0001558370-20-009714.txt : 20200806 0001558370-20-009714.hdr.sgml : 20200806 20200806170809 ACCESSION NUMBER: 0001558370-20-009714 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 80 CONFORMED PERIOD OF REPORT: 20200630 FILED AS OF DATE: 20200806 DATE AS OF CHANGE: 20200806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Kala Pharmaceuticals, Inc. CENTRAL INDEX KEY: 0001479419 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 270604595 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38150 FILM NUMBER: 201082676 BUSINESS ADDRESS: STREET 1: 490 ARSENAL WAY STREET 2: SUITE 120 CITY: WATERTOWN STATE: MA ZIP: 02472 BUSINESS PHONE: 781-996-5252 MAIL ADDRESS: STREET 1: 490 ARSENAL WAY STREET 2: SUITE 120 CITY: WATERTOWN STATE: MA ZIP: 02472 10-Q 1 kala-20200630x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 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 001-38150

KALA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware

27-0604595

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

490 Arsenal Way, Suite 120

Watertown, MA

02472

(Address of principal executive offices)

(Zip Code)

(781) 996-5252

(Registrant’s telephone number, including area code)

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

Title of each class

Common Stock, $0.001 par value per share

Trading symbol(s)

KALA

Name of each exchange on which registered

The Nasdaq Global Select Market

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 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 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 56,059,865 shares of Common Stock, $0.001 par value per share, outstanding as of August 3, 2020.

TABLE OF CONTENTS

    

Page

PART I – FINANCIAL INFORMATION

3

Item 1.

Financial Statements (Unaudited)

3

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019

3

Condensed Consolidated Statement of Operations and Comprehensive Income for the three and six months ended June 30, 2020 and 2019

4

Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2020 and 2019

5

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

7

Notes to Condensed Consolidated Financial Statements

8

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

Item 4.

Controls and Procedures

38

PART II – OTHER INFORMATION

39

Item 1.

Legal Proceedings

39

Item 1A.

Risk Factors

40

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

90

Item 6.

Exhibits

91

SIGNATURES

92

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share amounts)

June 30, 

December 31, 

    

2020

    

2019

Assets

Current assets:

Cash and cash equivalents

$

128,023

$

85,449

Short-term investments

56,536

Accounts receivable, net

4,281

11,563

Inventory

5,711

4,648

Prepaid expenses and other current assets

2,473

3,824

Total current assets

197,024

105,484

Non-current assets:

Property and equipment, net

2,964

2,698

Long-term inventory

4,109

3,778

Right-of-use assets

28,829

29,781

Restricted cash

12,584

12,582

Total assets

$

245,510

$

154,323

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

1,548

$

2,518

Accrued expenses and other current liabilities

13,967

20,929

Current portion of lease liabilities

1,425

1,327

Total current liabilities

16,940

24,774

Long-term liabilities:

Long-term lease liabilities - less current portion

27,930

28,673

Long-term debt

71,697

71,184

Total long-term liabilities

99,627

99,857

Total liabilities

116,567

124,631

Commitments and Contingencies (Note 14)

Stockholders' equity:

Common stock, $0.001 par value; 120,000,000 shares authorized as of June 30, 2020 and December 31, 2019; 55,831,021 and 36,086,254 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively

56

36

Additional paid-in capital

469,627

325,112

Accumulated other comprehensive income

(17)

Accumulated deficit

(340,723)

(295,456)

Total stockholders' equity

128,943

29,692

Total liabilities and stockholders' equity

$

245,510

$

154,323

See accompanying notes to these unaudited condensed consolidated financial statements.

3

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except share and per share amounts)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Product revenues, net

$

833

$

2,057

$

1,904

$

3,443

Costs and expenses:

Cost of product revenues

759

352

1,113

593

Selling, general and administrative

15,301

17,007

30,709

35,243

Research and development

6,053

7,108

11,487

14,067

Total costs and expenses

22,113

24,467

43,309

49,903

Loss from operations

(21,280)

(22,410)

(41,405)

(46,460)

Other income (expense):

Interest and other income

102

646

400

1,402

Interest and other expense

(2,134)

(2,061)

(4,262)

(4,155)

Total interest and other expense

(2,032)

(1,415)

(3,862)

(2,753)

Net loss

$

(23,312)

$

(23,825)

$

(45,267)

$

(49,213)

Net loss per share—basic and diluted

$

(0.42)

$

(0.70)

$

(0.94)

$

(1.45)

Weighted average shares outstanding—basic and diluted

55,703,882

33,882,939

48,232,933

33,880,494

Net loss

$

(23,312)

$

(23,825)

$

(45,267)

$

(49,213)

Other comprehensive income:

Change in unrealized gains/losses on investments:

Change in fair value of investments, net of tax

17

17

Total change in unrealized gains/losses on investments, net of tax

17

17

Total other comprehensive income

17

17

Total comprehensive loss

$

(23,295)

$

(23,825)

$

(45,250)

$

(49,213)

See accompanying notes to these unaudited condensed consolidated financial statements.

4

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands, except share data)

Three Months Ended June 30,

Common Stock

Additional

Accumulated

Total

$0.001 Par Value

Paid-In

Other Comprehensive

Accumulated

Stockholders'

    

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Equity

Balance as of March 31, 2019

33,882,857

$

34

$

308,830

$

$

(226,497)

$

82,367

Exercise of stock options

110

Stock-based compensation expense

2,524

2,524

Net loss

(23,825)

(23,825)

Balance as of June 30, 2019

33,882,967

$

34

$

311,354

$

$

(250,322)

$

61,066

Balance as of March 31, 2020

54,585,636

$

55

$

458,866

$

$

(317,411)

$

141,510

Exercise of stock options

249,870

772

772

Common stock offering, net of issuance cost and underwriting fees of $0.5 million

979,371

1

7,215

7,216

Stock-based compensation expense

2,774

2,774

Warrant exercises

16,144

Accumulated other comprehensive income

(17)

(17)

Net loss

(23,312)

(23,312)

Balance as of June 30, 2020

55,831,021

$

56

$

469,627

$

(17)

$

(340,723)

$

128,943

See accompanying notes to these unaudited condensed consolidated financial statements

5

Six Months Ended June 30,

Common Stock

Additional

Accumulated

Total

$0.001 Par Value

Paid-In

Other Comprehensive

Accumulated

Stockholders'

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Equity

Balance as of December 31, 2018

33,863,077

$

34

$

306,053

$

$

(201,109)

$

104,978

Exercise of stock options

19,890

39

39

Stock-based compensation expense

5,262

5,262

Net loss

(49,213)

(49,213)

Balance as of June 30, 2019

33,882,967

$

34

$

311,354

$

$

(250,322)

$

61,066

Balance as of December 31, 2019

36,086,254

$

36

$

325,112

$

$

(295,456)

$

29,692

At the market offering, net of sales agent commission of $0.4 million

2,352,671

3

12,543

12,546

Exercise of stock options

311,028

938

938

Common stock offering, net of issuance cost and underwriting fees of $8.1 million

16,979,371

17

125,406

125,423

Issuance under employee stock purchase plan

85,553

270

270

Stock-based compensation expense

5,358

5,358

Warrant exercises

16,144

Accumulated other comprehensive income

(17)

(17)

Net loss

(45,267)

(45,267)

Balance as of June 30, 2020

55,831,021

$

56

$

469,627

$

(17)

$

(340,723)

$

128,943

See accompanying notes to these unaudited condensed consolidated financial statements

6

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

Six Months Ended

June 30, 

    

2020

2019

Cash flows from operating activities:

Net loss

$

(45,267)

$

(49,213)

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

Depreciation

454

388

Non-cash operating lease cost

952

840

Amortization of debt discount and other non-cash interest

513

466

Stock-based compensation

5,271

5,094

Change in operating assets and liabilities:

Accounts receivable

7,282

(5,648)

Prepaid expenses and other current assets

1,351

1,106

Inventory

(1,306)

(3,955)

Accounts payable

(973)

(2,249)

Accrued expenses and other current liabilities

(6,782)

1,776

Lease liabilities and other long-term liabilities

(629)

(201)

Net cash used in operating activities

(39,134)

(51,596)

Cash flows from investing activities:

Purchases of property and equipment

(915)

(943)

Purchases of short-term investments

(56,535)

Net cash used in investing activities

(57,450)

(943)

Cash flows from financing activities:

Proceeds from common stock offerings, net of underwriters' discounts and offering cost

137,969

Payment of principal on finance lease

(16)

(20)

Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan

1,207

39

Net cash provided by financing activities

139,160

19

Net increase/(decrease) in cash and restricted cash:

42,576

(52,520)

Cash and restricted cash at beginning of period

98,031

183,104

Cash and restricted cash at end of period

140,607

130,584

Reconciliation of cash and restricted cash:

Cash, cash equivalents, and restricted cash at end of period

140,607

130,584

Less restricted cash

(12,584)

(12,578)

Cash and cash equivalents at end of period

$

128,023

$

118,006

Non-cash investing and financing activities:

Right-of-use asset obtained in exchange for finance lease obligation

$

$

136

Supplemental disclosure:

Cash paid for interest

$

3,749

$

3,683

Right-of-use assets obtained in exchange of operating lease obligations

1,852

See accompanying notes to these unaudited condensed consolidated financial statements.

7

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business— Kala Pharmaceuticals, Inc. (the “Company”) was incorporated on July 7, 2009, and is a biopharmaceutical company focused on the discovery, development and commercialization of innovative therapies for diseases of the eye. The Company has applied its AMPPLIFY® mucus-penetrating particle (“MPP”) Drug Delivery Technology to loteprednol etabonate (“LE”), a corticosteroid designed for ocular applications, resulting in the U.S. Food and Drug Administration’s (the “FDA”) approval of INVELTYS® (loteprednol etabonate ophthalmic suspension) 1% as the first and only topical twice-daily ocular corticosteroid for treatment of post-operative inflammation and pain following ocular surgery, and the development of its lead product candidate, KPI-121 0.25%, which if approved it plans to commercialize under the brand name EYSUVISTM (loteprednol etabonate ophthalmic suspension) 0.25%, for the short-term treatment of the signs and symptoms of dry eye disease. 

In October 2018, the Company submitted a New Drug Application (“NDA”) to the FDA for EYSUVIS. In August 2019, the Company announced that it received a complete response letter (“CRL”) from the FDA indicating that positive efficacy data from an additional clinical trial would be needed to support a resubmission of the NDA. Based upon the previous recommendation of the FDA, the Company initiated an additional Phase 3 clinical trial (“STRIDE 3”) (STRIDE- Short Term Relief In Dry Eye), in July 2018. On March 9, 2020, the Company announced that STRIDE 3 met both of its primary symptom endpoints and its key secondary sign endpoint and on April 30, 2020, the Company resubmitted its NDA with the positive data from STRIDE 3. The Company believes that the data from STRIDE 3 replicates the positive efficacy data from previous clinical trials for both signs and symptoms of dry eye disease and will satisfy the recommendation in the CRL for an additional positive trial. On May 26, 2020, the Company announced that the FDA stated that our NDA resubmission was a complete, Class 2 response to the CRL and set a Prescription Drug User Fee Act (“PDUFA”) goal date of October 30, 2020 for the completion of its review of the NDA.

In January 2019, the Company launched its first commercial product, INVELTYS, in the United States. The Company is engaged in the commercialization of INVELTYS, pursuing FDA approval of, and preparing to launch, EYSUVIS, research and development activities, raising capital and recruiting skilled personnel. The Company is subject to a number of risks similar to those of other companies conducting high-risk, research and development of pharmaceutical product candidates and launching products for the first time. Principal among these risks are dependence on key individuals and intellectual property, competition from other products and companies and the technical risks associated with the successful research, development and marketing of its product candidates. The Company’s success is dependent upon its ability to obtain regulatory approval of EYSUVIS, the success of commercializing its products, the success of its research and development efforts, its ability to obtain regulatory approval of its other product candidates, its ability to raise additional capital when needed and, ultimately, attain profitable operations.

The Company is also evaluating other opportunities for MPP nanosuspensions of LE, compounds in its receptor Tyrosine Kinase Inhibitor program (the “rTKI program”), that inhibit the vascular endothelial growth factor (“VEGF”), pathway, for the potential treatment of a number of retinal diseases, and novel next-generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action for eye disease with the goal of eliminating the risk of interocular pressure (“IOP”) increase and cataract formation.

Liquidity— Since inception, the Company has incurred significant losses from operations and negative cash flows from operations. As of June 30, 2020, the Company had an accumulated deficit of $340.7 million. The Company has generated only limited revenues to date from product sales and has financed operations primarily through proceeds from its initial public offering of common stock (“IPO”), public common stock offerings and sales of its common stock under its at-the-market offering facility, private placements of preferred stock, convertible debt financings, borrowings under credit facilities and warrants. The Company has devoted substantially all of its financial resources and efforts to research and development, including preclinical studies and clinical trials and engaging in activities to launch and commercialize INVELTYS. The Company expects to continue to incur significant expenses and operating losses. Net losses may fluctuate significantly from quarter-to-quarter and year-to-year.

The Company believes that its existing cash, cash equivalents and short-term investments as of June 30, 2020, will enable it to fund its planned operating expenses, debt service obligations and capital expenditure requirements for at

8

least twelve months from the date these condensed consolidated financial statements were issued. This evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the condensed consolidated financial statements are issued. As a result, the Company could deplete its available capital resources sooner than it currently expects.

COVID-19 – The ongoing novel coronavirus pandemic, commonly referred to as COVID-19, which was declared a global pandemic by the World Health Organization on March 11, 2020, has caused federal, state, and local governments to implement measures to slow the spread of the outbreak through quarantines, strict travel restriction and bans, heightened border scrutiny and other measures. The Company is following, and will continue to follow, recommendations from the U.S. Centers for Disease Control and Prevention as well as federal, state, and local governments regarding working-from-home practices for non-essential employees. As a result, the Company previously suspended substantially all in-person interactions with customers, including visits to physician offices, clinics, and hospitals, and was limited to conducting educational and promotional activities virtually, and the Company may be forced to suspend all or some in-person interactions again in the future. In addition, all office-based personnel have been instructed to work from home and the Company’s laboratory facilities, that support our early-stage research activities, are being utilized as necessary. The moratoria on routine medical appointments and elective surgeries that have occurred at times in many jurisdictions, including ocular surgeries, has adversely affected the market for INVELTYS, which is indicated for the treatment of inflammation and pain following ocular surgery, resulting in a significant reduction in the demand for INVELTYS. The extent of the impact of COVID-19 on the Company’s operational and financial performance will depend on certain developments, including the length and severity of this pandemic, impact on its customers, employees, vendors, and government agencies, all of which are uncertain and cannot be predicted. The Company cannot reasonably estimate the extent to which the disruption may materially impact its condensed consolidated results of operations or financial position.

Use of Estimates—The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expense, and related disclosures. The Company bases estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. Estimates and assumptions relied upon in preparing these condensed consolidated financial statements relate to, but are not limited to, revenue recognition, inventory, the present value of lease liabilities and the corresponding right-of-use assets, the fair value of warrants, stock compensation, accrued expenses and the recoverability of the Company’s net deferred tax assets and related valuation allowance. Actual results may differ from these estimates under different assumptions or conditions.

Net Loss per Share—Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including the assumed exercise of stock options and warrants.

The weighted average number of common shares included in the computation of diluted net loss gives effect to all potentially dilutive common equivalent shares, including outstanding stock options and warrants. Common stock equivalent shares are excluded from the computation of diluted net loss per share if their effect is antidilutive. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common stockholders for the three and six months ended June 30, 2020 and 2019.

Unaudited Interim Financial Information—The condensed consolidated financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. The accompanying condensed consolidated financial statements reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations,

9

statement of stockholders’ equity and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “Annual Report”).

The unaudited condensed consolidated financial statements include the accounts of Kala Pharmaceuticals, Inc. and its wholly owned subsidiary, Kala Pharmaceuticals Security Corporation. All intercompany transactions and balances have been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in the Annual Report. There have been no material changes to the significant accounting policies during the period ended June 30, 2020, other than the addition of the Investments section below.

Investments — The Company determines the appropriate classification of its investments at the time of purchase. The Company’s investments are classified as available-for-sale in accordance with Accounting Standards Codification (“ASC”) Topic 320. The Company classifies investments available to fund current operations as current assets on its condensed consolidated balance sheets. Investments are classified as long-term assets on the condensed consolidated balance sheets if (i) the Company has the intent and ability to hold the investments for a period of at least one year and (ii) the contractual maturity date of the investments is greater than one year.

Available-for-sale investments are recorded at fair value, with unrealized gains or losses included in comprehensive loss on the condensed consolidated statements of operations and in accumulated other comprehensive loss on the condensed consolidated balance sheets. Realized gains and losses, interest income earned on the Company’s cash, cash equivalents and investments, and amortization or accretion of discounts and premiums on investments are included within other income (expense).

The Company reviews investments for other-than-temporary impairment whenever the fair value of an investment is less than the amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time.

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 is intended to improve the effectiveness of disclosures in the notes to financial statements related to fair value measurements in Topic 820. This ASU will become effective for annual periods beginning after December 15, 2019, including interim periods within that period, and early adoption is permitted. The ASU was effective on January 1, 2020 and the adoption of ASU 2018-13 did not have a material effect on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software -Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This ASU became effective for annual periods beginning after December 15, 2019, including interim periods within that period, and early adoption is permitted. The ASU was effective on January 1, 2020 and the adoption of ASU 2018-15 did not have a material effect on the Company’s condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 significantly changes the impairment model

10

for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”), which is effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be Smaller Reporting Companies (“SRCs”) as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim period within those fiscal years and for all other entities, including SRCs, for fiscal years beginning December 15, 2022, including interim periods within those fiscal years. Upon adoption, beginning January 1, 2023, the Company does not expect ASU 2019-10 to have a material effect on its condensed consolidated financial statements.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has short-term investments which are considered financial instruments that are measured on a recurring basis. ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and our own assumptions (unobservable inputs). The hierarchy consists of three levels:

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

Our financial instruments consist primarily of cash, cash equivalents, and short-term investments in money market funds and short-term securities. Cash, cash equivalents and short-term investments are reported at their respective fair values on our Condensed Consolidated Balance Sheets. See Note 4 (Investments) for additional information.

The following table sets forth the fair value of the Company’s financial assets by level within the fair value hierarchy at June 30, 2020:

Carrying Amount

Fair Value

Level 1

Level 2

Level 3

Assets:

Cash and cash equivalents

$

128,023

$

128,023

$

128,023

$

-

$

-

Short-term investments

56,536

56,536

56,536

-

-

Total Assets

$

184,559

$

184,559

$

184,559

$

-

$

-

During the three and six months ended June 30, 2020, there were no transfers between Level 1, Level 2, and Level 3.

11

4. INVESTMENTS

Investments by security type consisted of the following as of June 30, 2020:

June 30, 2020

Gross

Gross

Amortized

Unrealized

Unrealized

Fair

Cost

Gains

Losses

Value

U.S. treasury securities

$

27,980

$

-

$

(8)

$

27,972

U.S. government agencies securities

28,573

-

(9)

28,564

Total

$

56,553

$

-

$

(17)

$

56,536

As of June 30, 2020, all of our investments had a contractual maturity within one year. The fair value of all our investments are classified as short-term on our Condensed Consolidated Balance Sheets.

5. REVENUE & ACCOUNTS RECEIVABLE, NET

The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to be entitled in exchange for those goods or services. The Company performs the following five steps to recognize revenue under ASC Topic 606: (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 recognizes revenue when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services that will be transferred to the customer.

Product revenues, net

The Company sells INVELTYS to wholesalers and/or specialty distributors in the United States (collectively, “Customers”). These Customers subsequently resell the Company’s products to specialty and other retail pharmacies. In addition to agreements with Customers, the Company enters into arrangements with payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts for the purchase of the Company’s products.

The goods promised in the Company’s product sales contracts represent a single performance obligation; as the promise to transfer the individual products to the Customer is not separately identifiable from other promises in the contracts and, therefore, not distinct. The Company recognizes revenue from product sales at the point the Customer obtains control of the product, which occurs upon delivery. The transaction price (“net sales price”) that is recognized as revenue for product sales includes the selling price to the Customer and an estimate of variable consideration. Components of variable consideration include prompt pay and other discounts, product returns, government rebates, third-party payor rebates, coverage gap rebates, incentives such as patient co-pay assistance, and other fees paid to Customers where a distinct good or service is not received. Variable consideration is recorded on the condensed consolidated balance sheet as either a reduction of accounts receivable, if payable to a Customer, or as a current liability, if payable to a third-party other than a Customer. The Company considers all relevant information when estimating variable consideration such as assessment of its current and anticipated sales and demand forecasts, information from third parties regarding the payor mix for products, information from third parties regarding the units remaining in the distribution channel, specific known market events and trends, industry data and current contractual and statutory requirements that are reasonably available. The Company includes estimated amounts in the net sales price to the extent it is determined probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.

12

Payment terms with Customers do not exceed one year and, therefore, the Company does not account for a significant financing component in its arrangements. The Company expenses incremental cost of obtaining a contract with a Customer when incurred as the period of benefit is less than one year.

Reserves for Variable Consideration:

Trade Discounts and Allowances

The Company provides its Customers with certain trade discounts and allowances including discounts for prompt payments and fees paid for distribution, data and administrative services. These discounts and fees are based on contractually-determined percentages and are recorded as a reduction of revenue and accounts receivable in the period in which the related product revenue is recognized.

Chargebacks

Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These components of variable consideration are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Reserves for chargebacks consist of credits the Company expects to issue for units that remain in the distribution channel at the end of each reporting period and that the Company expects will be sold to qualified healthcare providers, as well as chargebacks that Customers have claimed, but for which the Company has not yet issued a credit.

Product Returns

Consistent with industry practice, the Company has a product returns policy that provides Customers a right of return for product purchased within a specified period prior to and subsequent to the product’s expiration date. The Company estimates the amount of its products that may be returned and presents this amount as a reduction of revenue in the period the related product revenue is recognized, in addition to establishing a liability. The Company’s estimates for product returns are based upon available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel.

Commercial Payor and Medicare Part D Rebates 

The Company contracts with certain third-party payors, primarily pharmacy benefit managers (“PBMs”) and health plans (“Plans”), for the payment of rebates with respect to utilization of its product. These rebates are based on contractual percentages applied to the amount of product prescribed to patients who are covered by the PBMs or the Plans with which it contracts. The Company estimates the rebates for commercial and Medicare Part D payors based on the contractual discount percentage, the various payor mix for INVELTYS as well as future rebates that will be made for product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. The Company also estimates the number of patients in the prescription drug coverage gap for whom it will owe an additional liability under the Medicare Part D program. Such estimates 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.

Government Rebates

The Company is subject to discount obligations under Medicaid and other government programs. For Medicaid, reserves are based on estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Centers for Medicaid and Medicare Services. The Company’s liability for these rebates consists of estimates of claims for the current period and estimated future claims that will be made for product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. These reserves are

13

recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.

Co-pay Assistance Program

The Company offers a co-pay assistance program (the “co-pay program”), which is intended to provide financial assistance to patients who may or may not be covered by commercial insurance or who opt out of Medicare Part D programs. The calculation of accruals for the co-pay program is based on actual claims processed during the period as well as an estimate of the number and cost per claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. Allowances for estimated co-pay claims 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.

The following table summarizes activity in each of the Company’s product revenue provision and allowance categories for the six months ended June 30, 2020:

Trade Discounts,

Allowances and

Rebates and

Chargebacks (1)

    

Product Returns (2)

    

Incentives (3)

Balance at December 31, 2019

$

1,783

$

180

$

10,044

Provision related to current period sales

725

4,576

Changes in estimate related to prior period sales

2

(66)

93

Credit/payments made

(1,114)

(8,090)

Balance at March 31, 2020

$

1,396

$

114

$

6,623

Provision related to current period sales

335

2,194

Changes in estimate related to prior period sales

3

(51)

(234)

Credit/payments made

(1,336)

1

(3,013)

Balance at June 30, 2020

$

398

$

64

$

5,570

(1)Trade discounts, allowances and chargebacks include fees for distribution service fees, prompt pay discounts, and chargebacks. Trade discounts, allowances and chargebacks are deducted from gross revenue at the time revenues are recognized and are recorded as a reduction to accounts receivable in the Company’s Condensed Consolidated Balance Sheets.
(2)Provisions for product returns are deducted from gross revenues at the time revenues are recognized and are included in accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets.
(3)Rebates and incentives includes managed care rebates, government rebates, co-pay program incentives, and sales incentives and allowances. Provisions for rebates and discounts are deducted from gross revenues at the time revenues are recognized and are included in accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets.

Accounts Receivable, net

Accounts receivable are reported on the condensed consolidated balance sheets at outstanding amounts due from Customers for product sales. The Company deducts sales discounts for prompt payments and contractual fees for service arrangements from accounts receivable. The Company evaluates the collectability of accounts receivable on a regular basis, by reviewing the financial condition and payment history of Customers, an overall review of collections experience on other accounts, and economic factors or events expected to affect future collections experience. An allowance for doubtful accounts is recorded when a receivable is deemed to be uncollectible.

The Company recorded no allowance for doubtful accounts as of June 30, 2020 or June 30, 2019. The Company recorded an allowance of $0.4 million and $0.9 million for expected sales discounts, related to prompt pay discounts and contractual fee for service arrangements, to wholesalers and distributors as of June 30, 2020 and June 30, 2019, respectively.

14

6. INVENTORY

Current inventory and long-term inventory consist of the following (in thousands):

June 30, 

December 31, 

    

2020

    

2019

Raw materials

$

1,025

$

1,387

Work in progress

4,589

4,166

Finished goods

4,206

2,873

Total inventory

$

9,820

$

8,426

As of June 30, 2020, the Company had $5.7 million of current inventory and $4.1 million of long-term inventory. As of December 31, 2019, the Company had $4.6 million of current inventory and $3.8 million of long-term inventory.

7. ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

June 30, 

December 31, 

    

2020

    

2019

Compensation and benefits

$

5,347

$

6,502

Accrued revenue reserves (1)

5,061

9,482

Development costs

179

1,600

Professional services

938

760

Commercial cost

800

930

Contract manufacturing

1,462

630

Other

180

1,025

Accrued expenses

$

13,967

$

20,929

(1) There were additional revenue reserves included in accounts payable of $0.6 million and $0.7 million, as of June 30, 2020 and December 31, 2019, respectively.

8. LEASES

Operating leases

On February 28, 2018, the Company entered into a lease agreement for the lease of a portion of the building located at 490 Arsenal Way, Watertown, Massachusetts (the “Watertown Lease”) to be used as the Company’s corporate headquarters. The Company recognized the right-of-use asset and corresponding lease liability on November 15, 2018, by calculating the present value of lease payments, discounted at 9.9%, the Company’s estimated incremental borrowing rate, over the 13-year expected term.

In connection with the Watertown Lease, the Company issued a letter of credit to the landlord for $2.0 million. The Company secured the letter of credit for the full amount of the letter with cash on deposit, which is reported as restricted cash as of June 30, 2020 and December 31, 2019.

For the six months ended June 30, 2020 and 2019, the variable lease expense for the Watertown Lease, which includes common area maintenance and real estate taxes, was $1.1 million and $0.5 million, respectively. The remaining lease term was 11.3 years as of June 30, 2020.

15

Vehicle Fleet lease

During the year ended December 31, 2019, the Company entered into a master fleet lease agreement (the “Vehicle Fleet Lease”), pursuant to which it currently leases approximately 65 vehicles. In connection with the Vehicle Fleet Lease, the Company issued a letter of credit for $0.5 million, which was reported as restricted cash on the balance sheet. The lease has an expected term of three years, which commenced upon the delivery of the vehicles in March 2019. As of June 30, 2020, the remaining lease term was 1.7 years.

The components of lease expense and related cash flows were as follows (in thousands):

Three Months Ended
June 30, 

Six Months Ended
June 30,

    

2020

    

2019

    

2020

    

2019

Lease cost

    

  

    

  

    

  

    

  

Operating lease cost

$

1,185

$

1,187

$

2,371

$

2,243

Variable lease cost

658

383

1,068

507

Total lease cost

$

1,843

$

1,570

$

3,439

$

2,750

Operating cash outflows from operating leases

$

1,686

$

911

$

3,130

$

1,654

9. DEBT

Athyrium Credit Facility

On October 1, 2018, the Company entered into a credit agreement (the “Athyrium Credit Facility”), with Athyrium Opportunities III Acquisition LP (“Athyrium”) for up to $110.0 million. The Athyrium Credit Facility provided for a Term Loan A in the aggregate principal amount of $75.0 million (the “Term Loan A”), and a Term Loan B in the aggregate principal amount of $35.0 million (the “Term Loan B”). On October 1, 2018, the Company borrowed the entire principal amount of the Term Loan A. The Company did not satisfy the conditions to draw down any of the Term Loan B funds, and as a result, the Term Loan B funds are no longer available. The maturity date of the Athyrium Credit Facility is October 1, 2024, the six-year anniversary of the close.

The Term Loan A bears interest at a rate of 9.875% per annum, with quarterly, interest-only payments until the fourth anniversary of the Term Loan A. The unpaid principal amount of the Term Loan A is due and payable in quarterly installments starting on the fourth anniversary of the loan.  The Company may make voluntary prepayments, in whole or in part, and subject to certain exceptions, is required to make mandatory prepayments upon the occurrence of certain events of default as defined in the agreement, including but not limited to, the occurrence of a change of control. In addition, upon payment or repayment of any outstanding balance under the Athyrium Credit Facility, the Company will have to pay a 1% exit fee of the total principal payments (whether mandatory, voluntary, or at maturity) made throughout the term. The exit fee of $0.7 million based on the $75.0 million principal amount outstanding, will be accreted to the carrying amount of the debt using the effective interest method over the term of the loan.

All mandatory and voluntary prepayments of the Athyrium Credit Facility are subject to the payment of prepayment premiums as follows: (i) if prepayment occurs prior to the second anniversary of the applicable date of issuance, an amount equal to the amount by which (a) the present value of 105% of the principal prepaid plus all interest that would have accrued on such principal through such second anniversary exceeds (b) the amount of principal prepaid, (ii) if prepayment occurs on or after the second anniversary of the applicable date of issuance but prior to the third anniversary of such issuance, an amount equal to 3% of the principal prepaid, and (iii) if prepayment occurs on or after the third anniversary of the applicable date of issuance but prior to the fourth anniversary of such issuance, an amount equal to 2% of the principal prepaid. No prepayment premium is due on any principal prepaid after the fourth anniversary of the applicable date of issuance.

16

The Athyrium Credit Facility includes features requiring (1) additional interest rate upon an event of default accrued at an additional 3%, or a total interest rate of 12.875%, and (2) the lender’s right to declare all outstanding principal and interest immediately payable upon an event of default. These two features were analyzed and determined to be embedded derivatives to be valued as separate financial instruments. These embedded derivatives were bundled and valued as one compound derivative in accordance with the applicable accounting guidance for derivatives and hedging transactions. The Company determined that, due to the unlikely event of default, the embedded derivatives have a de minimis value as of June 30, 2020. The derivative liability will be remeasured at fair value at each reporting date, with changes in fair value being recorded as other income (expense) in the condensed consolidated statements of operations.

The Athyrium Credit Facility is secured by a pledge of substantially all of the Company’s assets and contains affirmative and negative covenants customary for financings of this type, including limitations on the Company’s and its subsidiaries’ ability to, among other things, incur and prepay additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, change in the nature of business, enter into sale and leaseback transactions, make distributions, and enter into affiliate transactions, in each case, subject to certain exceptions. In addition, the Athyrium Credit Facility also contains a financial covenant requiring the Company to maintain at least $10.0 million of cash and cash equivalents. As a result of this financial covenant, the Company has recorded $10.0 million as restricted cash as of June 30, 2020 and December 31, 2019.

In connection with the Athyrium Credit Facility, the Company issued a warrant (“Warrant”), to purchase up to 270,835 shares of the Company’s common stock, at an exercise price per share of $12.18456. The Warrant is immediately exercisable as to 184,660 shares. The remaining 86,175 shares under the Warrant were exercisable only upon the Company’s draw of the Term Loan B and, as a result, the remaining 86,175 shares under the Warrant are no longer exercisable. The Warrant is exercisable through October 1, 2025 and is classified as an equity instrument. The Company allocated the proceeds from the Term Loan A to the Warrant using the relative fair value method. The fair value of the Warrant of $1.9 million was recognized as equity and a corresponding debt discount.

In addition, the Company paid certain fees to Athyrium and other third-party service providers. These fees paid to Athyrium were recorded as a debt discount while the fees paid to other third-party service providers were recorded as debt issuance cost. These costs, along with the fair value of the Warrant of $1.9 million are being amortized using the effective interest method over the term of the Athyrium Credit Facility. The amortization of debt discount and debt issuance cost is included in interest expense within the Condensed Consolidated Statements of Operations. As of June 30, 2020 and June 30, 2019, the effective interest rate was 11.63%, which takes into consideration the non-cash accretion of the exit fee and the amortization of the debt discount and issuance costs. During each of the three months ended June 30, 2020 and June 30, 2019, the Company recognized interest expense of $2.1 million, which consisted of amortization of the debt discount of $0.2 million, and the contractual coupon interest expense of $1.9 million. During the six months ended June 30, 2020, and June 30, 2019, the Company recognized interest expense of $4.2 million and $4.1 million, respectively. This consisted of amortization of debt discount of $0.4 million for the periods ended June 30, 2020 and June 30, 2019, and the contractual coupon interest expense of $3.8 million and $3.7 million as of June 30, 2020 and June 30, 2019, respectively.

The components of the carrying value of the debt as of June 30, 2020, and December 31, 2019 are detailed below (in thousands):

June 30, 

December 31,

    

2020

    

2019

Principal loan balance

$

75,000

$

75,000

Unamortized debt discount and issuance cost

(3,559)

(3,999)

Cumulative accretion of exit fee

256

183

Long-term debt, net

$

71,697

$

71,184

17

The annual principal payments due under the Athyrium Credit Facility as of June 30, 2020 were as follows (in thousands):

Years Ending December 31,

    

2020 (remaining six months)

$

2021

2022

16,665

2023

33,330

2024

25,005

Total

$

75,000

10. WARRANTS

The Company issued warrants in connection with debt transactions that were completed prior to 2017. Upon the completion of the IPO, the Company’s then outstanding warrants to purchase preferred stock converted into warrants to purchase common stock. The Company also issued the Warrant to purchase common stock in connection with the Athyrium Credit Facility, described further in Note 9.

The following table summarizes the common stock warrants outstanding as of June 30, 2020 and December 31, 2019, each exercisable into the number of shares of common stock set forth below as of the specified dates:

Shares Exercisable at

Exercise

    

Expiration

    

Exercisable

    

June 30, 

    

December 31, 

Issued

    

Price

Date

From

2020

2019

2013

$

7.50

April 2021

July 2017

33,333

82,816

2014

$

7.50

 

November 2024

 

July 2017

16,000

16,000

2016

$

8.27

 

October 2026

 

September 2017

14,512

14,512

2018

$

12.18

October 2025