Company Quick10K Filing
Quick10K
Rocket Pharmaceuticals
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$11.63 50 $585
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
8-K 2019-06-18
8-K 2019-06-17 Shareholder Vote
8-K 2019-04-15 Enter Agreement, Exhibits
8-K 2018-12-27 Other Events
8-K 2018-11-27 Enter Agreement, Sale of Shares, Exhibits
8-K 2018-11-26 Regulation FD, Exhibits
8-K 2018-11-19 Enter Agreement, Other Events, Exhibits
8-K 2018-06-25 Officers, Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-05-18 Regulation FD, Exhibits
8-K 2018-03-29 Officers, Amend Bylaw, Exhibits
8-K 2018-03-16 Accountant, Exhibits
8-K 2018-01-24 Enter Agreement, Officers, Exhibits
8-K 2018-01-04 M&A, Sale of Shares, Shareholder Rights, Control, Officers, Amend Bylaw, Shareholder Vote, Other Events, Exhibits
ARRY Array Biopharma 3,796
MOR MorphoSys AG 958
COLL Collegium Pharmaceutical 637
ITCI Intra-Cellular Therapies 460
MTFB Motif Bio 178
CRVS Corvus Pharmaceuticals 108
MTNB Matinas Biopharma Holdings 102
CKPT Checkpoint Therapeutics 92
ABEO Abeona Therapeutics 88
SYN Synthetic Biologics 7
RCKT 2019-06-30
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 ex10_1.htm
EX-31.1 ex31_1.htm
EX-31.2 ex31_2.htm
EX-32.1 ex32_1.htm

Rocket Pharmaceuticals Earnings 2019-06-30

RCKT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q.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 June 30, 2019

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.)

350 Fifth Avenue, Suite 7530
New York, NY 10118
(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code:
(646) 440-9100

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 ☒

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
RCKT
Nasdaq Global Market

As of August 5, 2019, there were 50,348,435 shares of common stock, $0.01 par value per share, outstanding.



   
Page
PART I - FINANCIAL INFORMATION
 
Item 1.
4
 
4
 
5
 
6
 
7
 
8
 
9
Item 2.
17
Item 3.
28
Item 4.
28
PART II - OTHER INFORMATION
 
Item 1.
29
Item 1A.
29
Item 2.
54
Item 3.
54
Item 4.
54
Item 5.
54
Item 6.
55
56

Forward-looking statements

This Quarterly Report on Form 10-Q for the Quarter ended June 30, 2019 (“Form 10-Q”), contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The words “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” and variations of such words and similar expressions are intended to identify such forward-looking statements, which may include, but are not limited to, statements concerning the following:
 
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 to the FDA and to obtain and maintain FDA or other regulatory authority approval of our product candidates;
 

our competitors’ activities, including decisions as to the timing of competing product launches, generic entrants, 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, 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 successfully develop and commercialize any technology that we may in-license or products we may acquire;


unanticipated delays due to manufacturing difficulties, supply constraints or changes in the regulatory environment;


our ability to successfully operate in non-U.S. jurisdictions in which we currently or in the future may do business, including compliance with applicable regulatory requirements and laws;


uncertainties associated with obtaining and enforcing 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.

These forward-looking statements are neither promises nor guarantees of future performance due to a variety of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those indicated by these forward-looking statements, including, without limitation: the possibility that we may experience slower than expected clinical site initiation or slower than expected identification and enrollment of evaluable patients; the potential for delays or problems in analyzing data or the need for additional analysis, data or patients; the potential that future pre-clinical and clinical results may not support further development of our product candidates; the potential for unexpected adverse events in the conduct of one of our clinical trials to impact our ability to continue the clinical trial or further development of a product candidate; the risk that we may encounter other unexpected hurdles or issues in the development and manufacture of our product candidates that may impact our cost, timing or progress, as well as those risks more fully discussed in the “Risk Factors” section in this prospectus, the section of any accompanying prospectus supplement entitled “Risk Factors” and the risk factors and cautionary statements described in other documents that we file from time to time with the SEC, specifically under “Item 1A: Risk Factors” and elsewhere in our most recent Annual Report on Form 10-K for the period ended December 31, 2018, and our Current Reports on Form 8-K.
 
Given these uncertainties, readers should not place undue reliance on our forward-looking statements. These forward-looking statements speak only as of the date on which the statements were made and are not guarantees of future performance. Except as may be required by applicable law, we do not undertake to update any forward-looking statements after the date of this prospectus or the respective dates of documents incorporated by reference herein or therein that include forward-looking statements.

PART I — FINANCIAL INFORMATION

Item 1.
Financial Statements

Rocket Pharmaceuticals, Inc.
Consolidated Balance Sheets
(in thousands, except share and per share amounts)



June 30,
2019


December 31,
2018

Assets
 
(unaudited)
       
Current assets:
           
Cash and cash equivalents
 
$
64,833
   
$
111,355
 
Investments
   
192,950
     
94,375
 
Prepaid expenses and other assets
   
5,846
     
3,358
 
Total current assets
   
263,629
     
209,088
 
Property and equipment, net
   
9,844
     
2,027
 
Goodwill
   
30,815
     
30,815
 
Restricted cash
   
1,525
     
1,436
 
Deposits
   
455
     
545
 
Operating lease right-of-use assets
   
2,452
     
-
 
Investments
   
-
     
7,402
 
Total assets
 
$
308,720
   
$
251,313
 
Liabilities and stockholders’ equity
               
Current liabilities:
               
Accounts payable and accrued expenses
 
$
14,168
   
$
15,372
 
Operating lease liabilities, current
   
913
     
-
 
Total current liabilities
   
15,081
     
15,372
 
Convertible notes, net of unamortized discount
   
43,180
     
41,447
 
Operating lease liabilities, non-current
   
1,933
     
-
 
Other liabilities
   
22
     
457
 
Total liabilities
   
60,216
     
57,276
 
Commitments and contingencies (Note 11)
               
                 
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 at June 30, 2019 and December 31, 2018
   
-
     
-
 
Series B convertible preferred stock; 300,000 shares designated as Series B; 0 shares issued and outstanding at June 30, 2019 and December 31, 2018
   
-
     
-
 
Common stock, $0.01 par value, 120,000,000 shares authorized; 50,332,435 and 45,194,736 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
   
503
     
452
 
Treasury stock, at cost, 22,308 and 50,000 common shares at June 30, 2019 and December 31, 2018, respectively
   
(344
)
   
(668
)
Additional paid-in capital
   
392,205
     
300,253
 
Accumulated other comprehensive income (loss)
   
144
     
(127
)
Accumulated deficit
   
(144,004
)
   
(105,873
)
Total stockholders’ equity
   
248,504
     
194,037
 
Total liabilities and stockholders’ equity
 
$
308,720
   
$
251,313
 

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

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

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Revenue
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
Operating expenses:
                               
Research and development
   
13,989
     
10,772
     
29,126
     
16,525
 
General and administrative
   
4,403
     
4,100
     
8,211
     
12,752
 
Total operating expenses
   
18,392
     
14,872
     
37,337
     
29,277
 
Loss from operations
   
(18,392
)
   
(14,872
)
   
(37,337
)
   
(29,277
)
Research and development incentives
   
-
     
-
     
250
     
186
 
Interest expense
   
(1,544
)
   
(1,363
)
   
(3,148
)
   
(2,834
)
Interest and other income, net
   
1,000
     
468
     
1,601
     
815
 
Accretion of discount on investments
   
256
     
-
     
503
     
-
 
Net loss
 
$
(18,680
)
 
$
(15,767
)
 
$
(38,131
)
 
$
(31,110
)
Net loss per share attributable to common stockholders - basic and diluted
 
$
(0.38
)
 
$
(0.40
)
 
$
(0.81
)
 
$
(0.82
)
Weighted-average common shares outstanding - basic and diluted
   
49,267,247
     
39,483,006
     
47,206,480
     
37,954,972
 

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

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

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Net loss
 
$
(18,680
)
 
$
(15,767
)
 
$
(38,131
)
 
$
(31,110
)
Other comprehensive loss
                               
Net unrealized gain (loss) on investments
   
233
     
(89
)
   
271
     
(79
)
Total comprehensive loss
 
$
(18,447
)
 
$
(15,856
)
 
$
(37,860
)
 
$
(31,189
)

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

Rocket Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equity
For the Three and Six Months Ended June 30, 2019 and 2018

(in thousands except share amounts)
(unaudited)

   
Common Stock
   
Treasury
   
Additional
Paid-In
   
Accumulated
Other
Comprehensive
   
Accumulated
   
Total
Stockholders’
 
   
Shares
   
Amount
   
Stock
   
Capital
   
Income (Loss)
   
Deficit
   
Equity
 
                                           
Balance at December 31, 2018
   
45,194,736
   
$
452
   
$
(668
)
 
$
300,253
   
$
(127
)
 
$
(105,873
)
 
$
194,037
 
Issuance of common stock pursuant to exercise of stock options
   
19,701
     
-
     
-
     
-
     
-
     
-
     
-
 
Stock repurchase
   
-
     
-
     
(725
)
   
(2
)
   
-
     
-
     
(727
)
Retirement of treasury stock
   
(100,000
)
   
(1
)
   
1,393
     
(1,392
)
   
-
     
-
     
-
 
Unrealized comprehensive gain on marketable securities
   
-
     
-
     
-
     
-
     
38
     
-
     
38
 
Stock-based compensation
   
-
     
-
     
-
     
3,180
     
-
     
-
     
3,180
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
(19,451
)
   
(19,451
)
Balance at March 31, 2019
   
45,114,437
     
451
     
-
     
302,039
     
(89
)
   
(125,324
)
   
177,077
 
                                                         
Issuance of common stock, net of issuance costs
   
5,175,000
     
52
     
-
     
86,028
     
-
     
-
     
86,080
 
Issuance of common stock pursuant to exercise of stock options
   
42,998
     
-
     
-
     
-
     
-
     
-
     
-
 
Net exercise of options
   
-
     
-
     
(344
)
   
-
     
-
     
-
     
(344
)
Unrealized comprehensive gain on marketable securities
   
-
     
-
     
-
     
-
     
233
     
-
     
233
 
Stock-based compensation
   
-
     
-
     
-
     
4,138
     
-
     
-
     
4,138
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
(18,680
)
   
(18,680
)
Balance at June 30, 2019
   
50,332,435
   
$
503
   
$
(344
)
 
$
392,205
   
$
144
   
$
(144,004
)
 
$
248,504
 

 
 
Series A Convertible
Preferred Shares
   
Series B Convertible
Preferred Shares
   
Common Stock
   
Additional
Paid-In
   
Accumulated
Other
Comprehensive
   
Accumulated
   
Total
Stockholders’
 
 
 
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Income (Loss)
   
Deficit
   
Equity
 
 
                                                           
Balance at December 31, 2017
   
128,738
   
$
16,060
     
126,909
   
$
25,406
     
6,795,627
   
$
68
   
$
5,340
   
$
-
   
$
(31,355
)
 
$
15,519
 
Conversion of convertible preferred shares into common shares
   
(128,738
)
   
(16,060
)
   
(126,909
)
   
(25,406
)
   
19,475,788
     
194
     
41,272
     
-
     
-
     
-
 
Exchange of common shares in connection with the Merger
   
-
     
-
     
-
     
-
     
6,805,608
     
68
     
85,992
     
-
     
-
     
86,060
 
Issuance of common shares, net of issuance costs of $5.3 million
   
-
     
-
     
-
     
-
     
6,325,000
     
63
     
78,455
     
-
     
-
     
78,518
 
Issuance of common shares pursuant to settlement of restricted stock units
   
-
     
-
     
-
     
-
     
1,875
     
1
     
(1
)
   
-
     
-
     
-
 
Unrealized gain on short term investments
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
10
     
-
     
10
 
Stock-based compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
5,382
     
-
     
-
     
5,382
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(15,343
)
   
(15,343
)
Balance at March 31, 2018
   
-
     
-
     
-
     
-
     
39,403,898
     
394
     
216,440
     
10
     
(46,698
)
   
170,146
 
 
                                                                               
Issuance of common stock pursuant to settlement of restricted stock units
   
-
     
-
     
-
     
-
     
41,093
     
-
     
-
     
-
     
-
     
-
 
Issuance of common stock pursuant to settlement of stock option exercises
   
-
     
-
     
-
     
-
     
61,536
     
1
     
(1
)
   
-
     
-
     
-
 
Unrealized comprehensive loss on marketable securities
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(89
)
   
-
     
(89
)
Stock-based compensation
   
-
     
-
     
-
     
-
     
-
     
-
     
2,786
     
-
     
-
     
2,786
 
Net loss
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(15,767
)
   
(15,767
)
Balance at June 30, 2018
   
-
   
$
-
     
-
   
$
-
     
39,506,527
   
$
395
   
$
219,225
   
$
(79
)
 
$
(62,465
)
 
$
157,076
 

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

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

   
Six Months Ended June 30,
 
   
2019
   
2018
 
             
Operating Activities:
           
Net loss
 
$
(38,131
)
 
$
(31,110
)
Adjustments to reconcile net loss to net cash used in operating activities:
               
Accretion of discount on convertible notes
   
1,733
     
1,454
 
Increase in lease liability
   
-
     
(109
)
Depreciation expense
   
204
     
157
 
Stock-based compensation expense
   
7,319
     
8,168
 
Loss on disposal of property and equipment
   
-
     
205
 
Accretion of discount on investments
   
(503
)
   
(118
)
Changes in operating assets and liabilities:
               
Prepaid expenses and other assets
   
(2,398
)
   
(651
)
Accounts payable and accrued expenses
   
(2,265
)
   
665
 
Operating lease liabilities
   
(40
)
   
-
 
Net cash used in operating activities
   
(34,081
)
   
(21,339
)
Investing activities:
               
Cash acquired in connection with the Reverse Merger
   
-
     
76,348
 
Purchases of investments
   
(140,336
)
   
(118,819
)
Proceeds from maturities of investments
   
49,936
     
21,232
 
Proceeds from sale of property and equipment
   
-
     
20
 
Purchases of property and equipment
   
(7,305
)
   
(117
)
Net cash used in investing activities
   
(97,705
)
   
(21,336
)
Financing activities:
               
Proceeds from issuance of common stock, net of issuance costs
   
86,080
     
78,518
 
Common stock repurchase
   
(727
)
   
-
 
Net cash provided by financing activities
   
85,353
     
78,518
 
Net change in cash, cash equivalents and restricted cash
   
(46,433
)
   
35,843
 
Cash, cash equivalents and restricted cash at beginning of period
   
112,791
     
18,349
 
Cash, cash equivalents and restricted cash at end of period
 
$
66,358
   
$
54,192
 
                 
Supplemental disclosure of non-cash financing and investing activities:
               
Accrued purchases of property and equipment
 
$
716
   
$
-
 
Retirement of treasury stock
 
$
1,395
   
$
-
 
Net exercise of options
 
$
344
   
$
-
 
Unrealized gain (loss) on investments
 
$
271
   
$
(79
)
Conversion of convertible preferred stock into common stock
 
$
-
   
$
41,466
 
Supplemental cash flow information:
               
Cash paid for interest
 
$
1,495
   
$
1,495
 

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

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

1.
Nature of Business
 
Rocket Pharmaceuticals, Inc., together with its subsidiaries (collectively, “Rocket” or the “Company”), is a clinical-stage, multi-platform biotechnology company focused on the development of first or best-in-class gene therapies, with direct on-target mechanism of action and clear clinical endpoints, for rare and devastating pediatric diseases. The Company has clinical-stage lentiviral vector (“LVV”) programs currently undergoing clinical testing 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 and Leukocyte Adhesion Deficiency-I (“LAD-I), a genetic disorder that causes the immune system to malfunction. FA has been in clinical stage testing in the European Union (“EU”) since 2016, and in the United States (“U.S.”), Rocket received investigational new drug (“IND”) clearance for both FA and LAD-I in late 2018. Two additional pre-clinical stage LVV programs include Pyruvate Kinase Deficiency (“PKD”), a rare red blood cell autosomal recessive disorder that results in chronic non-spherocytic hemolytic anemia; and Infantile Malignant Osteopetrosis (“IMO”), a genetic disorder characterized by increased bone density and bone mass secondary to impaired bone resorption.  In addition, the Company has an adeno-associated virus (“AAV”), program for Danon disease, a multi-organ lysosomal-associated disorder leading to early death due to heart failure. An IND filing was cleared in Danon disease in early 2019 and human clinical studies began in the second quarter of 2019. The Company has global commercialization and development rights to all of its product candidates under royalty-bearing license agreements, with the exception of the CRISPR/Cas9 development program for which the Company currently only has development rights.

2.
Risks and Liquidity
 
The Company has not generated any revenue and has incurred losses since inception. The Company’s operations are subject to certain risks and uncertainties, including, among others, uncertainty of drug candidate development, technological uncertainty, uncertainty regarding patents and proprietary rights, lack of commercial manufacturing experience, a lack of 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 drug 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 $144.0 million as of June 30, 2019. As of June 30, 2019, the Company has $257.8 million of cash, cash equivalents and investments. During the six months ended June 30, 2019, the Company received net proceeds of $86.1 million from the completion on April 18, 2019 of a public offering of 5,175,000 shares of common stock. Rocket expects such resources would be sufficient to fund its operating expenses and capital expenditure requirements into the first half of 2021.
 
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.

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, 2018 included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 8, 2019. 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 financial position as of June 30, 2019 and the results of its operations and its cash flows for the three and six months ended June 30, 2019 and 2018. The financial data and other information disclosed in these consolidated notes related to the three and six months ended June 30, 2019 and 2018 are unaudited. The results for the three and six months ended June 30, 2019 are not necessarily indicative of results to be expected for the year ending December 31, 2019 and any other interim periods or any future year or period.

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 (“US GAAP”). All intercompany accounts have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with US 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 impairment, the accrual of research and development 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.

Significant Accounting Policies

The significant accounting policies used in the preparation of these consolidated financial statements for the three and six months ended June 30, 2019 are consistent with those disclosed in Note 3 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, except as noted below.

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 11 “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:



June 30,
2019


December 31,
2018

             
Cash and cash equivalents
 
$
64,833
   
$
111,355
 
Restricted cash
   
1,525
     
1,436
 
   
$
66,358
   
$
112,791
 

Leases

The Company adopted ASU 2016-02, Leases (“ASU 2016-02”), as amended, on January 1, 2019, which supersedes the current leasing guidance and upon adoption, requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Upon the adoption of the guidance, operating leases are capitalized on the balance sheet at the present value of lease payments. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 was calculated using the applicable incremental borrowing rate at the date of adoption.

The Company adopted ASU 2016-02, including several practical expedients, on January 1, 2019. The Company elected the available package of practical expedients which allows the Company to not reassess previous accounting conclusions around whether arrangements are or contain leases, the classification of leases, and the treatment of initial direct costs. The Company also made an accounting policy election to utilize the short-term lease exemption, whereby leases with a term of 12 months or less will not follow the recognition and measurement requirements of the new standard. Upon adoption, the Company recognized total right-of-use assets of $2.6 million, with corresponding liabilities of $3.1 million on the consolidated balance sheets, including the reclassification of $0.5 million from deferred rent to right-of-use assets.

See Note 11 “Commitments and Contingencies” for additional disclosures in accordance with the new lease standard.

Government Grants

Research and development expense is presented net of reimbursements from the California Institute for Regenerative Medicine (“CIRM”), which are recognized over the period necessary to match the reimbursement with the related costs when it is probable that the Company has complied with the CIRM conditions and will receive the reimbursement.  During the three months ended June 30, 2019, we offset $0.8 million of grant funds against research and development expenses (see Note 14).

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
June 30, 2019 Using:

   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Money market mutual funds (included in cash and cash equivalents)
 
$
30,905
   
$
-
   
$
-
   
$
30,905
 
United States Treasury securities (included in cash and cash equivalents)
   
9,985
     
-
     
-
     
9,985
 
 
   
40,890
     
-
     
-
     
40,890
 
Current:
                               
United States Treasury securities
   
121,946
     
-
     
-
     
121,946
 
Government Bonds
   
-
     
35,754
     
-
     
35,754
 
Corporate Bonds
   
-
     
26,250
     
-
     
26,250
 
Municipal Bonds
   
-
     
9,000
     
-
     
9,000
 
Investments
   
121,946
     
71,004
     
-
     
192,950
 
 
                               
   
$
162,836
   
$
71,004
   
$
-
   
$
233,840
 

   
Fair Value Measurements as of
December 31, 2018 Using:
 
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Assets:
                       
Money market mutual funds (included in cash and cash equivalents)
 
$
30,552
   
$
-
   
$
-
   
$
30,552
 
 
                               
United States Treasury securities
   
101,777
     
-
     
-
     
101,777
 
Investments
   
101,777
     
-
     
-
     
101,777
 
                                 
   
$
132,329
   
$
-
   
$
-
   
$
132,329
 

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 Government, Corporate and Municipal 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. The fair value of the 2021 Convertible Notes as of June 30, 2019 was $46.9 million.

5.
Property and Equipment

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

   
June 30,
2019
   
December 31,
2018
 
Laboratory equipment
 
$
1,850
   
$
1,556
 
Leasehold improvements
   
29
     
29
 
Furniture and fixtures
   
273
     
273
 
Computer equipment
   
179
     
179
 
Construction in progress
   
8,196
     
469
 
     
10,527
     
2,506
 
Less: accumulated depreciation
   
(683
)
   
(479
)
   
$
9,844
   
$
2,027
 

Construction in progress comprises costs associated with the build out of the Company’s research facilities under an operating lease in Cranbury, NJ. See Note 11 “Commitments and Contingencies” for additional disclosures. During the three and six months ended June 30, 2019, the Company recognized $0.1 million and $0.2 million of depreciation expense, respectively. During the three and six months ended June 30, 2018, the Company recognized $74,000 and $0.1 million of depreciation expense, respectively.

6.
Accounts Payable and Accrued Expenses

At June 30, 2019 and December 31, 2018, the Company’s accounts payable and accrued expenses consisted of the following:

   
June 30,
2019
   
December 31,
2018
 
Research and development
 
$
9,439
   
$
10,414
 
Construction in progress
   
788
     
-
 
Government grant payable
   
548
     
534
 
Professional fees
   
665
     
690
 
Accrued interest
   
1,241
     
1,241
 
Bonus
   
1,021
     
1,774
 
Other
   
234
     
589
 
Accrued vacation
   
232
     
130
 
   
$
14,168
   
$
15,372
 

7.
Debt
 
On January 4, 2018, in connection with the Reverse Merger, the Company assumed the obligations of Inotek Pharmaceuticals Corporation (“Inotek”) under its outstanding convertible notes, with an aggregate principal value of $52.0 million, (the “2021 Convertible Notes”). The 2021 Convertible Notes were issued in 2016 and mature on August 1, 2021 (the “Maturity Date”). The 2021 Convertible Notes are unsecured, and accrue interest at a rate of 5.75% per annum and interest is payable semi-annually on February 1 and August 1 of each year. Each holder of the 2021 Convertible Notes (“Holder”) has the option until the close of business on the second business day immediately preceding the Maturity Date to convert all, or any portion, of the 2021 Convertible Notes held by it at a conversion rate of 31.1876 shares of the Company’s common stock per $1.00 principal amount of 2021 Convertible Notes (the “Conversion Rate”) which is $32.08 per share. The Conversion Rate is subject to adjustment from time to time upon the occurrence of certain events, including the issuance of stock dividends and payment of cash dividends.

The Company, at its option, may redeem for cash all or any portion of the 2021 Convertible Notes if the last reported sale price of a share of the Company’s common stock is equal to or greater than 200% of the conversion price for the 2021 Convertible Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending within the five trading days immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the 2021 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

The 2021 Convertible Notes are considered a hybrid financial instrument consisting of a fixed interest rate “host” and various embedded features that required evaluation as potential embedded derivatives under FASB ASC 815, Derivatives and Hedging (“ASC 815”). Based on the nature of the host instrument and the embedded features, management concluded that none of the conversion, put and redemption features required bifurcation and separate accounting from the host instrument. The Company determined that the Additional Interest was an embedded derivative that contains non-credit related events of default. As a result, the Additional Interest feature required bifurcation and separate accounting under ASC 815. Based on the amount of Additional Interest that would be owed and the likelihood of occurrence, Rocket estimated the fair value of the Additional Interest feature to be insignificant upon issuance and as of June 30, 2019 and December 31, 2018.As of June 30, 2019, the stated interest rate was 5.75%, and the effective interest rate was 15.3%.

The table below summarizes the carrying value of the 2021 Convertible Notes as of June 30, 2019:

Principal amount
 
$
52,000
 
Discount
   
(8,820
)
Carrying value as of June 30, 2019
 
$
43,180
 

Accretion of the 2021 Convertible Notes discount was $0.8 million and $1.7 million for the three and six months ended June 30, 2019, respectively. Accretion of the 2021 Convertible Notes discount was $0.7 million and $1.5 million for the three and six months ended June 30, 2018, respectively.

8.
Stock Based Compensation

Stock Option Valuation

Effective July 1, 2018, the Company adopted ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The table below for the six months ended June 30, 2019 is post adoption of ASU 2018-07. 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 for the six months ended June 30, 2019 and the stock options granted to employees and directors for the six months ended June 30, 2018 were as follows:

   
Six Months Ended June 30,
 
   
2019
   
2018
 
       
Risk-free interest rate
   
2.57
%
   
2.60
%
Expected term (in years)
   
5.79
     
5.78
 
Expected volatility
   
74.99
%
   
88.60
%
Expected dividend yield
   
0.00
%
   
0.00
%
Exercise price
 
$
15.01
   
$
17.63
 
Fair value of common stock
 
$
15.01
   
$
17.63
 

The following table for the six months ended June 30, 2018 is before the adoption of ASU 2018-07. 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 non-employees and directors for the six months ended June 30, 2018 were as follows:
 
  
Six Months Ended
June 30,
2018

       
Risk-free interest rate
   
2.74
%
Expected term (in years)
   
10.00
 
Expected volatility
   
83.79
%
Expected dividend yield
   
0.00
%
Exercise price
 
$
18.75
 
Fair value of common stock
 
$
18.75
 

The Company recognizes compensation expense for only the portion of awards that are expected to vest.

The following table summarizes stock option activity for the six months ended June 30, 2019 under the Second Amended and Restated 2014 Stock Option and Incentive Plan:

   
Number of
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Contractual
Term (Years)
   
Aggregate
Intrinsic
Value
 
                         
Outstanding as of December 31, 2018
   
8,615,997
   
$
4.48
     
7.51
   
$
94,474
 
Granted
   
1,175,866
     
15.01
     
9.79
         
Exercised
   
(62,699
)
   
1.81
             
1,389
 
Forfeited
   
(296,589
)
   
6.50
                 
Outstanding as of June 30, 2019
   
9,432,575
   
$
5.75
     
7.55
   
$
92,783
 
                                 
Options vested and exercisable as of June 30, 2019
   
6,949,270
   
$
2.55
     
6.92
   
$
88,373
 
Options unvested as of June 30, 2019
   
2,483,305
   
$
14.69
     
9.20
         

The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common stock for those stock options that had exercise prices lower than the fair value of the Company’s common stock. The intrinsic value of options exercised and exercisable as of June 30, 2019 and 2018 was $88,373 and $119,000 respectively.

The weighted average grant-date fair value per share of stock options granted during the six months ended June 30, 2019 and 2018 was $9.90 and $12.93, respectively.

The total fair value of options vested during the six months ended June 30, 2019 and 2018 was $35.7 million and $41.8 million, respectively.

Stock-Based Compensation

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2019
   
2018
   
2019
   
2018
 
             
Research and development
 
$
2,252
   
$
1,403
   
$
3,818
   
$
3,610
 
General and administrative
   
1,886
     
1,382
     
3,501
     
4,558
 
Total stock based compensation expense
 
$
4,138
   
$
2,785
   
$
7,319
   
$
8,168
 

As of June 30, 2019, the Company had an aggregate of $22.3 million of unrecognized stock-based compensation cost, which is expected to be recognized over the weighted average period of 1.92 years.

9.
Stockholders’ Equity
 
On December 27 and 28, 2018, the Company repurchased 100,000 shares of its common stock for aggregate consideration of approximately $1.4 million. The repurchases were made on the Nasdaq Stock Market at prevailing market prices in accordance with SEC Rule 10b-18. 50,000 of the shares repurchased at an average price of $13.36 by the Company settled on December 31, 2018 and the remaining 50,000 shares repurchased at an average price of $14.50 settled on January 2, 2019. As of December 31, 2018, the Company recorded a prepaid expense of $0.7 million related to the 50,000 shares that settled on January 2, 2019 and recorded treasury stock of $0.7 million relating to the 50,000 shares that settled as of December 31, 2018. These shares were subsequently retired in January 2019.
 
The Company has 14,102 warrants outstanding as of June 30, 2019, convertible into 14,102 shares of common stock at an exercise price of $24.82 per share, and expiring on June 28, 2023.
 
On April 18, 2019, the Company completed a public offering of 5,175,000 shares of common stock, which includes the full exercise of the underwriters’ option to purchase an additional 675,000 shares of its common stock, at a public offering price of $17.50 per share. The gross proceeds to Rocket from the public offering were $86.1 million after deducting $4.5 million of offering costs, commissions, legal and other expenses for net proceeds from the gross proceeds from the offering of $90.6 million.
 
On June 25, 2019, the Company recorded treasury stock of $0.3 million for the payroll tax liability of an option exercise. The related payroll tax liability is included in the balance sheet within accounts payable and accrued expenses.

10.
Net Loss Per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2019
   
2018
   
2019
   
2018
 
                         
Numerator:
                       
Net loss
 
$
(18,680
)
 
$
(15,767
)
 
$
(38,131
)
 
$
(31,110
)
Denominator:
                               
Weighted-average common shares outstanding - basic and diluted
   
49,267,247
     
39,483,006
     
47,206,480
     
37,954,972
 
Net loss per share- basic and diluted
 
$
(0.38
)
 
$
(0.40
)
 
$
(0.81
)
 
$
(0.82
)

The Company excluded the following potential shares of common stock, presented based on amounts outstanding at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2019
   
2018
   
2019
   
2018
 
Shares issuable upon conversion of the 2021 Convertible Notes
   
1,620,948
     
1,620,948
     
1,620,948
     
1,620,948
 
Warrants exercisable for common shares
   
14,102
     
14,102
     
14,102
     
14,102
 
Options to purchase common shares
   
9,432,575
     
8,870,004
     
9,432,575
     
8,870,004
 
     
11,067,625
     
10,505,054
     
11,067,625
     
10,505,054
 

11.
Commitments and Contingencies
 
Operating Leases

On August 14, 2018, Rocket entered into a lease for office space, process development, research activities and manufacturing to support the Company’s pipeline in Cranbury, NJ. The NJ Lease Agreement was subsequently amended on June 26, 2019. The amendment to the NJ Lease increased by 10,000 square feet the space rental by the Company to 102,000 square feet and adjusted the lease payment date of rent for the full building (“Lease Payment Date”) and the beginning of the term of the lease to September 1, 2019.  The NJ Lease Agreement has a term of 15 years from the Lease Payment Date, with an option to renew for two consecutive five-year renewal terms.
 
Estimated rent payments are $1.2 million per annum, payable in monthly installments, depending upon the nature of the leased space, and subject to annual base rent increases of 3%. The total commitment under the lease is estimated to be approximately $26.5 million over the 15-year term of the lease. The Company delivered a cash security deposit of $0.3 million to the landlord in connection with the NJ Lease Agreement which has been reflected in deposits in the consolidated balance sheets. The Company entered into the lease prior to the building being available for use as the building construction was not complete. The Company has determined it does not control the leased asset prior to the Lease Payment Date, but is involved with the design and construction of the space in selecting building designs, general contractors, and funding certain construction costs.

The total restricted cash balance for the Company’s operating leases at June 30, 2019 and December 31, 2018 was $1.0 million and $1.4 million, respectively.
 
The Company determines if an arrangement is a lease at inception. Operating leases are included in our balance sheet as right-of-use assets from operating leases, current operating lease liabilities and long-term operating lease liabilities. Certain of the Company’s lease agreements contain renewal options; however, the Company does not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that the Company is reasonably certain of renewing the lease at inception or when a triggering event occurs. As the Company’s leases do not provide an implicit rate, the Company estimated the incremental borrowing rate in calculating the present value of the lease payments. The Company has utilized its incremental borrowing rate based on the long -term borrowing costs of comparable companies in the biotechnology industry. Since the Company elected to account for each lease component and its associated non-lease components as a single combined lease component, all contract consideration was allocated to the combined lease component. Some of the Company’s lease agreements contain rent escalation clauses (including index-based escalations). The Company recognizes the minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. The Company amortizes this expense over the term of the lease beginning with the date of initial possession, which is the date the Company can enter the leased space and begin to make improvements in preparation for its intended use. Variable lease components represent amounts that are not fixed in nature and are not tied to an index or rate, and are recognized as incurred.

Lease cost
 
June 30, 2019
 
Operating lease cost
 
$
501
 
Total lease cost
 
$
501
 

The following table summarizes the maturity of the Company’s lease liabilities on an undiscounted cash flow basis and a reconciliation to the operating lease liabilities recognized on our balance sheet as of June 30, 2019:

Maturity of Lease Liabilities   June 30, 2019
 
2019 (remaining six months)
 
$
546
 
2020
   
1,103
 
2021
   
894
 
2022
   
572
 
2023
   
73
 
Total future minimum lease payments
 
$
3,188
 
Less: Imputed interest
   
(342
)
Present value of future minimum lease payments
 
$
2,846
 

The following disclosure is provided for periods prior to adoption of ASU 2016-02. Future annual minimum lease payment commitments as of June 30, 2019 were as follows:

2019 (remaining six months)
 
$
987
 
2020
   
1,970
 
2021
   
1,907
 
2022
   
1,757
 
2023
   
1,618
 
Thereafter
   
20,144
 
Total
 
$
28,383
 

Leases
 
June 30, 2019
 
       
Operating right-of-use assets
 
$
2,452
 
         
Operating current lease liabilities
   
913
 
Operating noncurrent lease liabilities
   
1,933
 
Total operating lease liabilities
 
$
2,846
 

Other information
     
       
Cash paid for amounts included in the measurement of lease liabilities:
     
Operating cash flows from operating leases
 
$
542
 
Weighted-average remaining lease term - operating leases
 
3.1 years
 
Weighted-average discount rate - operating leases
   
7.77
%

Rent expense was $0.5 million and $0.4 million for the six months ended June 30, 2019 and 2018, respectively.  Rent expense was $0.3 million and $0.2 million for the three months ended June 30, 2019 and 2018, respectively.

Litigation

From time to time, the Company may be subject to other various legal proceedings and claims that arise in the ordinary course of its business activities. Although the results of litigation and claims cannot be predicted with certainty, the Company does not believe it is party to any other claim or litigation the outcome of which, if determined adversely to the Company, would individually or in the aggregate be reasonably expected to have a material adverse effect on its business. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense and settlement costs, diversion of management resources and other factors.

Indemnification Arrangements

Pursuant to its bylaws and as permitted under Delaware law, the Company has indemnification obligations to directors, officers, employees or agents of the Company or anyone serving in these capacities. The maximum potential amount of future payments the Company could be required to pay is unlimited. The Company has insurance that reduces its monetary exposure and would enable it to recover a portion of any future amounts paid. As a result, the Company believes that the estimated fair value of these indemnification commitments is minimal.

Throughout the normal course of business, the Company has agreements with vendors that provide goods and services required by the Company to run its business. In some instances, vendor agreements include language that requires the Company to indemnify the vendor from certain damages caused by the Company’s use of the vendor’s goods and/or services. The Company has insurance that would allow it to recover a portion of any future amounts that could arise from these indemnifications. As a result, the Company believes that the estimated fair value of these indemnification commitments is minimal.

12.
Agreements Related to Intellectual Property
 
The Company has various license and research and collaboration arrangements. The transactions principally resulted in the acquisition of rights to intellectual property which is in the preclinical phase and has not been tested for safety or feasibility. In all cases, the Company did not acquire tangible assets, processes, protocols or operating systems. The Company expenses the acquired intellectual property rights as of the acquisition date on the basis that the cost of intangible assets purchased from others for use in research and development activities has no alternative future uses.

13.
Strategic Research Collaboration
 
On May 16, 2018, Rocket and the Stanford University School of Medicine (“Stanford University”) entered into a strategic collaboration agreement to support the advancement of FA and PKD gene therapy research. Under the terms of the collaboration agreement, Stanford University will serve as the lead clinical trial research center in the U.S. for the planned FA registrational trial and would also be the lead U.S. site for PKD clinical trials. The project will also separately evaluate the potential for non-myeloablative, non-genotoxic antibody-based conditioning regimens as a future development possibility that may be applied across bone marrow-derived disorders. In addition, Rocket agreed to support expansion of Stanford University’s Laboratory for Cell and Gene Therapy (“LCGM”) in order to further enhance the development of Rocket’s internal pipeline. Rocket agreed to contribute up to $3.5 million for the LCGM expansion of which 40% or $1.4 million was due upon execution of the collaboration agreement and the remaining $2.1 million balance is due upon the achievement of certain milestones. In January 2019, the Company and Stanford University signed a Clinical Trial Agreement for the treatment of FA. Upon the signing of the Clinical Trial Agreement, the second milestone of $1.4 million for the LGCM became due and was accrued and expensed in January 2019, when the milestone was met, and paid in April 2019. During the six months ended June 30, 2019, none of the remaining milestones were met with regard to the LCGM.

14.
CIRM Grant
 
On April 30, 2019, the Company announced the California Institute for Regenerative Medicine (“CIRM”) awarded Rocket up to a $6.5 million CLIN2 grant award to support the clinical development of gene therapy for LAD-I. Proceeds from the grant will help fund clinical trial costs as well as manufactured drug product for Phase I/II patients enrolled at the U.S. clinical site, University of California, Los Angeles (“UCLA”) Mattel Children’s Hospital, led by principal investigator Donald Kohn, M.D., UCLA Professor of Microbiology, Immunology and Molecular Genetics, Pediatrics (Hematology/Oncology), Molecular and Medical Pharmacology and member of the Eli and Edythe Broad Center of Regenerative Medicine and Stem Cell Research at UCLA. On July 1, 2019, the Company received the first cash advance from CIRM of $0.8 million. The CIRM grant receipts will be treated as an offset against R&D expenses as reimbursable expenses are incurred.  As of June 30, 2019, the Company recorded a receivable and reduction of R&D expenses of $0.8 million for the reimbursable expenses incurred prior to June 30, 2019.

15.
Related Party Transactions
 
During March 2018, the Company entered into a consulting agreement with a member of the Board of Directors for strategic and corporate consulting services to be provided to the Company. The Company incurred expenses of $3,600 and $149,293 during the six months ended June 30, 2019 and 2018, respectively and expenses of $3,600 and $35,000 during the three months ended June 30, 2019 and 2018, respectively relating to services provided under this consulting agreement.

During April 2018, the Company entered into a consulting agreement with a member of the Board of Directors for business development consulting services. Payments for the services under the agreement are $27,500 per quarter, and the Company may terminate the agreement with 14 days’ notice. The Company incurred expenses of $55,000 for the six months ended June 30, 2019 and 2018, respectively and $27,500 for the three months ended June 30, 2019 and 2018, respectively, relating to services provided under this consulting agreement.

16.
401(k) Savings Plan
 
The Company has a defined contribution savings plan (the “Plan”) under Section 401(k) of the Internal Revenue Code of 1986. This Plan covers substantially all employees who meet minimum age and service requirements and allows participants to defer a portion of their annual compensation on a pre-tax basis. Company contributions to the Plan may be made at the discretion of the Company’s board of directors. The Company has elected to match 4% of employee contributions to the Plan, subject to certain limitations. The Company’s matching contribution for the six months ended June 30, 2019 and 2018 was $125,204 and $57,995, respectively and $43,580 and $35,130 for the three months ended June 30, 2019 and 2018, respectively.

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

You should read the following discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and related notes that are included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission, or the SEC, on March 8, 2019, or our 2018 Form 10-K. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those discussed in the section entitled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. In preparing this MD&A, we presume that readers have access to and have read the MD&A in our Annual Report on Form 10-K, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K.

The information set forth below should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q as well as the audited financial statements and the notes thereto contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2019. Unless stated otherwise, references in this Quarterly Report on Form 10-Q to “us,” “we,” “our,” or our “Company” and similar terms refer to Rocket Pharmaceuticals, Inc. References to “Inotek” refer to the company prior to the Reverse Merger.

Recent Developments
 
Rocket Pharmaceuticals, Inc., together with its subsidiaries (collectively, “Rocket” or the “Company”), is a clinical-stage, multi-platform biotechnology company focused on the development of first or best-in-class gene therapies, with direct on-target mechanism of action and clear clinical endpoints, for rare and devastating pediatric diseases. We have clinical-stage lentiviral vector (“LVV”) programs currently undergoing clinical testing 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 and Leukocyte Adhesion Deficiency-I (“LAD-I), a genetic disorder that causes the immune system to malfunction. FA has been in clinical stage testing in the European Union (“EU”) since 2016, and in the United States (“U.S.”), Rocket received investigational new drug (“IND”) clearance for both FA and LAD-I in late 2018. . Two additional pre-clinical stage LVV programs include Pyruvate Kinase Deficiency (“PKD”), a rare red blood cell autosomal recessive disorder that results in chronic non-spherocytic hemolytic anemia; and Infantile Malignant Osteopetrosis (“IMO”), a genetic disorder characterized by increased bone density and bone mass secondary to impaired bone resorption.  In addition, we have an adeno-associated virus (“AAV”) program for Danon disease, a multi-organ lysosomal-associated disorder leading to early death due to heart failure. An IND filing was cleared in Danon disease in early 2019, and human clinical studies began in the second quarter of 2019. We have global commercialization and development rights to all of our product candidates under royalty-bearing license agreements, with the exception of the CRISPR/Cas9 development program (described below) for which we currently only have development rights.

On April 18, 2019, we completed a public offering of 5,175,000 shares of common stock, which includes the full exercise of the underwriters’ option to purchase an additional 675,000 shares of our common stock, at a public offering price of $17.50 per share. The net proceeds to Rocket from the public offering were approximately $86.1 million, after deducting $4.5 million of offering costs, commissions, legal and other expenses from the gross proceeds from the offering of $90.6 million. SVB Leerink LLC, Evercore Group L.L.C. and William Blair & Company, L.L.C., acted as joint book-running managers for the offering. Oppenheimer & Co. acted as lead manager for the offering.  Pursuant to the underwriting agreement executed in connection with the offering, the Company’s executive officers and directors, and certain other stockholders entered into agreements providing for a 90-day “lock-up” period with respect to sales of the Company’s common stock, subject to certain exceptions.
 
On April 30, 2019, the California Institute for Regenerative Medicine (“CIRM”) awarded Rocket up to $6.5 million CLIN2 grant award to support the clinical development of gene therapy for LAD-I.  Proceeds from the grant will help fund clinical trial costs as well as manufactured drug product for Phase I/II patients enrolled at the U.S. clinical site, University of California, Los Angeles (“UCLA”) Mattel Children’s Hospital, led by principal investigator Donald Kohn, M.D., UCLA Professor of Microbiology, Immunology and Molecular Genetics, Pediatrics (Hematology/Oncology), Molecular and Medical Pharmacology and member of the Eli and Edythe Broad Center of Regenerative Medicine and Stem Cell Research at UCLA.  On July 1, 2019, we received the first grant from CIRM of $0.8 million.
 
Gene Therapy Overview

Genes are composed of sequences of deoxyribonucleic acid (“DNA”), which code for proteins that perform a broad range of physiologic functions in all living organisms. Although genes are passed on from generation to generation, genetic changes, also known as mutations, can occur in this process. These changes can result in the lack of production of proteins or the production of altered proteins with reduced or abnormal function, which can in turn result in disease.

Gene therapy is a therapeutic approach in which an isolated gene sequence or segment of DNA is administered to a patient, most commonly for the purpose of treating a genetic disease that is caused by genetic mutations. Currently available therapies for many genetic diseases focus on administration of large proteins or enzymes and typically address only the symptoms of the disease. Gene therapy aims to address the disease-causing effects of absent or dysfunctional genes by delivering functional copies of the gene sequence directly into the patient’s cells, offering the potential for curing the genetic disease, rather than simply addressing symptoms.

We are using modified non-pathogenic viruses for the development of our gene therapy treatments. Viruses are particularly well suited as delivery vehicles because they are adept at penetrating cells and delivering genetic material inside a cell. In creating our viral delivery vehicles, the viral (pathogenic) genes are removed and are replaced with a functional form of the missing or mutant gene that is the cause of the patient’s genetic disease. The functional form of a missing or mutant gene is called a therapeutic gene, or the “transgene.” The process of inserting the transgene is called “transduction.” Once a virus is modified by replacement of the viral genes with a transgene, the modified virus is called a “viral vector.” The viral vector delivers the transgene into the targeted tissue or organ (such as the cells inside a patient’s bone marrow). We have two types of viral vectors in development, LVV and AAV. We believe that our LVV and AAV-based programs have the potential to offer a significant therapeutic benefit to patients that is durable (long-lasting).

The gene therapies can be delivered either (1) ex vivo (outside the body), in which case the patient’s cells are extracted and the vector is delivered to these cells in a controlled, safe laboratory setting, with the modified cells then being reinserted into the patient, or (2) in vivo (inside the body), in which case the vector is injected directly into the patient, either intravenously (“IV”) or directly into a specific tissue at a targeted site, with the aim of the vector delivering the transgene to the targeted cells.
 
We believe that scientific advances, clinical progress, and the greater regulatory acceptance of gene therapy have created a promising environment to advance gene therapy products as these products are being designed to restore cell function and improve clinical outcomes, which in many cases include prevention of death at an early age. The U.S. Food and Drug Administration (“FDA”) approval of Novartis’s treatment for pediatric acute lymphoblastic leukemia indicates that there is a regulatory pathway forward for gene therapy products.

Pipeline Overview

LVV Programs. Rocket’s LVV-based programs utilize third-generation, self-inactivating lentiviral vectors to target selected rare diseases. Currently, Rocket is developing LVV programs to treat FA, LAD-I, PKD, and IMO.

The chart below shows the current phases of development of Rocket’s programs and product candidates:


Fanconi Anemia Complementation Group A (FANCA):

FA, a rare and life-threatening DNA-repair disorder, generally arises from a mutation in a single FA gene. An estimated 60% to 70% of cases arise from mutations in the Fanconi-A (“FANCA”) gene, which is the focus of the current Rocket program.  FA results in bone marrow failure, developmental abnormalities, myeloid leukemia and other malignancies, often during the early years and decades of life. Bone marrow aplasia, which is bone marrow that no longer produces any or very few red and white blood cells and platelets leading to infections and bleeding, is the most frequent cause of early morbidity and mortality in FA, with a median onset before 10 years of age. Leukemia is the next most common cause of mortality, ultimately occurring in about 20% of patients later in life. Solid organ malignancies, such as head and neck cancers, can also occur, although at lower rates during the first two to three decades of life.

Although improvements in allogeneic (donor-mediated) hematopoietic stem cell transplant (“HSCT”), currently the most frequently utilized therapy for FA, have resulted in more frequent hematologic correction of the disorder, HSCT is associated with both acute and long-term risks, including transplant-related mortality, graft versus host disease (“GVHD”), a sometimes fatal side effect of allogeneic transplant characterized by painful ulcers in the GI tract, liver toxicity and skin rashes, as well as increased risk of subsequent cancers. Rocket’s gene therapy program in FA is designed to enable a minimally toxic hematologic correction using a patient’s own stem cells during the early years of life. Rocket believes that the development of a broadly applicable autologous gene therapy can be transformative for these patients.

Rocket’s LVV-based programs utilize third-generation, self-inactivating lentiviral vectors to correct defects in patients’ hematopoietic stem cell (“HSCs”), which are the cells found in bone marrow that are capable of generating blood cells over a patient’s lifetime. Defects in the genetic coding of HSCs can result in severe, and potentially life-threatening anemia, which is when a patient’s blood lacks enough properly functioning red blood cells to carry oxygen throughout the body. Stem cell defects can also result in severe and potentially life-threatening decreases in white blood cells resulting in susceptibility to infections, and in platelets responsible for blood clotting, which may result in severe and potentially life-threatening bleeding episodes. Patients with FA have a genetic defect that prevents the normal repair of genes and chromosomes within blood cells in the bone marrow, which frequently results in the development of acute myeloid leukemia (“AML”), a type of blood cancer, as well as bone marrow failure and congenital defects. The average lifespan of an FA patient is estimated to be 30 to 40 years. The prevalence of FA in the U.S. and European Union (“EU”) is estimated to be about 2,000, and given the efficacy seen in non-conditioned patients, the addressable annual market opportunity is now thought to be in the 400-500 range, or at least double previous estimates.

We currently have one LVV-based program targeting FA, RP-L102. RP-L102 is our lead lentiviral vector-based program that we in-licensed from Centro de Investigaciones Energéticas, Medioambientales y Tecnológicas (“CIEMAT”), which is a leading research institute in Madrid, Spain. RP-L102 is currently being studied in a Rocket-sponsored Phase 1 clinical trial treating FA patients initially at the Center for Definitive and Curative Medicine at Stanford University School of Medicine (“Stanford University”). A modified process under an Investigational Medicinal Product Dossier (“IMPD”), is being studied in a trial sponsored by CIEMAT. We are entitled to the data from this clinical study and have the commercial rights to the drug being studied under this IMPD.
 
We submitted an IND to initiate clinical studies of RP-L102 in the U.S. in September 2018 and were notified by the FDA of its clearance in November 2018.  The clinical trial will evaluate “Process B” RP-L102 which incorporates a modified cell enrichment process, transduction enhancers, and commercial-grade vector manufacturing and cell processing. The initial two FA pediatric patients have received treatment on the Phase 1 clinical trial of “Process B” RP-L102 at Stanford University. The study is designed to assess the safety and tolerability of a single infusion of RP-L102, as well as efficacy endpoints. Preliminary data is expected by the fourth quarter of 2019.

On April 29, 2019, long-term updated clinical data from the ongoing Phase 1/2 trial of RP-L102, sponsored by CIEMAT, for FA that utilizes ‘Process A’ without the use of myeloablative conditioning, was presented at the American Society of Cell and Gene Therapy (“ASCGT”) annual meeting. Results for the four patients who have been followed for at least one year and up to three years show increasing and durable engraftment in peripheral blood and bone marrow, and restoration of bone marrow hematopoietic stem cell function.
 
Leukocyte Adhesion Deficiency-I (LAD-I):

Overview of LAD-I

LAD-I is a rare autosomal recessive disorder of white blood cell adhesion and migration, resulting from mutations in the ITGB2 gene encoding for the Beta-2 Integrin component, CD18. Deficiencies in CD18 result in an impaired ability for neutrophils (a subset of infection-fighting white blood cells) to leave blood vessels and enter into tissues where these cells are needed to combat infections. As is the case with many rare diseases, true estimates of incidence are difficult; however, several hundred cases (both living and deceased) have been reported to date.

Most LAD-I patients are believed to have the severe form of the disease. Severe LAD-I is notable for recurrent, life-threatening infections and substantial infant mortality in patients who do not receive an allogeneic HSCT. Mortality for severe LAD-I has been reported as 60 to 75% by age two in the absence of allogeneic HCST.

Rocket currently has one program targeting LAD-I, RP-L201. RP-L201 is a clinical program that Rocket in-licensed from CIEMAT. The planned open-label, single-arm, Phase 1/2 registration enabling clinical trial of RP-L201 is expected to enroll two severe LAD-I patients in the U.S. or E.U. and will assess the safety and tolerability of RP-L201.  The Phase 1 portion of the registrational trial is underway with the first patient’s cells harvested in the second quarter.  Preliminary data will be presented in the fourth quarter.

Rocket partners with UCLA to lead U.S. clinical development efforts for LAD-I and program. UCLA and its Eli and Edythe Broad Center of Regenerative Medicine and Stem Cell Research is serving as the lead U.S. clinical research center for the registrational clinical trial for LAD-I.

Pyruvate Kinase Deficiency (PKD):

Red blood cell (“RBC”) PKD is a rare autosomal recessive disorder resulting from mutations in the pyruvate kinase L/R (“PKLR”) gene encoding for a component of the RBC glycolytic pathway. PKD is characterized by chronic non-spherocytic hemolytic anemia, a disorder in which RBCs do not assume a normal spherical shape and are broken down, leading to decreased ability to carry oxygen to cells, with anemia severity that can range from mild (asymptomatic) to severe forms that may result in childhood mortality or a requirement for frequent, lifelong RBC transfusions. The pediatric population is the most commonly and severely affected subgroup of patients with PKD, and PKD often results in splenomegaly (abnormal enlargement of the spleen), jaundice and chronic iron overload which is likely the result of both chronic hemolysis and the RBC transfusions used to treat the disease. The variability in anemia severity is believed to arise in part from the large number of diverse mutations that may affect the PKLR gene. Estimates of disease incidence have ranged between 3.2 and 51 cases per million in the white U.S. and EU population. Industry estimates suggest at least 2,500 cases in the U.S. and EU have already been diagnosed despite the lack of FDA-approved molecularly targeted therapies.

We currently have one LVV-based program targeting PKD, RP-L301. RP-L301 is a preclinical program that we in-licensed from CIEMAT. This program is currently being developed through an ongoing collaboration with CIEMAT. New market research indicates the application of gene therapy to broader populations could increase the market opportunity from approximately 250 to 500 per year.

This program has been granted EMA orphan drug disease designation and FDA orphan drug disease designation (“ODD”). Initiation of the Phase 1 clinical trial of RP-L301 is anticipated in the fourth quarter of 2019.
 
Infantile Malignant Osteopetrosis (IMO):
 
IMO is a genetic disorder characterized by increased bone density and bone mass secondary to impaired bone resorption. Normally, small areas of bone are constantly being broken down by special cells called osteoclasts, then made again by cells called osteoblasts. In IMO, the cells that break down bone (osteoclasts) do not work properly, which leads to the bones becoming thicker and not as healthy. Untreated IMO patients may suffer from a compression of the bone-marrow space, which results in bone marrow failure, anemia and increased infection risk due to the lack of production of white blood cells. Untreated IMO patients may also suffer from a compression of cranial nerves, which transmit signals between vital organs and the brain, resulting in blindness, hearing loss and other neurologic deficits.

Rocket currently has one LVV-based program targeting IMO, RP-L401. RP-L401 is a preclinical program that Rocket in-licensed from Lund University, Sweden. This program has been granted ODD from the FDA.  In March 2019, Rocket received Rare Pediatric Disease designation from the FDA for RP-L401 for the treatment of IMO. The FDA defines a “rare pediatric disease” as a serious and life-threatening disease that affects less than 200,000 people in the U.S. that are aged between birth to 18 years. The Rare Pediatric Disease designation program allows for a sponsor who receives an approval for a product to potentially qualify for a voucher that can be redeemed to receive a priority review of a subsequent marketing application for a different product. Rocket has partnered with UCLA to lead U.S clinical development efforts for the IMO program and UCLA is serving as the lead U.S. clinical site for IMO.

AAV Program:

Overview of Danon Disease

Danon disease is a multi-organ lysosomal-associated disorder leading to early death due to heart failure. RP-A501 is in development as an in vivo therapy for Danon disease, which is estimated to have a prevalence of 15,000 to 30,000 patients in the U.S. and the EU, however new market research is being performed and the prevalence of patients may be updated in the future. Danon disease is caused by mutations in the gene encoding lysosome-associated membrane protein 2 (“LAMP-2”), a mediator of autophagy. This mutation results in the accumulation of autophagic vacuoles, predominantly in cardiac and skeletal muscle. Male patients often require heart transplantation and typically die in their teens or twenties from progressive heart failure. Along with severe cardiomyopathy, other Danon disease symptoms can include skeletal muscle weakness, liver disease, and intellectual impairment. There are no specific therapies available for the treatment of Danon disease.
 
In January 2019, we announced the clearance of our IND application by the FDA for RP-A501. We dosed the first patient initiating our Phase 1 clinical trial of RP-A501 for Danon disease in the second quarter of 2019. University of California San Diego Health is the initial and lead center for the Phase 1 clinical trial. In February 2019, we were notified by the FDA that we were granted Fast Track designation for RP-A501.
 
On May 2, 2019, we presented additional preclinical data at the ASCGT annual meeting, indicating that high vector copy number (“VCN”), in Danon disease-relevant organs in both mice and non-human primates (“NHN’s”), with high concentrations in heart and liver tissue (for NHP, cardiac VCN was approximately 10 times higher on average than in skeletal muscle and central nervous system), which is consistent with reported results in several studies of heart tissue across different species. There were no treatment-related adverse events or safety issues up to the highest dose.

CRISPR/Cas9 gene editing in Fanconi Anemia:

In addition to its LVV and AAV programs, Rocket also has a program evaluating CRISPR/Cas9-based gene editing for FA. This program is currently in the discovery phase. CRISPR/Cas9-based gene editing is a different method of correcting the defective genes in a patient, where the editing is very specific and targeted to a particular gene sequence. “CRISPR/Cas9” stands for Clustered, Regularly Interspaced Short Palindromic Repeats (“CRISPR”) Associated protein-9. The CRISPR/Cas9 technology can be used to make “cuts” in DNA at specific sites of targeted genes, making it potentially more precise in delivering gene therapies than traditional vector-based delivery approaches. CRISPR/Cas9 can also be adapted to regulate the activity of an existing gene without modifying the actual DNA sequence, which is referred to as gene regulation.

Strategy

We seek to bring hope and relief to patients with devastating, undertreated, rare pediatric diseases through the development and commercialization of potentially curative first-in-class gene therapies. To achieve these objectives, we intend to develop into a fully-integrated biotechnology company. In the near- and medium-term, we intend to develop our first-in-class product candidates, which are targeting devastating diseases with substantial unmet need. In the medium and long-term, we expect to develop proprietary in-house analytics and manufacturing capabilities, commence registration trials for our currently planned programs and submit our first biologics license applications (“BLAs”), and establish our gene therapy platform and expand our pipeline to target additional indications that we believe to be potentially compatible with our gene therapy technologies. In addition, during that time, we believe that our currently planned programs will become eligible for priority review vouchers from the FDA that provide for expedited review. We have assembled a leadership and research team with expertise in cell and gene therapy, rare disease drug development and commercialization.

We believe that our competitive advantage lies in our disease-based selection approach, a rigorous process with defined criteria to identify target diseases. We believe that this approach to asset development differentiates us as a gene therapy company and potentially provides us with a first-mover advantage.

Financial Overview

Since our inception, we have devoted substantially all of our resources to organizing and staffing the company, business planning, raising capital, acquiring or discovering product candidates and securing related intellectual property rights, conducting discovery, research and development activities for the programs and planning for potential commercialization. We do not have any products approved for sale and have not generated any revenue from product sales. From inception through June 30, 2019, Rocket raised net cash proceeds of approximately $294.5 million from investors through both equity and convertible debt financing to fund operating activities. As of June 30, 2019, we had cash, cash equivalents and investments of $257.8 million.

Since inception, we have incurred significant operating losses. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of one or more of the current or future product candidates and programs. Rocket had net losses of $74.5 million for the year ended December 31, 2018 and $38.1 million for the six months ended June 30, 2019. As of June 30, 2019, we had an accumulated deficit of $144.0 million. We expect to continue to incur significant expenses and higher operating losses for the foreseeable future as we advance our current product candidates from discovery through preclinical development and clinical trials and seek regulatory approval of our product candidates. In addition, if we obtain marketing approval for any of their product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. Furthermore, we expect to incur additional costs as a public company. Accordingly, we will need additional financing to support continuing operations and potential acquisitions of licensing or other rights for product candidates.

Until such a time as we can generate significant revenue from product sales, if ever, we will seek to fund our operations through public or private equity or debt financings or other sources, which may include collaborations with third parties and government programs or grants. Adequate additional financing may not be available to us on acceptable terms, or at all. We can make no assurances that we will be able to raise the cash needed to fund our operations and, if we fail to raise capital when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more product candidates or delay pursuit of potential in-licenses or acquisitions.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.
 
Financial Overview

Revenue

To date, we have not generated any revenue from any sources, including from product sales, and we do not expect to generate any revenue from the sale of products in the near future. If our development efforts for product candidates are successful and result in regulatory approval or license agreements with third parties, we may generate revenue in the future from product sales.

Operating Expenses

Research and Development Expenses

Our research and development program (“R&D”) expenses consist primarily of external costs incurred for the development of our product candidates. These expenses include:


expenses incurred under agreements with research institutions that conduct research and development activities including, process development, preclinical, and clinical activities on Rocket’s behalf;

costs related to process development, production of preclinical and clinical materials, including fees paid to contract manufacturers and manufacturing input costs for use in internal manufacturing processes;


consultants supporting process development and regulatory activities; and

costs related to in-licensing of rights to develop and commercialize our product candidate portfolio.

We recognize external development costs based on contractual payment schedules aligned with program activities, invoices for work incurred, and milestones which correspond with costs incurred by the third parties. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses.

Our direct research and development expenses are tracked on a program-by-program basis for product candidates and consist primarily of external costs, such as research collaborations and third party manufacturing agreements associated with our preclinical research, process development, manufacturing, and clinical development activities. Our direct research and development expenses by program also include fees incurred under license agreements. Our personnel, non-program and unallocated program expenses include costs associated with activities performed by our internal research and development organization and generally benefit multiple programs. These costs are not separately allocated by product candidate and consist primarily of:


salaries and personnel-related costs, including benefits, travel and stock-based compensation, for our scientific personnel performing research and development activities;

facilities and other expenses, which include expenses for rent and maintenance of facilities, and depreciation expense and;

laboratory supplies and equipment used for internal research and development activities.
 
Our research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development. As a result, we expect that research and development expenses will increase substantially over the next several years as we increase personnel costs, including stock-based compensation, supports ongoing clinical studies, seeks to achieve proof-of-concept in one or more product candidates, advances preclinical programs to clinical programs, and prepares regulatory filings for product candidates.

We cannot determine with certainty the duration and costs to complete current or future clinical studies of product candidates or if, when, or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates. The duration, costs, and timing of clinical studies and development of product candidates will depend on a variety of factors, including:

 
the scope, rate of progress, and expense of ongoing as well as any clinical studies and other research and development activities that we undertake;
 
future clinical study results;
 
uncertainties in clinical study enrollment rates;
 
changing standards for regulatory approval; and
 
the timing and receipt of any regulatory approvals.
 
We expect research and development expenses to increase for the foreseeable future as we continue to invest in research and development activities related to developing product candidates, including investments in manufacturing, as our programs advance into later stages of development and as we conduct additional clinical trials. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of product candidates is highly uncertain. As a result, we are unable to determine the duration and completion costs of research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.
 
Our future research and development expenses will depend on the clinical success of our product candidates, as well as ongoing assessments of the commercial potential of such product candidates. In addition, we cannot forecast with any degree of certainty which product candidates may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements. We expect our research and development expenses to increase in future periods for the foreseeable future as we seek to complete development of our product candidates.

The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:

 
the scope, progress, outcome and costs of our clinical trials and other research and development activities;
 
the efficacy and potential advantages of our product candidates compared to alternative treatments, including any standard of care;
 
the market acceptance of our product candidates;
 
obtaining, maintaining, defending and enforcing patent claims and other intellectual property rights;
 
significant and changing government regulation; and
 
the timing, receipt and terms of any marketing approvals.

A change in the outcome of any of these variables with respect to the development of our product candidates that we may develop could mean a significant change in the costs and timing associated with the development of our product candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently contemplate for the completion of clinical development of any of our product candidates that we may develop or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.

General and Administrative Expenses

General and administrative (“G&A”) expenses consist primarily of salaries and related benefit costs for personnel, including stock-based compensation and travel expenses for our employees in executive, operational, finance, legal, business development, and human resource functions. In addition, other significant general and administrative expenses include professional fees for legal, patents, consulting, investor and public relations, auditing and tax services as well as other expenses for rent and maintenance of facilities, insurance and other supplies used in general and administrative activities.  We expect general and administrative expenses to increase for the foreseeable future due to anticipated increases in headcount to support the continued advancement of our product candidates. We also anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses.

Interest Expense

Interest expense is related to Rocket’s 2021 Convertible Notes, which are due in August 2021.

Interest Income

Interest income is related to interest earned from investments.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the U.S.  The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in more detail in our Annual Report on Form 10-K filed for the year ended December 31, 2018, which was filed with the SEC on March 8, 2019, except as otherwise described below.
 
Refer to Part 1, Item 1, Note 3 and Note 11 of the Notes to our Consolidated Financial Statements for disclosures regarding estimates and judgments relating to leases.

Results of Operations

Comparison of the Three Months Ended June 30, 2019 and 2018

The following table summarizes the results of operations for the three months ended June 30, 2019 and 2018 ($ in thousands):

   
Three Months Ended June 30,
 
   
2019
   
2018
   
Change
 
Operating expenses:
                 
Research and development
 
$
13,989
   
$
10,772
   
$
3,217
 
General and administrative
   
4,403
     
4,100
     
303
 
Total operating expenses
   
18,392
     
14,872
     
3,520
 
Loss from operations
   
(18,392
)
   
(14,872
)
   
(3,520
)
Research and development incentives
   
-
     
-
     
-
 
Interest expense
   
(1,544
)
   
(1,363
)
   
(181
)
Interest and other income net
   
1,000
     
468
     
532
 
Accretion of discount on investments
   
256
     
-
     
256
 
Total other expense net
   
(288
)
   
(895
)
   
607
 
Net loss
 
$
(18,680
)
 
$
(15,767
)
 
$
(2,913
)

Research and Development Expenses

R&D expenses increased $3.2 million to $14.0 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The increase was primarily a result of an increase in clinical trial expenses of $2.1 million as the Phase 1 clinical trials commenced for FA and Danon disease; an increase in license expenses of $1.1 million; an increase in stock compensation expense of $0.8 million; offset by a decrease in preclinical research of $1.3 million.

General and Administrative Expenses

G&A expenses increased $0.3 million to $4.4 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The increase in G&A was primarily driven by an increase in stock compensation expense of $0.5 million and an increase in compensation and benefits expense of $0.4 million; offset by decreases in consulting, legal and other G&A expenses of $0.6 million.

Other Expense

Other expense decreased $0.6 million to $0.3 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, which was primarily due to an increase in interest and accretion income of $0.8 million, offset by an increase in interest expense of $0.2 million.

Comparison of the Six Months Ended June 30, 2019 and 2018

The following table summarizes the results of operations for the six months ended June 30, 2019 and 2018 ($ in thousands):

   
Six Months Ended June 30,
 
   
2019
   
2018
   
Change
 
Operating expenses:
                 
Research and development
 
$
29,126
   
$
16,525
   
$
12,601
 
General and administrative
   
8,211
     
12,752
     
(4,541
)
Total operating expenses
   
37,337
     
29,277
     
8,060
 
Loss from operations
   
(37,337
)
   
(29,277
)
   
(8,060
)
Research and development incentives
   
250
     
186
     
64
 
Interest expense
   
(3,148
)
   
(2,834
)
   
(314
)
Interest and other income net
   
1,601
     
815
     
786
 
Accretion of discount on investments
   
503
     
-
     
503
 
Total other expense net
   
(794
)
   
(1,833
)
   
1,039
 
Net loss
 
$
(38,131
)
 
$
(31,110
)
 
$
(7,021
)

Research and Development Expenses

R&D expenses increased $12.6 million to $29.1 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The increase was primarily a result of increase in manufacturing and process development expenses of $4.7 million; increase in clinical trials expense of $2.5 million as the Phase I clinical trials commenced for FA and Danon disease; increase in compensation expense of $1.7 million as R&D headcount increased during the six months ended June 30, 2019 as compared to the six months ended June 30, 2018; an increase in license expense of $1.0 million and an increase in stock compensation expense of $1.0 million.

General and Administrative Expenses

G&A expenses decreased $4.5 million to $8.2 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. Included in G&A for the six months ended June 30, 2018 were merger-related expenses of $5.3 million which were incurred for the six months ended June 30, 2018, including stock-based compensation expenses and post-Reverse Merger transition expenses including payroll and severance payments for remaining Inotek employees retained for the post-Reverse Merger transition which were not recurring for the six months ended June 30, 2019.  The decrease in G&A for the six months ended June 30, 2019 was primarily driven by a decrease in stock compensation expense of $1.8 million; a decrease in compensation and benefits of $1.6 million and a decrease in consulting and legal expenses of $0.6 million.

Other Expense

Other expense decreased by $1.0 million to $0.8 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, which was primarily due to an increase in interest and accretion income of $1.3 million, offset by an increase in interest expense of $0.3 million.

Liquidity, Capital Resources and Plan of Operations

Since inception, we have not generated any revenue from any sources, including from product sales, and have incurred significant operating losses and negative cash flows from our operations. We have funded operations to date primarily with proceeds from the sale of preferred shares, common stock and the issuance of convertible notes.

Cash Flows

The following table summarizes our cash flows for each of the periods presented:

   
Six Months Ended June 30,
 
   
2019
   
2018
 
Cash used in operating activities
 
$
(34,081
)
 
$
(21,339
)
Cash used in investing activities
   
(97,705
)
   
(21,336
)
Cash provided by financing activities
   
85,353
     
78,518
 
Net change in cash, cash equivalents and restricted cash
 
$
(46,433
)
 
$
35,843
 

Operating Activities

During the six months ended June 30, 2019, operating activities used $34.1 million of cash, primarily resulting from our net loss of $38.1 million offset by net changes in our operating assets and liabilities of $4.7 million and net non-cash charges of $8.8 million, including stock-based compensation expense of $7.3 million and accretion of discount on convertible notes of $1.7 million. Changes in Rocket’s operating assets and liabilities for the six months ended June 30, 2019 consisted of increases in prepaid expenses and other assets of $2.4 million, and accounts payable and accrued expenses of $2.3 million.

During the six months ended June 30, 2018, operating activities used $21.3 million of cash, primarily resulting from our net loss of $31.1 million, partially offset by net non-cash charges of $9.8 million, including stock-based compensation expense of $8.2 million. There was no change in our operating assets and liabilities for the six months ended June 30, 2018 as the increase in accounts payable and accrued expenses of $1.3 million was offset by a decrease in prepaid expenses and other current assets of $0.7 million and a decrease in accrued research and development of $0.6 million.

Investing Activities

During the six months ended June 30, 2019, net cash used in investing activities was $97.7 million, consisting of purchases of investments of $140.3 million and purchases of property and equipment of $7.3 million, offset by proceeds of $49.9 million from the maturities of investments.

During the six months ended June 30, 2018, net cash outflow on investing activities was $21.3 million, consisting of purchases of investments of $118.8 million offset by $76.3 million of cash acquired in connection with the Reverse Merger, and $21.2 million from the maturities of investments.

Financing Activities

During the six months ended June 30, 2019, net cash provided by financing activities was $85.4 million, consisting of proceeds from the issuance of common stock of $86.1 million, offset by share repurchase of $0.7 million.

During the six months ended June 30, 2018, net cash provided by financing activities was $78.5 million, consisting entirely of proceeds from the issuance of common stock.

Funding Requirements

We expect expenses to increase substantially in connection with our ongoing activities, particularly as we advance our preclinical activities, initiate additional clinical trials and manufacturing of our product candidates. In addition, we expect to incur additional costs associated with operating as a public company. Our expenses will also increase as we:

 
leverage our programs to advance other product candidates into preclinical and clinical development;
 
seek regulatory agreements to initiate clinical trials in the EU, US and ROW;
 
establish a sales, marketing, medical affairs and distribution infrastructure to commercialize any product candidates for which Rocket may obtain marketing approval and intend to commercialize on its own or jointly;
 
hire additional preclinical, clinical, regulatory, quality and scientific personnel;
 
expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company;
 
maintain, expand and protect our intellectual property portfolio; and
 
acquire or in-license other product candidates and technologies.
 
As of June 30, 2019, we had cash, cash equivalents and investments of $257.8 million.  We expect such resources would be sufficient to fund its operating expenses and capital expenditure requirements into the first half of 2021.

Because of the numerous risks and uncertainties associated with research, development and commercialization of pharmaceutical product candidates, we are unable to estimate the exact amount of working capital requirements. Our future funding requirements will depend on, and could increase significantly as a result of, many factors, including:
 
 
the scope, progress, results and costs of researching and developing our product candidates, and conducting preclinical studies and clinical trials;
 
the costs, timing and outcome of regulatory review of our product candidates;
 
the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;
 
the costs of manufacturing commercial-grade product to support commercial launch;
 
the ability to receive additional non-dilutive funding, including grants from organizations and foundations;
 
the revenue, if any, received from commercial sale of its products, should any of its product candidates receive marketing approval;
 
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
 
our ability to establish and maintain collaborations on favorable terms, if at all;
 
the extent to which we acquire or in-license other product candidates and technologies; and
 
the timing, receipt and amount of sales of, or milestone payments related to our royalties on, current or future product candidates, if any.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of public or private equity offerings, debt financings, collaborations, strategic partnerships or marketing, distribution or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, additional debt financing would result in increased fixed payment obligations.

If we raise funds through governmental funding, collaborations, strategic partnerships or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, reduce or eliminate our product development or future commercialization efforts or grant rights to develop and market product candidates that it would otherwise prefer to develop and market themselves.

Contractual Obligations and Commitments

Information regarding contractual obligations and commitments may be found in Note 11 of our “Consolidated Unaudited Financial Statements in this Quarterly Report on Form 10-Q.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.

JOBS Act

Under Section 107(b) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), an “emerging growth company” can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, as a result, we will adopt new or revised accounting standards at the same time as other public companies that are not emerging growth companies. There are other exemptions and reduced reporting requirements provided by the JOBS Act that we are currently evaluating. For example, as an emerging growth company, we are exempt from Sections 14A(a) and (b) of the Securities Exchange Act of 1934 (the “Exchange Act”), which would otherwise require us to (i) submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency” and “golden parachutes” and (ii) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of our Chief Executive Officer’s compensation to our median employee compensation. We also intend to rely on an exemption from the rule requiring us to provide an auditor’s attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and the rule requiring us to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements as the auditor discussion and analysis. We will continue to remain an “emerging growth company” until the earliest of the following: December 31, 2020; the last day of the fiscal year in which our total annual gross revenue is equal to or more than $1.07 billion; the date on which we have issued more than $1.0 billion in nonconvertible debt during the previous three years; or the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 3 of our “Consolidated Unaudited Financial Statements,” in this Quarterly Report on Form 10-Q.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. These market risks are principally limited to interest rate fluctuations. We had cash, cash equivalents and investments of $257.8 million at June 30, 2019, consisting primarily of funds in a money market account, corporate and municipal bonds and United States Treasury securities. The primary objective of our investment activities is to preserve principal and liquidity while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of our investment portfolio, we do not believe an immediate 1.0% increase in interest rates would have a material effect on the fair market value of our portfolio, and accordingly we do not expect a sudden change in market interest rates to affect materially our operating results or cash flows.

Our 2021 Convertible Notes bear interest at a fixed rate and therefore a change in interest rates would not impact the amount of interest we would have to pay on this indebtedness.

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures. Based on that evaluation of our disclosure controls and procedures as of June 30, 2019, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of such date are effective at the reasonable assurance level. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Inherent Limitations of Internal Controls

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the six months ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.
Legal Proceedings

From time to time, we may be subject to various legal proceedings and claims that arise in the ordinary course of our business activities. Although the results of litigation and claims cannot be predicted with certainty, we do not believe we are party to any other claim or litigation the outcome of which, if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our business. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
 
Item 1A.
Risk Factors
 
We operate in an industry that involves numerous risks and uncertainties. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this Quarterly Report on Form 10-Q, including our financial statements and related notes hereto. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations and future growth prospects. The risks and uncertainties described below may change over time and other risks and uncertainties, including those that we do not currently consider material, may impair our business. In these circumstances, the market price of our common stock could decline. The following Risk Factors are consistent with those previously disclosed in the 2018 Form 10-K.

Risks Related to Our Financial Position

We have a history of operating losses, and we may not achieve or sustain profitability. We anticipate that we will continue to incur losses for the foreseeable future. If we fail to obtain additional funding to conduct our planned research and development effort, we could be forced to delay, reduce or eliminate our product development programs or commercial development efforts.

We are an early-stage gene therapy company with a limited operating history on which to base your investment decision. Gene therapy product development is a highly speculative undertaking and involves a substantial degree of risk. Our operations to date have been limited primarily to organizing and staffing our company, business planning, raising capital, acquiring and developing product and technology rights and conducting preclinical research and development activities for our product candidates. We have never generated any revenue from product sales. We have not obtained regulatory approvals for any of our product candidates, and have funded our operations to date through proceeds from sales of our stock.

We have incurred net losses since our inception. We incurred net losses of $18.7 million and $38.1 million for the three and six months ended June 30, 2019, respectively, and $74.5 million and $19.6 million for the years ended December 31, 2018 and 2017, respectively. As of June 30, 2019, we had an accumulated deficit of $144.0 million. Substantially all of our operating losses have resulted from costs incurred in connection with our research and development programs and from G&A costs associated with our operations. We expect to continue to incur significant expenses and operating losses over the next several years and for the foreseeable future as we intend to continue to conduct research and development, clinical testing, regulatory compliance activities, manufacturing activities, and, if any of our product candidates is approved, sales and marketing activities that, together with anticipated G&A expenses, will likely result in us incurring significant losses for the foreseeable future. Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our accumulated deficit and working capital.

We may need to raise additional funding, which may not be available on acceptable terms, or at all. Failure to obtain this necessary capital when needed may force us to delay, limit or terminate certain of our licensing activities, product development efforts or other operations.

We expect to require substantial future capital in order to seek to broaden licensing of our gene therapy platforms, complete preclinical and clinical development for our current product candidates and other future product candidates, if any, and potentially commercialize these product candidates. We expect our spending levels to increase in connection with our preclinical and clinical trials. In addition, if we obtain marketing approval for any of our product candidates, we expect to incur significant expenses related to product sales, medical affairs, marketing, manufacturing and distribution. Furthermore, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on acceptable terms, we could be forced to delay, reduce or eliminate certain of our licensing activities, our research and development programs or other operations.

Our operations have consumed significant amounts of cash since inception. As of June 30, 2019, our cash, cash equivalents and investments was $257.8 million. Our future capital requirements will depend on many factors, including:
 
 
the timing of enrollment, commencement, completion and results of our clinical trials;
 
the production of LVV and AAV gene therapy products to support preclinical and clinical needs
 
the results of our preclinical studies for our current product candidates and any subsequent clinical trials;
 
the scope, progress, results and costs of drug discovery, laboratory testing, preclinical development and clinical trials, if any, for our internal product candidates; the costs associated with building out additional laboratory and research capacity;
 
the costs, timing and outcome of regulatory review of our product candidates;
 
the costs of future activities, including product sales, medical affairs, marketing, manufacturing and distribution, for any of our product candidates for which we receive marketing approval;
 
the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
 
our current licensing agreements or collaborations remaining in effect;
 
our ability to establish and maintain additional licensing agreements or collaborations on favorable terms, if at all;
 
the extent to which we acquire or in-license other product candidates and technologies; and
 
the costs associated with being a public company.

Many of these factors are outside of our control. Identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory and marketing approval and achieve product sales. In addition, our product candidates, if approved, may not achieve commercial success. Accordingly, we will need to continue to rely on additional financing to achieve our business objectives.
 
To the extent that additional capital is raised through the sale of equity or equity-linked securities, the issuance of those securities could result in substantial dilution for our current stockholders and the terms may include liquidation or other preferences that adversely affect the rights of our current stockholders. Adequate additional financing may not be available to us on acceptable terms, or at all. We also could be required to seek funds through arrangements with partners or otherwise that may require us to relinquish rights to our intellectual property, our product candidates or otherwise agree to terms unfavorable to us.
 
Our limited operating history may make it difficult for us to evaluate the success of our business to date and to assess our future viability.

Our operations to date have predominantly focused on organizing and staffing our company, business planning, raising capital, acquiring our technology, administering and expanding our gene therapy platforms, identifying potential product candidates, undertaking research, preclinical studies and clinical trials of our product candidates and establishing licensing arrangements and collaborations. We have not yet completed clinical trials of our product candidates, obtained marketing approvals, manufactured a commercial-scale product or conducted sales and marketing activities necessary for successful commercialization. Consequently, any predictions made about our future success or viability may not be as accurate as they could be if we had a longer operating history.

In addition, as a relatively new business, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We are still in the early stages of transitioning from a drug-discovery company with a licensing and research focus to a clinical-stage company that is supporting clinical development activities, and we may need to transition to supporting commercial activities in the future. We cannot guarantee that we will be successful in these transitions.

We have never generated any revenue from product sales and may never be profitable.

Our ability to generate revenue and achieve profitability depends on our ability, alone or with strategic collaboration partners, to successfully complete the development of, and obtain the regulatory, pricing and reimbursement approvals necessary to commercialize our product candidates. We do not anticipate generating revenues from product sales for the foreseeable future, if ever. Our ability to generate future revenues from product sales depends heavily on our success in:
 
 
completing research and preclinical and clinical development of our product candidates;
 
seeking and obtaining regulatory and marketing approvals for product candidates for which we complete clinical studies;
 
developing a sustainable, commercial-scale, reproducible, and transferable manufacturing process for our vectors and product candidates;
 
establishing and maintaining supply and manufacturing relationships with third parties that can provide adequate (in amount and quality) products and services to support clinical development and the market demand for our product candidates, if approved;
 
launching and commercializing product candidates for which we obtain regulatory and marketing approval, either by collaborating with a partner or, if launched independently, by establishing a sales force, marketing and distribution infrastructure;
 
obtaining sufficient pricing and reimbursement for our product candidates from private and governmental payors
 
obtaining market acceptance of our product candidates and gene therapy as a viable treatment option;
 
addressing any competing technological and market developments;
 
identifying and validating new gene therapy product candidates;
 
negotiating favorable terms in any collaboration, licensing or other arrangements into which we may enter; and
 
maintaining, protecting and expanding our portfolio of intellectual property rights, including patents, trade secrets and know-how.

Even if one or more of the product candidates that we will develop is approved for commercial sale, we anticipate incurring significant costs associated with commercializing any approved product candidate. Our expenses could increase beyond expectations if we are required by the FDA, the EMA, or other regulatory agencies, domestic or foreign, to perform clinical and other studies in addition to those that we currently anticipate. Even if we are able to generate revenues from the sale of any approved products, we may not become profitable and may need to obtain additional funding to continue operations.

Risks Related to Product Regulatory Matters

Our gene therapy product candidates are based on novel technology, which makes it difficult to predict the time and cost of product candidate development and subsequently obtaining regulatory approval. Currently, only a few gene therapy products have been approved in the U.S. and the E.U.

We have concentrated our research and development efforts to date on a gene therapy platform, and our future success depends on the successful development of viable gene therapy product candidates. We cannot guarantee that we will not experience problems or delays in developing current or future product candidates or that such problems or delays will not cause unanticipated costs, or that any such development problems or delays can be resolved. We may also experience unanticipated problems or delays in developing our manufacturing capacity or transferring our manufacturing process to commercial partners, which may prevent us from completing our clinical studies or commercializing our products on a timely or profitable basis, if at all.
 
In addition, the clinical study requirements of the FDA, the EMA, and other regulatory agencies and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty and intended use and market of the potential products. The regulatory approval process for novel product candidates such as ours can be more expensive and take longer than for other, better known or more extensively studied pharmaceutical or other product candidates. Currently, only a few gene therapy products have received marketing authorization in the U.S. or the EU, including Novartis Pharmaceuticals’ Kymriah, Kite Pharma’s Yescarta, GlaxoSmithKline’s Strimvelis and Spark Therapeutics’ Luxturna. It is therefore difficult to determine how long it will take or how much it will cost to obtain regulatory approvals for our product candidates in the U.S., the EU or other jurisdictions. Approvals by the EMA may not be indicative of what the FDA may require for approval. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approvals necessary to bring a potential product to market could decrease our ability to generate sufficient product revenue and our business, financial condition, results of operations and prospects could be materially harmed.

Regulatory requirements governing gene therapy products have evolved and may continue to change in the future. For example, CBER may require us to perform additional nonclinical studies or clinical trials that may increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our gene therapy product candidates or lead to significant post-approval limitations or restrictions.

In addition, the EMA’s Committee for Advanced Therapies (“CAT”) and other regulatory review committees and advisory groups and any new guidelines they promulgate may lengthen the regulatory review process, require us to perform additional studies, increase our development costs, lead to changes in regulatory positions and interpretations, delay or prevent approval and commercialization of our product candidates or lead to significant post-approval limitations or restrictions. As we advance our product candidates, we will be required to consult with these regulatory and advisory groups, and comply with applicable guidelines. If we fail to do so, we may be required to delay or discontinue development of certain of our product candidates. These additional processes may result in a review and approval process that is longer than we otherwise would have expected. Delay or failure to obtain, or unexpected costs in obtaining, the regulatory approval necessary to bring a potential product to market could decrease our ability to generate product revenue, and our business, financial condition, results of operations and prospects would be materially harmed.

We may encounter substantial delays in commencement, enrollment or completion of our clinical trials or may fail to demonstrate safety and efficacy to the satisfaction of applicable regulatory authorities, which could prevent us from commercializing our current and future product candidates on a timely basis, if at all.

Before obtaining marketing approval from regulatory authorities for the sale of our current and future product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of our product candidates. Clinical trials are expensive, time-consuming, and outcomes are uncertain.

Our experience with clinical trials has been limited. Our clinical programs to date have been performed under an IMPD, in Spain sponsored by CIEMAT, and in the U.S. sponsored by Hutch. The clinical trials performed by these sponsors were for a lentiviral treatment for FA, a rare mutation of the FANC-A gene. We have now initiated Rocket-sponsored clinical trials for FA and LAD-I, but have not completed any clinical trials to date. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. A clinical trial may be delayed or halted at any stage of testing for various reasons, including:

 
failure of patients to enroll in the studies at the rate we expect;
 
ineffectiveness of our product candidates;
 
patients experiencing unexpected side effects or other safety concerns being raised during treatment;
 
changes in governmental regulations or administrative actions;
 
failure to conduct studies in accordance with required clinical practices;
 
inspection of clinical study operations or study sites by the FDA, the EMA or other regulatory authorities, resulting in a clinical hold;
 
insufficient financial resources;
 
insufficient supplies of drug product to treat the patients in the studies;
 
political unrest at foreign clinical sites;
 
a shutdown of the U.S. government, including the FDA; or
 
natural disasters at any of our clinical sites.
 
In addition, to the extent we seek to obtain regulatory approval for our product candidates in foreign countries, our ability to successfully initiate, enroll and complete a clinical study in any foreign country is subject to numerous risks unique to conducting business in foreign countries, including:
 
 
difficulty in establishing or managing relationships with CROs, and physicians;
 
different standards for the conduct of clinical trials;
 
absence in some countries of established groups with sufficient regulatory expertise for review of LVV and AAV gene therapy protocols;
 
our inability to locate qualified local partners or collaborators for such clinical trials; and
 
the potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical and biotechnology products and treatment.
 
Moreover, we intend to rely on the nonclinical studies and clinical trials performed by CIEMAT, and the FDA or the regulatory authority in any other country in which we decide to perform clinical trials or seek approval may not accept that results of the CIEMAT studies and trials. Any inability to successfully complete preclinical studies and clinical trials could result in additional costs to us or impair our ability to generate revenues from product sales, regulatory and commercialization milestones and royalties.

If we have difficulty enrolling a sufficient number of patients to conduct our clinical trials as planned, we may need to delay, limit or terminate planned clinical trials, the occurrence of any of which would harm our business, financial condition, results of operations and prospects.
 
Identifying and qualifying patients to participate in clinical trials of our product candidates is critical to our success. We may not be able to identify, recruit and enroll a sufficient number of patients, or those with required or desired characteristics, to complete clinical trials in a timely manner. Patient enrollment and trial completion is affected by numerous factors including:
 
 
severity of the disease under investigation;
 
design of the study protocol;
 
size of the patient population;
 
eligibility criteria for the study in question;
 
perceived risks and benefits of the product candidate under study, including as a result of adverse effects observed in similar or competing therapies;
 
proximity and availability of clinical study sites for prospective patients;
 
availability of competing therapies and clinical studies;
 
efforts to facilitate timely enrollment in clinical studies;

 
patient referral practices of physicians; and
 
ability to monitor patients adequately during and after treatment.

In particular, each of the conditions for which we plan to evaluate our current product candidates are rare genetic diseases with limited patient pools from which to draw for clinical studies. Additionally, the process of finding and diagnosing patients may prove costly. In some cases, potential patients may be located outside of the U.S., and immigration related issues, including government policy changes, may introduce additional delays into the enrollment process. Finally, the treatment process requires that the cells be obtained from patients and then shipped to a transduction facility within the required timelines, and this may introduce unacceptable shipping-related delays to the process.

We have not completed any clinical studies of our current product candidates. Initial or interim results in our ongoing clinical studies may not be indicative of results obtained when these studies are completed. Furthermore, success in early clinical studies may not be indicative of results obtained in later studies.

Our FA gene therapy treatment was studied in clinical trials conducted by our partners. We have now initiated Rocket sponsored clinical trials for FA and LAD-I, but have not completed any clinical trials to date. We cannot guarantee that any clinical trials will be conducted as planned or completed on schedule, if at all. Our other gene therapy programs are in the preclinical stages. Study designs and results from previous or ongoing studies and clinical trials are not necessarily predictive of future study or clinical trial results, and initial or interim results may not continue or be confirmed upon completion of the study or trial. Positive data may not continue or occur for subjects in our clinical studies or for any future subjects in our ongoing or future clinical studies, and may not be repeated or observed in ongoing or future studies involving our product candidates. Furthermore, our product candidates may also fail to show the desired safety and efficacy in later stages of clinical development despite having successfully advanced through initial clinical studies. We cannot guarantee that any of these studies will ultimately be successful or that preclinical or early stage clinical studies will support further clinical advancement or regulatory approval of our product candidates.

Data obtained from preclinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays or rejections may be encountered as a result of many factors, including changes in regulatory policy during the period of product development.

Even if we successfully complete the necessary preclinical studies and clinical trials, we cannot predict when, or if, we will obtain regulatory approval to commercialize a product candidate and the approval may be for a narrower indication than we seek.
 
We cannot commercialize a product candidate until the appropriate regulatory authorities have reviewed and approved the product candidate. We have not received approval from regulatory authorities in any jurisdiction to market any of our product candidates. Even if our product candidates meet their safety and efficacy endpoints in clinical trials, the regulatory authorities may not complete their review processes in a timely manner, issue a complete response letter, or ultimately, we may not be able to obtain regulatory approval. In addition, we may experience delays or rejections if an FDA Advisory Committee recommends disapproval or restrictions on use. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative actions, or changes in regulatory authority policy during the period of product development, clinical trials and the review process. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of data obtained from preclinical and clinical testing could delay, limit or prevent the receipt of marketing approval for a product candidate.

Regulatory authorities also may approve a product candidate for more limited indications than requested or they may impose significant limitations in the form of narrow indications, warnings or REMS. These regulatory authorities may require precautions or contra-indications with respect to conditions of use or they may grant approval subject to the performance of costly post-marketing clinical trials. In addition, regulatory authorities may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. Any of the foregoing scenarios could materially harm the commercial prospects for our product candidates and materially harm our business, financial condition, results of operations and prospects.

Even if we obtain regulatory approval for a product candidate, our products will remain subject to regulatory scrutiny.

Even if we obtain regulatory approval in a jurisdiction, the applicable regulatory authority may still impose significant restrictions on the indicated uses or marketing of our product candidates, or impose ongoing requirements for potentially costly post-approval studies, post-market surveillance or patient or drug restrictions. Additionally, the holder of an approved BLA, is obligated to monitor and report adverse events and any failure of a product to meet the specifications in the BLA. The holder of an approved BLA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. FDA guidance advises that patients treated with some types of gene therapy undergo follow-up observations for potential adverse events for as long as 15 years. Advertising and promotional materials must comply with FDA rules and are subject to FDA review, in addition to other potentially applicable federal and state laws.

In addition, product manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with GMP, and current good tissue practice, as well as adherence to commitments made in the BLA. If we or a regulatory agency discover previously unknown problems with a product such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions relative to that product or the manufacturing facility, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.

If we fail to comply with applicable regulatory requirements following approval of any of our product candidates, a regulatory agency may take a variety of actions, including:

 
issue a warning letter asserting that we are in violation of the law;
 
seek an injunction or impose civil or criminal penalties or monetary fines;
 
suspend any ongoing clinical studies;
 
refuse to approve a pending marketing application, such as a BLA or supplements to a BLA submitted by us;
 
seize products; or
 
refuse to allow us to enter into supply contracts, including government contracts.
 
Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and generate revenues and could harm our business, financial condition, results of operations and prospects.

In addition, the FDA’s policies, and those of comparable foreign regulatory authorities, may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative actions, either in the U.S. or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval which we may have obtained and we may not achieve or sustain profitability, which would materially harm our business, financial condition, results of operations and prospects.

We may never obtain FDA or EMA approval for any of our product candidates in the U.S. or the EU, and even if we do, we may never obtain approval for or commercialize any of our product candidates in any other jurisdiction, which would limit our ability to realize our full market potential.
 
In order to eventually market any of our product candidates in any particular jurisdiction, we must establish and comply with numerous and varying regulatory requirements regarding safety and efficacy on a jurisdiction-by-jurisdiction basis. Approval by the FDA in the U.S. or the EMA in the EU, if obtained, does not ensure approval by regulatory authorities in other countries or jurisdictions. In addition, preclinical studies and clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one country does not guarantee regulatory approval in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us and require additional preclinical studies or clinical trials which could be costly and time-consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of our products in those countries. The foreign regulatory approval process involves similar risks to those associated with FDA and EMA approval. We do not have any product candidates approved for sale in any jurisdiction, including international markets, nor have we attempted to obtain such approval. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be unrealized.

Our product candidates may cause undesirable and unforeseen side effects or be perceived by the public as unsafe, which could delay or prevent their advancement into clinical trials or regulatory approval, limit the commercial potential or result in significant negative consequences.

Gene therapy is still a relatively new approach to disease treatment and adverse side effects could develop with our product candidates. There also is the potential risk of delayed adverse events following exposure to gene therapy products due to persistent biologic activity of the genetic material or other components of products used to carry the genetic material.

Possible adverse side effects that could occur with treatment with gene therapy products include an immunologic reaction soon after administration which could substantially limit the effectiveness and durability of the treatment. If certain side effects are observed in testing of our potential product candidates, we may decide or be required to halt or delay further clinical development of our product candidates.

In addition to side effects caused by the product candidate, the administration process or related procedures associated with a given product candidate also can cause adverse side effects. If any such adverse events occur, our clinical trials could be suspended or terminated. Under certain circumstances, the FDA, the European Commission, the EMA or other regulatory authorities could order us to cease further development of, or deny approval of, our product candidates for any or all targeted indications. Moreover, if we elects or are required, to not initiate or to delay, suspend or terminate any future clinical trial of any of our product candidates, the commercial prospects of such product candidates may be harmed and our ability to generate product revenues from any of these product candidates may be delayed or eliminated. Any of these occurrences may harm our ability to develop other product candidates, and may harm our business, financial condition and prospects significantly.

Furthermore, if undesirable side effects caused by our product candidate are identified following regulatory approval of a product candidate, several potentially significant negative consequences could result, including:

 
regulatory authorities may suspend or withdraw approvals of such product candidate;
 
regulatory authorities may require additional warnings on the label;
 
we may be required to change the way a product candidate is administered or conduct additional clinical trials; and
 
our reputation may suffer.
 
Any of these occurrences may harm our business, financial condition and prospects significantly.

Risks Related to Manufacturing, Development and Commercialization of Our Product Candidates

Products intended for use in gene therapies are novel, complex and difficult to manufacture. We could experience production problems that result in delays in our development or commercialization programs, limit the supply of our products or otherwise harm our business.

We currently have development, manufacturing and testing agreements with third parties to manufacture supplies of our product candidates. Several factors could cause production interruptions, including equipment malfunctions, facility contamination, raw material shortages or contamination, natural disasters, disruption in utility services, human error or disruptions in the operations of suppliers.

Our product candidates require processing steps that are more complex than those required for small molecule pharmaceuticals.

We may encounter problems contracting with, hiring and retaining the experienced scientific, quality control and manufacturing personnel needed to operate our manufacturing process which could result in delays in our production or difficulties in maintaining compliance with applicable regulatory requirements.

Any problems in our manufacturing process or the facilities with which we contract could make us a less attractive collaborator for potential partners, including larger pharmaceutical companies and academic research institutions, which could limit our access to attractive development programs. Any such problems could also result in a decision to abandon or write off prior investments, which could result in significant accounting charges for impairment of previously capitalized expenditures. Problems in third-party manufacturing processes or facilities also could restrict our ability to meet market demand for our products. Additionally, should our manufacturing agreements with third parties be terminated for any reason, there may be a limited number of manufacturers who would be suitable replacements and it could take a significant amount of time to transition the manufacturing to a replacement.
 
Even if approved, we may not successfully commercialize our drug candidates.

Our gene therapy product candidates are subject to the risks of failure inherent in the development of pharmaceutical products based on new technologies, and our failure to develop safe, commercially viable products would severely limit our ability to become profitable or to achieve significant revenues. Even if one or more of our drug candidates is approved, we may be unable to successfully commercialize our product candidates for several reasons, including:

some or all of our product candidates may be found to be unsafe or ineffective or otherwise fail to meet applicable regulatory standards or receive necessary regulatory clearances;

 
our product candidates, if safe and effective, may nonetheless not be able to be developed into commercially viable products;
 
it may be difficult to manufacture or market our product candidates on a scale that is necessary to ultimately deliver our products to end-users;
 
proprietary rights of third parties may preclude us from marketing our product candidates;
 
the nature of our indications as rare diseases means that the potential market size may be limited; and
 
third parties may market superior or equivalent drugs which could adversely affect the commercial viability and success of our product candidates.

Our ability to successfully develop and commercialize our product candidates will substantially depend upon the availability of reimbursement funds for the costs of the resulting drugs and related treatments.

Market acceptance and sales of our product candidates may depend on coverage and reimbursement policies and health care reform measures. Decisions about formulary coverage as well as levels at which government authorities and third-party payors, such as private health insurers and health maintenance organizations, reimburse patients for the price they pay for our products as well as levels at which these payors pay directly for our products, where applicable, could affect whether we are able to successfully commercialize these products. We cannot guarantee that reimbursement will be available for any of our product candidates, nor can we guarantee that coverage or reimbursement amounts will not reduce the demand for, or the price of, our product candidates. We have not commenced efforts to have our product candidates reimbursed by government or third-party payors. If coverage and reimbursement are not available or are available only at limited levels, we may not be able to successfully commercialize our products. In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the PPACA, was signed into law, and in recent years, numerous proposals to change the health care system in the U.S. have been made. These reform proposals include measures that would limit or prohibit payments for certain medical treatments or subject the pricing of drugs to government control. In addition, in many foreign countries, particularly the countries of the EU, the pricing of prescription drugs is subject to government control. If our products are or become subject to government regulation that limits or prohibits payment for our products, or that subjects the price of our products to governmental control, we may not be able to generate revenue, attain profitability or commercialize our products.

In addition, third-party payors are increasingly limiting both coverage and the level of reimbursement of new drugs. They may also impose strict prior authorization requirements and/or refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted market approvals. As a result, significant uncertainty exists as to whether and how much third-party payors will reimburse patients for their use of newly-approved drugs. If we are unable to obtain adequate levels of reimbursement for our product candidates, our ability to successfully market and sell our product candidates will be harmed. The manner and level at which reimbursement is provided for services related to our product candidates (e.g., for administration of our product to patients) is also important to successful commercialization of our product candidates. Inadequate reimbursement for such services may lead to physician resistance and limit our ability to market or sell our products.

We face intense competition and rapid technological change and the possibility that our competitors may develop therapies that are more advanced or effective than ours, which may adversely affect our financial condition and our ability to successfully commercialize our product candidates.

We are engaged in gene therapy for severe genetic and rare diseases, which is a competitive and rapidly changing field. Although we are not currently aware of any gene therapy competitors addressing any of the same indications as those in our pipeline, we may have competitors both in the U.S. States and internationally, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions.

Our potential competitors may have substantially greater financial, technical and other resources, such as larger research and development staff, manufacturing capabilities and experienced marketing and manufacturing organizations. These competitors may succeed in developing, acquiring or licensing on an exclusive basis, products that are more effective or less costly than any product candidate that we may develop, or achieve earlier patent protection, regulatory approval, product commercialization and market penetration than us. Additionally, technologies developed by our competitors may render our potential product candidates uneconomical or obsolete, and we may not be successful in marketing our product candidates against those of our competitors.
 
In addition, if our patent rights were to expire or be successfully challenged, we could face increased litigation with respect to the validity and/or scope of patents relating to our competitors’ products. The availability of our competitors’ products could limit the demand, and the price we are able to charge, for any products that we may develop and commercialize, thereby causing harm to our business, financial condition, results of operations and prospects.

We may not be successful in our efforts to build a pipeline of additional product candidates.

Our business model is centered on applying our expertise in rare genetic diseases by establishing focused selection criteria to develop and advance a portfolio of gene therapy product candidates through development into commercialization. We may not be able to continue to identify and develop new product candidates in addition to the pipeline of product candidates that our research and development efforts to date have resulted in. Even if we are successful in continuing to build our pipeline, the potential product candidates that we identify may not be suitable for clinical development. If we do not successfully develop and commercialize product candidates based upon our approach, we will not be able to obtain product revenue in future periods, which would likely result in significant harm to our financial position and results of operations.

The success of our research and development activities, clinical testing and commercialization, upon which we primarily focus, is uncertain.

Our primary focus is on our research and development activities and the clinical testing and commercialization of our product candidates and we anticipate that we will remain principally engaged in these activities for an indeterminate, but substantial, period of time. Research and development was our most significant operating expense for the year ended December 31, 2018. Research and development activities, including the conduct of clinical studies, by their nature, preclude definitive statements as to the time required and costs involved in reaching certain objectives. Actual research and development costs, therefore, could significantly exceed budgeted amounts and estimated time frames may require significant extension. Cost overruns, unanticipated regulatory delays or demands, unexpected adverse side effects or insufficient therapeutic efficacy will prevent or substantially slow our research and development effort and our business could ultimately suffer.

Risks Related to Third Parties

We rely on third parties to conduct certain aspects of our preclinical studies and clinical trials and perform other tasks for us. If these third parties do not successfully carry out their contractual duties, meet expected deadlines, or comply with regulatory requirements, we may not be able to obtain regulatory approval for or commercialize our product candidates and our business, financial condition and results of operations could be substantially harmed.

We have relied upon and plan to continue to rely upon third parties, including CROs, medical institutions, and contract laboratories for certain aspects of our ongoing preclinical and clinical programs. Nevertheless, we maintain responsibility for ensuring that each of our clinical trials and preclinical studies is conducted in accordance with the applicable protocol, legal, regulatory, and scientific standards and our reliance on these third parties does not relieve us of our regulatory responsibilities. We and our vendors are required to comply with current requirements on GMP, good clinical practice (“GCP”), and good laboratory practice (“GLP”), which are a collection of laws and regulations enforced by the FDA, the EMA or comparable foreign authorities for all of our drug candidates in clinical development.

Regulatory authorities enforce these regulations through periodic inspections of preclinical study and clinical trial sponsors, principal investigators, preclinical study and clinical trial sites, and other contractors. If we or any of our vendors fail to comply with applicable regulations, the data generated in our preclinical studies and clinical trials may be deemed unreliable and the FDA, the EMA or comparable foreign authorities may require us to perform additional preclinical studies and clinical trials before approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory authority will determine that any of our clinical trials comply with GCP regulations. In addition, our clinical trials must be conducted with products produced consistent with GMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the development and regulatory approval processes.

If any of our relationships with these third parties, medical institutions, clinical investigators or contract laboratories terminate, we may not be able to enter into arrangements with alternative CROs on commercially reasonable terms, or at all. In addition, our CROs are not our employees, and except for remedies available to us under our agreements with such CROs, we cannot control whether or not they devote sufficient time and resources to our ongoing preclinical and clinical programs.
 
If our CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our protocols, regulatory requirements, or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates. CROs may also generate higher costs than anticipated. As a result, our business, financial condition and results of operations and the commercial prospects for our product candidates could be materially and adversely affected, our costs could increase, and our ability to generate revenue could be delayed.
 
Switching or adding additional CROs, medical institutions, clinical investigators or contract laboratories involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new CRO commences work replacing a previous CRO. As a result, delays may occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, we cannot guarantee that we will not encounter similar challenges or delays in the future or that these delays or challenges will not have a material adverse effect on our business, financial condition or results of operations.

We expect to rely on third parties to conduct some or all aspects of our drug product manufacturing, research and preclinical and clinical testing, and these third parties may not perform satisfactorily.

We do not expect to independently conduct all aspects of our gene therapy production, product manufacturing, research and preclinical and clinical testing. We currently rely, and expect to continue to rely, on third parties with respect to these items. In some cases, these third parties are academic, research or similar institutions that may not apply the same quality control protocols utilized in certain commercial settings.

Our reliance on these third parties for research and development activities will reduce our control over these activities but will not relieve us of our responsibility to ensure compliance with all required regulations and study protocols. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our studies in accordance with regulatory requirements or our stated study plans and protocols, we will not be able to complete, or may be delayed in completing, the preclinical and clinical studies required to support future product submissions and approval of our product candidates.

Generally, these third parties may terminate their engagements with us at will upon notice. If we need to enter into alternative arrangements, it could delay our product development activities.

We expect to rely solely on third-party manufacturers to manufacture supplies of our product candidates. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured the product candidates ourselves, including:

 
the inability to negotiate manufacturing agreements with third parties under commercially reasonable terms;
 
reduced control as a result of using third-party manufacturers for all aspects of manufacturing activities;
 
the risk that these activities are not conducted in accordance with our study plans and protocols;
 
termination or nonrenewal of manufacturing agreements with third parties in a manner or at a time that is costly or damaging to us; and
 
disruptions to the operations of our third-party manufacturers or suppliers caused by conditions unrelated to our business or operations, including the bankruptcy of the manufacturer or supplier.

Any of these events could lead to clinical study delays or failure to obtain regulatory approval, or impact our ability to successfully commercialize future products. Some of these events could be the basis for FDA action, including an injunction, recall, seizure or total or partial suspension of production.

We may not be successful in finding strategic collaborators for continuing development of certain of our product candidates or successfully commercializing our product candidates.

We may seek to establish strategic partnerships for developing and/or commercializing certain of our product candidates due to relatively high capital costs required to develop the product candidates, manufacturing constraints or other reasons. We may not be successful in our efforts to establish such strategic partnerships or other alternative arrangements for our product candidates for several reasons, including because our research and development pipeline may be insufficient, our product candidates may be deemed to be at too early of a stage of development for collaborative effort or third parties may not view our product candidates as having the requisite potential to demonstrate efficacy or market opportunity. In addition, we may be restricted under existing agreements from entering into future agreements with potential collaborators.

If we are unable to reach agreements with suitable licensees or collaborators on a timely basis, on acceptable terms or at all, we may have to curtail the development of a product candidate, reduce or delay our development program, delay our potential commercialization, reduce the scope of any sales or marketing activities or increase our expenditures and undertake development or commercialization activities at our own expense. If we elect to independently fund development or commercialization activities, we may need to obtain additional expertise and additional capital, which may not be available on acceptable terms or at all. If we fail to enter into collaboration arrangements and does not have sufficient funds or expertise to undertake necessary development and commercialization activities, we may not be able to further develop our product candidates and our business, financial condition, results of operations and prospects may be materially harmed.

The commercial success of any of our product candidates will depend upon our degree of market acceptance by physicians, patients, third-party payors and others in the medical community.
 
Ethical, social, legal and other concerns about gene therapy could result in additional regulations restricting or prohibiting our products. Even with the requisite approvals from the FDA in the U.S., the EMA in the EU and other regulatory authorities internationally, the commercial success of our product candidates will depend, in part, on the acceptance of physicians, patients and health care payors of gene therapy products in general, and our product candidates in particular, as medically beneficial, cost-effective and safe. Any product that we commercialize may not gain acceptance by physicians, patients, health care payors and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate significant product revenue and may not become profitable. The degree of market acceptance of gene therapy products and, in particular, our product candidates, if approved for commercial sale, will depend on several factors, including: