eypt-10q_20190630.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 June 30, 2019

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 106,297,792 shares of the registrant’s common stock, $0.001 par value, outstanding as of August 5, 2019.

 

 


EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Unaudited Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – June 30, 2019 and December 31, 2018

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss – Three and Six Months Ended June 30, 2019 and 2018

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity – Three and Six Months Ended June 30, 2019 and 2018

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2019 and 2018

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

28

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

38

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

39

 

 

 

 

 

PART II: OTHER INFORMATION

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

40

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

40

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

40

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

40

 

 

 

 

 

Item 5.

 

Other Information

 

40

 

 

 

 

 

Item 6.

 

Exhibits

 

41

 

 

 

 

 

Signatures

 

43

 

 

 

 

 

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)

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

44,161

 

 

$

45,261

 

Accounts and other receivables

 

 

9,598

 

 

 

627

 

Prepaid expenses and other current assets

 

 

3,144

 

 

 

1,434

 

Inventory

 

 

1,670

 

 

 

279

 

Total current assets

 

 

58,573

 

 

 

47,601

 

Property and equipment, net

 

 

417

 

 

 

288

 

Operating lease right-of-use assets

 

 

3,291

 

 

 

 

Intangible assets, net

 

 

28,899

 

 

 

30,129

 

Restricted cash

 

 

150

 

 

 

150

 

Total assets

 

$

91,330

 

 

$

78,168

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,066

 

 

$

2,640

 

Accrued expenses

 

 

4,214

 

 

 

3,789

 

Accrued development milestone

 

 

 

 

 

15,000

 

Deferred revenue

 

 

 

 

 

30

 

Operating lease liabilities - current portion

 

 

441

 

 

 

 

Total current liabilities

 

 

10,721

 

 

 

21,459

 

Long-term debt

 

 

46,250

 

 

 

17,621

 

Operating lease liabilities - noncurrent

 

 

3,149

 

 

 

 

Other long-term liabilities

 

 

3,000

 

 

 

1,455

 

Total liabilities

 

 

63,120

 

 

 

40,535

 

Contingencies (Note 13)

 

 

 

 

 

 

 

 

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 June

   30, 2019 and December 31, 2018; 106,297,792 and 95,372,236 shares

   issued and outstanding at June 30, 2019 and December

   31, 2018, respectively

 

 

106

 

 

 

95

 

Additional paid-in capital

 

 

466,493

 

 

 

445,192

 

Accumulated deficit

 

 

(439,229

)

 

 

(408,493

)

Accumulated other comprehensive income

 

 

840

 

 

 

839

 

Total stockholders' equity

 

 

28,210

 

 

 

37,633

 

Total liabilities and stockholders' equity

 

$

91,330

 

 

$

78,168

 

 

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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales, net

 

$

6,705

 

 

$

 

 

$

7,932

 

 

$

 

Collaborative research and development

 

 

5

 

 

 

218

 

 

 

70

 

 

 

742

 

Royalty income

 

 

500

 

 

 

497

 

 

 

1,220

 

 

 

901

 

Total revenues

 

 

7,210

 

 

 

715

 

 

 

9,222

 

 

 

1,643

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales, excluding amortization of acquired

   intangible assets

 

 

706

 

 

 

 

 

 

1,035

 

 

 

 

Research and development

 

 

3,955

 

 

 

4,765

 

 

 

7,753

 

 

 

8,090

 

Sales and marketing

 

 

7,284

 

 

 

1,512

 

 

 

14,595

 

 

 

1,512

 

General and administrative

 

 

4,815

 

 

 

4,220

 

 

 

9,425

 

 

 

6,501

 

Amortization of acquired intangible assets

 

 

615

 

 

 

 

 

 

1,230

 

 

 

 

Total operating expenses

 

 

17,375

 

 

 

10,497

 

 

 

34,038

 

 

 

16,103

 

Loss from operations

 

 

(10,165

)

 

 

(9,782

)

 

 

(24,816

)

 

 

(14,460

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

 

266

 

 

 

27

 

 

 

509

 

 

 

52

 

Interest expense

 

 

(1,599

)

 

 

(720

)

 

 

(2,619

)

 

 

(720

)

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

(3,810

)

 

 

 

Change in fair value of derivative liability

 

 

 

 

 

(23,953

)

 

 

 

 

 

(26,278

)

Total other expense, net

 

 

(1,333

)

 

 

(24,646

)

 

 

(5,920

)

 

 

(26,946

)

Net loss

 

$

(11,498

)

 

$

(34,428

)

 

$

(30,736

)

 

$

(41,406

)

Net loss per share - basic and diluted

 

$

(0.11

)

 

$

(0.62

)

 

$

(0.30

)

 

$

(0.82

)

Weighted average shares outstanding - basic and diluted

 

 

106,238

 

 

 

55,387

 

 

 

100,847

 

 

 

50,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(11,498

)

 

$

(34,428

)

 

$

(30,736

)

 

$

(41,406

)

Foreign currency translation adjustments

 

 

1

 

 

 

1

 

 

 

1

 

 

 

2

 

Comprehensive loss

 

$

(11,497

)

 

$

(34,427

)

 

$

(30,735

)

 

$

(41,404

)

 

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 March 31, 2018

 

 

53,909,917

 

 

$

54

 

 

$

336,870

 

 

$

(329,563

)

 

$

837

 

 

$

8,198

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(34,428

)

 

 

 

 

 

(34,428

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Issuance of stock, net of issue costs

 

 

20,184,224

 

 

 

20

 

 

 

36,357

 

 

 

 

 

 

 

 

 

36,377

 

Fair value of warrants issued

 

 

 

 

 

 

 

 

87

 

 

 

 

 

 

 

 

 

87

 

Exercise of stock options

 

 

310,900

 

 

 

 

 

 

503

 

 

 

 

 

 

 

 

 

503

 

Vesting of stock units

 

 

107,007

 

 

 

 

 

 

(25

)

 

 

 

 

 

 

 

 

(25

)

Stock-based compensation

 

 

 

 

 

 

 

 

974

 

 

 

 

 

 

 

 

 

974

 

Balance at June 30, 2018

 

 

74,512,048

 

 

$

74

 

 

$

374,766

 

 

$

(363,991

)

 

$

838

 

 

$

11,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

 

95,554,228

 

 

$

96

 

 

$

446,673

 

 

$

(427,731

)

 

$

839

 

 

$

19,877

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(11,498

)

 

 

 

 

 

(11,498

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Issuance of stock, net of issue costs

 

 

10,526,500

 

 

 

10

 

 

 

18,333

 

 

 

 

 

 

 

 

 

18,343

 

Exercise of stock options

 

 

25,000

 

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

44

 

Vesting of stock units

 

 

192,064

 

 

 

 

 

 

(53

)

 

 

 

 

 

 

 

 

(53

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,496

 

 

 

 

 

 

 

 

 

1,496

 

Balance at June 30, 2019

 

 

106,297,792

 

 

$

106

 

 

$

466,493

 

 

$

(439,229

)

 

$

840

 

 

$

28,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2018

 

 

45,256,999

 

 

$

45

 

 

$

331,609

 

 

$

(322,585

)

 

$

836

 

 

$

9,905

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(41,406

)

 

 

 

 

 

(41,406

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

2

 

Issuance of stock, net of issue costs

 

 

28,790,548

 

 

 

29

 

 

 

40,909

 

 

 

 

 

 

 

 

 

40,938

 

Fair value of warrants issued

 

 

 

 

 

 

 

 

355

 

 

 

 

 

 

 

 

 

355

 

Exercise of stock options

 

 

310,900

 

 

 

 

 

 

503

 

 

 

 

 

 

 

 

 

503

 

Vesting of stock units

 

 

153,601

 

 

 

 

 

 

(27

)

 

 

 

 

 

 

 

 

(27

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,417

 

 

 

 

 

 

 

 

 

1,417

 

Balance at June 30, 2018

 

 

74,512,048

 

 

$

74

 

 

$

374,766

 

 

$

(363,991

)

 

$

838

 

 

$

11,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2019

 

 

95,372,236

 

 

$

95

 

 

$

445,192

 

 

$

(408,493

)

 

$

839

 

 

$

37,633

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(30,736

)

 

 

 

 

 

(30,736

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Issuance of stock, net of issue costs

 

 

10,526,500

 

 

 

10

 

 

 

18,333

 

 

 

 

 

 

 

 

 

18,343

 

Exercise of stock options

 

 

166,760

 

 

 

1

 

 

 

307

 

 

 

 

 

 

 

 

 

308

 

Vesting of stock units

 

 

232,296

 

 

 

 

 

 

(73

)

 

 

 

 

 

 

 

 

(73

)

Stock-based compensation

 

 

 

 

 

 

 

 

2,734

 

 

 

 

 

 

 

 

 

2,734

 

Balance at June 30, 2019

 

 

106,297,792

 

 

$

106

 

 

$

466,493

 

 

$

(439,229

)

 

$

840

 

 

$

28,210

 

 

See notes to consolidated financial statements

5


EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(30,736

)

 

$

(41,406

)

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

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

 

1,230

 

 

 

615

 

Depreciation of property and equipment

 

 

78

 

 

 

84

 

Amortization of debt discount

 

 

270

 

 

 

209

 

Non-cash interest expense

 

 

406

 

 

 

 

Loss on extinguishment of debt

 

 

3,810

 

 

 

 

Stock-based compensation

 

 

2,734

 

 

 

1,417

 

Change in fair value of derivative liability

 

 

 

 

 

26,278

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable and other current assets

 

 

(10,681

)

 

 

(241

)

Inventory

 

 

(1,392

)

 

 

 

Accounts payable and accrued expenses

 

 

3,826

 

 

 

2,659

 

Right-of-use assets and operating lease liabilities

 

 

44

 

 

 

 

Deferred revenue

 

 

(30

)

 

 

(505

)

Deferred rent

 

 

 

 

 

 

(11

)

Net cash used in operating activities

 

 

(30,441

)

 

 

(10,901

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisition of Icon Bioscience Inc., net of cash acquired

 

 

 

 

 

(16,780

)

Purchases of property and equipment

 

 

(207

)

 

 

(44

)

Net cash used in investing activities

 

 

(207

)

 

 

(16,824

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of stock, net of issuance costs

 

 

18,343

 

 

 

34,471

 

Proceeds from issuance of long-term debt

 

 

50,000

 

 

 

20,000

 

Payment of debt issue costs

 

 

(1,341

)

 

 

(1,347

)

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

 

 

(46

)

 

 

 

Proceeds from exercise of stock options

 

 

308

 

 

 

503

 

Payment of contingent development milestone

 

 

(15,000

)

 

 

 

Net cash provided by financing activities

 

 

29,548

 

 

 

53,627

 

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

 

 

 

(2

)

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

 

 

(1,100

)

 

 

25,900

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

45,411

 

 

 

13,026

 

Cash, cash equivalents and restricted cash at end of period

 

$

44,311

 

 

$

38,926

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash interest paid

 

$

1,175

 

 

$

258

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued development milestone

 

 

 

 

 

15,000

 

Accrued term loan exit fee

 

 

3,000

 

 

 

1,200

 

Fair value of second tranche purchase liability

 

 

 

 

 

4,734

 

Fair value of warrants issued with debt

 

 

 

 

 

355

 

Fair value of second tranche warrants

 

 

 

 

 

18,165

 

 

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 June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 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 Transition Report on Form 10-K for the six months ended December 31, 2018. 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 six months ended December 31, 2018, 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 and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the entire fiscal year or any future period.

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

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 55,000 to 120,000 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 4.8 million cataract surgeries performed during 2018 in the U.S., with growth projected at an estimated annual rate of 8%, 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.

ILUVIEN® for diabetic macular edema (“DME”), the Company’s lead 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. Retisert®, one of the Company’s earlier generation products, was approved in 2005 by the FDA for the treatment of chronic non-infectious uveitis affecting the posterior segment of the eye and is sold in the U.S. by Bausch & Lomb Inc. (“Bausch & Lomb”). The Company’s development programs are focused primarily on developing sustained release products that utilize its Durasert and Verisome technology platforms to deliver approved drugs to treat chronic diseases. The Company’s strategy includes developing products independently while continuing to leverage its technology platforms through collaborations and license agreements.

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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 royalty income and other fees received from collaboration partners. In April 2019, the Company consummated an equity offering of its common stock (“Common Stock”), resulting in net proceeds of approximately $18.3 million. During April 2019, the Company exercised its option to draw an additional $15.0 million under the new term loan agreement (the “CRG Loan Agreement”) with CRG Servicing LLC  (“CRG”) and paid a $15.0 million development milestone that was due to the former Icon security holders following the first commercial sale of DEXYCU (see Note 3). The Company had cash and cash equivalents of $44.2 million at June 30, 2019 .

In the first quarter of 2019, the Company commenced the U.S. launch of its first two commercial products, YUTIQ and DEXYCU. Overall, the commercial launch of YUTIQ and DEXYCU has been encouraging with demand for YUTIQ exceeding the Company’s expectations. Interest in DEXYCU remains strong within the physician groups that have received training and are now authorized to order DEXYCU from their wholesalers, and DEXYCU demand within these groups have been increasing during the second quarter of 2019. However, overall DEXYCU demand has been slower than anticipated due in part to Ambulatory Surgical Centers’ office management generally adopting a cautious approach to the reimbursement process, as reimbursement for other surgical drugs has been inconsistent in the past. Even though DEXYCU has a “J” code which should enable a more straightforward and consistent reimbursement process, particularly when patients are covered by commercial and Medicare Advantage plans, many Ambulatory Surgical Centers nevertheless are waiting to ensure reimbursement of DEXYCU across multiple insurers before ordering the product in significant volume. Additionally, physicians have been utilizing the Company’s non-revenue sample program to facilitate their training. These factors have contributed to a reduced anticipated cash flow from the early launch of DEXYCU. The Company expects that its existing cash and cash equivalents at June 30, 2019 and cash inflows from anticipated YUTIQ and DEXYCU product sales will be sufficient to fund the Company’s operating plan into 2020.

The Company, however, has no history of direct commercialization of its products and management does not yet have sufficient historical evidence to assert that it is probable that the Company will receive sufficient revenues from its sales of YUTIQ and DEXYCU to fund 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. 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.

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 February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which contains certain amendments to ASU 2016-02 intended to provide relief in implementing the new standard. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all operating leases, with an exception provided for leases with a duration of one year or less. The Company adopted ASU 2016-02 on January 1, 2019 using the modified retrospective transition approach which, pursuant to ASU 2018-11, allows companies to recognize existing leases at the adoption date without requiring comparable period presentation. Comparative periods are presented in accordance with the previous guidance in Accounting Standards Codification (“ASC”) 840, Leases.

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In adopting the new standard, the Company elected to utilize the available package of practical expedients permitted under the transition guidance within the new standard, which does not require the reassessment of the following: (i) whether existing or expired arrangements are or contain a lease, (ii) the lease classification of existing or expired leases, and (iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. Additionally, the Company elected to combine lease and non-lease components and to exclude leases with a term of 12 months or less. The adoption of this accounting standard resulted in recording operating lease ROU assets for three real estate operating lease arrangements and corresponding operating lease liabilities of $3.5 million and $3.7 million, respectively, as of January 1, 2019. The operating lease assets at adoption were lower than the operating lease liabilities because the balance of the Company’s deferred rent liabilities at December 31, 2018, which represented lease incentives, was reclassified into operating lease assets. The adoption of the standard did not have a material effect on the Company’s consolidated statements of operations or consolidated statements of cash flows.

Under Topic 842, the Company determines whether the arrangement is or contains a lease at inception. Operating leases are recognized on the consolidated balance sheets as ROU assets, current portion of lease liabilities and long-term lease liabilities. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease liabilities and their corresponding ROU assets are recorded based on the present value of lease payments over the expected remaining lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. The operating lease ROU assets also include any lease payments made and adjustments for prepayments and lease incentives. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilized its incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): 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. This standard will be effective for the Company in the first quarter of its fiscal year ending December 31, 2020. 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

The Company’s significant accounting policies are described in Note 2 to our audited financial statements included in the Company’s Transition Report on Form 10-K for the six-month transition period ended December 31, 2018. There have been no subsequent changes to the Company’s significant accounting policies except for the policies discussed below related to revenue and cost of goods sold for commercial product sales and for the adoption of the new accounting standard for lessee operating leases (see Note 1).

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.

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Product sales, net The Company began selling YUTIQ and DEXYCU in February and March 2019, respectively. The Company is currently selling YUTIQ and DEXYCU in the U.S. through a single third-party logistics provider (the 3PL”), which takes title to the goods. The 3PL distributes the products through a limited number of specialty distributors and specialty pharmacies (collectively the “Distributors”), 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 products when the 3PL obtains control of the products, which occurs at a point in time, typically upon delivery. The Company expects to enter 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 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 our estimates. If actual results in the future vary from our 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.

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 our Distributors.  These Distributors charge us for the difference between what they pay for the product and our 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 expects to contract 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.

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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.

3.

Acquisition of Icon Bioscience, Inc.

On March 28, 2018, the Company and its newly-created wholly-owned subsidiary, Oculus Merger Sub, Inc., acquired Icon, a specialty biopharmaceutical company, through a reverse triangular merger (the “Icon Acquisition”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) between the Company, Icon, and Shareholder Representative Services LLC (“SRS”), solely in its capacity as representative of Icon’s securityholders. The Icon Acquisition was accounted for as an asset acquisition because substantially all of the fair value of the gross assets acquired were deemed to be concentrated in a group of similar identifiable assets related to Icon’s lead product, DEXYCU. A portion of the Icon Acquisition was funded by a debt financing and an equity financing, both of which closed concurrently with the Icon Acquisition (see Notes 9 and 10).

Pursuant to the Merger Agreement, the Company made a closing payment of $15.0 million to SRS, net of an estimated $127,000 working capital adjustment, and is obligated to pay certain post-closing contingent cash payments upon the achievement of specified milestones and based upon certain net sales and partnering revenue standards, in each case subject to the terms and conditions set forth in the Merger Agreement. These include but are not limited to (i) a one-time development milestone of $15.0 million payable in cash upon the first commercial sale of DEXYCU in the U.S., (ii) sales milestone payments totaling up to $95.0 million upon the achievement of certain sales thresholds and subject to certain Centers for Medicare & Medicaid Services (“CMS”) reimbursement conditions set forth in the Merger Agreement, (iii) quarterly earn-out payments equal to 12% on net sales of DEXYCU in a given year, which earn-out payments will increase to 16% of net sales of DEXYCU in such year beginning in the calendar quarter for such year to the extent aggregate annual DEXYCU consideration exceeds $200.0 million in such year, (iv) quarterly earn-out payments equal to 20% of partnering revenue received by the Company for DEXYCU outside of the U.S., and (v) single-digit percentage quarterly earn-out payments with respect to net sales and/or partnering income, if any, resulting from future clinical development, regulatory approval and commercialization of any other product candidates the Company acquired in the Icon Acquisition. Following the first commercial sale of DEXYCU, the Company paid the $15.0 million one-time development milestone to SRS in April 2019.

The purchase price on the date of the Icon Acquisition was $32.0 million, and was comprised of the closing consideration of $15.0 million, including the assumption of an estimated $127,000 of net current liabilities of Icon, the contingent development milestone payment of $15.0 million and transaction costs of approximately $2.0 million. Given the stage of development of DEXYCU, the Company determined these payments did not represent research and development costs. The contingent consideration in the form of sales milestones will be capitalized as additional intangible assets when any such consideration becomes probable and can be reasonably estimated. Sales-based royalty payments will be expensed as incurred.

The purchase price was allocated to a single finite-lived intangible asset with an expected amortization life of approximately 13 years. The intangible asset is being amortized on a straight-line basis over that period. The acquisition did not have a net tax impact due to a full valuation allowance against the acquired net deferred tax assets.

For the three and six months ended June 30, 2019, the Company accrued sales-based royalty expense of $0 and $99,000 respectively, as a component of cost of sales.

 

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4.

License and Collaboration Agreements

Alimera

Under a collaboration agreement with Alimera, as amended in March 2008 (the “Prior Alimera Agreement”), the Company licensed to Alimera the rights to develop, market and sell certain product candidates, including ILUVIEN for DME, and Alimera assumed all financial responsibility for the development of the licensed products. The Company was entitled to receive a share of any net profits (as defined) on sales of each licensed product (including ILUVIEN) by Alimera, measured on a quarter-by-quarter and country-by-country basis, and Alimera was entitled to recover a share of previously incurred and unapplied net losses (as defined) for commercialization of each product in a country. The Company was also entitled to reimbursement of certain patent maintenance costs with respect to the patents licensed to Alimera.

On July 10, 2017, the Company entered into a further amended and restated collaboration agreement (the “Amended Alimera Agreement”), pursuant to which the Company (i) licensed its then Durasert three-year uveitis product candidate (currently marketed by the Company as YUTIQ in the U.S.) to Alimera for regulatory approval and distribution under its ILUVIEN trade name in EMEA and (ii) converted the net profit share arrangement for each licensed product (including ILUVIEN) under the Prior Alimera Agreement to a sales-based royalty on a calendar quarter basis commencing July 1, 2017, with payments from Alimera due 60 days following the end of each quarter.

Following the completion of the Amended Alimera Agreement, Alimera filed a Type II variation in December 2017 for ILUVIEN for the treatment of non-infectious uveitis affecting the posterior segment of the eye in all seventeen European countries in which it previously received regulatory approval for ILUVIEN for DME. In March 2019, Alimera received regulatory approval for the uveitis indication. After the label for this new indication is finalized consistent with each such country’s local requirements, Alimera has indicated that it plans to commercialize the product for this indication under its ILUVIEN trademark.

Under the Amended Alimera Agreement, sales-based royalties started at the rate of 2%. Commencing December 12, 2018, the royalty rate increased to 6% on aggregate calendar year net sales up to $75 million and to 8% on any calendar year net sales in excess of $75 million. Alimera’s share of contingently recoverable accumulated ILUVIEN commercialization losses under the Prior Alimera Agreement, capped at $25 million, are being reduced as follows: (i) $10.0 million was cancelled in lieu of an upfront license fee on the effective date of the Amended Alimera Agreement; (ii) for the period from December 12, 2018 through calendar year 2020, 50% of earned sales-based royalties in excess of 2% will be offset against quarterly royalty payments otherwise due from Alimera; (iii) in March 2019, another $5.0 million was cancelled upon Alimera’s receipt of regulatory approval for ILUVIEN for the uveitis indication; and (iv) commencing in calendar year 2021, 20% of earned sales-based royalties in excess of 2% will be offset against quarterly royalty payments otherwise due from Alimera until such time as the balance of the original $25 million of recoverable commercialization losses has been fully recouped. At June 30, 2019, the remaining recoverable balance of these commercialization losses was approximately $9.4 million.

Revenue recognized under the Amended Alimera Agreement totaled $505,000 and $199,000 for the three months ended June 30, 2019 and 2018, respectively, and $1,056,000 and $433,000 for the six months ended June 30, 2019 and 2018, respectively. In addition to patent fee reimbursements in both periods, the Company recorded $500,000 and $196,000 of sales-based royalty income for the three months ended June 30, 2019 and 2018, respectively, and $1,016,000 and $379,000 for the six months ended June 30, 2019 and 2018, respectively.

Bausch & Lomb

Pursuant to a licensing and development agreement, as amended, Bausch & Lomb has a worldwide exclusive license to make and sell Retisert in return for royalties based on sales. Royalty income was $0 and $301,000 for the three months ended June 30, 2019 and 2018, respectively, and $204,000 and $522,000 for the six months ended June 30, 2019 and 2018, respectively. Accounts receivable from Bausch & Lomb was $0 at June 30, 2019 and $253,000 at December 31, 2018.

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OncoSil Medical

The Company entered into an exclusive, worldwide royalty-bearing license agreement in December 2012, amended and restated in March 2013, with OncoSil Medical UK Limited (f/k/a Enigma Therapeutics Limited), a wholly-owned subsidiary of OncoSil Medical Ltd (“OncoSil”) for the development of BrachySil, the Company’s previous product candidate for the treatment of pancreatic and other types of cancer. The Company received an upfront fee of $100,000 and is entitled to 8% sales-based royalties, 20% of sublicense consideration and milestone payments based on aggregate product sales. OncoSil is obligated to pay an annual license maintenance fee of $100,000 by the end of each calendar year, the most recent of which was received in December 2018. For each calendar year commencing with 2014, the Company is entitled to receive reimbursement of any patent maintenance costs, sales-based royalties and sub-licensee sales-based royalties earned, but only to the extent such amounts, in the aggregate, exceed the $100,000 annual license maintenance fee. As of June 30, 2019, OncoSil has not received regulatory approval in any jurisdiction. In March 2019 the Clinical Oversight Committee of the British Standards Institute (“BSI”) advised OncoSil that insufficient clinical benefit had been demonstrated to recommend approval of its longstanding CE Mark application. OncoSil is awaiting confirmation of a follow-up meeting with BSI to discuss next steps. The Company has no consequential performance obligations under the OncoSil license agreement. No revenue was recognized related to the OncoSil agreement for each of the three and six months ended June 30, 2019 and 2018. As of June 30, 2019, no deferred revenue was recorded for this agreement.

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 in the greater China territory, which is comprised of 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 approximately $10 million upon the achievement by Ocumension of certain prescribed development, regulatory and commercial sales-based milestones. In addition, the Company is entitled to receive mid-single digit sales-based royalties.

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. Ocumension has a first right of negotiation for an additional exclusive license to the Company’s shorter-duration line extension candidate for this indication.

During the three and six months ended June 30, 2019, $0 and $30,000, respectively, attributable to the Company’s technical assistance obligation was recognized as revenue. At June 30, 2019, no deferred revenue was recorded for this agreement.

Feasibility Study 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. No revenue under feasibility study agreements was recognized for the three and six months ended June 30, 2019, and revenues of $215,000 and $685,000 were recognized for the three and six months ended June 30, 2018, respectively. At June 30, 2019, no deferred revenue was recorded for any such agreements.

 

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5.

Intangible Assets

The reconciliation of intangible assets for the six months ended June 30, 2019 and 2018 was as follows (in thousands):

 

 

 

June 30,

 

 

June 30,

 

 

 

2019