Company Description and Summary of Significant Accounting Policies |
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| Company Description and Summary of Significant Accounting Policies |
Nature of Business
Ocuphire Pharma, Inc. (the “Company” or “Ocuphire”) is a clinical-stage biopharmaceutical company with one FDA-approved product currently marketed by Viatris, Inc. Headquartered in
Farmington Hills, Michigan, the Company is focused on developing novel therapies for the treatment of unmet needs of patients with retinal and refractive eye disorders.
The Company’s lead retinal product candidate, APX3330, is a small-molecule inhibitor of Ref-1 (reduction oxidation effector factor-1 protein). Ref-1 is a regulator of transcription factors such as HIF-1α
and NF-kB. Inhibiting Ref-1 reduces levels of vascular endothelial growth factor (“VEGF”) and inflammatory cytokines which are known to play key roles in ocular angiogenesis and inflammation. APX3330 is an oral tablet
administered twice per day in development for the treatment of diabetic retinopathy (“DR”). A Phase 2 study in subjects with DR or diabetic macular edema was completed and results were reported in January 2023. An End-of-Phase 2
(“EOP2”) meeting with the U.S. Food and Drug Administration (the “FDA”) was held in October 2023 at which the Company obtained agreement on the registration endpoint supporting the advancement of APX3330 into future clinical
trials. Ocuphire submitted a Special Protocol Assessment (“SPA”) to the FDA in February 2024 to seek agreement on the clinical trial protocol and statistical analysis plan.
The Company has also in-licensed APX2009 and APX2014, which are second-generation analogs of APX3330. The unique mechanism of action
of this family of Ref-1 inhibitors of reducing angiogenesis and inflammation could potentially be beneficial in treating other retinal diseases such as age-related macular degeneration, geographic atrophy, and non-ophthalmic
diseases.
In
November 2022, the Company entered into a license and collaboration agreement (the “Viatris License Agreement”) with FamyGen Life Sciences, Inc. (“Famy”) (acquired by and now known as Viatris, Inc. (“Viatris”) in January 2023)
pursuant to which it granted Viatris an exclusive license to develop, manufacture, import, export and commercialize its refractive product candidate Phentolamine Ophthalmic Solution 0.75% (initially known as Nyxol) (“PS”). PS
is a once-daily eye drop formulation of phentolamine mesylate designed to reduce pupil diameter and improve visual acuity. PS was approved by the FDA for the treatment for pharmacologically-induced mydriasis under the brand
name RYZUMVITM in September 2023 and was launched commercially in April 2024. The VEGA-2 Phase 3 study in presbyopia achieved its primary endpoint. PS is currently in an additional Phase 3 clinical trial for presbyopia
(age-related blurry near vision). On December 5, 2023, the Company received FDA Agreement Under Special Protocol Assessment for LYNX-2, a Phase 3 Trial of PS for the treatment of decreased Visual Acuity under dim (mesopic)
light conditions following keratorefractive surgery. The first patient enrolled in LYNX-2 in April 2024.
Basis of Presentation
The accompanying condensed financial statements have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.
The December 31, 2023 condensed balance sheet was derived from audited financial statements,
and may not include all disclosures required by GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in
conjunction with the audited financial statements and the notes thereto for the fiscal year ended December 31, 2023.
In the opinion of management, all adjustments, consisting of only normal recurring adjustments
that are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, have been made. The results of operations for the interim periods are not necessarily indicative of the operating
results for the full fiscal year or any future periods.
Liquidity
The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern. From its
inception, the Company has devoted substantially all of its efforts to drug development and conducting clinical trials.
As of March 31, 2024, the Company had $47.2
million in cash and cash equivalents. The Company believes its current available cash and cash equivalents will be sufficient to fund the Company’s planned expenditures and meet its obligations for at least twelve months from the date
of issuance of these financial statements.
In the future, the Company may need to raise additional funds until it is able to generate sufficient revenues to fund its
development activities. The Company’s future operating activities, coupled with its plans to raise capital or issue debt financing, may provide additional liquidity in the future, however these actions are not solely within the control
of the Company and the Company is unable to predict the outcome of these actions to generate the liquidity ultimately required.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Segment Information
Operating segments are components of an enterprise for which separate financial information
is available and is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assessing performance. The Company’s chief operating decision maker is its Chief Executive Officer or such
person functioning in such role. The Company’s Chief Executive Officer views the Company’s operations and manages its business in one
operating segment, which is the business of development of products related to vision performance and health. Accordingly, the Company has a single reporting segment.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of deposit to be cash equivalents.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. Management follows approved policies established by its Board of Directors to reduce credit risk associated with
the Company’s cash deposit and investment accounts. Pursuant to these policies, the Company limits its exposure through the kind, quality and concentration of its investments. The Company’s cash and cash equivalents are held or managed by two financial institutions in the United States. As of March 31, 2024, the Company had
cash equivalents of $46.7 million that were not eligible for coverage by Federal Deposit Insurance Corporation. These balances are invested in funds whose assets consist almost entirely of securities issued by the U.S. Treasury or
guaranteed by the U.S. government.
Short-term Investments
The Company determines the appropriate classification of its investments in debt and equity securities at the time of purchase and
records them on a settlement date basis. The Company’s short-term investments are comprised of equity securities, which in accordance with the fair value hierarchy described below are recorded at fair value using Level l inputs on the
balance sheets. Subsequent changes in fair values are recorded in other income (expense), net on the statements of comprehensive loss. The Company classifies investments available to fund current operations as current assets on its
balance sheets. The Company did not recognize any impairments on its investments to date through March 31, 2024.
Revenue Recognition
The Company follows the provisions of Accounting Standards Codification (“ASC”) 606, Revenue
from Contracts with Customers. The guidance provides a five-step model to determine how revenue is recognized. The Company has entered into license agreements which have revenue recognition implications (See Note 9 – License
and Collaboration Agreements).
In determining the appropriate amount of revenue to be recognized, the Company performs the following steps: (i) identification of
the contracts with a customer; (ii) determination of the performance obligations in the contract; (iii) measurement of the transaction price, including potential constraints on variable consideration; (iv) allocation of the transaction
price to the performance obligations based on estimated stand-alone selling prices; and (v) recognition of revenue when (or as) the Company satisfies a performance obligation.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. Performance obligations may include license rights, development
and other services. Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the
arrangement. If the Company cannot reasonably estimate when its performance obligations are either completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates. Revenue
is then recognized over the remaining estimated period of performance using the cumulative catch-up method.
As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the
stand-alone selling price of each performance obligation identified in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines,
reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success. The Company allocates the total transaction price to each performance obligation based on the relative standalone selling
prices of the promised goods or service underlying each performance obligation.
Licenses of intellectual property and research and development services: If the license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues
from non-refundable, up-front fees allocated to the license when the license is transferred to the customer, and the customer can use and benefit from the license. For licenses that are bundled with other obligations, such as research
and development services, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over
time, the appropriate method of measuring progress for purposes of recognizing revenue from non-refundable, up-front fees. For research and development services
that are distinct from a license transfer obligation, the Company determines whether the services are satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of
recognizing revenue from such services. The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.
Milestone payments: At the
inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being achieved and estimates the amount to be included in the transaction price using the most
likely amount method. If it is probable that a significant revenue reversal would not occur, the value of the associated milestone (such as a regulatory submission) is included in the transaction price. Milestone payments that are not
within the control of the Company, such as approvals from regulators, are not considered probable of being achieved until such contingency occurs (such as receipt of those approvals).
Royalties: For arrangements that
include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the
related sales occur, or (b) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Contract Assets and Unbilled Receivables
The Company recognizes contract assets and unbilled receivables when goods or services are transferred to the customer before the
customer pays or before reimbursement for payment is billed or due, excluding any amounts presented as an account receivable. The Company recorded contract assets and unbilled receivables in connection with a license and collaboration
agreement (See Note 9 – License and Collaboration Agreements).
Accounts Receivable and Allowances for Credit Losses
The Company records a provision for credit losses, when appropriate, based
on historical experience, current conditions and reasonable supportable forecasts. The Company estimates credit losses over the remaining expected life of an asset by, among other things, primarily using historical experience and
current economic conditions that could affect the collectability of the balances in the future. Account balances are charged off against the allowance when the Company believes that it is probable that the receivable will not be
recovered. Actual write-offs may be in excess of the Company’s estimated allowance. The Company has not incurred any bad
debt expense to date and no allowance for credit losses has been recorded during the periods presented.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including salaries, benefits and stock-based
compensation costs, for personnel in functions not directly associated with research and development activities. Other significant costs include insurance coverage for directors and officers and other property and liability exposures,
legal fees relating to intellectual property and corporate matters, professional fees for accounting and tax services, other services provided by business consultants, and legal settlements.
Research and Development
Research and development expenses consist of costs incurred in performing research and development activities, including
compensation, benefits and stock-based compensation costs for research and development employees and costs for consultants, costs associated with nonclinical studies and clinical trials, regulatory activities, manufacturing activities to
support clinical activities, license fees, nonlegal patent costs, fees paid to external service providers that conduct certain research and development, and an allocation of overhead expenses. Research
and development expenses include costs that are reimbursed under the Viatris License Agreement (See Note 9 – License and Collaboration Agreements).
Other Income, net
Other income, net includes interest
earned from cash and cash equivalent investments, realized and unrealized gains (losses) from equity investments and reimbursements in connection with grants and other sources when they occur. In addition, this line item would include
payments when made by the Company in connection with the Contingent Value Rights Agreement (the “CVR Agreement”) discussed further below with former Rexahn shareholders.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with the provisions of the Financial Accounting Standards Board
(“FASB”) ASC 718, Compensation — Stock Compensation. Accordingly, compensation costs related to equity instruments granted are recognized at the grant date fair value. The Company records
forfeitures when they occur. Stock-based compensation arrangements to non-employees are accounted for in accordance with the applicable provisions of ASC 718.
Derivative Liability
The Company evaluates all features contained in financing agreements to determine if
there are any embedded derivatives that require separation from the underlying agreement under ASC 815 – Derivatives and Hedging. An embedded derivative that requires separation is accounted
for as a separate liability from the host agreement. The separated embedded derivative is accounted for separately on a fair market value basis. The Company records the fair value change of a separated embedded derivative at each
reporting period in the statements of comprehensive loss under the fair value change in derivative liability line item. The Company determined that certain features under an equity line financing (See Note 6 — Stockholders’ Equity)
collectively qualified as an embedded derivative. The derivative was accounted for separately from the underlying equity line financing agreement.
Fair Value Measurements
The Company follows accounting guidance that emphasizes that fair value is a market-based
measurement, not an entity-specific measurement. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
Fair value measurements are defined on a three-level hierarchy:
As of March 31, 2024 and December 31, 2023, the fair values of cash and cash equivalents, accounts receivable, contract assets and
unbilled receivables, prepaid and other assets, accounts payable, and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. The fair value of the short-term investments, while
outstanding, were based on observable Level 1 inputs in the form of quoted market prices from a major stock exchange. The fair value of the derivative liability associated with the equity line financing facility (See Note 6 – Stockholders’ Equity) was based on cash flow models discounted at
current implied market rates representing expected returns by market participants for similar instruments and are based on Level 3 inputs as well the Company’s underlying stock price and associated volatility, expected term of the
financing and market interest rates. The fair value of the warrant liabilities, while
outstanding, were based on a Black-Scholes option model using Level 3 inputs. There were no transfers between fair value
hierarchy levels during the three months ended March 31, 2024 and 2023.
The fair value of financial instruments measured on a
recurring basis is as follows (in thousands):
The following table provides a roll-forward of
short-term investments measured at fair value on a recurring basis using observable level 1 inputs for the three months ended March 31, 2024 and 2023 (in thousands):
The following table
provides a roll-forward of the derivative liabilities measured at fair value on a recurring basis using unobservable level 3 inputs for the three months ended March 31, 2024 and 2023 (in thousands):
Rexahn Warrants
The fair value of the warrant liabilities associated with the Rexahn Pharmaceuticals, Inc. (“Rexahn”) warrants was de minimis during the periods presented. The last of the Rexahn warrants classified as liabilities expired in April 2023 unexercised. See Note 2 – Merger for additional background.
There were no
financial instruments measured on a non-recurring basis for any of the periods presented.
Recent Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07 - Segment Reporting (Topic 280): Improvements to
Reportable Segment Disclosures, which enhances reportable segment disclosure requirements, primarily through disclosures of significant segment expenses. This ASU is effective for fiscal years beginning after December 15, 2023,
including interim periods within those fiscal years, with early adoption permitted. The guidance must be applied retrospectively to all prior periods presented. The Company is currently evaluating the impact of adoption of this guidance
on its financial statements.
In December 2023, the FASB issued ASU 2023-09 Income Taxes (Topic 740): Improvements to Income
Tax Disclosures, which enhances income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This guidance also includes certain other amendments to improve the effectiveness of income
tax disclosures. This ASU is effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years and should be applied on a prospective basis, with retrospective application permitted. The
Company is currently evaluating the impact of adoption of this guidance on its financial statements.
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