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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2023

or

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

For the transition period from              to

Commission File No. 001-37759

OUTLOOK THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

-

Delaware

 

38-3982704

(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

485 Route 1 South
Building F, Suite 320

Iselin, New Jersey

 

08830

(Address of principal executive offices)

 

(Zip Code)

(609619-3990

(Registrant’s telephone number, including area code)

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

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

Common Stock

OTLK

Nasdaq Stock Market LLC

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

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

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

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

Smaller reporting company

 

 

Emerging growth company

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

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

The number of shares of the registrant’s common stock, $0.01 par value per share, outstanding as of August 10, 2023 was 260,245,017.

Table of Contents

Outlook Therapeutics, Inc.

Table of Contents

    

Page
Number

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

1

Consolidated Balance Sheets as of June 30, 2023 and September 30, 2022

1

Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2023 and 2022

2

Consolidated Statements of Stockholders’ (Deficit) Equity for the Three and Nine Months Ended June 30, 2023 and 2022

3

Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2023 and 2022

4

Notes to Unaudited Interim Consolidated Financial Statements

5

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

20

Item 3. Quantitative and Qualitative Disclosures About Market Risk

32

Item 4. Controls and Procedures

32

PART II. OTHER INFORMATION

34

Item 1. Legal Proceedings

34

Item 1A. Risk Factors

34

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

35

Item 3. Defaults Upon Senior Securities

35

Item 4. Mine Safety Disclosures

35

Item 5. Other Information

35

Item 6. Exhibits

36

SIGNATURES

37

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

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including risks described in the section titled “Risk Factors” contained in our Annual Report on Form 10-K for the year ended September 30, 2022, filed with the Securities and Exchange Commission (“SEC”) on December 29, 2022 and in Part II, Item 1A of this Quarterly Report on Form 10-Q, including, among other things, risks associated with:

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

These risks are not exhaustive. Additional factors could harm our business and financial performance, such as risks associated with the current macroeconomic environment, including as a result of the impacts of inflation, rising interest rates, current or potential future bank failures or political disruption such as the war between Ukraine and Russia. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Unless required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements. We qualify all of the forward-looking statements in this report by these cautionary statements.

ii

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Outlook Therapeutics, Inc.

Consolidated Balance Sheets

(unaudited)

June 30, 2023

September 30, 2022

Assets

Current assets:

Cash and cash equivalents

$

33,709,075

$

17,396,812

Prepaid expenses and other current assets

9,309,063

10,123,634

Total current assets

43,018,138

27,520,446

Operating lease right-of-use assets, net

37,389

70,360

Equity method investment

802,282

804,930

Other assets

589,365

132,015

Total assets

$

44,447,174

$

28,527,751

Liabilities, convertible preferred stock and stockholders’ (deficit) equity

Current liabilities:

Current portion of long-term debt

$

34,733,000

$

10,915,015

Current portion of finance lease liabilities

7,349

11,751

Current portion of operating lease liabilities

26,995

Accounts payable

5,055,408

3,491,485

Accrued expenses

8,277,615

3,427,900

Income taxes payable

1,856,629

1,856,629

Total current liabilities

49,930,001

19,729,775

Finance lease liabilities

4,267

Warrant liability

20,012

57,138

Total liabilities

49,950,013

19,791,180

Commitments and contingencies (Note 8)

Convertible preferred stock:

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

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

Total convertible preferred stock

Stockholders’ (deficit) equity:

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

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

Common stock, par value $0.01 per share; 425,000,000 shares authorized; 258,704,055 and 227,310,572 shares issued and outstanding at June 30, 2023 and September 30, 2022, respectively

2,587,040

2,273,105

Additional paid-in capital

446,837,546

415,398,984

Accumulated deficit

(454,927,425)

(408,935,518)

Total stockholders' (deficit) equity

(5,502,839)

8,736,571

Total liabilities, convertible preferred stock and stockholders' (deficit) equity

$

44,447,174

$

28,527,751

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

1

Table of Contents

Outlook Therapeutics, Inc.

Consolidated Statements of Operations

(unaudited)

Three months ended June 30, 

Nine months ended June 30, 

    

2023

    

2022

    

2023

    

2022

Operating expenses:

Research and development

$

11,101,504

$

11,249,191

$

21,508,876

$

33,341,333

General and administrative

7,039,901

5,774,769

19,158,487

15,741,888

Loss from operations

(18,141,405)

(17,023,960)

(40,667,363)

(49,083,221)

Loss (income) on equity method investment

7,188

11,805

2,648

41,504

Interest (income) expense, net

(395,234)

356,947

1,865,563

1,126,808

Loss on extinguishment of debt

577,659

1,025,402

Change in fair value of promissory notes

2,910,000

376,963

2,913,000

882,903

Change in fair value of warrant liability

11,749

(229,714)

(37,126)

(454,599)

Loss before income taxes

(20,675,108)

(17,539,961)

(45,989,107)

(51,705,239)

Income tax expense

2,800

2,000

Net loss

$

(20,675,108)

$

(17,539,961)

$

(45,991,907)

$

(51,707,239)

Per share information:

Net loss per share of common stock, basic and diluted

$

(0.08)

$

(0.08)

$

(0.19)

$

(0.25)

Weighted average shares outstanding, basic and diluted

256,881,805

220,497,826

246,879,211

209,108,090

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

2

Table of Contents

Outlook Therapeutics, Inc.

Consolidated Statements of Stockholders’ (Deficit) Equity

(unaudited)

Stockholders' (Deficit) Equity

Common Stock

Additional Paid-in

Accumulated

Total Stockholders'

    

Shares

    

Amount

    

Capital

    

Deficit

    

(Deficit) Equity

Balance at October 1, 2022

227,310,572

$

2,273,105

$

415,398,984

$

(408,935,518)

$

8,736,571

Sale of common stock, net of issuance costs

29,356,222

293,562

23,998,598

24,292,160

Stock-based compensation expense

1,392,393

1,392,393

Net loss

(18,662,513)

(18,662,513)

Balance at December 31, 2022

256,666,794

2,566,667

440,789,975

(427,598,031)

15,758,611

Stock-based compensation expense

1,383,405

1,383,405

Net loss

(6,654,286)

(6,654,286)

Balance at March 31, 2023

256,666,794

2,566,667

442,173,380

(434,252,317)

10,487,730

Sale of common stock, net of issuance costs

2,037,261

20,373

3,282,361

3,302,734

Stock-based compensation expense

1,381,805

1,381,805

Net loss

(20,675,108)

(20,675,108)

Balance at June 30, 2023

258,704,055

$

2,587,040

$

446,837,546

$

(454,927,425)

$

(5,502,839)

Stockholders' Equity

Common Stock

Additional Paid-in

Accumulated

Total Stockholders'

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity

Balance at October 1, 2021

176,461,628

$

1,764,616

$

345,726,087

$

(342,883,254)

$

4,607,449

Issuance of common stock in connection with exercise of stock options

25,000

250

17,500

17,750

Sale of common stock, net of issuance costs

47,773,974

477,740

56,979,163

57,456,903

Stock-based compensation expense

1,204,048

1,204,048

Net loss

(14,462,729)

(14,462,729)

Balance at December 31, 2021

224,260,602

2,242,606

403,926,798

(357,345,983)

48,823,421

Issuance of common stock in connection with exercise of warrants

15,675

157

187,943

188,100

Sale of common stock, net of issuance costs

1,516,465

15,164

2,877,750

2,892,914

Stock-based compensation expense

3,762,795

3,762,795

Net loss

(19,704,549)

(19,704,549)

Balance at March 31, 2022

225,792,742

2,257,927

410,755,286

(377,050,532)

35,962,681

Sale of common stock, net of issuance costs

149,977

1,500

290,001

291,501

Stock-based compensation expense

1,367,874

1,367,874

Net loss

(17,539,961)

(17,539,961)

Balance at June 30, 2022

225,942,719

$

2,259,427

$

412,413,161

$

(394,590,493)

$

20,082,095

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

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Outlook Therapeutics, Inc.

Consolidated Statements of Cash Flows

(unaudited)

Nine months ended June 30, 

    

2023

    

2022

OPERATING ACTIVITIES

Net loss

$

(45,991,907)

$

(51,707,239)

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

Depreciation and amortization

32,971

153,224

Loss on extinguishment of debt

577,659

1,025,402

Non-cash interest expense

2,529,830

1,199,697

Stock-based compensation

4,157,603

6,334,717

Change in fair value of promissory notes

2,913,000

882,903

Change in fair value of warrant liability

(37,126)

(454,599)

Loss on equity method investment

2,648

41,504

Interest paid on debt

(1,158,609)

Changes in operating assets and liabilities:

Prepaid expenses and other assets

827,163

(4,461,133)

Other assets

(232,220)

Operating lease liabilities

(26,995)

(31,646)

Accounts payable

1,324,184

284,522

Accrued expenses

4,849,715

308,776

Net cash used in operating activities

(30,232,084)

(46,423,872)

FINANCING ACTIVITIES

Proceeds from the sale of common stock, net of issuance costs

27,596,910

60,675,552

Proceeds from debt

30,000,000

10,000,000

Proceeds from exercise of common stock warrants

188,100

Proceeds from exercise of stock options

17,750

Payments of finance lease obligations

(8,669)

(20,779)

Repayment of debt

(10,220,000)

(12,292,646)

Payment of financing costs

(823,894)

(600,000)

Net cash provided by financing activities

46,544,347

57,967,977

Net increase in cash and cash equivalents

16,312,263

11,544,105

Cash and cash equivalents at beginning of year

17,396,812

14,477,324

Cash and cash equivalents at end of period

$

33,709,075

$

26,021,429

Supplemental disclosure of cash flow information:

Cash paid for interest

$

1,159,008

$

1,556,088

Supplemental schedule of non-cash financing activities:

Common stock issuance costs in accounts payable

$

223,760

$

Deferred offering costs amortization

$

131,944

$

34,234

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

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

1.     Organization and Description of Business

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

All development activities are currently active in support of the Company’s Biologics License Application (“BLA”) registration program for ONS-5010 for wet age-related macular degeneration (“wet AMD”). In fiscal year 2022, the Company submitted the BLA and received confirmation from the U.S. Food and Drug Administration (“FDA”) that the BLA had been accepted for filing with a goal date of August 29, 2023 for a review decision by the FDA. Additionally, the Company submitted a Marketing Authorization Application (“MAA”) with the European Medicines Agency (“EMA”), which has been validated for review with an estimated decision date expected in early 2024.

2.    Liquidity

The Company has incurred recurring losses and negative cash flows from operations since its inception and has an accumulated deficit of $454,927,425 as of June 30, 2023. As of June 30, 2023, the Company had $35,908,170 of principal, accrued interest and exit fees due under an unsecured convertible promissory note issued in December 2022 (the “December 2022 Note”), maturing on January 1, 2024. As a result, there is substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited interim consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The unaudited interim consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

In May 2023, the Company entered into the BTIG ATM Agreement (as defined under Note 9), allowing for sales of up to $100,000,000 of common stock (refer to Note 9 for further details). In July 2023, the Company sold 1,540,962 shares of common stock under the BTIG ATM Offering (as defined under Note 9). The Company generated $2,732,973 in gross proceeds from the BTIG ATM Offering before payment of fees to BTIG and other issuance costs of $81,989, resulting in net proceeds of $2,650,984.

Management believes that the Company’s existing cash and cash equivalents as of June 30, 2023, together with the $2,650,984 in net proceeds from the sale of shares of common stock under the BTIG ATM Offering in July 2023, will be sufficient to fund its operations through the anticipated approval of the BLA for ONS-5010 in the third calendar quarter of 2023 and potentially through the fourth calendar quarter of 2023. As a result, additional financing will be needed by the Company to fund its operations in the future and to commercially develop ONS-5010 and to develop any other product candidates. Management is currently evaluating different strategies to obtain the required funding for future operations, including but not limited to, continuing to access capital through at-the-market offering agreements (refer to Note 9 for further details), proceeds from potential licensing and/or marketing arrangements or collaborations with pharmaceutical or other companies, the issuance of equity securities, the issuance of additional debt, and revenues from potential future product sales, if any. There can be no assurance that these future funding efforts will be successful.

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

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Table of Contents

Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

3.     Basis of Presentation and Summary of Significant Accounting Policies

Basis of presentation

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

In the opinion of management, the accompanying unaudited interim consolidated financial statements include all normal and recurring adjustments (which consist primarily of accruals, estimates and assumptions that impact the financial statements) considered necessary to present fairly the Company’s financial position as of June 30, 2023 and its results of operations for the three and nine months ended June 30, 2023 and 2022, cash flows for the nine months ended June 30, 2023 and 2022, and stockholders’ equity for the three and nine months ended June 30, 2023 and 2022. Operating results for the nine months ended June 30, 2023 are not necessarily indicative of the results that may be expected for the full year ending September 30, 2023. The unaudited interim consolidated financial statements presented herein do not contain all of the required disclosures under GAAP for annual consolidated financial statements. The accompanying unaudited interim consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and related notes as of and for the year ended September 30, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on December 29, 2022.

Use of estimates

The preparation of the unaudited interim consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Due to the uncertainty of factors surrounding the estimates or judgments used in the preparation of the unaudited interim consolidated financial statements, such as the current macroeconomic environment, including as a result of inflation, rising interest rates or political disruption such as the war between Ukraine and Russia, actual results may materially vary from these estimates. Estimates and assumptions are periodically reviewed, and the effects of revisions are reflected in the unaudited interim consolidated financial statements in the period they are determined to be necessary.

Net loss per share

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

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

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

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

Three months ended June 30, 

Nine months ended June 30, 

    

2023

    

2022

    

2023

    

2022

Net loss attributable to common stockholders

$

(20,675,108)

$

(17,539,961)

$

(45,991,907)

$

(51,707,239)

Common stock shares outstanding (weighted average)

256,881,805

220,497,826

246,879,211

209,108,090

Basic and diluted net loss per share

$

(0.08)

$

(0.08)

$

(0.19)

$

(0.25)

The following potentially dilutive securities (in common stock equivalents) have been excluded from the computation of diluted weighted-average shares outstanding as of June 30, 2023 and 2022, as they would be antidilutive:

As of June 30, 

    

2023

    

2022

Performance-based stock units

2,470

2,470

Performance-based stock options

1,900,000

700,000

Stock options

23,631,279

20,099,581

Common stock warrants

7,328,549

6,812,794

Convertible debt

16,701,474

(i)

(i)The potentially dilutive securities related to convertible debt are calculated based on a fixed conversion price of $2.00 per share, which is subject to change as described in Note 7.

Recently issued accounting pronouncements

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815 - 40). ASU 2020-06 eliminated the beneficial conversion and cash conversion accounting models in ASC 470-20 that required separate accounting for embedded conversion features and simplifies the settlement assessment to determine whether a contract qualifies for equity classification. In addition, the new guidance requires entities to use the if-converted method to calculate earnings per share for all convertible instruments and to include the effect of share settlement for instruments that may be settled in cash or shares. The Company adopted ASU 2020-06 on October 1, 2022 using the modified retrospective approach and applied the guidance to all financial instruments that were outstanding as of the beginning of 2022. There was no cumulative effect adjustment to the opening balance of retained earnings as a result of adopting ASU 2020-06.

There have been no other accounting pronouncements issued but not yet adopted by the Company which are expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

4.     Fair Value Measurements

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

Level 1 - Quoted prices in active markets for identical assets or liabilities.

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

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

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

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

June 30, 2023

    

(Level 1)

    

(Level 2)

    

(Level 3)

Liabilities

Unsecured convertible promissory note

$

$

$

34,733,000

Warrant liability

20,012

Total

$

$

$

34,753,012

September 30, 2022

(Level 1)

    

(Level 2)

    

(Level 3)

Liabilities

Unsecured convertible promissory note

$

$

$

Warrant liability

57,138

Total

$

$

$

57,138

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the warrant liability and unsecured convertible promissory note for the nine months ended June 30, 2023:

Unsecured Convertible

    

Promissory Note

    

Warrants

Balance at October 1, 2022

$

$

57,138

Fair value at issuance date

31,820,000

Change in fair value

2,913,000

(37,126)

Balance at June 30, 2023

$

34,733,000

$

20,012

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

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

The fair value of the December 2022 Note as of June 30, 2023 was estimated using a binomial lattice model with the following assumptions:

June 30, 2023

Term (years)

0.5

Stock price

$

1.74

Volatility

68.0

%

Risk-free rate

5.5

%

Dividend yield

%

Credit-adjusted discount rate

22.6

%

The warrants issued in connection with the convertible senior secured notes originally issued pursuant to that certain Note and Warrant Purchase Agreement dated December 22, 2017 are classified as liabilities on the accompanying unaudited interim consolidated balance sheets as the warrants include cash settlement features at the option of the holders under certain circumstances. The warrant liability is revalued each reporting period with the change in fair value recorded in the accompanying consolidated statements of operations until the warrants are exercised or expire. The fair value of the warrant liability is estimated using the Black-Scholes option pricing model using the following assumptions:

    

June 30, 2023

September 30, 2022

Risk-free interest rate

5.07

%

4.23

%

Remaining contractual term of warrants (years)

1.6

2.4

Expected volatility

75.3

%

92.5

%

Annual dividend yield

%

%

Fair value of common stock (per share)

$

1.74

$

1.22

5.  Equity Method Investment

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

The Company made the initial investment of $900,000 in June 2020 and expects to be required to make an additional capital contribution to Syntone of approximately $2,100,000, which will be made within four years after the establishment date in accordance with the development plan contemplated in the license agreement or on such other terms within such four-year period. The maximum exposure to a loss as a result of the Company’s involvement in Syntone is limited to the initial investment and the future capital contributions of approximately $2,100,000.

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

6.     Accrued Expenses

Accrued expenses consists of:

    

    

June 30, 2023

September 30, 2022

Compensation

$

1,956,249

$

1,976,252

Research and development

5,334,946

744,154

Professional fees

846,685

564,423

Other accrued expenses

139,735

143,071

$

8,277,615

$

3,427,900

7.    Debt

Debt consists of:

    

June 30, 2023

    

September 30, 2022

Unsecured convertible promissory note (measured at fair value)

$

34,733,000

$

Unsecured promissory note

11,114,518

Total debt

34,733,000

11,114,518

Less: unamortized loan costs

(199,503)

Total debt, net of unamortized loan costs

34,733,000

10,915,015

Less: current portion

(34,733,000)

(10,915,015)

Long-term debt

$

$

Unsecured convertible promissory note

On December 22, 2022, the Company entered into a Securities Purchase Agreement and issued the December 2022 Note with a face amount of $31,820,000 to Streeterville Capital, LLC (the “Lender”), the holder of the Company’s unsecured promissory note issued in November 2021 (the “November 2021 Note”). The December 2022 Note has an original issue discount of $1,820,000. The Company received net proceeds of $18,052,461 upon the closing on December 28, 2022 after deducting the Lender’s transaction costs in connection with the issuance and a full payment of the remaining outstanding principal and accrued interest on the November 2021 Note. The November 2021 Note was cancelled upon repayment. See below for additional disclosures relating to November 2021 Note. The December 2022 Note bears interest at 9.5% per annum and matures on January 1, 2024. The December 2022 Note contains customary covenants, including a restriction on the Company’s ability to pledge certain of the Company’s assets, subject to certain exceptions, without the Lender’s consent. Beginning on April 1, 2023, the Lender will have the right to convert the December 2022 Note at the Conversion Price (as defined below). The principal amount and conversion price of the December 2022 Note are subject to adjustment upon certain triggering events. In addition, the Company has the right to convert all or any portion of the outstanding balance under the December 2022 Note into shares of common stock at the Conversion Price if certain conditions have been met at the time of conversion, including if at any time after the six-month anniversary of the closing date, the daily volume-weighted average price of the common stock on Nasdaq equals or exceeds $2.50 per share (subject to adjustments for stock splits and stock combinations) for a period of 30 consecutive trading days. Payments may be made by the Company (i) in cash, (ii) in shares of common stock, with the number of shares being equal to the portion of the applicable payment amount divided by the Conversion Price (as defined below), or (iii) a combination of cash and shares of common stock. Any payments made by the Company in cash, including prepayments or repayment at maturity, will be subject to an additional fee of 7.5%. Upon the occurrence of certain events described in the December 2022 Note, including, among others, the Company’s failure to pay amounts due and payable under the December 2022 Note, events of insolvency or bankruptcy, failure to observe covenants contained in the Securities Purchase Agreement and the December 2022 Note, breaches of representations and warranties in the Securities Purchase Agreement, and the occurrence of certain transactions without the Lender’s consent (each such event, a “Trigger Event”), the Lender shall have the right, subject to certain

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

exceptions, to increase the balance of the December 2022 Note by 10% for a Major Trigger Event (as defined in the December 2022 Note) and 5% for a Minor Trigger Event (as defined in the December 2022 Note). If a Trigger Event is not cured within ten (10) trading days of written notice thereof from the Lender, it will result in an event of default (such event, an “Event of Default”). Following an Event of Default, the Lender may accelerate the December 2022 Note such that all amounts thereunder become immediately due and payable, and interest shall accrue at a rate of 22% annually until paid. Under the December 2022 Note, “Conversion Price” means, prior to a Major Trigger Event, $2.00 per share (subject to adjustment for stock splits and stock combinations), and following a Major Trigger Event, the lesser of (i) $2.00 per share (subject to adjustment for stock splits and stock combinations), and (ii) 90% multiplied by the lowest closing bid price of the Company’s common stock in the three trading days prior to the date on which the conversion notice is delivered. If the Conversion Price is below $0.1756 per share, the Company will be required to satisfy a conversion notice from the Lender in cash. Subject to certain exceptions, while the December 2022 Note is outstanding, the Lender will have a consent right on any future variable rate transactions or any debt and a 10% participation right in any future debt or equity financings.

The Company elected to account for the December 2022 Note at fair value (Note 4) and was not required to bifurcate the conversion option as a derivative and as a result the original issue discount of $1,820,000 and debt issuance costs were written off upon election to fair value and accounted for as interest. During the nine months ended June 30, 2023 the Company recognized $2,074,964 of interest expense related to the December 2022 Note related to original issue discount of $1,820,000 and other third party debt issuance costs of $254,964 as the Company elected the fair value option.

Unsecured promissory note

On November 16, 2021, the Company received $10,000,000 in net proceeds from the issuance of the November 2021 Note with a face amount of $10,220,000. Debt issuance costs totaling $820,000 were recorded as debt discount and were deducted from the principal in the accompanying consolidated balance sheet as of September 30, 2022. The debt discount was amortized as a component of interest expense over the term of the underlying debt using the effective interest method. The November 2021 Note bore interest at a rate of 9.5% per annum compounding daily and was set to mature on January 1, 2023. The Company could prepay all or a portion of the November 2021 Note at any time by paying 105% of the outstanding balance elected for pre-payment.

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

During the three months ended June 30, 2022, the Company recognized $436,593 of interest expense related to the November 2021 Note of which $179,228 was related to the amortization of debt discount. During the nine months ended June 30, 2023 and 2022, the Company recognized $454,866 and $1,199,697, respectively, of interest expense related to the November 2021 Note of which $190,775 and $457,208, respectively, were related to the amortization of debt discount.

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

8.     Commitments and Contingencies

Leases

Corporate office

In March 2021, the Company entered into a three-year term corporate office lease in Iselin, New Jersey that commenced on April 23, 2021.

Equipment leases

The Company has equipment leases, with terms between 12 and 36 months, recorded as finance leases. The equipment leases bear interest between 4.0% and 13.0% per annum.

Certain lease agreements contain provisions for future rent increases. Payments due under the lease contracts include minimum payments that the Company is obligated to make under the non-cancelable initial terms of the leases as the renewal terms are at the Company’s option. Lease expense is recorded as research and development or general and administrative based on the use of the leased asset.

The components of lease cost for the three and nine months ended June 30, 2023 and 2022 are as follows:

Three months ended June 30, 

Nine months ended June 30, 

    

2023

    

2022

    

2023

    

2022

Lease cost:

 

  

 

  

 

  

 

  

Amortization of right-of-use assets

$

$

$

$

Interest on lease liabilities

 

304

 

723

 

1,193

 

2,547

Total finance lease cost

 

304

 

723

 

1,193

 

2,547

Operating lease cost

 

11,217

 

11,217

 

33,650

 

33,650

Total lease cost

$

11,521

$

11,940

$

34,843

$

36,197

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

June 30, 2023

    

September 30, 2022

Operating leases:

 

 

  

Right-of-use asset

$

37,389

$

70,360

Operating lease liabilities

 

 

26,995

Finance leases:

 

  

 

  

Right-of-use asset

$

$

Financing lease liabilities

 

7,349

 

16,018

Weighted-average remaining lease term (years):

 

  

 

  

Operating leases

0.8

1.6

Finance leases

 

0.5

 

1.3

Weighted-average discount rate:

 

  

 

  

Operating leases

7.5%

7.5%

Finance leases

 

13.0%

 

13.0%

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

Other information related to leases for the nine months ended June 30, 2023 and 2022 are as follows:

Nine months ended June 30, 

    

2023

    

2022

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

 

 

  

Operating cash flows from finance leases

$

1,193

$

2,547

Operating cash flows from operating leases

 

27,675

 

34,791

Financing cash flows from finance leases

 

8,669

 

20,779

Future minimum lease payments under non-cancelable leases as of June 30, 2023 are as follows for the years ending September 30:

Finance leases

2023 (remaining three months)

$

3,287

2024

 

4,383

Total undiscounted lease payments

7,670

Less: Imputed interest

 

321

Total lease obligations

$

7,349

9.    Common Stock and Stockholders’ Equity

Common stock

On March 29, 2023, following receipt of stockholder approval at the Company’s 2023 annual meeting of stockholders, the number of authorized shares of common stock under the Company’s Certificate of Incorporation was increased from 325,000,000 shares to 425,000,000 shares.

In December 2022, in a registered direct equity offering to certain institutional and accredited investors, including GMS Ventures and Investments (“GMS Ventures”), the Company’s largest stockholder, the Company issued 28,460,831 shares of common stock at a purchase price per share of $0.8784 for $23,208,679 in net proceeds after payment of placement agent fees and other offering costs. GMS Ventures purchased an aggregate of 14,230,418 shares of common stock in the registered direct equity offering. In connection with the registered direct equity offering, the Company issued to M.S. Howells & Co., the placement agent, warrants to purchase up to an aggregate of 515,755 shares of common stock at an exercise price of $1.05 per share, which warrants have a three-year term.

In November 2021, the Company issued 46,000,000 shares of common stock in an underwritten public offering at a purchase price per share of $1.25 for $53,968,057 in net proceeds after payment of underwriter discounts and commissions and other underwriter offering costs. GMS Ventures purchased an aggregate of 16,000,000 shares of common stock in the public offering at the public offering price per share. In connection with the underwritten public offering, the Company issued the underwriter warrants to purchase up to an aggregate of 2,100,000 shares of common stock at an exercise price of $1.5625 per share, which warrants have a five-year term.

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

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

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Outlook Therapeutics, Inc.

Notes to Unaudited Interim Consolidated Financial Statements

being reclassified to additional paid in capital on a pro rata basis when the Company sells common stock under the Wainwright ATM Offering.

Under the Wainwright ATM Agreement, the Company paid Wainwright a commission equal to 3.0% of the aggregate gross proceeds of any sales of common stock under the Wainwright ATM Agreement. The Company terminated the Wainwright ATM Agreement effective May 15, 2023. As a result, the Company wrote off unamortized deferred costs under the Wainwright ATM Agreement during the three months ended June 30, 2023.

No shares of common stock were sold under the Wainwright ATM Offering during the three months ended June 30, 2023. During the nine months ended June 30, 2023, the Company sold 895,391 shares of common stock under the Wainwright ATM Offering and generated $1,127,904 in gross proceeds. The Company paid fees to the Wainwright and other issuance costs of $38,799. During the nine months ended June 30, 2022, the Company sold 3,440,416 shares of common stock under the Wainwright ATM Offering and generated $6,929,743 in gross proceeds. The Company paid fees to Wainwright and other issuance costs of $222,249.

BTIG, LLC At-the-Market Offering Agreement

On May 16, 2023, the Company entered into an At-the-Market Sales Agreement with BTIG, LLC (“BTIG”), as sales agent (the “BTIG ATM Agreement” or the “BTIG ATM Offering”), under which the Company may issue and sell shares of its common stock having an aggregate offering price of up to $100,000,000 from time to time through BTIG. The Company incurred financing costs of $353,688, which were capitalized and are being reclassified to additional paid in capital on a pro rata basis when the Company sells common stock under the BTIG ATM Offering. As of June 30, 2023, $341,167 of such deferred costs are included in other assets on the unaudited interim consolidated balance sheets.

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

During the nine months ended June 30, 2023, the Company sold 2,037,261 shares of common stock under the BTIG ATM Offering and generated $3,535,159 in gross proceeds. The Company paid fees to BTIG and other issuance costs of $106,055.

Common stock warrants

As of June 30, 2023, shares of common stock issuable upon the exercise of outstanding warrants were as follows:

Shares of

common stock

issuable upon

exercise of

Exercise Price

Expiration Date

    

warrants

    

Per Share

December 22, 2024

(i)

277,128

$

12.00

February 26, 2024

1,747,047

$

0.9535

February 24, 2025

172,864

$

1.27

April 13, 2025

(i)

145,686

$

12.00

May 31, 2025

(i)

62,437

$

12.00

June 22, 2025

191,268

$

1.51875

December 28, 2025

515,755

$

1.0500

January 28, 2026

2,116,364

$

1.25

November 23, 2026

2,100,000

$

1.5625

7,328,549

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Notes to Unaudited Interim Consolidated Financial Statements

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

10.  Stock-Based Compensation

2011 Equity Incentive Plan

The Company’s 2011 Equity Compensation Plan (the “2011 Plan”) provided for the Company to sell or issue restricted common stock, RSUs, performance-based awards (“PSUs”), cash-based awards or to grant stock options for the purchase of common stock to officers, employees, consultants and directors of the Company. The 2011 Plan was administered by the board of directors or, at the discretion of the board of directors, by a committee of the board. As of June 30, 2023, PSUs representing 2,470 shares of the Company’s common stock were outstanding under the 2011 Plan. Effective with the December 2015 adoption of the 2015 Equity Incentive Plan, (the “2015 Plan”), no future awards under the 2011 Plan will be granted.

2015 Equity Incentive Plan

In December 2015, the Company adopted the 2015 Plan. The 2015 Plan provides for the grant of stock options, stock appreciation rights, restricted stock awards, RSU awards, performance stock awards and other forms of equity compensation to Company employees, directors and consultants. The aggregate number of shares of common stock authorized for issuance pursuant to the Company’s 2015 Plan is 42,265,841. As of June 30, 2023, 16,539,910 shares remained available for grant under the 2015 Plan.

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

The Company recorded stock-based compensation expense in the following expense categories of its unaudited interim consolidated statements of operations for the three and nine months ended June 30, 2023 and 2022:

Three months ended June 30, 

Nine months ended June 30, 

2023

    

2022

    

2023

    

2022

Research and development

$

280,489

$

205,410

$

893,413

$