ROCKET PHARMACEUTICALS, INC. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended September 30, 2017

OR

For the transition period from                      to                     

Commission file number: 001-36829

Inotek Pharmaceuticals Corporation

(Exact name of registrant as specified in its charter)

91 Hartwell Avenue

Lexington, MA 02421

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code:

(781) 676-2100

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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.

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

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

As of November 3, 2017, there were 27,222,745 shares of common stock, $0.01 par value per share, outstanding.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

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

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. Risk Factors in this Quarterly Report on Form 10-Q and elsewhere in this Quarterly Report on Form 10-Q. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

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Inotek Pharmaceuticals Corporation

INDEX

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PART I — FINANCIAL INFORMATION

Inotek Pharmaceuticals Corporation

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

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

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Inotek Pharmaceuticals Corporation

Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)

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

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Inotek Pharmaceuticals Corporation

Consolidated Statements of Comprehensive Loss

(Unaudited)

(In thousands)

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

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Inotek Pharmaceuticals Corporation

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

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

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INOTEK PHARMACEUTICALS CORPORATION

Notes to Consolidated Financial Statements

(Amounts in thousands, except share and per share data)

1. Organization and Operations

Inotek Pharmaceuticals Corporation (the “Company” or “Inotek”), located in Lexington, MA, is a clinical-stage biopharmaceutical company which had been focused on the discovery, development and commercialization of therapies for ocular diseases, including glaucoma. The Company had been developing trabodenoson in a monotherapy and in a fixed-dose combination therapy (“FDC”) to treat glaucoma. After failing to meet the primary endpoints in its first pivotal Phase 3 trial of trabodenoson monotherapy for the treatment of primary open-angle glaucoma or ocular hypertension in January 2017 and its Phase 2 FDC clinical trial of trabodenoson and latanoprost for the treatment of glaucoma in July 2017, Inotek voluntarily discontinued its development of trabodenoson.

The Company engaged Perella Weinberg Partners, LP (“Perella Weinberg”) as a financial advisor to assist in pursuing strategic alternatives. On September 12, 2017, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Rocket Pharmaceuticals, Ltd., a privately held biopharmaceutical company (“Rocket”) and Rome Merger Sub, a wholly owned subsidiary of the Company (“Merger Subsidiary”), pursuant to which the Merger Subsidiary will be merged with and into Rocket (the “Proposed Merger”) at the Effective Time of the Proposed Merger, as defined in the Merger Agreement, with Rocket continuing after the Proposed Merger as the surviving company and a wholly-owned subsidiary of the Company. The consummation of the Proposed Merger is subject to the satisfaction or waiver of customary closing conditions, including, among others, obtaining the requisite approvals of the Company’s stockholders and Rocket, including the approval of the charter amendments by the Company’s stockholders, and the preparation of a proxy statement. The preliminary proxy statement was filed on October 12, 2017.

Subject to the terms and conditions of the Merger Agreement, the percentage of the combined company that the Company’s stockholders will own following the closing of the Proposed Merger is subject to an adjustment based on the amount of the Company’s net cash at the closing. On a pro forma basis, based upon the number of shares of the Company’s common stock to be issued in the Proposed Merger, following the closing of the Proposed Merger, if it is approved and consummated, the Company’s current stockholders would own approximately 19% of the combined company and current Rocket shareholders would own approximately 81% of the combined company if the Company has a valuation of at least $47,000, which is based on a projected net cash balance (or cash and cash equivalents minus outstanding liabilities) at the closing of $42,000, plus an additional $5,000 of enterprise value. Under the terms of the Merger Agreement, Rocket has a stipulated valuation of $200,000 which is not subject to any adjustments. Ten days prior to the closing, the Company’s estimated net cash at closing will be mutually agreed upon and the final exchange ratio will be calculated based on the relative values of the parties as described in the Merger Agreement. If the Company’s net cash at closing is within a range of $40,500 to $43,500, no adjustment will be made to the foregoing split. There can be no assurance as to the Company’s level of net cash between now and the planned closing.

The Merger Agreement contains a customary “no-shop” provision under which neither the Company nor Rocket is permitted to (i) solicit any alternative acquisition proposals, (ii) participate in any negotiations or discussions with any person relating to any alternative acquisition proposal, (iii) approve, endorse or recommend any alternative acquisition proposal, or (iv) enter into any agreement relating to any alternative acquisition proposal. The Company’s “no-shop” provision is subject to certain exceptions that permit the board of directors of the Company to comply with its fiduciary duties, which, under certain circumstances, would enable the Company to provide information to, and engage in discussions or negotiations with, third parties with respect to alternative acquisition proposals.

The Merger Agreement provides each of the Company and Rocket with specified termination rights. If the Merger Agreement is terminated by the Company to accept a superior acquisition proposal or under other circumstances specified in the Merger Agreement, the Company will be required to pay to Rocket or Rocket will be required to pay the Company, as the case may be, a termination fee of $2,000 (the “Termination Fee”). Further, in connection with the termination of the Merger Agreement if the Company’s stockholders do not approve the Merger Agreement, the Company has agreed to reimburse Rocket for its out-of-pocket fees and expenses of up to $500.

The Merger Agreement provides that, immediately following the Effective Time, as defined in the Merger Agreement, the board of directors of the combined company will consist of up to seven individuals, two of whom shall be designated by the Company (and mutually agreeable to Rocket) and the other five of whom shall be designated by Rocket (until each of their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal). In connection with the Proposed Merger, the Company will seek to amend our certificate of incorporation to: (i) effect a reverse split of the Company’s common stock at a ratio to be determined by the Company, which is intended to ensure that the listing requirements of the Nasdaq Global Market are satisfied,

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and (ii) change the name of the Company to “Rocket Pharmaceuticals, Inc.” and (iii) declassify the Company’s Board of Directors, subject to the consummation of the Proposed Merger.

In September 2017, the Company entered into separation agreements with ten of its employees. Pursuant to the separation agreements, the Company agreed to provide severance payments and continued medical, dental and vision coverage pursuant to COBRA (of the employer’s portion of the premium cost) for up to six months, primarily depending on duration of service. The Company recorded a charge to operations for an aggregate of $783 in the three and nine months ended September 30, 2017 for these terminations, of which $745 and $38 was reflected in research and development and general and administrative expenses, respectively, in each such period. As of September 30, 2017, the Company had $719 of accrued severance and benefits related to these ten former employees.

In addition, for each of the ten terminated employees, the Company accelerated the vesting of all unvested Restricted Stock Units and stock options held by the employee and recorded an incremental charge of $158 in the three and nine months ended September 30, 2017, of which $142 and $16 was reflected in research and development and general and administrative expenses, respectively, in each such period (see Note 6).

In addition, the Company amended employment agreements with the remaining seven current employees (see Note 7).

In April 2016, the Company filed a registration statement on Form S-3 containing two prospectuses: (i) a base prospectus which covers the offering, issuance and sale of up to $200,000 in the aggregate of an indeterminate number of shares of common stock and preferred stock, such indeterminate principal amount of debt securities and such indeterminate number of warrants and units; and (ii) a sales agreement prospectus covering the offering, issuance and sale of up to a maximum aggregate offering price of $50,000 of the Company’s common stock that may be issued and sold under an at-the-market sales agreement with Cowen and Company, LLC (the “ATM”). The $50,000 of common stock that may be issued and sold under the ATM reduces the available balance under the base prospectus by the amount issued. The Company did not sell any shares of common stock pursuant to the ATM during the three and nine months ended September 30, 2017. At September 30, 2017, $45,599 was available for sale of common stock under the ATM. Additionally, in 2016 the Company issued $52,000 aggregate principal amount of 5.75% Convertible Senior Notes due 2021 pursuant to a Prospectus Supplement to its Form S-3, (the “2021 Convertible Notes”), which further reduces the balance available under the base prospectus to $98,000 as of September 30, 2017.

As of September 30, 2017, the Company had an accumulated deficit of $263,504 and $103,125 of cash and cash equivalents and short-term investments.

Although the Company has suspended its research and development activities, if the Company resumes the development of any product candidates, it will need to expend substantial resources for research and development, including costs associated with the clinical testing of its product candidates and will need to obtain additional financing to fund its operations and to conduct trials for its product candidates. If such products were to receive regulatory approval, the Company would need to prepare for the potential commercialization of its product candidates and fund the commercial launch and continued marketing of its products. The Company expects aggregate operating expenses will not increase in 2017 over 2016, but has incurred expenses related to strategic alternatives and the Proposed Merger and expects to continue to incur expenses related to the Proposed Merger.

2. Significant Accounting Policies

Basis of Presentation—The Company’s interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the Company has made all necessary adjustments, which include normal recurring adjustments necessary for a fair statement of the Company’s financial position and results of operations for the interim periods presented. Certain information and disclosures normally included in the annual financial statements prepared in accordance with GAAP have been condensed or omitted. These interim financial statements should be read in conjunction with the audited financial statements and accompanying notes for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K. Certain reclassifications have been made to prior year amounts in the consolidated balance sheets to conform to the current period presentation. The results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for a full year, any other interim periods or any future year or period.

The accompanying consolidated financial statements include our accounts and those of our wholly-owned subsidiaries, Inotek Securities Corporation, Inotek Ltd and Rome Merger Sub. All significant intercompany balances and transactions have been eliminated in consolidation.

Segment Reporting—Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company views its operations and manages its business in one operating segment.

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Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from these estimates. Significant items subject to such estimates and assumptions include the valuation of stock options used for the calculation of stock-based compensation and calculation of accruals related to research and clinical development.

Comprehensive loss—Comprehensive loss is defined as the change in equity of a business enterprise during a period from transactions, and other events and circumstances from non-owner sources, and currently consists of net loss and changes in unrealized gains and losses on short-term investments. Accumulated other comprehensive loss consists entirely of unrealized gains and losses from short-term investments as of September 30, 2017 and December 31, 2016.

Cash and Cash Equivalents—Cash and cash equivalents consist of bank deposits, certificates of deposit and money market accounts. 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 maintains its cash and cash equivalent balances in the form of money market, savings or operating accounts with financial institutions that management believes are creditworthy. 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. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.

Short-term Investments—Short-term investments consist of investments in certificates of deposit, agency bonds and United States Treasury securities. Management determines the appropriate classification of these securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. The Company classifies its short-term investments as available-for-sale pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 320, Investments—Debt and Equity Securities. Short-term investments are recorded at fair value, with unrealized gains and losses included as a component of accumulated other comprehensive loss in stockholders’ equity and a component of total comprehensive loss in the consolidated statements of comprehensive loss, until realized. Realized gains and losses are included in investment income on a specific-identification basis. There were no realized gains or losses on short-term investments for the three and nine months ended September 30, 2017 and 2016. There were $48 and $29 of net unrealized gains on short-term investments for the three and nine months ended September 30, 2017, respectively. There were $15 of net unrealized losses and $13 of net unrealized gains on short-term investments for the three and nine months ended September 30, 2016, respectively.

The Company reviews short-term investments for other-than-temporary impairment whenever the fair value of a short-term investment is less than the amortized cost and evidence indicates that a short-term investment’s carrying amount is not recoverable within a reasonable period of time. Other-than-temporary impairments of investments are recognized in the consolidated statements of operations if the Company has experienced a credit loss, has the intent to sell the short-term investment, or if it is more likely than not that the Company will be required to sell the short-term investment before recovery of the amortized cost basis. Evidence considered in this assessment includes reasons for the impairment, compliance with the Company’s investment policy, the severity and the duration of the impairment and changes in value subsequent to the end of the period.

Short-term investments at September 30, 2017 consist of the following:

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Short-term investments at December 31, 2016 consist of the following:

At September 30, 2017 and December 31, 2016, all short-term investments held by the Company had contractual maturities of less than one year. The Company evaluated its securities for other-than-temporary impairment and determined that no such impairment existed at September 30, 2017 and December 31, 2016.

Property and Equipment—Property and equipment are stated at cost. Expenditures for repairs and maintenance are charged to expense as incurred. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is reflected in the consolidated statement of operations. Depreciation and amortization is provided using the straight-line method over the estimated useful lives of the assets.

Impairment of Long-Lived Assets—The Company assesses the recoverability of its long-lived assets, which include property and equipment, whenever significant events or changes in circumstances indicate impairment may have occurred. If indicators of impairment exist, projected future undiscounted cash flows associated with the asset are compared to its carrying amount to determine whether the asset’s value is recoverable. Any resulting impairment is recorded as a reduction in the carrying value of the related asset in excess of fair value and charged to operating results (See Note 3). 

Debt Issuance Costs—Debt issuance costs consist of underwriting discounts and offering-related costs incurred by the Company in connection with the closing of the 2021 Convertible Notes and are included as a direct deduction from the carrying amount of the 2021 Convertible Notes on the Company’s consolidated balance sheets. The Company amortizes debt issuance costs to interest expense over the life of the 2021 Convertible Notes using the effective interest method. (See Note 5). Amortization of debt issuance costs was $147 and $430 in the three and nine months ended September 30, 2017, and $82 in the three and nine months ended September 30, 2016.

Research and Development Costs—Research and development costs are charged to expense as incurred and include, but are not limited to:

Costs for certain development activities, such as clinical studies, are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations, and information provided to the Company by its vendors on their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the patterns of costs incurred, and are reflected in the financial statements as accrued expenses, or prepaid expenses and other current assets, if the related services have not been provided.

Stock-Based Compensation—The Company measures the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the grant date. That cost is recognized on a straight-line basis over the period during which the employee is required to provide service in exchange for the award. The fair value of options on the date of grant is calculated using the Black-Scholes option pricing model based on key assumptions such as stock price, expected volatility and expected term. The Company’s estimates of these assumptions are primarily based on the trading price of the Company’s stock, historical data, peer company data and judgment regarding future trends and factors. The fair value of restricted stock awards is based on the intrinsic value of such awards on the date of grant. Compensation cost for stock purchase rights under the employee stock

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purchase plan is measured and recognized on the date the Company becomes obligated to issue shares of our common stock and is based on the difference between the fair value of the Company’s common stock and the purchase price on such date.

The Company accounts for stock options issued to non-employees in accordance with the provisions of FASB ASC 505-50, Equity-Based Payments to Non-employees, which requires valuing the stock options on their grant date and measuring such stock options at their current fair value as they vest.

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

Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2—Valuations based on quoted prices for similar assets or liabilities in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3—Valuations that require inputs that reflect the Company’s own assumptions that are both significant to the fair value measurement and unobservable.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The fair value of the Company’s financial instruments, including cash and cash equivalents, prepaid expenses and other current assets and accounts payable approximate their respective carrying values due to the short-term nature of these instruments and amounts. The Company estimates the fair value of its 2021 Notes using quoted market prices obtained from third-party pricing services, which is classified as a Level 2 input due to limited market trading. As of September 30, 2017, the fair value of the 2021 Notes was approximately $40,690, which differed from its carrying value. The Company’s assets and liabilities measured at fair value on a recurring basis include its short-term investments.

Net Loss Per Share—The Company calculates net loss per share in accordance with FASB ASC 260, Earnings per Share. Basic earnings (loss) per share (“EPS”) is calculated by dividing the net income or loss applicable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration of unissued common stock equivalents. The net loss applicable to common stockholders is determined by the reported net loss for the period and deducting dividends accrued and accretion of preferred stock. Diluted EPS is calculated by adjusting the weighted average common shares outstanding for the dilutive effect of common stock options, warrants, and convertible preferred stock and accrued but unpaid convertible preferred stock dividends. In periods where a net loss is recorded, no effect is given to potentially dilutive securities, as their effect would be anti-dilutive.

The following table sets forth the computation of basic and diluted EPS attributable to the Company’s common stockholders:

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The following common stock equivalents were excluded from the calculation of diluted net loss per share for the periods indicated as including them would have an anti-dilutive effect:

Subsequent Events—The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The Company has completed an evaluation of all subsequent events through the date the financial statements were issued.

Recent Accounting Pronouncements— In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The standard, including subsequently issued amendments, will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The standard will require an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will be effective for annual and interim periods beginning after December 15, 2017. The Company has not yet selected a transition method and is evaluating the impact the adoption will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the current leasing guidance and upon adoption, will require lessees to recognize right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The new standard is effective for the Company for the annual period beginning after December 15, 2018, and can be early adopted by applying a modified retrospective approach for leases existing at, and entered into after, the beginning of the earliest comparable period presented in the financial statements. The Company is currently evaluating the impact of this accounting standard update on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends FASB ASC Topic 718, Compensation – Stock Compensation (“ASC 718”), and includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new standard is effective for the Company for the annual period beginning after December 15, 2016, and for annual and interim periods thereafter, with early adoption permitted. The Company adopted this standard on January 1, 2017.

The update revises requirements in the following areas: minimum statutory withholding, accounting for income taxes, and forfeitures. Prior to adoption, the Company applied a 0% forfeiture rate to share-based compensation, resulting in no cumulative effect adjustment to the opening period. Upon adoption of ASU 2016-09, the Company’s accounting policy is to recognize forfeitures as they occur. The update also requires the Company to recognize the income tax effect of awards in the income statement when the awards vest or are settled. Finally, the update allows the Company to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering a liability. The income tax related items had no effect on the current period presentation and the Company maintains a full valuation allowance against its deferred tax assets.

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting, which clarifies the scope under which modification accounting should be applied to a share-based payment award under ASC 718. The standard will be effective for annual reporting periods and interim periods within those annual periods, beginning after December 15, 2017, and early adoption is permitted for interim or annual period beginning after January 1, 2017. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

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3. Property and Equipment

At September 30, 2017 and December 31, 2016, the Company’s property and equipment consisted of the following:

During the three and nine months ended September 30, 2017, the Company recognized $38 and $162 of depreciation expense, respectively, and wrote off $217 of fully depreciated net assets in the nine months ended September 30, 2017. During the three and nine months ended September 30, 2016, the Company recognized $39 and $111 of depreciation expense, respectively.

During the three months ended September 30, 2017, the Company voluntarily discontinued its development of trabodenoson and classified its equipment used in the production of trabodenoson as held for sale. The Company performed an impairment assessment of this equipment by comparing the equipment’s carrying value to its estimated fair value, which was based on prices obtained for similar assets. The analysis resulted in an impairment of the Company’s laboratory equipment of $423 which was charged to research and development expenses in the three and nine months ended September 30, 2017.

4. Accrued Expenses and Other Current Liabilities

At September 30, 2017 and December 31, 2016, the Company’s accrued expenses and other current liabilities consisted of the following:

5. Debt

2021 Convertible Notes

On August 5, 2016, the Company issued an aggregate of $50,000 of the 2021 Convertible Notes. On August 30, 2016, the Company issued an additional $2,000 of 2021 Convertible Notes pursuant to the exercise of the underwriters’ overallotment option. The 2021 Convertible Notes have a maturity date of August 1, 2021 (“Maturity Date”), are unsecured and accrue interest at a rate of 5.75% per annum, payable semi-annually on February 1 and August 1 of each year, beginning February 1, 2017. In connection with the issuance of the 2021 Convertible Notes, the Company incurred $3,262 of debt issuance costs which were recorded as a discount on the 2021 Convertible Notes.

Each holder of a 2021 Convertible Note (the “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 an initial conversion rate of 124.7505 shares of the Company’s common stock per $1 principal amount of 2021 Convertible Notes (the “Conversion Rate”). 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. In addition, in certain circumstances, the Conversion Rate will be increased in respect of a Holder’s conversion of 2021 Convertible Notes in connection with the occurrence of one or more corporate events specified in the indenture (as supplemented, the “Indenture”) governing the 2021 Convertible Notes (each such specified corporate event, a “Make-Whole Fundamental Change”) that occurs prior to the Maturity Date (a “Make-Whole Fundamental Change

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Conversion”) or in respect of a Holder’s voluntary conversion of 2021 Convertible Notes other than in connection with a Make-Whole Fundamental Change (a “Voluntary Conversion”). In connection with a Make-Whole Fundamental Change Conversion or a Voluntary Conversion, the Company will increase the Conversion Rate for the 2021 Convertible Notes surrendered for conversion by a number of additional shares of the Company’s common stock set forth in the Additional Shares Make-Whole Table in the Indenture, based on the applicable Stock Price (as defined in the Indenture) and Effective Date (as defined in the Indenture) for such conversion. The additional shares potentially issuable in connection with a Make-Whole Fundamental Change Conversion or a Voluntary Conversion range from 0 to 24.95 per $1 principal amount of 2021 Convertible Notes, subject to adjustment. If the Stock Price applicable to any conversion is greater than $40.00 per share, the Conversion Rate will not be increased. If the Stock Price applicable to any conversion is less than $6.68 per share, the Conversion Rate in connection with a Make-Whole Fundamental Change Conversion will not be increased but it will be increased by 24.95 shares in connection with a Voluntary Conversion. Upon conversion, Holders of the 2021 Convertible Notes will receive shares of the Company’s common stock and cash in lieu of fractional shares.

Upon the occurrence of a Fundamental Change, the occurrence of certain change of control transactions or delisting events (as defined in the Indenture), each Holder may require the Company to repurchase for cash all or any portion of the 2021 Convertible Notes held by such Holder at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest thereon.

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.

If an Event of Default (as defined in the Indenture), other than certain events of bankruptcy, insolvency or reorganization involving the Company, occurs and is continuing, the trustee under the Indenture (the “Trustee”) or the Holders of at least 25% in principal amount of the outstanding 2021 Convertible Notes may declare 100% of the principal of and accrued and unpaid interest, if any, on all of the 2021 Convertible Notes to be due and payable immediately. Upon the occurrence of an Event of Default relating to bankruptcy, insolvency or reorganization involving the Company, 100% of the principal of and accrued and unpaid interest, if any, on all of the 2021 Convertible Notes would become due and payable automatically.

Notwithstanding the foregoing, the Indenture provides that, to the extent the Company elects, the sole remedy for an Event of Default relating to certain failures by the Company to comply with certain reporting covenants in the Indenture, will (i) for the first 90 days after the occurrence of such an Event of Default, consist exclusively of the right to receive additional interest on the 2021 Convertible Notes at a rate equal to 0.25% per annum of the principal amount of the 2021 Convertible Notes outstanding for each day during such 90-day period on which such an Event of Default is continuing and (ii) for the period from, and including, the 91st day after the occurrence of such an Event of Default to, and including, the 180th day after the occurrence of such an Event of Default, consist exclusively of the right to receive additional interest on the 2021 Convertible Notes at a rate equal to 0.50% per annum of the principal amount of the 2021 Convertible Notes outstanding for each day during such additional 90-day period on which such an Event of Default is continuing (such additional interest, “Additional Interest”). After 180 days, if such Event of Default is not cured or waived, the 2021 Convertible Notes would be subject to acceleration in accordance with the Indenture.

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, the Company estimated the fair value of the Additional Interest feature to be insignificant as of September 30, 2017 and December 31, 2016.

The issuance costs which were recorded as a discount on the debt are being amortized to interest expense over the life of the 2021 Convertible Notes using the effective interest method. As of September 30, 2017, the stated interest rate was 5.75%, and the effective interest rate was 7.3%. For the three months ended September 30, 2017, interest expense related to the 2021 Convertible Notes was $901, including $147 related to amortization of the debt discount. For the nine months ended September 30, 2017, interest expense related to the 2021 Convertible Notes was $2,666, including $430 related to amortization of the debt discount. For the three and nine months ended September 30, 2016, interest expense related to the 2021 Convertible Notes was $533, including $82 related to amortization of the debt discount.

The table below summarizes the carrying value of the 2021 Convertible Notes as of September 30, 2017:

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6. Equity

Authorized Shares

As of September 30, 2017, the Company’s authorized capital stock consisted of 120,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of undesignated preferred stock, par value $0.001 per share.

Common Stock

All preferences, voting powers, relative, participating, optional, or other specific rights and privileges, limitations, or restrictions of the common stock are expressly subject to those that may be fixed with respect to any shares of preferred stock. Common stockholders are entitled to one vote per share, and to receive dividends, when and if declared by the Company’s board of directors. At September 30, 2017 and December 31, 2016, there were 27,222,745 and 26,986,318 shares of common stock outstanding, respectively.

Equity Plans

The Company maintains three equity compensation plans: the 2014 Stock Option and Incentive Plan (the “2014 Plan”), the 2004 Stock Option and Incentive Plan (the “2004 Plan”) and the 2014 Employee Stock Purchase Plan (“ESPP”).

2014 Stock Option and Incentive Plan

The 2014 Plan provides for the issuance of incentive and non-qualified stock options, restricted stock, and other equity awards, all for common stock, as determined by the board of directors to employees, officers, directors, consultants, and advisors of the Company and its subsidiaries. Pursuant to the provisions of the 2014 Plan and approval by the board of directors, on January 1, 2017 an additional 1,079,453 shares were added to the 2014 Plan representing 4% of total common shares issued and outstanding at December 31, 2016. There were 562,316 shares available for issuance under the 2014 Plan as of September 30, 2017. The 2014 Plan expires in August 2024.

In December 2016, the board granted to certain executive officers an aggregate of 470,000 restricted stock units (“RSU’s”) pursuant to the 2014 Plan. Each restricted stock unit represents a contingent right to receive one share of Company common stock. Vesting for these RSU’s was based equally on the achievement of two performance-based conditions, subject to continued service through such achievement dates. The intrinsic fair value of these RSU’s as of the date of grant was $3,055 and no stock-based compensation expense was recorded in 2016 as the Company determined that the vesting conditions were not probable of occurring. In January 2017, these RSU’s were modified such that instead of vesting based on the achievement of certain performance-based conditions, they will vest in equal annual installments over four years from the December 2016 date of grant, subject to continued service through such dates. This change in vesting criteria was accounted for as a modification under ASC 718 whereby the Company will recognize the $717 fair value of the grants as of the date of modification over the vesting term.

In September 2017, the Company accelerated the vesting of all unvested RSU’s and stock options held by the ten terminated employees (see Note 1) and recorded an incremental charge related to these modifications of $158 in the three and nine months ended September 30, 2017, of which $142 and $16 was reflected in research and development and general and administrative expenses, respectively, in each such period. The Company also modified the employment agreements with certain of its current employees such that in the event of a change in control, if the employee experiences a qualifying termination by the Company any time prior to or within 12 months of the change in control, all outstanding stock options and RSU’s will vest in full and become exercisable. The Company determined that the original awards were expected to vest under their original terms both prior to and after the modification. A comparison of the fair value of the outstanding stock awards immediately before and after the modification resulted in no incremental expense.

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The following table summarizes stock option activity under the 2014 Plan:

 The weighted-average fair value of all stock options granted for the three and nine months ended September 30, 2017, was $1.43 per share. The exercise prices exceed the $1.78 per share closing price of common stock on September 30, 2017, therefore there is no intrinsic value of the outstanding 2014 Plan stock options.   

The following table summarizes RSU activity under the 2014 Plan:

As noted above, all outstanding RSU’s were modified in September 2017. Therefore, the weighted average grant date fair value per share of outstanding RSU’s as of September 30, 2017, reflects the $1.05 per share fair value of the outstanding RSU’s as of the date of modification.

Shares issued for RSU’s that vested and settled during the three months ended September 30, 2017, included 13,082 shares of common stock surrendered by employees for payment of $16 of withholding taxes due.

2004 Stock Option and Incentive Plan

The following table summarizes stock option activity under the 2004 Plan:

The exercise prices exceed the $1.78 per share closing price of common stock on September 30, 2017, therefore there is no intrinsic value of the outstanding 2004 Plan stock options.

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Employee Stock Purchase Plan

In November 2014, the Company’s board of directors adopted and the stockholders approved the 2014 Employee Stock Purchase Plan (“ESPP”). The ESPP provides that the number of shares reserved and available for issuance under the ESPP shall be cumulatively increased each January 1, beginning on January 1, 2016, by the lesser of (i) 600,000 shares of common stock or (ii) the number of shares necessary to set the number of shares of Common Stock under the Plan at 1% percent of the outstanding number of shares as of January 1 of the applicable year. However, the board of directors reserves the right to determine that there will be no increase for any year or that any increase will be for a lesser number of shares. As of January 1, 2017, 31,555 shares were added to the ESPP. As of September 30, 2017, there were 245,979 shares available for issuance under the ESPP.

 On May 31, 2017, 23,884 shares of common stock were purchased pursuant to the ESPP, resulting in proceeds to the Company of $35. The Company recorded $0 and $6 of stock-based compensation expense pursuant to the ESPP during the three and nine months ended September 30, 2017, respectively, and $23 and $43 of stock-based compensation expense pursuant to the ESPP during the three and nine months ended September 30, 2016, respectively.

Stock-Based Compensation

Stock-based compensation expense for options, RSU’s and the ESPP is reflected in the consolidated statements of operations as follows:

7. Commitments and Contingencies

Operating Lease

In 2015, the Company entered into a lease agreement (the “Office Lease”) for its headquarters in Lexington, Massachusetts. The Company recorded $445 as leasehold improvements for costs incurred to build out the space, and is amortizing those costs to facilities expense over the term of the lease. Rent expense is recognized on a straight-line basis at the average monthly rent over the term of the lease. Deferred rent is included in other current and long-term liabilities on the Company’s consolidated balance sheets.

In 2016, the Company signed an amendment to the Office Lease, whereby it agreed to rent additional space (the “Lease Amendment”). The terms of the Lease Amendment follow the terms of the Office Lease. The lease term is 90 months and the Company has the right to extend the term for one period of five years.

The Company recorded rent expense of $84 and $253 for the three and nine months ended September 30, 2017, respectively, and $66 and $190 for the three and nine months ended September 30, 2016, respectively. As of September 30, 2017, the aggregate annual commitments pursuant to the Office Lease and the Lease Amendment are as follows:

Securities Litigation

On January 6, 2017, a purported stockholder of the Company filed a putative class action in the U.S. District Court for the District of Massachusetts, captioned Whitehead v. Inotek Pharmaceuticals Corporation, et al., No. 1:17-cv-10025. An amended complaint was filed on July 10, 2017, and a second amended complaint was filed on September 5, 2017. The second amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 against the Company, David Southwell, and Rudolf Baumgartner based on allegedly false and misleading statements and omissions regarding our phase 2 and phase 3 clinical trials of trabodenoson. The lawsuit seeks, among other things, unspecified compensatory damages for

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purchasers of the Company’s common stock between July 23, 2015 and July 10, 2017, as well as interest and attorneys’ fees and costs. On October 6, 2017, defendants filed a motion to dismiss the second amended complaint. The Company continues to vigorously defend itself against this claim.

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.

Change-in-Control

In September 2017, the Company modified the employment agreements with certain of its current employees such that in the event of termination in connection with a change in control (“CIC”), the Company will provide these employees severance payments at each employee’s current monthly salary rate, and continued medical, dental and vision coverage pursuant to COBRA (of the employer’s portion of the premium cost) for up to six months primarily depending on duration of service. The Company also modified the employment agreements with certain of its named executive officers. In the event of a qualifying termination in connection with a CIC, for each of the Company’s Chief Medical Officer and Vice President, Finance, the Company will pay (i) twelve and six months’ severance, respectively, at each person’s current monthly salary rate, and (ii) continued medical, dental and vision coverage pursuant to COBRA (of the employer’s portion of the premium cost), for twelve and six months, respectively. In the event of a qualifying termination in connection with a CIC, in addition to the severance benefits previously provided to the Company’s Chief Executive Officer (consisting of a lump-sum payment equal to 18 months’ base salary), the Company agreed to provide continued medical, dental and vision coverage pursuant to COBRA (of the employer’s portion of the premium cost), for eighteen months. In addition, the Company has committed to pay to all seven remaining employees, if they are employees on the date of a CIC, a retention bonus, with the aggregate of all such retention bonuses equal to approximately $642.

Also, upon a CIC, the Company will owe Perella Weinberg a fee of $2,000.

Indemnification Arrangements

As permitted under Delaware law, the Company’s bylaws provide that the Company will indemnify any director, officer, employee or agent 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.

8. Fair Value of Financial Measurements

Items measured at fair value on a recurring basis are short-term 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:

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Money market mutual funds

The Company classifies its money market mutual funds 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.

Short-term investments

The Company classifies its United States 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 certificates of deposit as Level 2 assets under the fair value hierarchy, as there are no quoted market prices in active markets, and its agency bonds as Level 2 assets under the fair value hierarchy, as these assets are not always valued daily using quoted market prices in active markets.

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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Overview

We are a clinical-stage biopharmaceutical company which had been focused on the discovery, development and commercialization of therapies for ocular diseases, including glaucoma. We had been developing trabodenoson in a monotherapy and in a fixed-dose combination therapy (“FDC”) to treat glaucoma. After failing to meet the primary endpoints in our first pivotal Phase 3 trial of trabodenoson monotherapy for the treatment of primary open-angle glaucoma or ocular hypertension and our Phase 2 FDC clinical trial of trabodenoson and latanoprost for the treatment of glaucoma, we voluntarily discontinued our development of trabodenoson.

We have engaged Perella Weinberg Partners, LP (“Perella Weinberg”) as a financial advisor to assist us in pursuing strategic alternatives with a goal to enhance stockholder value, including the Proposed Merger (as further described and defined below), or if the Proposed Merger is not approved and consummated, the possibility of another merger or sale of the Company. On September 12, 2017, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Rocket Pharmaceuticals, Ltd., a privately held biopharmaceutical company (“Rocket”) and Rome Merger Sub, a wholly owned subsidiary of Inotek (“Merger Subsidiary”), pursuant to which the Merger Subsidiary will be merged with and into Rocket (the “Proposed Merger”) at the Effective Time of the Proposed Merger, as defined in the Merger Agreement, with Rocket continuing after the Proposed Merger as the surviving company and a wholly-owned subsidiary of Inotek. We expect to devote significant time and resources to completion of the Proposed Merger, or, if the Proposed Merger is not approved and consummated, identifying and evaluating other strategic alternatives. However, there can be no assurance that such activities will result in the completion of the Proposed Merger or any other agreements or transactions that will enhance stockholder value. Further, the completion of the Proposed Merger, or of any other strategic transaction, ultimately may not deliver the anticipated benefits or enhance stockholder value.  Further, the consummation of the Proposed Merger is subject to the satisfaction or waiver of customary closing conditions, including, among others, obtaining the requisite approvals of our stockholders and Rocket, including the approval of the charter amendments by our stockholders, and the preparation of a proxy statement. The preliminary proxy statement was filed on October 12, 2017.

Subject to the terms and conditions of the Merger Agreement, the percentage of the combined company that our stockholders will own following the closing of the Proposed Merger is subject to an adjustment based on the amount of our net cash at the closing. On a pro forma basis, based upon the number of shares of our common stock to be issued in the Proposed Merger, following the closing of the Proposed Merger, if it is approved and consummated, our current stockholders would own approximately 19% of the combined company and current Rocket shareholders would own approximately 81% of the combined company if we have a valuation of at least $47.0 million, which is based on a projected net cash balance (or cash and cash equivalents minus outstanding liabilities) at the closing of $42.0 million, plus an additional $5.0 million of enterprise value. Under the terms of the Merger Agreement, Rocket has a stipulated valuation of $200.0 million which is not subject to any adjustments. Ten days prior to the closing, our estimated net cash at closing will be mutually agreed upon and the final exchange ratio will be calculated based on the relative values of the parties as described in the Merger Agreement. If our net cash at closing is within a range of $40.5 million to $43.5 million, no adjustment will be made to the foregoing split. There can be no assurances as to our level of net cash between now and the planned closing.

The Merger Agreement contains a customary “no-shop” provision under which neither we nor Rocket is permitted to (i) solicit any alternative acquisition proposals, (ii) participate in any negotiations or discussions with any person relating to any alternative acquisition proposal, (iii) approve, endorse or recommend any alternative acquisition proposal, or (iv) enter into any agreement relating to any alternative acquisition proposal. Our “no-shop” provision is subject to certain exceptions that permit our board of directors to comply with its fiduciary duties, which, under certain circumstances, would enable us to provide information to, and engage in discussions or negotiations with, third parties with respect to alternative acquisition proposals.

The Merger Agreement provides each of us and Rocket with specified termination rights. If the Merger Agreement is terminated by us to accept a superior acquisition proposal or under other circumstances specified in the Merger Agreement, we will be required to pay to Rocket or Rocket will be required to pay us, as the case may be, a termination fee of $2 million (the “Termination Fee”). Further, in connection with the termination of the Merger Agreement if our stockholders do not approve the Merger Agreement, we have agreed to reimburse Rocket for its out-of-pocket fees and expenses of up to $0.5 million.

The Merger Agreement provides that, immediately following the Effective Time, as defined in the Merger Agreement, the board of directors of the combined company will consist of up to seven individuals, two of whom shall be designated by us (and mutually

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agreeable to Rocket) and the other five of whom shall be designated by Rocket (until each of their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal). In connection with the Proposed Merger, we will seek to amend our certificate of incorporation to: (i) effect a reverse split of our common stock at a ratio to be determined by us, which is intended to ensure that the listing requirements of the Nasdaq Global Market are satisfied, (ii) change our name to “Rocket Pharmaceuticals, Inc.” and (iii) declassify our board of directors, subject to the approval and consummation of the Proposed Merger.

In September 2017, we entered into separation agreements with ten of our employees. Pursuant to the separation agreements, we agreed to provide severance payments and continued medical, dental and vision coverage pursuant to COBRA (of the employer’s portion of the premium cost) for up to six months, primarily depending on duration of service.    

In addition, we amended employment agreements with the remaining seven current employees (See Note 7 in the accompanying notes to the financial statements).

In April 2016, we filed a registration statement on Form S-3 containing two prospectuses: (i) a base prospectus which covers the offering, issuance and sale by us of up to $200.0 million in the aggregate of an indeterminate number of shares of common stock and preferred stock, such indeterminate principal amount of debt securities and such indeterminate number of warrants and; and (ii) a sales agreement prospectus covering the offering, issuance and sale by us of up to a maximum aggregate offering price of $50.0 million of our common stock that may be issued and sold under an at-the-market sales agreement with Cowen and Company, LLC (the “ATM”). The $50.0 million of common stock that may be issued and sold under the ATM reduces the available balance under the base prospectus by the amount issued. We did not sell any shares of common stock pursuant to the ATM during the nine months ended September 30, 2017. At September 30, 2017, $45.6 million was available for sale of common stock under the ATM. Additionally, in 2016 we issued $52.0 million aggregate principal amount of 5.75% Convertible Senior Notes due 2021 pursuant to a Prospectus Supplement to our Form S-3, (the “2021 Convertible Notes”), which further reduces the balance available under the base prospectus to $98.0 million as of September 30, 2017.

As of September 30, 2017, we had an accumulated deficit of $263.5 million and cash and cash equivalents and short-term investments aggregating $103.1 million. Based on current assumptions, we estimate we have sufficient funding to sustain operations into 2019. See “Liquidity and Capital Resources.”

Since our inception on July 7, 1999, we have devoted substantially all of our resources to business planning, raising capital, product research and development, applying for and obtaining government and private grants, recruiting management, research and technical staff and other personnel, acquiring operating assets, and undertaking preclinical studies and clinical trials of our lead product candidates. We have not completed development of any product candidate and we have therefore not generated any revenues from product sales.

Factors Affecting our Results of Operations

We are not currently developing trabodenoson. Based upon our current operating assumptions, we do not expect our aggregate operating expenses, excluding strategic transaction-specific expenses, to increase in 2017 over 2016. We may incur significant additional costs related to finalizing and closing the Proposed Merger.

We may need to obtain additional funding, if the Proposed Merger is not approved or consummated, in connection with our continuing operations or other strategic review processes. Adequate additional financing may not be available to us on acceptable terms, or at all.

Financial Overview

Revenue

We have not generated any revenue from product sales since our inception and do not expect to generate any revenue from the sale of products.

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Research and Development Expenses

Research and development expenses consist primarily of the costs associated with our research and development activities, conducting preclinical studies and clinical trials and activities related to regulatory filings. Our research and development expenses consist of:

We expense research and development costs as incurred. We record costs for some development activities, such as clinical trials, based on an evaluation of the progress to completion of specific tasks using data such as subject enrollment, clinical site activations or other information our vendors provide to us. We expect research and development expenses to decrease in the second half of 2017 compared to the first half of 2017 due to our decision in July 2017 to discontinue development of trabodenoson, and the termination of nine research and development employees in September 2017.

The following table summarizes our research and development expenses by type of activity for the three and nine months ended September 30, 2017 and 2016:

We do not track trabodenoson-related expenses by product candidate. All expenses related to trabodenoson as a monotherapy also benefit the FDC product candidate trabodenoson with latanoprost. We have expended approximately $83 million for external development costs related to trabodenoson from inception through September 30, 2017.

The process of conducting the necessary clinical research to obtain regulatory approval is costly and time consuming and the successful development of our product candidates is highly uncertain. For example, we are not currently developing trabodenoson in view of the results of our MATrX-1 Phase 3 clinical trial and Phase 2 FDC clinical trial of trabodenoson and latanoprost. We expect to incur minimal external research and development expenses in the future, subject to the approval and consummation of the Proposed Merger.

General and Administrative Expenses

General and administrative expenses consist of compensation and related benefit costs, including stock-based compensation for administrative personnel. Other significant general and administrative expenses include travel costs, professional fees for legal, patents, consulting, investor and public relations, auditing and tax services as well as other direct and allocated expenses for rent and maintenance of facilities, insurance and other supplies used in general and administrative activities. General and administrative expense increased in the third quarter of 2017 as compared to the second quarter of 2017 and may increase further in the fourth quarter of 2017 as we continue to incur costs related to the Proposed Merger and our defense of the putative class action filed against us on January 6, 2017, amended on July 10, 2017, and September 5, 2017 (see Part II – Other Information, Item 1. Legal Proceedings).

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Interest Expense

Interest expense relates to our 2021 Convertible Notes which are due in August 2021.

Interest Income

Interest income relates to interest earned from invested funds.

Results of Operations

Comparison of the Three Months Ended September 30, 2017 and 2016

The following table summarizes the results of our operations for the three months ended September 30, 2017 and 2016:

Research and development expenses

Research and development expenses decreased $5.6 million to $2.8 million for the three months ended September 30, 2017, as compared to $8.4 million for the three months ended September 30, 2016. This decrease primarily reflects $1.9 million of decreased clinical expenses related to our Phase 3 trial, MATrX-1, for which top-line results were announced in January of 2017 and $1.6 million of decreased clinical expenses related to our Phase 2 FDC clinical trial that commenced in October of 2016, for which top-line results were announced in July 2017. In addition, preclinical expense decreased $2.0 million due to reduced activity, employee-related expenses decreased $0.9 million due to reduced headcount and a reduction of the bonus accrual related to the employees terminated in September 2017 and consulting costs decreased $0.3 million. These decreases are partially offset by $0.7 million of severance expense related to employees terminated during the three months ended September 30, 2017, and an impairment charge of $0.4 million to write-down our laboratory equipment used in the production of trabodenoson to net realizable value, as we voluntarily discontinued our development of trabodenoson in July 2017.

General and administrative expenses

General and administrative expenses increased $1.6 million to $3.9 million for the three months ended September 30 , 2017, as compared to $2.3 million for the three months ended September 30, 2016. This increase primarily reflects $1.5 million of increased professional services fees related to the Proposed Merger and $0.4 million of increased legal expenses primarily related to our ongoing securities litigation that commenced in January of 2017 and patents. These increases are partially offset by decreased employee-related expenses of $0.2 million due to decreased headcount.

Interest expense

Interest expense consists of coupon interest and amortization of debt issuance costs related to our 2021 Convertible Notes which we issued in August 2016 and which are due in August 2021.

Interest income

Interest income increased $0.1 million to $0.2 million for the three months ended September 30, 2017, as compared to $0.1 million for the three months ended September 30, 2016, primarily due to higher interest rates.

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Comparison of the Nine Months Ended September 30, 2017 and 2016

The following table summarizes the results of our operations for the nine months ended September 30, 2017 and 2016:

Research and development expenses

Research and development expenses decreased $9.0 million to $13.5 million for the nine months ended September 30, 2017, as compared to $22.5 million for the nine months ended September 30, 2016. This decrease primarily reflects $6.9 million of decreased clinical expenses related to our Phase 3 trial, MATrX-1, for which top-line results were announced in January of 2017, partially offset by $1.0 million of increased clinical expenses and supplies related to our Phase 2 FDC clinical trial, which was not enrolling patients in the 2016 period. In addition, preclinical expense decreased $2.8 million due to reduced activity, employee-related expenses decreased $1.0 million due to reduced headcount and consulting costs decreased $0.6 million. These decreases are partially offset by $0.8 million of severance expense related to employees terminated during the nine months ended September 30, 2017, and an impairment charge of $0.4 million to write-down our laboratory equipment used in the production of trabodenoson to net realizable value, as we voluntarily discontinued our development of trabodenoson in July of 2017.

General and administrative expenses

General and administrative expenses increased $1.8 million to $9.0 million for the nine months ended September 30, 2017, as compared to $7.1 million for the nine months ended September 30, 2016. This increase primarily reflects $1.5 million of increased professional services fees related to the Proposed Merger, $0.5 million of increased legal expenses primarily related to our ongoing securities litigation that commenced in January of 2017 and patents, and $0.4 million of increased stock-based compensation expense primarily related to restricted stock units granted during the fourth quarter of 2016 and the first quarter of 2017. These increases are partially offset by decreased employee-related expenses of $0.3 million due to decreased headcount and $0.3 million of decreased consulting costs.

Interest expense

Interest expense consists of coupon interest and amortization of debt issuance costs related to our 2021 Convertible Notes which we issued in August 2016 and which are due in August 2021.

Interest income

Interest income increased $0.3 million to $0.6 million for the nine months ended September 30, 2017, as compared to $0.3 million for the nine months ended September 30, 2016, primarily due to higher interest rates.

Liquidity and Capital Resources

Since inception, we have incurred accumulated net losses and negative cash flows from our operations. We incurred a net loss of $24.6 million for the nine months ended September 30, 2017. As of September 30, 2017, we had an accumulated deficit of $263.5 million and $103.1 million of cash and cash equivalents and short-term investments. We are obligated to pay approximately $1.5 million of interest on the 2021 Convertible Notes on each February 1 and August 1 of 2017 through 2021, and on August 1, 2021 the full outstanding principal, currently $52.0 million, is due and payable.

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The following table summarizes our sources and uses of cash for each of the periods presented:

Net cash used in operating activities

Net cash used in operating activities was $23.1 million for the nine months ended September 30, 2017   and principally resulted from our net loss of $24.6 million and a $2.1 million net decrease in operating assets and liabilities, partially offset by $2.5 million in noncash stock-based compensation, $0.4 million of noncash interest expense and an impairment charge of $0.4 million related to the write-down of our laboratory equipment used in the production of trabodenoson to net realizable value, as we voluntarily discontinued our development of trabodenoson in July of 2017.

Net cash used in operating activities was $26.1 million for the nine months ended September 30, 2016, and principally resulted from our net loss of $29.9 million, partially offset by $2.0 million in noncash stock-based compensation and a $1.5 million net increase in operating assets and liabilities.

Net cash provided by (used in) investing activities

Net cash provided by investing activities was $42.5 million for the nine months ended September 30, 2017, and related primarily to $69.7 million of proceeds from the maturity of short-term investments, partially offset by the purchase of $27.2 million of short-term investments.

Net cash used in investing activities was $23.8 million for the nine months ended September 30, 2016, and related primarily to the purchase of $69.1 million of short-term investments and $45.6 million of proceeds from the maturity of short-term investments. Additionally, we purchased $0.3 million of property and equipment in the nine months ended September 30, 2016.

Net cash provided by financing activities

Net cash provided by financing activities was $52.9 million for the nine months ended September 30, 2016, and reflects net proceeds of $48.7 million from the issuance of our 2021 Convertible Notes and net proceeds of $4.0 million from the issuance of common stock pursuant to our ATM. 

Operating Capital Requirements

To date, we have not generated any revenue from product sales. We have discontinued development of trabodenoson and have entered into the Merger Agreement. We expect to continue to generate losses until the approval and consummation of the Proposed Merger, which is expected to occur in the first quarter of 2018, and thereafter if the Proposed Merger is not approved and consummated.

Contractual Obligations and Commitments

The following summarizes our significant contractual obligations as of September 30, 2017:

We enter into contracts in the normal course of business with CROs and contract manufacturers to assist in the performance of our research and development activities and other services and products for operating purposes. To the extent that these contracts

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provide for termination on notice, and therefore are cancelable contracts, they are not included in the table of contractual obligations and commitments.

In September 2017, we modified the employment agreements with certain of our current employees such that in the event of termination in connection with a CIC, we agreed to provide these employees severance payments, at each employee’s current monthly salary rate, and continued medical, dental and vision coverage pursuant to COBRA (of the employer’s portion of the premium cost), for up to six months, primarily depending on duration of service. In the event of a qualifying termination in connection with a CIC, we will pay severance costs to our Chief Executive Officer, Chief Medical Officer and Vice President, Finance, consisting of the following: (i) eighteen months, twelve months and six months of salary, respectively, at each person’s then-current monthly salary rate and (ii) continued medical, dental and vision coverage pursuant to COBRA (of the employer’s portion of the premium cost), for eighteen, twelve and six months, respectively. In addition, we have committed to pay to all seven remaining employees, if they are employees on the date of a CIC, a retention bonus, with the aggregate of all such retention bonuses equal to approximately $0.6 million.   

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 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.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

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 and cash equivalents of $49.1 million at September 30, 2017, consisting primarily of funds in money market accounts. We also had $54.0 million in short-term investments consisting of certificates of deposit, agency 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 a sudden change in market interest rates would have a material effect on the fair market value of our portfolio.

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 September 30, 2017, 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

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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 quarter ended September 30, 2017, 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

On January 6, 2017, a purported stockholder of the Company filed a putative class action in the U.S. District Court for the District of Massachusetts, captioned Whitehead v. Inotek Pharmaceuticals Corporation, et al., No. 1:17-cv-10025. An amended complaint was filed on July 10, 2017, and a second amended complaint was filed on September 5, 2017. The second amended complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 against the Company, David Southwell, and Rudolf Baumgartner based on allegedly false and misleading statements and omissions regarding our phase 2 and phase 3 clinical trials of trabodenoson. The lawsuit seeks, among other things, unspecified compensatory damages for purchasers of the Company’s common stock between July 23, 2015 and July 10, 2017, as well as interest and attorneys’ fees and costs. On October 6, 2017, defendants filed a motion to dismiss the second amended complaint.

From time to time, we may be subject to other 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.

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 Form 10-Q for the quarterly period ended September 30, 2017 and our Annual Report on Form 10-K for the year ended December 31, 2016, 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 stockholder approval and consummation and success of the Proposed Merger with Rocket Pharmaceuticals or other potential strategic alternatives. 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.

Risks Related to the Proposed Merger

If the Proposed Merger with Rocket is not consummated, Inotek’s business could suffer materially and Inotek’s stock price could decline.

The consummation of the Proposed Merger with Rocket is subject to a number of closing conditions, including approval by Inotek’s stockholders, approval by NASDAQ of Inotek’s application for initial listing of Inotek’s common stock in connection with the Proposed Merger, and other customary closing conditions. Inotek is targeting a closing of the transaction in the first quarter of 2018.

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If the Proposed Merger is not consummated, Inotek may be subject to a number of material risks, and its business and stock price could be adversely affected, as follows:

In addition, if the Merger Agreement is terminated and Inotek’s board of directors determines to seek another business combination, it may not be able to find a third party willing to provide equivalent or more attractive consideration than the consideration to be provided by each party in the Proposed Merger. In such circumstances, Inotek’s board of directors may elect to, among other things, divest all or a portion of Inotek’s business, or take the steps necessary to liquidate all of Inotek’s business and assets, and in either such case, the consideration that Inotek receives may be less attractive than the consideration to be received by Inotek pursuant to the Merger Agreement with Rocket.

Some of Inotek’s officers and directors have different interests that may influence them to support or approve the Proposed Merger.

Officers and directors of Inotek participate in arrangements that provide them with interests in the Proposed Merger that are different from its stockholders, including, among others, their continued service as a director of the combined company, retention and severance benefits, the acceleration of restricted stock and option vesting and continued indemnification. These interests, among others, may influence the officers and directors of Inotek to support or approve the Proposed Merger.

The Proposed Merger may be completed even though material adverse changes may result from the announcement of the Proposed Merger, industry-wide changes and other causes.

In general, either party can refuse to complete the Proposed Merger if there is a material adverse change affecting the other party between September 12, 2017, the date of the Merger Agreement, and the closing. However, some types of changes do not permit either party to refuse to complete the Proposed Merger, even if such changes would have a material adverse effect on Inotek or Rocket, to the extent they resulted from the following and do not have a materially disproportionate effect on Inotek or Rocket, as the case may be:

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If adverse changes occur but Inotek and Rocket must still complete the Proposed Merger, the combined company’s stock price may suffer.

The market price of the combined company’s common stock may decline as a result of the Proposed Merger.

The market price of the combined company’s common stock may decline as a result of the Proposed Merger for a number of reasons including if:

Inotek’s stockholders may not realize a benefit from the Proposed Merger commensurate with the ownership dilution they will experience in connection with the Proposed Merger.

If the combined company is unable to realize the strategic and financial benefits currently anticipated from the Proposed Merger, Inotek’s stockholders will have experienced substantial dilution of their ownership interest without receiving any commensurate benefit. Significant management attention and resources will be required to integrate the two companies. Delays in this process could adversely affect the combined company’s business, financial results, financial condition and stock price following the Proposed Merger. Even if the combined company were able to integrate the business operations successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, innovation and operational efficiencies that may be possible from this integration and that these benefits will be achieved within a reasonable period of time.

During the pendency of the Proposed Merger, Inotek may not be able to enter into a business combination with another party and will be subject to contractual limitations on certain actions because of restrictions in the Merger Agreement.

Covenants in the Merger Agreement impede the ability of Inotek or Rocket to make acquisitions or complete other transactions that are not in the ordinary course of business pending completion of the Proposed Merger. As a result, if the Proposed Merger is not completed, the parties may be at a disadvantage to their competitors. In addition, while the Merger Agreement is in effect and subject to limited exceptions, each party is prohibited from soliciting, initiating, encouraging or taking actions designed to facilitate any inquiries or the making of any proposal or offer that could lead to the entering into certain extraordinary transactions with any third party, such as a sale of assets, an acquisition of Inotek’s common stock, a tender offer for Inotek’s common stock, a merger or other business combination outside the ordinary course of business. Any such transactions could be favorable to such party’s stockholders.

The amount of merger consideration is dependent on amount of net cash of Inotek as of a certain determination date prior to closing.

Subject to the terms of the Merger Agreement, the percentage of the combined company that Inotek stockholders will own as of the closing of the Proposed Merger is subject to adjustment at the closing based on the level of Inotek’s net cash as of a certain

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determination date prior to closing. The level of net cash as of that determination date will be reduced by certain specified liabilities, as defined further in the Merger Agreement, including out-of-pocket costs in connection with any stockholder litigation filed against Inotek and related parties related to the Merger Agreement, including amounts payable to financial advisors and attorneys that are paid, incurred or expected to be incurred, payable or subject to reimbursement by Inotek. Thus, Inotek’s liabilities, including costs in defending against litigation, insofar as these liabilities reduce net cash, may reduce the percentage of the combined company that Inotek stockholders will own as of the closing of the Proposed Merger. Based on Inotek’s current level of net cash and taking into account Inotek’s projected expenses in connection with the proposed transaction, if the Proposed Merger were to close today, the stockholders of Inotek would own approximately 19% of the combined company on a fully-diluted basis and current Rocket shareholders would own approximately 81% of the combined company on a fully-diluted basis. However, in addition to the specified liabilities referenced above, any reductions in Inotek’s net cash balance caused by unexpected liabilities may also reduce the ownership percentage held by Inotek stockholders as of the closing of the Proposed Merger. There can be no assurances as to Inotek’s level of net cash between now and closing.

Because the lack of a public market for Rocket’s ordinary shares makes it difficult to evaluate the fairness of the Proposed Merger, Rocket’s shareholders may receive consideration in the Proposed Merger that is greater than or less than the fair market value of Rocket’s ordinary shares.

The outstanding share capital of Rocket is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Rocket. Since the percentage of Inotek’s equity to be issued to Rocket’s shareholders was determined based on negotiations between the parties, it is possible that the value of the Inotek’s common stock to be issued in connection with the Proposed Merger will be greater than the fair market value of Rocket. Alternatively, it is possible that the value of the shares of Inotek’s common stock to be issued in connection with the Proposed Merger will be less than the fair market value of Rocket.

The combined company will incur significant transaction costs as a result of the Proposed Merger, including investment banking, legal and accounting fees. In addition, the combined company will incur significant consolidation and integration expenses which cannot be accurately estimated at this time. These costs could include the possible relocation of certain operations from Massachusetts to other offices of the combined company as well as costs associated with terminating existing office leases and the loss of benefits of certain favorable office leases. Actual transaction costs may substantially exceed Rocket’s estimates and may have an adverse effect on the combined company’s financial condition and operating results.

The Proposed Merger is expected to result in a limitation on Inotek’s ability to utilize our net operating loss carryforward.

Under Section 382 of the Code, use of Inotek’s net operating loss carryforwards, which we refer to as NOLs, will be limited if Inotek experiences a cumulative change in ownership of greater than 50% in a moving three year period. Inotek will experience an ownership change as a result of the Proposed Merger and therefore its ability to utilize its NOLs and certain credit carryforwards remaining at the Effective Time will be limited. The limitation will be determined by the fair market value of Inotek’s common stock outstanding prior to the ownership change, multiplied by the applicable federal rate. Limitations imposed on Inotek’s ability to utilize NOLs could cause U.S. federal and state income taxes to be paid earlier than would be paid if such limitations were not in effect and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs.

The opinion received by Inotek’s board of directors from Perella Weinberg Partners has not been, and is not expected to be, updated to reflect changes in circumstances that may have occurred since the date of the opinion.

Perella Weinberg Partners delivered its opinion to the board of directors of Inotek that, as of September 12, 2017, and based upon and subject to the various assumptions made, procedures followed, matters considered and qualifications and limitations set forth in its opinion, the exchange ratio provided for in the Merger Agreement was fair, from a financial point of view, to Inotek. The opinion does not speak as of the time the Proposed Merger will be completed or any date other than the date of such opinion. The opinion does not reflect changes that may occur or may have occurred after the date of the opinion, including changes to the operations and prospects of Inotek or Rocket, changes in general market and economic conditions or regulatory or other factors. Any such changes may materially alter or affect the relative values of Inotek and Rocket. Perella Weinberg Partners does not have any obligation to update, revise or reaffirm its opinion to reflect subsequent developments and has not done so.

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Certain stockholders could attempt to influence changes within Inotek which could adversely affect Inotek’s operations, financial condition and the value of Inotek’s common stock.

Inotek’s stockholders may from time-to-time seek to acquire a controlling stake in Inotek, engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes. Campaigns by stockholders to effect changes at publicly-traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, and could disrupt Inotek’s operations and divert the attention of the Inotek board of directors and senior management from the pursuit of the Proposed Merger. These actions could adversely affect Inotek’s operations, financial condition, Inotek’s ability to consummate the Proposed Merger and the value of Inotek common stock.

Inotek and Rocket may become involved in securities litigation and stockholder litigation in connection with the Proposed Merger, and this could divert the attention of Inotek and Rocket management and harm the combined company’s business, and insurance coverage may not be sufficient to cover all related costs and damages.

Securities litigation or stockholder litigation frequently follows the announcement of certain significant business transactions, such as the sale of a business division or announcement of a business combination transaction. Inotek and Rocket may become involved in this type of litigation in connection with the Proposed Merger, and the combined company may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect the business of Inotek, Rocket and the combined company.

If we do not successfully consummate the Proposed Merger with Rocket, our board of directors may decide to pursue a dissolution and liquidation of our company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such liquidation as well as the amount of cash that will need to be reserved for commitments and contingent liabilities.

There can be no assurance that the Proposed Merger with Rocket will be successfully consummated. If not, our board of directors may decide to pursue a dissolution and liquidation of our company. In such an event, the amount of cash available for distribution to our stockholders will depend heavily on the timing of such decision and, ultimately, such liquidation, since the amount of cash available for distribution continues to decrease as we fund our operations while we evaluate our strategic alternatives. In addition, if our board of directors were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation of our company, we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provision for contingent and unknown obligations, prior to making any distributions in liquidation to our stockholders. Our commitments and contingent liabilities may include (i) regulatory and clinical obligations; (ii) obligations under our employment and related agreements with certain employees that provide for severance and other payments following a termination of employment occurring for various reasons, including a change in control of our company; (iii) potential litigation against us, and other various claims and legal actions arising in the ordinary course of business; (iv) non-cancelable facility lease obligations and (v) obligations to holders of our 2021 Convertible Notes. As a result of this requirement, a portion of our assets may need to be reserved pending the resolution of such obligations. In addition, we may be subject to litigation or other claims related to a dissolution and liquidation of our company. If a dissolution and liquidation were pursued, our board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of our common stock could lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of our company.

Our business to date has been almost entirely dependent on the success of trabodenoson, and we have recently decided to discontinue further development of trabodenoson and devote significant time and resources to identifying and evaluating strategic alternatives, including the Proposed Merger, which may not be successful.

To date, we have invested substantially all of our efforts and financial resources in the research and development of trabodenoson, which was our only product candidate to enter clinical trials. In July 2017, we voluntarily discontinued our development of trabodenoson in view of the results of our MATrX-1 Phase 3 clinical trial and Phase 2 FDC clinical trial of trabodenoson and latanoprost.

We are evaluating strategic alternatives with a goal to enhance stockholder value, including the Proposed Merger with Rocket, and have suspended further research and development activities to reduce operating expenses while we evaluate these opportunities.

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There can be no assurance that the Proposed Merger with Rocket will be approved and close or that if it is consummated would enhance shareholder value. There also can be no assurance that we will conduct further drug research or development activities in the future.

We are substantially dependent on our remaining employees to facilitate the Proposed Merger with Rocket.

Our ability to successfully complete the Proposed Merger with Rocket depends in large part on our ability to retain certain of our remaining personnel, particularly David P. Southwell, our President and Chief Executive Officer, Rudolf A. Baumgartner, M.D., our Executive Vice President and Chief Medical Officer, and Dale Ritter, our Vice President—Finance. Despite our efforts to retain these employees, one or more may terminate their employment with us on short notice. The loss of the services of any of these employees could potentially harm our ability to evaluate and pursue strategic alternatives, as well as fulfill our reporting obligations as a public company.

Risks Related to the Reverse Stock Split

The reverse stock split may not increase Inotek’s stock price over the long-term.

The principal purpose of the reverse stock split is to increase the per-share market price of Inotek’s common stock above the minimum bid price requirement under the NASDAQ Listing Rules so that the listing of the combined company and the shares of Inotek common stock being issued in the Proposed Merger on either NASDAQ Global Market or NASDAQ Capital Market will be approved. It cannot be assured, however, that the reverse stock split will accomplish this objective for any meaningful period of time. While it is expected that the reduction in the number of outstanding shares of common stock will proportionally increase the market price of Inotek’s common stock, it cannot be assured that the reverse stock split will increase the market price of its common stock by a multiple of the reverse stock split ratio chosen by its board of directors in its sole discretion, or result in any permanent or sustained increase in the market price of Inotek’s common stock, which is dependent upon many factors, including Inotek’s business and financial performance, general market conditions, and prospects for future success. Thus, while the stock price of the combined company might meet the continued listing requirements for the NASDAQ Capital Market or the NASDAQ Global Market initially, it cannot be assured that it will continue to do so.

The reverse stock split may decrease the liquidity of Inotek’s common stock.

Although the board of directors believes that the anticipated increase in the market price of Inotek’s common stock could encourage interest in its common stock and possibly promote greater liquidity for its stockholders, such liquidity could also be adversely affected by the reduced number of shares outstanding after the reverse stock split. The reduction in the number of outstanding shares may lead to reduced trading and a smaller number of market makers for Inotek’s common stock.

The reverse stock split may lead to a decrease in Inotek’s overall market capitalization.

Should the market price of Inotek’s common stock decline after the reverse stock split, the percentage decline may be greater, due to the smaller number of shares outstanding, than it would have been prior to the reverse stock split. A reverse stock split is often viewed negatively by the market and, consequently, can lead to a decrease in Inotek’s overall market capitalization. If the per share market price does not increase in proportion to the reverse stock split ratio, then the value of the combined company, as measured by its stock capitalization, will be reduced. In some cases, the per-share stock price of companies that have effected reverse stock splits subsequently declined back to pre-reverse split levels, and accordingly, it cannot be assured that the total market value of Inotek’s common stock will remain the same after the reverse stock split is effected, or that the reverse stock split will not have an adverse effect on Inotek’s stock price due to the reduced number of shares outstanding after the reverse stock split.

Risks Related to Our Financial Position and Need for Additional Capital

We currently have no source of revenue and may never become profitable.

We are a clinical-stage biopharmaceutical company with a limited operating history. Our ability to generate revenue and become profitable has depended upon our ability to successfully complete the development of our product candidates for the treatment of ocular diseases, including glaucoma, and obtain the necessary regulatory approvals for our product candidates. We have never been profitable, have no products approved for commercial sale and to date, have not generated any revenues from product sales. In July 2017, we voluntarily discontinued our development of our product candidate, trabodenoson, in view of the results of our MATrX-1 Phase 3 clinical trial and Phase 2 FDC clinical trial of trabodenoson and latanoprost. We have engaged Perella Weinberg as a financial advisor to assist us in pursuing the Proposed Merger. If the Proposed Merger is not approved and consummated, we plan to evaluate other strategic alternatives with a goal to enhance stockholder value. Even if we resume the development of product