,476
)
    
17.19
  
Unvested as of March 31, 2023
    
1,622,457
    
$
18.18
  


(1) Common stock issued is net of 85 shares related to taxes.

15

Stock-based Compensation


Stock-based compensation expense recognized by award type was as follows:


 
Three Months Ended March 31,
  
 
  
2023
    
2022
  
 
      
Stock options
  
$
6,985
    
$
5,961
  
Restricted stock units
    
1,930
      
309
  
Total stock-based compensation expense
  
$
8,915
    
$
6,270
  


Stock-based compensation expense by classification included within the consolidated statements of operations and comprehensive loss was as follows:


 
Three Months Ended March 31,
  
 
  
2023
    
2022
  
 
      
Research and development
  
$
3,819
    
$
2,318
  
General and administrative
    
5,096
      
3,952
  
Total stock-based compensation expense
  
$
8,915
    
$
6,270
  


As of March 31, 2023, the Company had an aggregate of $75.4 million of unrecognized stock-based compensation expense related to both stock options and RSU grants, which is expected to be recognized over the weighted average period of 1.52 years.

10.
Warrants


A summary of the warrants outstanding as of March 31, 2023 is as follows:

Exercise Price
  
Outstanding
  
Grant/Assumption Date
  
Expiration Date
24.42
    
7,051
  
June 28, 2013
  
June 28, 2023
57.11
    
603,386
  
December 21, 2020
  
December 21, 2030
33.63
    
301,291
  
August 9, 2021
  
August 9, 2031
22.51
    
153,155
  
December 17, 2021
  
December 17, 2031
22.51
    
153,155
  
December 17, 2021
  
December 17, 2031
65.23
    
617,050
  
December 1, 2022
  
April 23, 2025
65.23
    
760,086
  
December 1, 2022
  
December 1, 2026
Total
    
2,595,174
      


The following table below is a summary of changes in warrants to purchase common stock for the three months ended March 31, 2023:

   
Number of
Warrant
Shares
Outstanding
and
Exercisable
    
Exercise
Price
per Share
  
Balance as of December 31, 2022
    
2,721,267
        
Granted
    
-
        
Exercised
    
(126,093
)
  
$
0.06
  
Balance as of March 31, 2023
    
2,595,174
          

Assumed Renovacor Public Warrants