10-Q 1 eypt-10q_20200331.htm 10-Q eypt-10q_20200331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2020  

OR

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

For the transition period from               to              

COMMISSION FILE NUMBER 000-51122

 

EyePoint Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

26-2774444

(I.R.S. Employer

Identification No.)

 

 

 

480 Pleasant Street

Watertown, MA

(Address of principal executive offices)

 

02472

(Zip Code)

(617) 926-5000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

 

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001

EYPT

The Nasdaq Stock Market LLC

 

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

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

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

 

Large accelerated filer 

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

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

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

There were 124,741,832 shares of the registrant’s common stock, $0.001 par value, outstanding as of May 1, 2020.

 

 


EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Unaudited Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – March 31, 2020 and December 31, 2019

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss – Three months ended March 31, 2020 and 2019

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity – Three months ended March 31, 2020 and 2019

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Three months ended March 31, 2020 and 2019

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

36

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

36

 

 

 

 

 

PART II: OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

37

 

 

 

 

 

Item 1A.

 

Risk Factors

 

37

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

38

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

39

 

 

 

 

 

Item 5.

 

Other Information

 

39

 

 

 

 

 

Item 6.

 

Exhibits

 

40

 

 

 

 

 

Signatures

 

42

 

 

 

 

 

Certifications

 

 

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1.

Unaudited Financial Statements

 

EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands except share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

26,299

 

 

$

22,214

 

Accounts and other receivables, net

 

 

14,390

 

 

 

11,368

 

Prepaid expenses and other current assets

 

 

5,647

 

 

 

5,997

 

Inventory

 

 

3,358

 

 

 

2,138

 

Total current assets

 

 

49,694

 

 

 

41,717

 

Property and equipment, net

 

 

425

 

 

 

357

 

Operating lease right-of-use assets

 

 

2,967

 

 

 

3,078

 

Intangible assets, net

 

 

27,054

 

 

 

27,669

 

Restricted cash

 

 

150

 

 

 

150

 

Total assets

 

$

80,290

 

 

$

72,971

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,158

 

 

$

4,192

 

Accrued expenses

 

 

4,559

 

 

 

6,832

 

Deferred revenue

 

 

30

 

 

 

15

 

Other current liabilities

 

 

551

 

 

 

481

 

Total current liabilities

 

 

10,298

 

 

 

11,520

 

Long-term debt

 

 

47,716

 

 

 

47,223

 

Operating lease liabilities - noncurrent

 

 

2,764

 

 

 

2,898

 

Other long-term liabilities

 

 

3,038

 

 

 

3,000

 

Total liabilities

 

 

63,816

 

 

 

64,641

 

Contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares

   issued and outstanding

 

 

 

 

 

 

Common stock, $.001 par value, 150,000,000 shares authorized at March 31, 2020 and December 31, 2019; 124,741,832 and 109,417,322 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

125

 

 

 

109

 

Additional paid-in capital

 

 

493,969

 

 

 

472,667

 

Accumulated deficit

 

 

(478,460

)

 

 

(465,286

)

Accumulated other comprehensive income

 

 

840

 

 

 

840

 

Total stockholders' equity

 

 

16,474

 

 

 

8,330

 

Total liabilities and stockholders' equity

 

$

80,290

 

 

$

72,971

 

 

See notes to consolidated financial statements

3


EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

Product sales, net

 

$

4,687

 

 

$

1,227

 

License and collaboration agreement

 

 

2,020

 

 

 

65

 

Royalty income

 

 

782

 

 

 

720

 

Total revenues

 

 

7,489

 

 

 

2,012

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of sales, excluding amortization of acquired intangible assets

 

 

980

 

 

 

330

 

Research and development

 

 

4,853

 

 

 

3,797

 

Sales and marketing

 

 

8,125

 

 

 

7,311

 

General and administrative

 

 

4,360

 

 

 

4,610

 

Amortization of acquired intangible assets

 

 

615

 

 

 

615

 

Total operating expenses

 

 

18,933

 

 

 

16,663

 

Loss from operations

 

 

(11,444

)

 

 

(14,651

)

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest and other income, net

 

 

54

 

 

 

243

 

Interest expense

 

 

(1,784

)

 

 

(1,020

)

Loss on extinguishment of debt

 

 

 

 

 

(3,810

)

Total other expense, net

 

 

(1,730

)

 

 

(4,587

)

Net loss

 

$

(13,174

)

 

$

(19,238

)

Net loss per share - basic and diluted

 

$

(0.11

)

 

$

(0.20

)

Weighted average shares outstanding - basic and diluted

 

 

115,530

 

 

 

95,452

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(13,174

)

 

$

(19,238

)

Foreign currency translation adjustments

 

 

 

 

 

 

Comprehensive loss

 

$

(13,174

)

 

$

(19,238

)

 

See notes to consolidated financial statements

4


EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Number of

 

 

Par Value

 

 

Paid-In

 

 

Accumulated

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Income

 

 

Equity

 

Balance at January 1, 2019

 

 

95,372,236

 

 

$

95

 

 

$

445,192

 

 

$

(408,493

)

 

$

839

 

 

$

37,633

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(19,238

)

 

 

 

 

 

(19,238

)

Exercise of stock options

 

 

141,760

 

 

 

1

 

 

 

263

 

 

 

 

 

 

 

 

 

264

 

Vesting of stock units

 

 

40,232

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

 

 

(20

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,238

 

 

 

 

 

 

 

 

 

1,238

 

Balance at March 31, 2019

 

 

95,554,228

 

 

$

96

 

 

$

446,673

 

 

$

(427,731

)

 

$

839

 

 

$

19,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2020

 

 

109,417,322

 

 

$

109

 

 

$

472,667

 

 

$

(465,286

)

 

$

840

 

 

$

8,330

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(13,174

)

 

 

 

 

 

(13,174

)

Issuance of stock, net of issue costs

 

 

15,000,000

 

 

 

15

 

 

 

19,975

 

 

 

 

 

 

 

 

 

19,990

 

Employee stock purchase plan

 

 

161,660

 

 

 

1

 

 

 

186

 

 

 

 

 

 

 

 

 

187

 

Vesting of stock units

 

 

162,850

 

 

 

 

 

 

(19

)

 

 

 

 

 

 

 

 

(19

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,160

 

 

 

 

 

 

 

 

 

1,160

 

Balance at March 31, 2020

 

 

124,741,832

 

 

$

125

 

 

$

493,969

 

 

$

(478,460

)

 

$

840

 

 

$

16,474

 

 

 

See notes to consolidated financial statements

5


EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(13,174

)

 

$

(19,238

)

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

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

 

615

 

 

 

615

 

Depreciation of property and equipment

 

 

33

 

 

 

44

 

Amortization of debt discount

 

 

171

 

 

 

140

 

Non-cash interest expense

 

 

323

 

 

 

112

 

Loss on extinguishment of debt

 

 

 

 

 

3,810

 

Stock-based compensation

 

 

1,160

 

 

 

1,238

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable and other current assets

 

 

(2,320

)

 

 

(2,046

)

Inventory

 

 

(1,221

)

 

 

(607

)

Accounts payable and accrued expenses

 

 

(1,944

)

 

 

2,593

 

Right-of-use assets and operating lease liabilities

 

 

(3

)

 

 

35

 

Deferred revenue

 

 

15

 

 

 

(30

)

Net cash used in operating activities

 

 

(16,345

)

 

 

(13,334

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(16

)

 

 

(182

)

Net cash used in investing activities

 

 

(16

)

 

 

(182

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of stock, net of issuance costs

 

 

20,285

 

 

 

 

Proceeds from issuance of long-term debt

 

 

 

 

 

35,000

 

Payment of debt issue costs

 

 

 

 

 

(894

)

Payment of long-term debt principal

 

 

 

 

 

(20,000

)

Payment of extinguishment of debt costs

 

 

 

 

 

(2,716

)

Net settlement of stock units to satisfy statutory tax withholding

 

 

(19

)

 

 

(20

)

Proceeds from exercise of stock options and employee stock purchase plan

 

 

187

 

 

 

264

 

Principal payments on finance lease obligations

 

 

(7

)

 

 

 

Net cash provided by financing activities

 

 

20,446

 

 

 

11,634

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

4,085

 

 

 

(1,882

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

22,364

 

 

 

45,411

 

Cash, cash equivalents and restricted cash at end of period

 

$

26,449

 

 

$

43,529

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash interest paid

 

$

1,290

 

 

$

1,111

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Stock issuance costs

 

 

295

 

 

 

 

Debt issue costs

 

 

 

 

 

222

 

Accrued term loan exit fee

 

 

 

 

 

2,100

 

Principal portion of finance lease liabilities

 

 

7

 

 

 

 

 

See notes to consolidated financial statements

6


EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.

Operations and Basis of Presentation  

Overview

The accompanying condensed consolidated financial statements of EyePoint Pharmaceuticals, Inc. and subsidiaries (collectively, the “Company”) as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 are unaudited. Certain information in the footnote disclosures of these financial statements has been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2019, and include all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair presentation of the Company’s financial position, results of operations, comprehensive loss and cash flows for the periods indicated. The preparation of financial statements in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires management to make assumptions and estimates that affect, among other things, (i) reported amounts of assets and liabilities; (ii) disclosure of contingent assets and liabilities at the date of the consolidated financial statements; and (iii) reported amounts of revenues and expenses during the reporting period. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year or any future period.

The Company is a pharmaceutical company committed to developing and commercializing innovative ophthalmic products for the treatment of serious eye disorders. The Company has two products, YUTIQ® and DEXYCU®, which were approved by the U.S. Food and Drug Administration (“FDA”) in 2018.

YUTIQ (fluocinolone acetonide intravitreal implant) 0.18 mg for intravitreal injection, was launched directly in the U.S. in February 2019. YUTIQ is indicated for the treatment of chronic non-infectious uveitis affecting the posterior segment of the eye, which affects between 60,000 to 100,000 people in the U.S. each year and causes approximately 30,000 new cases of blindness every year, making it the third leading cause of blindness. Injected into the eye in an office visit, YUTIQ is a micro-insert that delivers a micro-dose of a corticosteroid to the back of the eye on a sustained constant (zero order release) basis for up to 36 months. YUTIQ is based on the Company’s proprietary Durasert® sustained-release drug delivery technology platform, which can deliver drugs for predetermined periods of time ranging from months to years.

DEXYCU (dexamethasone intraocular suspension) 9%, for intraocular administration, was launched directly in the U.S. in March 2019.  Indicated for the treatment of post-operative ocular inflammation, DEXYCU is administered as a single dose at the end of ocular surgery and is the first long-acting intraocular product approved by the FDA for this indication. DEXYCU utilizes the Company’s proprietary Verisome® drug-delivery platform, which allows for a single intraocular injection that releases dexamethasone, a corticosteroid, over time. There were approximately 3.8 million cataract surgeries performed during 2018 in the U.S. and the Company launched DEXYCU with a primary focus on its use following cataract surgery. The Company acquired DEXYCU in connection with its acquisition of Icon Bioscience, Inc. (“Icon”) in March 2018 (the Icon Acquisition”).

ILUVIEN® for diabetic macular edema (“DME”), the Company’s licensed product, is sold directly in the U.S. and several European Union (“EU”) countries by Alimera Sciences, Inc. (“Alimera”). In July 2017, the Company expanded its license agreement with Alimera to include the uveitis indication utilizing the Durasert technology in Europe, the Middle East and Africa (“EMEA”), which received European regulatory approval in March 2019 and, subject to obtaining pricing and reimbursement in each applicable country, will be marketed as ILUVIEN.

EYP-1901, 6-Month bioerodible Durasert Vorolanib – Tyrosine Kinase Inhibitor (“TKI”) is being advanced as a potential treatment for wet age-related macular degeneration (“wAMD”) with potential in diabetic retinopathy (“DR”) and retinal vein occlusion (“RVO”). The Company has completed initial animal pharmacokinetic and toxicology studies before 2020 and initiated GLP toxicology studies in March 2020 to support the anticipated filing of an Investigational New Drug application with the FDA later this year, with a Phase 1 clinical trial scheduled to follow shortly afterwards.    

7


Liquidity

The Company has a history of operating losses and has not had significant recurring cash inflows from revenue. The Company’s operations have been financed primarily from sales of its equity securities, issuance of debt and a combination of license fees, milestone payments, royalty income and other fees received from its collaboration partners. In the first quarter of 2019, the Company commenced the U.S. launch of its first two commercial products, YUTIQ and DEXYCU. However, management does not yet have sufficient historical evidence to assert that it is probable that the Company will receive sufficient revenues from its product sales to fund operations. As of March 31, 2020, the Company has had recurring operating losses since its inception and has an accumulated deficit of approximately $478.5 million and working capital of $39.4 million. The Company had cash and cash equivalents of $26.3 million at March 31, 2020.

Accordingly, the foregoing conditions, taken together, continue to raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company’s plans that are intended to mitigate those conditions include continuing to fulfill its funding needs through cash inflows from revenue of YUTIQ and DEXYCU product sales, licensing arrangements, additional capital raises or other arrangements. The Company’s plans also include a restructuring plan and curtailing expenses to conserve cash in response to a significant decline in product demand associated with shut-downs of customer facilities and postponements of elective surgical procedures and physician office visits in response to the COVID-19 coronavirus pandemic (the “Pandemic”).  On April 8, 2020, the Company submitted an application through Silicon Valley Bank for the Paycheck Protection Program Loan (the “PPP Loan”) that is administered by the U.S. Small Business Administration (the “SBA”), under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On April 22, 2020, the Company received the PPP Loan proceeds of $2.0 million. The Company believes that its cash and cash equivalents of $26.3 million at March 31, 2020, the PPP Loan proceeds of $2.0 million received on April 22, 2020, and expected cash inflows under its product sales and royalty agreements coupled with cash conservation activities will enable the Company to fund its current and planned operations into 2021 under current assumptions for the duration of the COVID-19-related closures across the U.S. Although the Company believes such plans, if executed, should provide the Company sufficient financing to meet its needs, there is no assurance that additional funding will be achieved and that the Company will succeed in its future operations. Actual cash requirements could differ from management’s projections due to many factors, including the success of commercialization for YUTIQ and DEXYCU, the actual costs of these commercialization efforts, additional investments in research and development programs, competing technological and market developments and the costs of any strategic acquisitions and/or development of complementary business opportunities.

Recently Adopted and Recently Issued Accounting Pronouncements

New accounting pronouncements are issued periodically by the Financial Accounting Standards Board (“FASB”) and are adopted by the Company as of the specified effective dates. Unless otherwise disclosed below, the Company believes that recently issued and adopted accounting pronouncements will not have a material impact on the Company’s financial position, results of operations and cash flows or do not apply to the Company’s operations.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”): Measurement of Credit Losses on Financial Instruments, to replace the current incurred loss impairment methodology for financial assets measured at amortized cost with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information, including forecasted information, to develop credit loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018. The Company adopted ASU 2016-13 on January 1, 2020. The adoption of this standard did not have a material impact on its consolidated financial statements.

8


In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) (“ASU 2019-12”): Simplifying the Accounting for Income Taxes. The amendments simplify the accounting for income taxes by removing certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. This standard will be effective for the Company in the first quarter of its fiscal year ending December 31, 2021. The Company is currently evaluating the impact the adoption of this update will have on its consolidated financial statements.

2.

Summary of Significant Accounting Policies

Revenue Recognition

Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, Revenue from Contracts with Customers (“ASC 606”), the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract, determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Sales, value add, and other taxes collected on behalf of third parties are excluded from revenue.

Product sales, net — The Company sells YUTIQ and DEXYCU to a limited number of specialty distributors and specialty pharmacies (collectively the “Distributors”) in the U.S., with whom the Company has entered into formal agreements, for delivery to physician practices for YUTIQ and to hospital outpatient departments and ambulatory surgical centers for DEXYCU. The Company recognizes revenue on sales of its products when a customer obtains control of the products, which occurs at a point in time, typically upon delivery. In addition to distribution agreements with customers, the Company also enters into arrangements with healthcare providers and payors that provide for government mandated and/or privately negotiated rebates, chargebacks, and discounts with respect to the purchase of the Company’s products.

Reserves for variable consideration Product sales are recorded at the wholesale acquisition costs, net of applicable reserves for variable consideration. Components of variable consideration include trade discounts and allowances, provider chargebacks and discounts, payor rebates, product returns, and other allowances that are offered within contracts between the Company and its Distributors, payors, and other contracted purchasers relating to the Company’s product sales. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified either as reductions of product revenue and accounts receivable or a current liability, depending on how the amount is to be settled. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts.  Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the estimates, the Company adjusts these estimates, which would affect product revenue and earnings in the period such variances become known.

Distribution fees The Company compensates its Distributors for services explicitly stated in the Company’s contracts and are recorded as a reduction of revenue in the period the related product sale is recognized.

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Provider chargebacks and discounts Chargebacks are discounts that represent the estimated obligations resulting from contractual commitments to sell products at prices lower than the list prices charged to the Company’s Distributors. These Distributors charge the Company for the difference between what they pay for the product and the Company’s contracted selling price. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.  Reserves for chargebacks consist of amounts that the Company expects to pay for units that remain in the distribution channel inventories at each reporting period-end that the Company expects will be sold under a contracted selling price, and chargebacks that Distributors have claimed, but for which the Company has not yet settled.

Government rebates — The Company is subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities on the condensed consolidated balance sheets. The Company’s liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.

Payor rebates — The Company contracts with certain private payor organizations, primarily insurance companies, for the payment of rebates with respect to utilization of its products. The Company estimates these rebates and records such estimates in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.

Co-Payment assistance — The Company offers co-payment assistance to commercially insured patients meeting certain eligibility requirements. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue.

Product returns — The Company generally offers a limited right of return based on its returned goods policy, which includes damaged product and remaining shelf life. The Company estimates the amount of its product sales that may be returned and records this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as reductions to trade receivables, net on the condensed consolidated balance sheets.

License and collaboration agreement revenue — The Company analyzes each element of its license and collaboration arrangements to determine the appropriate revenue recognition. The terms of the license agreement may include payment to the Company of non-refundable up-front license fees, milestone payments if specified objectives are achieved, and/or royalties on product sales. The Company recognizes revenue from upfront payments at a point in time, typically upon fulfilling the delivery of the associated intellectual property to the customer.

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

The Company recognizes sales-based milestone payments as revenue upon the achievement of the cumulative sales amount specified in the contract in accordance with ASC 606-10-55-65. For those milestone payments which are contingent on the occurrence of particular future events, the Company determines that these need to be considered for inclusion in the calculation of total consideration from the contract as a component of variable consideration using the most-likely amount method. As such, the Company assesses each milestone to determine the probability and substance behind achieving each milestone. Given the inherent uncertainty associated with these future events, the Company will not recognize revenue from such milestones until there is a high probability of occurrence, which typically occurs near or upon achievement of the event.

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of March 31, 2020.

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Royalties — The Company recognizes revenue from license arrangements with its commercial partners’ net sales of products. Such revenues are included as royalty income. In accordance with ASC 606-10-55-65, royalties are recognized when the subsequent sale of the commercial partner’s products occurs. The Company’s commercial partners are obligated to report their net product sales and the resulting royalty due to the Company typically within 60 days from the end of each quarter. Based on historical product sales, royalty receipts and other relevant information, the Company recognizes royalty income each quarter and subsequently determines a true-up when it receives royalty reports and payment from its commercial partners. Historically, these true-up adjustments have been immaterial.

Feasibility Studies — The Company recognizes revenue over the term of the statements of work under any funded feasibility study agreements. Revenue recognition for consideration, if any, related to a license option right is assessed based on the terms of any such future license agreement or is otherwise recognized at the completion of the feasibility study agreement.

Please refer to Note 3 for further details on the license and collaboration agreements into which the Company has entered and corresponding amounts of revenue recognized during the current and prior year periods.

Cost of sales, excluding amortization of acquired intangible assets — Cost of sales, excluding amortization of acquired intangible assets, consist of costs associated with the manufacture of YUTIQ and DEXYCU, certain period costs, product shipping and, as applicable, royalty expense. The inventory costs for YUTIQ include purchases of various components, the active pharmaceutical ingredient (“API”) and internal labor and overhead for the product manufactured in the Company’s Watertown, MA facility. The inventory costs for DEXYCU include purchased components, the API and third-party manufacturing and assembly. Capitalization of inventory costs begins after FDA approval of the product. Prior thereto, inventory costs of products and product candidates are recorded as research and development expense, even if this inventory may later be sold as commercial product.

For the three months ended March 31, 2020 and 2019, the Company accrued sales-based royalty expense of $517,000 and $99,000 respectively, as a component of cost of sales. $400,000 of accrued sales-based royalty expense during the three months ended March 31,  2020 was related to the partnering income in connection with the Icon Acquisition of Icon Bioscience, Inc. in March 2018.

      

 

 

 

 

   

 

 

  

 

  

 

 

 

 

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3.

Revenue

 

Product Revenue Reserves and Allowances

The Company’s product revenues have been primarily from sales of YUTIQ and DEXYCU in the U.S., which it began shipping to its customers in February 2019 and March 2019, respectively.

Net product revenues by product for the three months ended March 31, 2020 and 2019, respectively, were as follows (in thousands):

 

 

Three Months

Ended

 

 

Three Months

Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

YUTIQ

 

$

3,575

 

 

$

543

 

DEXYCU

 

 

1,112

 

 

 

684

 

Total product sales, net

 

$

4,687

 

 

$

1,227

 

 

 

The following table summarizes activity in each of the product revenue allowance and reserve categories for the three months ended March 31, 2020 and 2019, respectively (in thousands):

 

 

 

Chargebacks,

Discounts

 

 

Government

and Other

 

 

 

 

 

 

 

 

 

 

 

and Fees

 

 

Rebates

 

 

Returns

 

 

Total

 

Beginning balance at January 1, 2020

 

$

1,618

 

 

$

271

 

 

$

352

 

 

$

2,241

 

Provision related to sales in the current year

 

 

612

 

 

 

175

 

 

 

261

 

 

 

1,048

 

Adjustments related to prior period sales

 

 

(267

)

 

 

 

 

 

50

 

 

 

(217

)

Deductions applied and payments made

 

 

(639

)

 

 

(262

)

 

 

(195

)

 

 

(1,096

)

Ending balance at March 31, 2020

 

$

1,324

 

 

$

184

 

 

$

468

 

 

$

1,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chargebacks,

Discounts

 

 

Government

and Other

 

 

 

 

 

 

 

 

 

 

 

and Fees

 

 

Rebates

 

 

Returns

 

 

Total

 

Beginning balance at January 1, 2019

 

$

 

 

$

 

 

$

 

 

$

 

Provision related to sales in the current year

 

 

189

 

 

 

76

 

 

 

 

 

 

265

 

Adjustments related to prior period sales

 

 

 

 

 

 

 

 

 

 

 

 

Deductions applied and payments made

 

 

(8

)

 

 

 

 

 

 

 

 

(8

)

Ending balance at March 31, 2019

 

$

181

 

 

$

76

 

 

$

 

 

$

257

 

 

Returns are recorded as a reduction of accounts receivable on the condensed consolidated balance sheets. Chargebacks, discounts and fees and rebates are recorded as a component of accrued expenses on the condensed consolidated balance sheets (See Note 5).

 

License and Collaboration Agreements and Royalty Income

Alimera

Pursuant to a licensing and development agreement, as amended, Alimera Sciences, Inc. has a worldwide exclusive license to make and sell ILUVIEN in return for royalties based on sales and patent fee reimbursements. Royalties income was $782,000 and $516,000 for the three months ended March 31, 2020 and 2019, respectively. Total revenue was $817,000 and $551,000 for the three months ended March 31, 2020 and 2019, respectively.

Ocumension Therapeutics

In November 2018, the Company entered into an exclusive license agreement with Ocumension Therapeutics (“Ocumension”) for the development and commercialization of its three-year micro insert using the Durasert technology for the treatment of chronic non-infectious uveitis affecting the posterior segment of the eye (YUTIQ in

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the U.S.) in Mainland China, Hong Kong, Macau and Taiwan. The Company received a one-time upfront payment of $1.75 million from Ocumension and is eligible to receive up to (i) $7.25 million upon the achievement by Ocumension of certain prescribed development and regulatory milestones, and (ii) $3.0 million commercial sales-based milestones. In addition, the Company is entitled to receive mid-single digit sales-based royalties. Ocumension has also received a special approval by the Hainan Province People's Government to market this product for chronic, non-infectious posterior segment uveitis in the Hainan Bo Ao Lecheng International Medical Tourism Pilot Zone (“Hainan Pilot Zone”). In March 2019, the Company entered into a Memorandum of Understanding (“MOU”), pursuant to which, the Company will supply product for the clinical trials and Hainan Pilot Zone use. Paralleling to Ocumension’s normal registration process of the product with the Chinese Regulatory Authorities, the MOU modified the Company’s entitlement to the development and regulatory milestones of up to $7.25 million under the license agreement to product supply milestones or development milestones, whichever comes first, totaling up to $7.25 million. In August 2019, the Company began shipping this product to Ocumension.

The Company was required to provide a fixed number of hours of technical assistance support to Ocumension at no cost, which support has been completed and no future performance obligation exists. Ocumension is responsible for all development, regulatory and commercial costs, including any additional technical assistance requested. Ocumension has a first right of negotiation for an additional exclusive license to the Company’s shorter-duration line extension candidate for this indication.

In August 2019, the Company received a $1.0 million development milestone payment from Ocumension triggered by the approval of its Investigational New Drug (“IND”) in China for this program. The IND allows the importation of finished product into China for use in a clinical trial to support regulatory filing.

In January 2020, the Company entered into an exclusive license agreement with Ocumension for the development and commercialization in Mainland China, Hong Kong, Macau and Taiwan of DEXYCU for the treatment of post-operative inflammation following ocular surgery. Pursuant to the terms of the license agreement, the Company received upfront payments of $2.0 million from Ocumension in February 2020 and will be eligible to receive up to (i) $6.0 million upon the achievement by Ocumension of certain prescribed development and regulatory milestones, and (ii) $6.0 million commercial sales-based milestones. In addition, the Company is entitled to receive mid-single digit sales-based royalties. In exchange, Ocumension will receive exclusive rights to develop and commercialize DEXYCU in Mainland China, Hong Kong, Macau and Taiwan, at its own cost and expense with the Company supplying product for clinical trials and commercial sale. In addition, Ocumension will receive a fixed number of hours of technical assistance support from the Company at no cost.

Other than a fixed number of hours of technical assistance support to be provided at no cost by the Company, Ocumension is responsible for all development, regulatory and commercial costs, including any additional technical assistance requested. During the three months ended March 31, 2020, the Company recognized approximately $2.0 million of license and collaboration revenue. The remaining balance of $30,000 attributable to the Company’s technical assistance obligation has been recorded as current deferred revenue in the accompanying consolidated balance sheet.

During the three months ended March 31, 2019, the Company recognized revenue of $30,000 attributable to the Company’s technical assistance for the development and commercialization of its three-year micro insert using the Durasert technology for the treatment of chronic non-infectious uveitis affecting the posterior segment of the eye. As of March 31, 2020 and December 31, 2019, no deferred revenue was recorded for this agreement, respectively.

The Company recorded sales-based royalty expense of $400,000 during the three months ended March 31,  2020, with respect to partnering income in connection with the ICON acquisition in March 2018.

Research Agreements

The Company from time to time enters into funded agreements to evaluate the potential use of its technology systems for sustained release of third-party drug candidates in the treatment of various diseases. Consideration received is generally recognized as revenue over the term of the feasibility study agreement. Revenue recognition for consideration, if any, related to a license option right is assessed based on the terms of any such future license agreement or is otherwise recognized at the completion of the feasibility study agreement.  Revenues under feasibility study agreements totaled $15,000 and $470,000 for the three months ended March 31, 2020 and 2019, respectively. At March 31, 2020 and December 31, 2019, $0 and $15,000 deferred revenue was recorded for the feasibility study agreements, respectively.

 

 

 

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4.

Intangible Assets

The reconciliation of intangible assets for the three months ended March 31, 2020 and 2019 was as follows (in thousands):

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Patented technologies

 

 

 

 

 

 

 

 

Gross carrying cost at beginning of period

 

$

68,322

 

 

$

68,322

 

Gross carrying cost at end of period

 

 

68,322

 

 

 

68,322

 

Accumulated amortization at beginning of period

 

 

(40,653

)

 

 

(38,193

)

Amortization expense

 

 

(615

)

 

 

(615

)

Accumulated amortization at end of period

 

 

(41,268

)

 

 

(38,808

)

Net book value at end of period

 

$

27,054

 

 

$

29,514

 

 

The Company amortizes intangible assets with finite lives on a straight-line basis over their respective estimated useful lives. Amortization of intangible assets totaled $615,000 for the three months ended March 31, 2020 and 2019, respectively.  

In connection with the Icon Acquisition in March 2018, the initial purchase price was attributed to the DEXYCU product intangible asset. This finite-lived intangible asset is being amortized on a straight-line basis over its expected remaining useful life of 11.0 years at the rate of approximately $2.5 million per year. Amortization expense was reported as a component of cost of sales for the three months ended March 31, 2020 and 2019.  

5.

Accrued Expenses

Accrued expenses consisted of the following at March 31, 2020 and December 31, 2019 (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Personnel costs

 

$

1,715

 

 

$

3,263

 

Clinical trial costs

 

 

56

 

 

 

345

 

Professional fees

 

 

429

 

 

 

700

 

Sales chargebacks, rebates and other revenue reserves

 

 

1,508

 

 

 

1,889

 

Other

 

 

851

 

 

 

635

 

 

 

$

4,559

 

 

$

6,832

 

 

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6.

Leases

On May 17, 2018, the Company amended the lease for its headquarters in Watertown, Massachusetts. The original five-year lease for approximately 13,650 square feet of combined office and laboratory space was set to expire in April 2019. Under the amendment, the Company leased an additional 6,590 square feet of rentable area of the building, with a commencement date of September 10, 2018. The amendment extended the term of the lease for the combined space through May 31, 2025. The landlord agreed to provide the Company a construction allowance of up to $670,750 to be applied toward the aggregate work completed on the total space. The Company has an option to further extend the term of the lease for one additional five-year period. Per the terms of the lease agreement, the Company does not have a residual value guarantee. The Company previously provided a cash-collateralized $150,000 irrevocable standby letter of credit as security for the Company’s obligations under the lease, which was extended through the period that is four months beyond the expiration date of the amended lease. The Company will also be required to pay its proportionate share of certain operating costs and property taxes applicable to the leased premises in excess of new base year amounts.

In July 2017, the Company leased approximately 3,000 square feet of office space in Basking Ridge, New Jersey under a lease term extending through June 2022, with two five-year renewal options at 95% of the then-prevailing market rates. In addition to base rent, the Company is obligated to pay its proportionate share of building operating expenses and real estate taxes in excess of base year amounts. In June 2018, the Company subleased an additional 1,381 square feet of adjoining space from Caladrius Biosciences, Inc. (“Caladrius”) through May 2022. The Chief Executive Officer of Caladrius is a director of the Company. Per the terms of the lease and sublease agreements, the Company does not have any residual value guarantees.

The Company identified and assessed the following significant assumptions in recognizing its right-of-use (“ROU”) assets and corresponding lease liabilities:

 

As the Company’s leases do not provide an implicit rate, the Company estimated the incremental borrowing rate in calculating the present value of the lease payments. The Company utilized the borrowing rate under its existing 5-year term loan facility (see Note 7) as the discount rate.

 

Since the Company elected to account for each lease component and its associated non-lease components as a single combined component, all contract consideration was allocated to the combined lease component.

 

The expected lease terms include noncancelable lease periods. Renewal option periods have not been included in the determination of the lease terms as they are not deemed reasonably certain of exercise.

 

Variable lease payments, such as common area maintenance, real estate taxes and property insurance are not included in the determination of the lease’s ROU asset or lease liability.

The Company enters into finance leases for laboratory equipment identified and assessed the following significant assumptions in recognizing its ROU assets and corresponding lease liabilities

As of March 31, 2020, the weighted average remaining term of the Company’s operating leases was 5.0 years and the lease liabilities arising from obtaining ROU assets reflect a weighted average discount rate of 12.5%.

Supplemental balance sheet information related to operating leases as of March 31, 2020 and December 31, 2019 are as follows (in thousands):

 

March 31,

 

 

December 31,

 

 

2020

 

 

2019

 

Other current liabilities - operating lease current portion

$

502

 

 

$

481

 

Operating lease liabilities – noncurrent portion

 

2,764

 

 

 

 

2,898

 

Total operating lease liabilities

$

3,266

 

 

$

3,379

 

 

 

 

 

 

 

 

 

 

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Operating lease expense recognized during the three months ended March 31, 2020 and 2019, related to ROU assets were $213,000 and $213,000, respectively, excluding $9,000 and $9,000 of variable lease costs, respectively, and were included in general and administrative expense in the Company’s statement of comprehensive loss. Cash paid for amounts included in the measurement of operating lease liabilities were $215,000 and $178,000, respectively, for the three months ended March 31, 2020 and 2019.

 

The Company is a party to a finance lease for laboratory equipment. The equipment lease expires on December 18, 2021.

 

Supplemental balance sheet information related to the finance lease as of March 31, 2020 is as follows (in thousands):

 

 

March 31,

 

 

2020

 

Property and equipment, at cost

$

100

 

Accumulated amortization

 

(14

)

Property and equipment, net

$

86

 

 

 

 

 

Other current liabilities finance lease current portion

$

49

 

Other long-term liabilities

 

38

 

Total finance lease liabilities

$

87

 

 

The components of finance lease expense recognized during the three months ended March 31, 2020 related to ROU assets was $14,000 and interest on lease liabilities was $3,000, respectively. Cash paid for amounts included in the measurement of finance lease liabilities were operating cash flows of $2,000 and financing cash flows of $7,000 for the three months ended March 31, 2020. The Company has no finance lease in 2019.

 

As of March 31, 2020, the weighted average remaining term of the Company’s finance lease was 1.7 years and the lease liabilities arising from obtaining ROU assets reflect a weighted average discount rate of 12.5%.  

The Company’s total future minimum lease payments under non-cancellable leases at March 31, 2020 were as follows (in thousands):

 

 

Operating Leases

 

 

Finance Leases

 

Remainder of 2020

$

652

 

 

$

42

 

2021

 

889

 

 

 

55

 

2022

 

849

 

 

 

 

2023

 

815

 

 

 

 

2024 and beyond

 

1,176

 

 

 

 

Total lease payments

$

4,381

 

 

$

97

 

Less imputed interest

 

(1,115

)

 

 

(10

)

Total

$

3,266

 

 

$

87

 

 

 

7.

Term Loan Agreements

CRG Term Loan Agreement

On February 13, 2019 (the “CRG Closing Date”), the Company entered into the CRG Loan Agreement among the Company, as borrower, CRG Servicing LLC, as administrative agent and collateral agent (the “Agent”), and the lenders party thereto from time to time (the “Lenders”), providing for a senior secured term loan of up to $60 million (the “CRG Loan”). On the CRG Closing Date, $35 million of the CRG Loan was advanced (the “CRG Initial Advance”). The Company utilized the proceeds from the CRG Initial Advance for the repayment in full of all outstanding obligations under its prior credit agreement (the “SWK Credit Agreement”) with SWK Funding LLC

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(“SWK”). In April 2019, the Company exercised its option to borrow an additional $15 million of the CRG Loan (the “CRG Second Advance”). The Company did not draw any additional funds under the CRG Loan by the final draw deadline of March 31, 2020.

The CRG Loan is due and payable on December 31, 2023 (the “Maturity Date”). The CRG Loan bears interest at a fixed rate of 12.5% per annum payable in arrears on the last business day of each calendar quarter. The Company is required to make quarterly, interest only payments until the Maturity Date. So long as no default has occurred and is continuing, the Company may elect on each applicable interest payment date to pay 2.5% of the 12.5% per annum interest as Paid In-Kind (“PIK”), whereby such PIK amount would be added to the aggregate principal amount and accrue interest at 12.5% per annum. Through March 31, 2020, total PIK amounts of $323,000 have been added to the principal balance of the CRG Loan. In addition, the Company is required to pay an upfront fee of 1.5% of amounts borrowed under the CRG Loan (excluding any paid-in-kind amounts), which is payable as amounts are advanced under the CRG Loan. The Company will also be required to pay an exit fee equal to 6% of (i) the aggregate principal amounts advanced and (ii) PIK amounts issued, under the CRG Loan Agreement. In connection with the CRG Initial Advance, a 1.5% financing fee of $525,000 and an expense reimbursement of $350,000 were deducted from the net borrowing proceeds. In connection with the CRG Second Advance, a 1.5% financing fee of $225,000 was deducted from the net borrowing proceeds.

Upon the occurrence of a bankruptcy-related event of default, all amounts outstanding with respect to the CRG Loan become due and payable immediately, and upon the occurrence of any other Event of Default (as defined in the CRG Loan Agreement), all or any amounts outstanding with respect to the CRG Loan may become due and payable upon request of the Agent or majority Lenders. Subject to certain exceptions, the Company is required to make mandatory prepayments of the CRG Loan with the proceeds of assets sales and in the event of a change of control of the Company. In addition, the Company may make a voluntary prepayment of the CRG Loan, in whole or in part, at any time. All mandatory and voluntary prepayments of the CRG Loan are subject to the payment of prepayment premiums as follows: (i) if prepayment occurs after December 31, 2019 and on or prior to December 31, 2020, 5% of the aggregate outstanding principal amount of the CRG Loan being prepaid and (ii) if prepayment occurs after December 31, 2020 and on or prior to December 31, 2021, an amount equal to 3% of the aggregate outstanding principal amount of the CRG Loan being prepaid. No prepayment premium is due on any principal prepaid after December 31, 2021. Certain of the Company’s existing and future subsidiaries are guaranteeing the obligations of the Company under the CRG Loan Agreement. The obligations of the Company under the CRG Loan Agreement and the guarantee of such obligations are secured by a pledge of substantially all of the Company’s and the guarantors’ assets.

The CRG Loan Agreement contains affirmative and negative covenants customary for financings of this type, including limitations on our and our subsidiaries’ abilities, among other things, to incur additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, pay dividends and distributions and enter into affiliate transactions, in each case, subject to certain exceptions. In addition, the CRG Loan Agreement contains the following financial covenants requiring the Company and the Guarantors to maintain:

 

liquidity in an amount which shall exceed the greater of (i) $5 million and (ii) to the extent the Company has incurred certain permitted debt, the minimum cash balance, if any, required of the Company by the creditors of such permitted debt; and

 

annual minimum product revenue from YUTIQ and DEXYCU: (i) for the twelve-month period beginning on January 1, 2019 and ending on December 31, 2019, of at least $15 million, (ii) for the twelve-month period beginning on January 1, 2020 and ending on December 31, 2020, of at least $45 million, (iii) for the twelve-month period beginning on January 1, 2021 and ending on December 31, 2021, of at least $80 million and (iv) for the twelve-month period beginning on January 1, 2022 and ending on December 31, 2022, of at least $90 million.

 

In November 2019, CRG waived the financial covenant associated with the Company’s revenue derived from sales of its products, DEXYCU and YUTIQ, for the twelve-month period ending December 31, 2019.

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The total debt discount related to the CRG Loan was approximately $4.3 million and consisted of (i) the accrual of a $3.0 million exit fee; (ii) the $750,000 upfront fee; and (iii) $591,000 of legal and other transaction costs. This amount is being amortized as additional interest expense over the term of the CRG Loan using the effective interest rate method.

Amortization of debt discount under the CRG Loan totaled $171,000 and $56,000 for the three months ended March 31, 2020 and 2019, respectively.

SWK Credit Agreement

On March 28, 2018(the “SWK Closing Date”), the Company entered into the SWK Credit Agreement among the Company, as borrower, SWK, as agent, and the lenders party thereto from time to time, providing for a senior secured term loan of up to $20 million (the “SWK Loan”). On the SWK Closing Date, $15 million of the SWK Loan was advanced (the “SWK Initial Advance”). The remaining $5 million of the SWK Loan was advanced on June 26, 2018 (the “SWK Additional Advance”).

In connection with the SWK Loan, the Company issued a warrant (the “SWK Warrant”) to the Agent to purchase (a) 409,091 shares of Common Stock (the “Initial Advance Warrant Shares”) at an exercise price of $1.10 per share and (b) 77,721 shares of Common Stock (the “Additional Advance Warrant Shares”) at an exercise price of $1.93 per share (see Note 10). The SWK Warrant is exercisable (i) with respect to the Initial Advance Warrant Shares, any time on or after the SWK Closing Date until the close of business on the 7-year anniversary of the SWK Initial Advance and (ii) with respect to the Additional Advance Warrant Shares, any time on or after the closing of the SWK Additional Advance until the close of business on the 7-year anniversary of the SWK Additional Advance. The Agent may exercise the SWK Warrant on a cashless basis at any time. In the event the Agent exercises the SWK Warrant on a cashless basis, the Company will not receive any proceeds.

The Additional Advance Warrant Shares were recorded as a liability at the Closing Date and were remeasured at fair value at each reporting period until the date of the SWK Additional Advance. The aggregate fair value of the Additional Advance Warrant Shares at the Closing Date was $69,000. The Initial Advance Warrant Shares were recorded as equity on the Company’s balance sheet at their relative fair value of $284,000. The remaining $14.6 million of the proceeds received were allocated to the SWK Initial Advance term loan. Upon the closing of the SWK Additional Advance in June 2018, the Additional Advance Warrant Shares were re-valued at $87,000 and reclassified to equity.

The total debt discount related to the SWK Initial Advance was $2.1 million and was comprised of (1) $1.8 million, which included a 1.5% upfront fee, a 6% exit fee (the “Exit Fee”) and legal and other transaction costs, which were ratably allocated to each of the two tranches of the SWK Loan based upon the total principal amount available to the Company under each tranche and (2) $353,000 related to the aggregate fair value of the Initial Advance Warrant Shares and the Additional Advance Warrant Shares. This amount was being amortized as additional interest expense over the term of the SWK Loan using the effective interest rate method.

The total debt issue costs related to the SWK Additional Advance was $299,000 and was comprised of the allocated portions of the 1.5% upfront fee and the Exit Fee.  This amount was recorded as a prepaid expense to be amortized ratably from the SWK Closing Date through December 31, 2018. Through the date of the SWK Additional Advance, $97,000 was amortized and the remaining balance of $202,000 was reclassified to debt discount in June 2018. Together with the 6% Exit Fee on the SWK Additional Advance and other transaction costs, total debt discount of $652,000 associated with the SWK Additional Advance was to be amortized over the remaining life of the SWK Additional Advance portion of the SWK Loan using the effective interest rate method.

The SWK Loan was originally scheduled to mature on March 27, 2023 and bore interest at a per annum rate of the three-month LIBOR rate (subject to a 1.5% floor) plus 10.50%.  On February 13, 2019, the Company repaid the SWK Loan in connection with the consummation of the CRG Loan Agreement. In addition to repayment of the $20 million principal balance, the Company paid (i) a $1.2 million prepayment penalty, (ii) the $1.2 million Exit Fee, (iii) accrued and unpaid interest of $664,000 through that date and (iv) an additional make-whole interest payment of $306,000 covering the additional period through what would have been the first anniversary of the SWK Loan. In connection with the prepayment of the SWK Loan, the Company recorded a loss on extinguishment of debt of $3.8 million in the three months ended March 31, 2019. In addition to the prepayment penalty and make-whole interest payment amounts, the loss on extinguishment of debt included the write-off of the remaining balance of unamortized debt discount of approximately $2.3 million.

18


Amortization of debt discount under the SWK Loan totaled $84,000 in the first quarter of 2019 through the SWK loan extinguishment date.

8.

Stockholders’ Equity

2020 Equity Financing

Share Offering

In February 2020, the Company sold 15,000,000 shares of common stock in an underwritten public offering at a price of $1.45 per share for gross proceeds of $21.75 million. Underwriter discounts and commissions and other share issue costs totaled approximately $1.8 million.

2019 Equity Financing

ATM Facility

In January 2019, the Company entered into an at-the-market program (the “ATM Program”). Pursuant to the ATM Program, under a Form S-3 shelf registration statement that was declared effective by the SEC in December 2018, the Company may, at its option, offer and sell shares of its Common Stock from time to time for an aggregate offering price of up to $20.0 million. The Company will pay the sales agent a commission of up to 3.0% of the gross proceeds from any future sales of such shares.

The Company did not sell any shares of its Common Stock pursuant to the ATM program during the three months ended March 31, 2020 and 2019.

Share Offering

In April 2019, the Company sold 10,526,500 shares of common stock in an underwritten public offering at a price of $1.90 per share for gross proceeds of $20.0 million. Underwriter discounts and commissions and other share issue costs totaled approximately $1.7 million.

Warrants to Purchase Common Shares

The following table provides a reconciliation of fixed price warrants to purchase shares of the Company’s Common Stock for the three months ended March 31, 2020 and 2019:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Average

 

 

 

Number of

 

 

Exercise

 

 

Number of

 

 

Exercise

 

 

 

Warrants

 

 

Price

 

 

Warrants

 

 

Price

 

Balance at beginning of period

 

 

486,812

 

 

$

1.23

 

 

 

486,812

 

 

$

1.23

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

Balance and exercisable at end of period

 

 

486,812

 

 

$

1.23

 

 

 

486,812

 

 

$

1.23

 

 

Pursuant to a credit agreement, the Company issued the SWK Warrant to purchase (i) 409,091 Initial Advance Warrant Shares on March 28, 2018 at an exercise price of $1.10 per share with a seven-year term and (ii) 77,721 Additional Advance Warrant Shares on June 26, 2018 at an exercise price of $1.93 per share with a seven-year term. At March 31, 2020, the weighted average remaining life of the warrants was approximately 5.03 years.

 

9.

Share-Based Payment Awards

Equity Incentive Plan

The 2016 Long-Term Incentive Plan (the “2016 Plan”), approved by the Company’s stockholders on December 12, 2016 (the “Adoption Date”), provides for the issuance of up to 3,000,000 shares of  the Company’s Common Stock reserved for issuance under the 2016 Plan plus any additional shares of the Company’s Common

19


Stock that were available for grant under the 2008 Incentive Plan (the “2008 Plan”) at the Adoption Date or would otherwise become available for grant under the 2008 Plan as a result of subsequent termination or forfeiture of awards under the 2008 Plan. At the Company’s Annual Meeting of Stockholders held on June 25, 2019, the Company’s stockholders approved an amendment to the 2016 Plan to increase the number of shares authorized for issuance by 11,000,000 shares. At March 31, 2020, a total of approximately 5.2 million shares were available for new awards.

Certain inducement awards, although not awarded under the 2016 Plan or the 2008 Plan, are subject to and governed by the terms and conditions of the 2016 Plan or 2008 Plan, as applicable.

Stock Options

The following table provides a reconciliation of stock option activity under the Company’s equity incentive plans and for inducement awards for the three months ended March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Remaining

 

 

Aggregate

 

 

 

Number

 

 

Exercise

 

 

Contractual

 

 

Intrinsic

 

 

 

of Options

 

 

Price

 

 

Life

 

 

Value

 

 

 

 

 

 

 

 

 

 

 

(in years)

 

 

(in thousands)

 

Outstanding at January 1, 2020

 

 

10,909,800

 

 

$

2.52