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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 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: 001-36554

Ocular Therapeutix, Inc.

(Exact name of registrant as specified in its charter)

Delaware

20-5560161

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

24 Crosby Drive

Bedford, MA

01730

(Address of principal executive offices)

(Zip Code)

(781) 357-4000

(Registrant’s telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

OCUL

The Nasdaq Global 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 (§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  

As of November 1, 2020, there were 71,391,376 shares of Common Stock, $0.0001 par value per share, outstanding.

Table of Contents

Ocular Therapeutix, Inc.

INDEX

    

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

3

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

3

Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2020 and 2019

4

Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

5

Consolidated Statements of Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2020 and 2019

6

Notes to Consolidated Financial Statements

8

Item 2.

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

30

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

63

Item 4.

Controls and Procedures

63

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

65

Item 1A.

Risk Factors

67

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

117

Item 5.

Other Items

117

Item 6.

Exhibits

117

SIGNATURES

119

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “target,” “potential,” “goals,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

our commercialization efforts for our product DEXTENZA®;

our plans to develop, seek regulatory approval for and commercialize DEXTENZA for additional indications, including for the treatment of ocular itching associated with allergic conjunctivitis, and our other product candidates based on our proprietary bioresorbable hydrogel technology platform;

our ability to manufacture DEXTENZA, ReSure Sealant® and our product candidates in compliance with current Good Manufacturing Practices, or cGMP;

our ability to manage a sales, marketing and distribution infrastructure to support the commercialization of DEXTENZA;
the timing of and our ability to submit applications and obtain and maintain regulatory approvals for DEXTENZA, including the submission of a supplemental new drug application for the approval of the treatment of ocular itching associated with allergic conjunctivitis as an additional indication, and other product candidates;
our estimates regarding expenses; future revenue; the sufficiency of our cash resources; our ability to fund our operating expenses, debt service obligations and capital expenditure requirements; and our needs for additional financing;

our plans to raise additional capital, including through equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, royalty agreements and marketing and distribution arrangements;

our ongoing and planned clinical trials, including our Phase 1 clinical trial of OTX-TIC for the reduction of intraocular pressure in patients with primary open-angle glaucoma or ocular hypertension, our Phase 1 clinical trial of OTX-TKI for the treatment of wet age-related macular degeneration, or wet AMD, and our Phase 2 clinical trial of OTX-CSI for the chronic treatment of dry eye disease;

the potential advantages of DEXTENZA, ReSure Sealant, and our product candidates;
the rate and degree of market acceptance and clinical utility of our products and our ability to secure and maintain reimbursement for our products;
our estimates regarding the market opportunity for DEXTENZA, ReSure Sealant and our other product candidates;

the preclinical and clinical development of our product candidate for the short-term treatment of the signs and symptoms of dry eye disease and our intravitreal implant with protein-based or small molecule drugs, including tyrosine kinase inhibitors, for the treatment of wet AMD, diabetic macular edema, or DME, and retinal vein occlusion, or RVO;

1

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our strategic collaboration, option and license agreement with Regeneron Pharmaceuticals, Inc. under which we are collaborating on the development of an extended-delivery formulation of the vascular endothelial growth factor, trap aflibercept, currently marketed under the brand name Eylea, for the treatment of wet AMD, DME and RVO;

our license agreement and collaboration with AffaMed Therapeutics Limited under which we are collaborating on the commercialization of DEXTENZA and our product candidate OTX-TIC in mainland China and certain other Asian jurisdictions;

our capabilities and strategy, and the costs and timing of manufacturing, sales, marketing, distribution and other commercialization efforts, with respect to DEXTENZA, ReSure Sealant and any additional products for which we may obtain marketing approval in the future;

our intellectual property position;

our ability to identify additional products, product candidates or technologies with significant commercial potential that are consistent with our commercial objectives, including potential opportunities outside the field of ophthalmology;
the impact of government laws and regulations;

the costs and outcomes of legal actions and proceedings;

our ability to continue as a going concern;

uncertainty regarding the extent to which the COVID-19 pandemic and related response measures will adversely affect our business, results of operations and financial condition; and

our competitive position.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q that could cause actual results or events to differ materially from the forward-looking statements that we make. Additional discussion of these and other risks, uncertainties and factors may be found under the heading “Risk Factors” in Part II, Item 1A in this Quarterly Report on Form 10-Q. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations, or investments we may make.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to the Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements included in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q. We do not assume, and we expressly disclaim, any obligation or undertaking to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

2

Table of Contents

 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

Ocular Therapeutix, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

September 30, 

December 31, 

    

2020

    

2019

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

70,642

$

54,437

Accounts receivable, net

 

7,779

 

2,548

Inventory

 

1,154

 

954

Prepaid expenses and other current assets

 

2,328

 

2,231

Total current assets

 

81,903

 

60,170

Property and equipment, net

 

8,490

 

10,151

Restricted cash

 

1,764

 

1,764

Operating lease assets

6,062

6,655

Total assets

$

98,219

$

78,740

Liabilities and Stockholders’ Equity (Deficit)

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

3,238

$

3,268

Accrued expenses and other current liabilities

 

12,165

 

7,635

Operating lease liabilities

1,297

1,126

Notes payable, net of discount, current

 

6,206

 

Total current liabilities

 

22,906

 

12,029

Operating lease liabilities, net of current portion

7,909

8,905

Derivative liability

28,764

12,124

Notes payable, net of discount

 

18,964

 

25,007

2026 convertible notes, net

 

23,802

 

24,305

Total liabilities

 

102,345

 

82,370

Commitments and contingencies (Note 13)

 

  

 

  

Stockholders’ equity (deficit):

 

  

 

  

Preferred stock, $0.0001 par value; 5,000,000 shares authorized and no shares issued or outstanding at September 30, 2020 and December 31, 2019

 

 

Common stock, $0.0001 par value; 100,000,000 shares authorized and 63,070,980 and 50,333,559 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively

 

6

 

5

Additional paid-in capital

 

449,507

 

379,980

Accumulated deficit

 

(453,639)

 

(383,615)

Total stockholders’ deficit

 

(4,126)

 

(3,630)

Total liabilities and stockholders’ equity (deficit)

$

98,219

$

78,740

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

 

3

Table of Contents

Ocular Therapeutix, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(Unaudited)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

  

2020

    

2019

    

2020

    

2019

Revenue:

 

  

 

  

 

  

 

  

Product revenue, net

$

5,876

$

829

$

10,054

$

1,971

Total revenue, net

 

5,876

 

829

 

10,054

 

1,971

Costs and operating expenses:

 

  

 

  

 

  

 

  

Cost of product revenue

 

450

 

806

 

1,403

 

1,486

Research and development

 

6,951

 

10,235

 

21,070

 

30,966

Selling and marketing

 

6,520

 

6,777

 

19,803

 

17,349

General and administrative

 

5,961

 

6,155

 

16,282

 

16,571

Total costs and operating expenses

 

19,882

 

23,973

 

58,558

 

66,372

Loss from operations

 

(14,006)

 

(23,144)

 

(48,504)

 

(64,401)

Other income (expense):

 

  

 

  

 

  

 

  

Interest income

 

6

 

308

 

162

 

1,016

Interest expense

 

(1,715)

 

(1,651)

 

(5,042)

 

(4,296)

Change in fair value of derivative liability

3,771

5,717

(16,640)

7,334

Other income (expense), net

 

 

(8)

 

 

(8)

Total other income (expense), net

 

2,062

 

4,366

 

(21,520)

 

4,046

Net loss and comprehensive loss

$

(11,944)

$

(18,778)

$

(70,024)

$

(60,355)

Net loss per share, basic

$

(0.19)

$

(0.40)

$

(1.22)

$

(1.37)

Weighted average common shares outstanding, basic

 

62,992,558

 

46,944,536

 

57,440,885

 

44,052,470

Net loss per share, diluted

$

(0.21)

$

(0.45)

$

(1.22)

$

(1.37)

Weighted average common shares outstanding, diluted

 

68,761,790

 

52,713,768

 

57,440,885

 

44,052,470

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

 

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Ocular Therapeutix, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Nine Months Ended

September 30, 

  

2020

    

2019

Cash flows from operating activities:

 

  

 

  

Net loss

$

(70,024)

$

(60,355)

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

 

 

  

Stock-based compensation expense

 

5,427

 

6,806

Non-cash interest expense

 

3,279

 

2,469

Change in fair value of derivative liability

16,640

(7,334)

Depreciation and amortization expense

 

2,106

 

1,856

(Gain)/loss on disposal of property and equipment

 

 

7

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

(5,231)

 

(913)

Prepaid expenses and other current assets

 

(97)

 

(500)

Inventory

 

(200)

 

(678)

Operating lease assets

593

552

Accounts payable

 

113

 

32

Accrued expenses

 

911

 

543

Operating lease liabilities

 

(825)

 

(596)

Net cash used in operating activities

 

(47,308)

 

(58,111)

Cash flows from investing activities:

 

  

 

  

Purchases of property and equipment

 

(588)

 

(1,637)

Net cash used in investing activities

 

(588)

 

(1,637)

Cash flows from financing activities:

 

  

 

  

Proceeds from issuance of 2026 convertible notes, net of issuance costs

37,275

Proceeds from exercise of stock options

 

1,044

 

34

Proceeds from issuance of common stock pursuant to employee stock purchase plan

 

350

 

294

Proceeds from the Paycheck Protection Program Loan

3,201

Repayment of the Paycheck Protection Program Loan

(3,201)

Proceeds from issuance of common stock upon public offering, net

 

62,707

 

28,647

Net cash provided by financing activities

 

64,101

 

66,250

Net increase in cash, cash equivalents and restricted cash

 

16,205

 

6,502

Cash, cash equivalents and restricted cash at beginning of period

 

56,201

 

60,676

Cash, cash equivalents and restricted cash at end of period

$

72,406

$

67,178

Supplemental disclosure of non-cash investing and financing activities:

 

  

 

  

Additional right of use asset and related lease liability

$

$

2,044

Additions to property and equipment included in accounts payable and accrued expenses at balance sheet dates

$

71

$

464

Derivative liability in connection with issuance of 2026 convertible notes

$

$

16,434

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

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Ocular Therapeutix, Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands, except share data)

(Unaudited)

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

    

Shares

    

Par Value

    

Capital

    

Deficit

    

Equity (Deficit)

Balances at December 31, 2019

50,333,559

$

5

$

379,980

$

(383,615)

$

(3,630)

Issuance of common stock upon exercise of stock options

 

46,321

 

 

128

 

 

128

Issuance of common stock upon public offering, net of issuance costs

 

2,657,823

 

 

12,690

 

 

12,690

Stock-based compensation expense

 

 

 

1,665

 

 

1,665

Net loss

 

 

 

 

(21,512)

 

(21,512)

Balances at March 31, 2020

 

53,037,703

$

5

$

394,463

$

(405,127)

$

(10,659)

Issuance of common stock upon exercise of stock options

 

75,862

 

 

378

 

 

378

Issuance of common stock in connection with employee stock purchase plan

 

104,579

 

 

350

 

 

350

Issuance of common stock upon public offering, net of issuance costs

 

9,735,649

 

1

 

50,016

 

 

50,017

Stock-based compensation expense

 

 

 

1,826

 

 

1,826

Net loss

 

 

 

 

(36,568)

 

(36,568)

Balances at June 30, 2020

 

62,953,793

$

6

$

447,033

$

(441,695)

$

5,344

Issuance of common stock upon exercise of stock options

 

117,187

 

 

538

 

 

538

Stock-based compensation expense

 

 

 

1,936

 

 

1,936

Net loss

 

 

 

 

(11,944)

 

(11,944)

Balances at September 30, 2020

 

63,070,980

$

6

$

449,507

$

(453,639)

$

(4,126)

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

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Ocular Therapeutix, Inc.

Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

(Unaudited)

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

    

Shares

    

Par Value

    

Capital

    

Deficit

    

Equity

Balances at December 31, 2018

 

41,518,091

$

4

$

333,114

$

(297,243)

$

35,875

Issuance of common stock upon exercise of stock options

 

406

 

 

1

 

 

1

Issuance of common stock upon public offering, net of issuance costs

 

1,318,481

 

 

4,954

 

 

4,954

Stock-based compensation expense

 

 

 

1,942

 

 

1,942

Net loss

 

 

 

 

(17,124)

 

(17,124)

Balances at March 31, 2019

 

42,836,978

$

4

$

340,011

$

(314,367)

$

25,648

Issuance of common stock in connection with employee stock purchase plan

 

84,238

 

 

294

 

 

294

Issuance of common stock upon public offering, net of issuance costs

 

1,180,367

 

 

5,074

 

 

5,074

Stock-based compensation expense

 

 

 

1,695

 

 

1,695

Net loss

 

 

 

 

(24,453)

 

(24,453)

Balances at June 30, 2019

 

44,101,583

$

4

$

347,074

$

(338,820)

$

8,258

Issuance of common stock upon exercise of stock options

 

16,389

 

 

33

 

 

33

Issuance of common stock upon public offering, net of issuance costs

 

3,961,643

 

1

 

18,618

 

 

18,619

Stock-based compensation expense

 

 

 

3,169

 

 

3,169

Net loss

 

 

 

 

(18,778)

 

(18,778)

Balances at September 30, 2019

 

48,079,615

$

5

$

368,894

$

(357,598)

$

11,301

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

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Ocular Therapeutix, Inc.

Notes to the Consolidated Financial Statements

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

(Unaudited)

1. Nature of the Business and Basis of Presentation

Ocular Therapeutix, Inc. (the “Company”) was incorporated on September 12, 2006 under the laws of the State of Delaware. The Company is a biopharmaceutical company focused on the formulation, development and commercialization of innovative therapies for diseases and conditions of the eye using its proprietary, bioresorbable hydrogel platform technology. The Company’s product pipeline candidates provide differentiated drug delivery solutions that reduce the complexity and burden of the current standard of care (eye drops) by creating local programmed-release alternatives. Since inception, the Company’s operations have been primarily focused on organizing and staffing the Company, acquiring rights to intellectual property, business planning, raising capital, developing its technology, identifying potential product candidates, undertaking preclinical studies and clinical trials, manufacturing initial quantities of its products and product candidates, building the initial sales and marketing infrastructure for the commercialization of the Company’s approved products and product candidates and launching its initial product.

The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations, regulatory approval and compliance, reimbursement, uncertainty of market acceptance of products and the need to obtain additional financing. Recently approved products will require significant sales, marketing and distribution support up to and including upon their launch. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization.

As of September 30, 2020, the Company’s lead product, DEXTENZA® (dexamethasone insert) 0.4mg, and its hydrogel ophthalmic wound sealant, ReSure Sealant®, have been approved by the U.S. Food and Drug Administration (the “FDA”) and the Company’s other product candidates are in clinical stage development. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary government regulatory approval and adequate reimbursement or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapidly changing technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees and consultants. The Company may not be able to generate significant revenue from sales of any product for several years, if at all. Accordingly, the Company will need to obtain additional capital to finance its operations.

The Company has incurred recurring losses and negative cash flows from operations since inception, including a net loss of $70,024 for the nine months ended September 30, 2020. As of September 30, 2020, the Company had an accumulated deficit of $453,639

As of November 5, 2020, the issuance date of this Quarterly Report on Form 10-Q, the Company believes that its existing cash and cash equivalents of $70,642, as of September 30, 2020, along with proceeds of $75,675 from the sale of the Company’s common stock, net of underwriting discounts and commissions but before deducting offering expenses, in October 2020 (Note 15), will enable the Company to fund its planned operating expenses, debt service obligations and capital expenditure requirements for at least the next twelve months. This estimate is based on the Company’s currently forecasted operating plan which includes estimates of anticipated cash inflows from DEXTENZA and ReSure Sealant product sales and cash outflows from operating expenses. These estimates are subject to various assumptions including those related to the severity and duration of the COVID-19 pandemic, the revenues and expenses associated with the commercialization of DEXTENZA, the pace of the Company’s research and clinical development programs, and other aspects of the Company’s business.

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The future viability of the Company is dependent on its ability to generate product sales, raise capital or reduce spending to finance its operations. The Company expects to seek additional funds through equity offerings, debt financings, government or other third-party funding, collaborations, strategic alliances, licensing arrangements, royalty agreements, and marketing and distribution arrangements. If the Company is unable to obtain financing, the Company would be forced to delay, reduce or eliminate its research and development programs or any future commercialization efforts or to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to the Company. The ability to raise capital and the actions necessary to reduce spending to a level that mitigates the factors described above are not considered probable, as defined in the accounting standards.

The accompanying unaudited interim financial statements of the Company have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying unaudited interim financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the ability to continue as a going concern.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

Unaudited Interim Financial Information

The balance sheet at December 31, 2019 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying unaudited financial statements as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019 have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K on file with the SEC. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of September 30, 2020 and results of operations and cash flows for the three and nine months ended September 30, 2020 and 2019 have been made. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020.

Risks and Uncertainties

The Company is monitoring the potential impact of COVID-19, if any, on the carrying value of certain assets. To date, the Company has not experienced material business disruption, nor has it incurred impairment of any assets as a result of COVID-19. The extent to which these events may impact the Company’s business will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of the COVID-19 pandemic and any resulting disruption to the Company’s operations is uncertain, and the Company will continue to assess the impact of COVID-19 on its financial position.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, revenue recognition and the fair value of derivatives.  The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition, and those of its customers, vendors, suppliers, and collaboration partners, will depend on future developments that are highly uncertain, subject to change and difficult to predict, including new information that may emerge concerning COVID-19, the actions taken to

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contain it or treat its impact and the economic impact on local, regional, national and international customers and markets. The Company has made estimates of the impact of COVID-19 within its financial statements, and there may be changes to those estimates in future periods. Actual results may differ from these estimates.

Fair Value Measurements

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

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

Level 2—Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s cash equivalents at September 30, 2020 and December 31, 2019, were carried at fair value determined according to the fair value hierarchy described above (Note 3). The Company’s derivative liability at September 30, 2020 was carried at fair value determined according to the fair value hierarchy described above and classified as a Level 3 measurement. The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short-term nature of these assets and liabilities.

The carrying value of the Company’s variable interest rate notes payable (Note 9) are recorded at amortized costs, which approximates fair value due to their short-term nature.

On March 1, 2019, the Company issued $37,500 aggregate principal amount of unsecured senior subordinated convertible notes (the “2026 Convertible Notes”) (Note 6) and this is carried, net of derivative liability, at its amortized cost of $23,802 at September 30, 2020. The estimated fair value of the 2026 Convertible Notes was $55,941 at September 30, 2020. The fair value of the 2026 Convertible Notes was estimated utilizing a binomial lattice model which requires the use of Level 3 unobservable inputs. The main input when determining the fair value for disclosure purposes is the bond yield which is updated each period to reflect the yield of a comparable instrument issued as of the valuation date. The estimated fair value presented is not necessarily indicative of an amount that could be realized in a current market exchange. The use of alternative inputs and estimation methodologies could have a material effect on these estimates of fair value.

Revenue Recognition

The Company recognizes product revenue from DEXTENZA for the treatment of post-surgical ocular inflammation and pain, which it began selling to customers in June 2019, and ReSure Sealant. The Company has generated limited revenues from ReSure Sealant to date and does not expect significant future sales.

In November 2018, the FDA approved DEXTENZA for the treatment of ocular pain following ophthalmic surgery. The Company entered into a limited number of arrangements with specialty distributors in the United States to distribute DEXTENZA. The Company recognizes revenue in accordance with Accounting Standards Codification 606 – Revenue from Contracts with Customers (“Topic 606”). Topic 606 applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance arrangements and financial instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services.

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To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity 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 arrangements that meet the definition of a contract with a customer under Topic 606, including when it is probable that the Company 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 Topic 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. For a complete discussion of accounting for product revenue, see Product Revenue, Net (below).

Product Revenue, Net— The Company derives its product revenues from the sale of DEXTENZA in the United States to customers, which includes a limited number of specialty distributors, who then subsequently resell DEXTENZA to clinics and certain medical centers or hospitals. In addition to distribution agreements with customers, the Company enters into arrangements with government payers that provide for government mandated rebates and chargebacks with respect to the purchase of DEXTENZA.    

The Company recognizes revenue on product sales when the customer obtains control of the Company's product, which occurs at a point in time (upon delivery to the customer). The Company has determined that the delivery of DEXTENZA to its customers constitutes a single performance obligation.  There are no other promises to deliver goods or services beyond what is specified in each accepted customer order.  The Company has assessed the existence of a significant financing component in the agreements with its customers.  The trade payment terms with the Company’s customers do not exceed one year and therefore the Company has elected to apply the practical expedient and no amount of consideration has been allocated as a financing component.  Product revenues are recorded net of applicable reserves for variable consideration, including rebates, discounts and allowances.

Transaction Price, including Variable Consideration— Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, government chargebacks, discounts and rebates, and other incentives, such as voluntary patient assistance, and other fee-for-service amounts that are detailed within contracts between the Company and its customers relating to the Company’s sale of DEXTENZA. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). These estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. 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.

The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price, only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the Company’s original estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

Trade Discounts and Allowances—The Company compensates (through trade discounts and allowances) its customers for sales order management, data, and distribution services. However, the Company has determined such services received to date are not distinct from the Company’s sale of products to the customer and, therefore, these payments have been recorded as a reduction of revenue within the statement of operations and comprehensive loss through September 30, 2020, as well as a reduction to accounts receivables, net on the consolidated balance sheets.

Product Returns— Consistent with industry practice, the Company generally offers customers a limited right of return for product in certain circumstances that has been purchased from the Company as further discussed below.  The Company estimates the amount of its product sales that may be returned by its customers and records this estimate as a

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reduction of revenue in the period the related product revenue is recognized, as well as within accrued expenses and other current liabilities, in the accompanying consolidated balance sheets. The Company currently estimates product return reserves using available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel. The Company believes the returns of DEXTENZA will be minimal.

The Company’s limited right of return allows for eligible returns of DEXTENZA in the following circumstances:

Shipment errors that were the result of an error by the Company;
Quantity delivered that is greater or less than the quantity ordered;
Product distributed by the Company that is damaged in transit prior to receipt by the customer;
Product from physicians, clinics, medical centers and hospitals that was not administered to the patient that is rendered non-usable due to spoilage or mishandling;
Expired product, previously purchased directly from the Company, that is returned during the period beginning six months prior to the product’s expiration date and ending twelve months after the product’s expiration date;
Product subject to a recall; and
Product that the Company, at its sole discretion, has specified to be returned.

Government Chargebacks— Chargebacks for fees and discounts to qualified government healthcare providers represent the estimated obligations resulting from contractual commitments to sell products to qualified U.S. Department of Veterans Affairs hospitals and 340B entities at prices lower than the list prices charged to customers who directly purchase the product from the Company.  The 340B Drug Discount Program is a U.S. federal government program created in 1992 that requires drug manufacturers to provide outpatient drugs to eligible health care organizations and covered entities at significantly reduced prices.   Customers charge the Company for the difference between what they pay for the product and the statutory selling price to the qualified government entity. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivables, net. Chargeback amounts are generally determined at the time of resale to the qualified government healthcare provider by customers, and the Company generally issues credits for such amounts within a few weeks of the customer’s notification to the Company of the resale. Reserves for chargebacks consist of credits that the Company expects to issue for units that remain in the distribution channel inventories at each reporting period-end that the Company expects will be sold to qualified healthcare providers, and chargebacks that customers have claimed but for which the Company has not yet issued a credit.

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 consolidated balance sheets. For Medicare, the Company also estimates the number of patients in the prescription drug coverage gap for whom the Company will owe an additional liability under the Medicare Part D program. For Medicaid programs, the Company estimates the portion of sales attributed to Medicaid patients and records a liability for the rebates to be paid to the respective state Medicaid programs.  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.

Other Incentives— Other incentives which the Company offers include voluntary patient assistance programs, such as the co-pay assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payers. 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 but remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a

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reduction of product revenue and the establishment of a current liability which is included as accrued expenses and other current liabilities on the consolidated balance sheets.

Concentration of Credit Risk and of Significant Suppliers and Customers

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company has all cash and cash equivalents balances at one accredited financial institution, in amounts that exceed federally insured limits. The Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

The Company is dependent on a small number of third-party manufacturers to supply products for research and development activities in its preclinical and clinical programs and for sales of its products. The Company’s development programs as well as revenue from future sales of its product sales could be adversely affected by a significant interruption in the supply of any of the components of these products.

For the three and nine months ended September 30, 2020, three individual customers accounted for 39%, 38% and 10% and three individual customers accounted for 40%, 30%, and 12%, respectively, of the Company’s total revenue. At September 30, 2020, three individual customers accounted for 44%, 35% and 11% of the Company’s total accounts receivable. No other customer accounted for more than 10% of total revenue or accounts receivable at September 30, 2020.

For the three and nine months ended September 30, 2019, two individual customers accounted for 13% and 10%, and one individual customer accounted for 18%, respectively, of the Company’s total revenue. At December 31, 2019, three individual customers accounted for 39%, 18% and 11% of the Company’s total accounts receivable. No other customer accounted for more than 10% of total accounts receivable for the year ended December 31, 2019.

Inventory

The Company values its inventories at the lower of cost or estimated net realizable value.

Inventory consisted of the following:

September 30, 

December 31, 

    

2020

    

2019

 

Raw materials

$

333

$

217

Work-in-process

75

148

Finished goods

 

746

 

589

$

1,154

$

954

Derivative Liability

The 2026 Convertible Notes allow the holders to convert all or part of the outstanding principal of their 2026 Convertible Notes into shares of the Company’s common stock provided that no conversion results in a holder beneficially owning more than 19.99% of the issued and outstanding common stock of the Company. The entire embedded conversion option is required to be separated from the 2026 Convertible Notes and accounted for as a freestanding derivative instrument subject to derivative accounting. Therefore, the entire conversion option is bifurcated from the underlying debt instrument and accounted for and valued separately from the host instrument. The Company measures the value of the embedded conversion option at its estimated fair value and recognizes changes in the estimated fair value in other income (expense), net in the consolidated statements of operations and comprehensive loss during the period of change. The embedded conversion is recognized as a derivative liability in the Company’s consolidated balance sheet.

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Restricted Cash

The Company held restricted cash of $1,764 at September 30, 2020 and December 31, 2019, on its consolidated balance sheet. The Company held restricted cash as security deposits for the lease of its manufacturing space and corporate headquarters.

The Company’s statements of cash flows include restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on such statements. A reconciliation of the cash, cash equivalents, and restricted cash reported within the balance sheet that sum to the total of the same amounts shown in the statement of cash flows is as follows:

September 30, 

September 30, 

December 31, 

    

2020

    

2019

    

2019

    

Cash and cash equivalents

$

70,642

$

65,414

$

54,437

Restricted cash

1,764

1,764

1,764

Total cash, cash equivalents and restricted cash as shown on the statements of cash flows

$

72,406

$

67,178

$

56,201

Net Loss Per Share

The Company follows the two-class method when computing net loss per share. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based on their respective rights to receive dividends as if all income for the period had been distributed.

Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted net loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities, including the assumed conversion of the Company’s 2026 Convertible Notes and the exercise of outstanding stock options and common stock warrants, except where the result would be anti-dilutive. Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares assuming the dilutive effect of the conversion of the 2026 Convertible Notes and the exercise of outstanding stock options and common stock warrants. In the diluted net loss per share calculation, net loss would also be adjusted for the elimination of interest expense on the 2026 Convertible Notes (which includes amortization of the discount created upon bifurcation of the conversion option from the debt) and the mark-to-market gain or loss each period to the bifurcated conversion option, if the impact was not anti-dilutive.

Recently Issued and Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). This standard modifies certain disclosure requirements on fair value measurements. This standard became effective for the Company on January 1, 2020 and did not have a material impact on the Company’s disclosures.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”). ASU 2018-18 makes targeted improvements to GAAP for collaborative arrangements, including (i) clarification that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (ii) adding unit-of-account guidance in Topic 808, Collaborative Arrangements, to align with the guidance in Topic 606 and (iii) a requirement that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. This

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guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. This standard became effective for the Company on January 1, 2020 and the adoption of ASU 2018-18 did not have a material impact on its consolidated financial statements and related disclosures.

In December 2019, the FASB issued amendments to accounting guidance that simplify the accounting for income taxes, as part of its initiative to reduce complexity in the accounting standards. The amendments eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The amendments also clarify and simplify other aspects of the accounting for income taxes. The Company early adopted the amendments as of January 1, 2020, on a prospective basis. The amendments did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (‘‘ASU 2016-13’’), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes may result in earlier recognition of credit losses. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which narrowed the scope and changed the effective date for non-public entities for ASU 2016-13. The FASB subsequently issued supplemental guidance within ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief (‘‘ASU 2019-05’’). ASU 2019-05 provides an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For public entities that are Securities and Exchange Commission filers, excluding entities eligible to be smaller reporting companies, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. For all other entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. This standard will be effective for the Company on January 1, 2023. The Company is currently evaluating the potential impact that this standard may have on its consolidated financial statements and related disclosures.

In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). This standard amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share guidance for both Subtopics. The amendments in the ASU are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The FASB also specified that an entity should adopt the guidance as of the beginning of its fiscal year and is not permitted to adopt the guidance in an interim period. The Company is assessing the impact of ASU 2020-06 on its consolidated financial statements.

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3. Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 and indicate the level of the fair value hierarchy utilized to determine such fair value:

Fair Value Measurements as of

September 30, 2020 Using:

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

  

 

  

 

  

 

  

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

$

66,369

$

$

66,369

Liability:

Derivative liability (Note 5)

28,764

28,764

Total

$

$

66,369

$

28,764

$

95,133

Fair Value Measurements as of

December 31, 2019 Using:

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

  

 

  

 

  

 

  

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

$

45,156

$

$

45,156

Liability:

 

  

 

  

 

  

 

  

Derivative liability (Note 5)

 

 

 

12,124

 

12,124

Total

$

$

45,156

$

12,124

$

57,280

4. Accrued Expenses

Accrued expenses as of September 30, 2020 and December 31, 2019 consisted of the following:

September 30, 

December 31, 

    

2020

    

2019

Accrued payroll and related expenses

$

5,395

$

5,042

Accrued professional fees

 

701

 

1,011

Accrued research and development expenses

 

845

 

849

Accrued interest payable on 2026 convertible notes

 

3,619

 

Accrued other

 

1,605

 

733

$

12,165

$

7,635

5. Derivative Liability

The 2026 Convertible Notes (Note 6) contained an embedded conversion option that met the criteria to be bifurcated and accounted for separately (the “Derivative Liability”) from the 2026 Convertible Notes. The Derivative Liability was recorded at fair value upon the issuance of the 2026 Convertible Notes and is subsequently remeasured to fair value at each reporting period.  The Derivative Liability was initially valued and remeasured using a “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument on an as-is basis and then valuing the instrument without the embedded conversion option. The difference between the entire instrument with the embedded conversion option compared to the instrument without the embedded conversion option is the fair value of the derivative, recorded as the Derivative Liability.

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The fair value of the 2026 Convertible Notes with and without the conversion option is estimated using a binomial lattice approach. The main inputs to valuing the 2026 Convertible Notes with the conversion option as of September 30, 2020 include the Company’s stock price on the valuation date ($7.61 on September 30, 2020), the expected annual volatility of the Company’s stock (100%) and the bond yield (13.0%), which was derived by making the fair value of the 2026 Convertible Notes equal to the face value on the issuance date. Fair value measurements are highly sensitive to changes in these inputs and significant changes in these inputs would result in a significantly higher or lower fair value.

A roll-forward of the derivative liability is as follows:

As of

    

September 30, 2020

Balance at December 31, 2019

$

12,124

Change in fair value

16,640

Balance at September 30, 2020

$

28,764

6. Convertible Notes

On March 1, 2019, the Company issued $37,500 of 2026 Convertible Notes. Each 2026 Convertible Note accrues interest at an annual rate of 6% of its outstanding principal amount, which is payable, along with the principal amount at maturity, on March 1, 2026, unless earlier converted, repurchased or redeemed. The Company includes the deferred interest in the balance of the 2026 Convertible Notes on its consolidated balance sheet. The effective annual interest rate for the 2026 Convertible Notes was 14.8% through September 30, 2020.

The holders of the 2026 Convertible Notes may convert all or part of the outstanding principal amount of their 2026 Convertible Notes into shares of the Company’s common stock, par value $0.0001 per share, prior to maturity and provided that no conversion results in a holder beneficially owning more than 19.99% of the issued and outstanding common stock of the Company. The conversion rate is initially 153.8462 shares of the Company’s common stock per $1,000 principal amount of the 2026 Convertible Notes, which is equivalent to an initial conversion price of $6.50 per share. The conversion rate is subject to adjustment in customary circumstances such as stock splits or similar changes to the Company’s capitalization.

At its election, the Company may choose to make such conversion payment in cash, in shares of common stock, or a combination thereof. Upon any conversion of any 2026 Convertible Note, the Company is obligated to make a cash payment to the holder of such 2026 Convertible Note for any interest accrued but unpaid on the principal amount converted. Upon the occurrence of a Corporate Transaction (as defined below), each holder has the option to require the Company to repurchase all or part of the outstanding principal amount of such note at a repurchase price equal to 100% of the outstanding principal amount of the 2026 Convertible Note to be repurchased, plus accrued and unpaid interest to, but excluding the repurchase date. In addition, each holder is entitled to receive an additional make-whole cash payment in accordance with a table set forth in each 2026 Convertible Note.

Upon conversion by the holder, the Company has the right to select the settlement of the conversion in shares of common stock, cash, or in a combination thereof. In addition, the Company is obligated to make a cash payment to the holder of such 2026 Convertible Note for any interest accrued but unpaid on the principal amount converted.

If the Company elects to satisfy such conversion by shares of common stock, the Company shall deliver to the converting holder in respect of each $1,000 principal amount of 2026 Convertible Notes being converted a number of common shares equal to the conversion rate in effect on the conversion date;
If the Company elects to satisfy such conversion by cash settlement, the Company shall pay to the converting holder in respect of each $1,000 principal amount of 2026 Convertible Notes being converted cash in an amount equal to the sum of the Daily Conversion Values (as defined below) for each of the twenty (20) consecutive trading days during a specified period. The “Daily Conversion Values” is defined as each of the 20 consecutive trading days during the specified period, 5.0% of the product of (a) the conversion rate on such trading day and (b) the Daily VWAP on such trading day. The Daily VWAP is defined as each of the 20 consecutive trading days during the applicable

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observation period, the per share volume-weighted average price as displayed under the heading “Bloomberg VWAP” on the Bloomberg page for the Company.
If the Company elects to satisfy such conversion by combination, the Company shall pay or deliver, as the case may be, in respect of each $1,000 principal amount of 2026 Convertible Notes being converted, a settlement amount equal to the sum of the Daily Settlement Amounts (as defined below) for each of the twenty (20) consecutive trading days during the specified period. The “Daily Settlement Amount” is defined as, for each of the 20 consecutive trading days during the specified period: (a) cash in an amount equal to the lesser of (i) the Daily Measurement Value (as defined below) and (ii) the Daily Conversion Value on such Trading Day; and (b) if the Daily Conversion Value on such trading day exceeds the Daily Measurement Value, a number of shares equal to (i) the difference between the Daily Conversion Value and the Daily Measurement Value, divided by (ii) the Daily VWAP for such Trading Day. The “Daily Measurement Value” is defined as the Specified Dollar Amount (as defined below), if any, divided by 20. The “Specified Dollar Amount” is defined as the maximum cash amount per $1,000 principal amount of Notes to be received upon conversion as specified in the notice specifying the Company’s chosen settlement method.

In the event of a Corporate Transaction, the noteholder shall have the right to either (a) convert all of the unpaid principal at the conversion rate and receive a cash payment equal to (i) the outstanding accrued but unpaid interest under the 2026 Convertible Note to, but excluding, the corporate transaction conversion date (to the extent such date occurs prior to March 1, 2026, the maturity date of the 2026 Convertible Notes) plus (ii) an additional amount of consideration based on a sliding scale depending on the date of such as Corporate transaction or (b) require the Company to repurchase all or part of the outstanding principal amount of such 2026 Convertible Note at a repurchase price equal to 100% of the outstanding principal amount of the 2026 Convertible Note to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date.

A corporate transaction includes (i) a merger or consolidation executed through a tender offer or change of control (other than one in which stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation); (ii) a sale, lease, transfer, of all or substantially all of the assets of the Company; or (iii) if the Company’s common stock ceases to be listed or quoted on any of the New York Stock Exchange, the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market (the “Corporate Transaction”).

On or after March 1, 2022, if the last reported sale price of the common stock has been at least 130% of the conversion rate then in effect for 20 of the preceding 30 trading days (including the last trading day of such period), the Company is entitled, at its option, to redeem all or part of the outstanding principal amount of the 2026 Convertible Notes, on a pro rata basis, at an optional redemption price equal to 100% of the outstanding principal amount of the 2026 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the optional redemption date.

The 2026 Convertible Notes are subject to acceleration upon the occurrence of specified events of default, including a default or breach of certain contracts material to the Company and the delisting and deregistration of the Company’s common stock.

As discussed in Note 5, the Company determined that the embedded conversion option is required to be separated from the 2026 Convertible Notes and accounted for as a freestanding derivative instrument subject to derivative accounting. The allocation of proceeds to the conversion option results in a discount on the 2026 Convertible Notes. The Company is amortizing the discount to interest expense over the term of the 2026 Convertible Notes using the effective interest method.

A summary of the 2026 Convertible Notes at September 30, 2020 is as follows:

   

September 30, 

    

2020

2026 Convertible Notes

$

37,500

Less: unamortized discount

(13,698)

$

23,802

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7. Income Taxes

The Company did not provide for any income taxes in its consolidated statement of operations and comprehensive loss for the three and nine-month periods ended September 30, 2020 or 2019. The Company has provided a valuation allowance for the full amount of its net deferred tax assets because, at September 30, 2020 and December 31, 2019, it was more likely than not that any future benefit from deductible temporary differences and net operating loss and tax credit carryforwards would not be realized.

The Company has not recorded any amounts for unrecognized tax benefits as of September 30, 2020 or December 31, 2019. As of September 30, 2020 and December 31, 2019, the Company had no accrued interest or tax penalties recorded related to income taxes. The Company’s income tax return reporting periods since December 31, 2015 are open to income tax audit examination by the federal and state tax authorities. In addition, because the Company has net operating loss carryforwards, the Internal Revenue Service is permitted to audit earlier years and propose adjustments up to the amount of net operating losses generated in those years.

8. Collaboration Agreement

In October 2016, the Company entered into a Collaboration, Option and License Agreement (the “Collaboration Agreement”) with Regeneron Pharmaceuticals, Inc. (“Regeneron”) for the development and potential commercialization of products containing the Company’s extended-delivery hydrogel formulation in combination with Regeneron’s large molecule vascular endothelial growth factor (“VEGF”)-targeting compounds for the treatment of retinal diseases. The Collaboration Agreement does not cover the development of any product candidates that deliver small molecule drugs, including tyrosine kinase inhibitors, or TKIs, or deliver large molecule drugs other than those that target VEGF proteins.

Under the terms of the Collaboration Agreement, the Company and Regeneron have agreed to conduct a joint research program with the aim of developing an extended-delivery formulation of aflibercept, currently marketed under the tradename Eylea, that is suitable for advancement into clinical development. The Company has granted Regeneron an option (the “Option”) to enter into an exclusive, worldwide license to develop and commercialize products containing the Company’s hydrogel in combination with Regeneron’s large molecule VEGF-targeting compounds (“Regeneron Licensed Products”). Under the term of the Collaboration Agreement, Regeneron is responsible for funding an initial preclinical tolerability study.

If the Option is exercised, Regeneron will conduct further preclinical development and an initial clinical trial under a collaboration plan. The Company is obligated to reimburse Regeneron for certain development costs incurred by Regeneron under the collaboration plan during the period through the completion of the initial clinical trial, subject to a cap of $25,000, which cap may be increased by up to $5,000 under certain circumstances. If Regeneron elects to proceed with further development following the completion of the collaboration plan, it will be solely responsible for conducting and funding further development and commercialization of product candidates. If the Option is exercised, Regeneron is required to use commercially reasonable efforts to research, develop and commercialize at least one Regeneron Licensed Product. Such efforts shall include initiating the dosing phase of a subsequent clinical trial within specified time periods following the completion of the first-in-human clinical trial or the initiation of preclinical toxicology studies, subject to certain extensions.

Under the terms of the Collaboration Agreement, Regeneron has agreed to pay the Company $10,000 upon the exercise of the Option. If Regeneron elects to exercise the Option, the Company is also eligible to receive up to $145,000 per Regeneron Licensed Product upon the achievement of specified development and regulatory milestones, $100,000 per Regeneron Licensed Product upon first commercial sale of such Regeneron Licensed Product and up to $50,000 based on the achievement of specified sales milestones for all Regeneron Licensed Products. In addition, the Company is entitled to tiered, escalating royalties, in a range from a high-single digit to a low-to-mid teen percentage of net sales of Regeneron Licensed Products.

In December 2017, the Company delivered to Regeneron a proposed final formulation for the initial preclinical tolerability study. Regeneron initiated the preclinical study in early 2018. The Company and Regeneron have subsequently reached an understanding that the proposed formulation was not final and have ceased development of it.

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On May 8, 2020, the Company entered into an amendment (the “Amendment”) to the Collaboration Agreement. Pursuant to the Amendment, the Company and Regeneron have adopted a new work plan to transition joint efforts under the Collaboration Agreement to the research and development of an extended-delivery formulation of aflibercept to be delivered to the suprachoroidal space. Regeneron has agreed to pay personnel and material costs of the Company for specified preclinical development activities in connection with the revised work plan, as well as certain other costs. In addition, the Amendment provides for the modification of the terms of the Option previously granted to Regeneron under the Collaboration Agreement. As amended, the Option is exclusive for twenty-four months following May 8, 2020. Through September 30, 2020, the Option has not been exercised, and no payments have been made.

As of September 30, 2020, the Company has recorded $480 related to work performed for preclinical development activities in connection with the revised work plan which the Company has recorded as a reduction of research and development expense as this research is not an output of the Company’s ordinary business activities.

9. Notes Payable

The Company entered into a credit and security agreement in 2014 (as amended to date, the “Credit Agreement”) establishing the Company’s credit facility (the “Credit Facility”). The Company has a total borrowing capacity of $25,000 under the Credit Facility which has been fully drawn down as of September 30, 2020.

In December 2018, the Company amended the terms of the Credit Agreement to increase total indebtedness under the Credit Facility to $25,000, which was used primarily to pay-off outstanding balances as of the closing date. The Company is required to make interest-only payments under the Credit Facility until December 2020. Commencing in January 2021, the Company is required to make 36 equal monthly installments of principal in the amount of $694, plus interest, through December 2023.  In the event the Company achieves certain milestones under the Credit Agreement, the Company has the right to extend the interest-only payments through December 21, 2021 and make 24 equal monthly installments of principal in the amount of $1,042, plus interest. The Company has not assumed the achievement of these milestones for purposes of disclosures herein.

Amounts borrowed under the Credit Facility are at LIBOR base rate, subject to 2.00% floor, plus 7.25%. The interest rate on the date of the amendment was 9.76%. In addition, a final payment (exit fee) equal to 3.5% of amounts drawn under the Credit Facility, or $875 based on borrowings of $25,000, is due upon the maturity date of December 21, 2023. The Company is accruing the exit fee through December 21, 2023.

There are no financial covenants associated with the Credit Agreement. However, the Credit Agreement does contain negative covenants restricting the Company’s activities, including limitations on dispositions, mergers or acquisitions; encumbering its intellectual property; incurring indebtedness or liens; paying dividends; making certain investments; and engaging in certain other business transactions.  The Company is not in violation of any of its covenants under the Credit Agreement. The obligations under the Credit Agreement are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in the Company’s business, operations or financial or other condition.  The debt is collateralized by substantially all of the Company’s assets, including its intellectual property.

In accordance with the Credit Agreement, in connection with the Company’s desire to issue and sell the 2026 Convertible Notes, the Company amended the terms of its debt with existing lenders in February 2019. The amendment added to the Credit Agreement, among other provisions, a negative covenant restricting the Company from paying the holders of the 2026 Convertible Notes ahead in priority to the existing lenders, for so long as indebtedness remains outstanding under the Credit Facility, and a cross-default provision to establish that an event of default under the purchase agreement for the 2026 Convertible Notes also constitutes an event of default under the Credit Agreement.

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Borrowings outstanding are as follows:

   

September 30, 

   

December 31, 

    

2020

    

2019

Borrowings outstanding

$

25,000

$

25,000

Accrued exit fee

310

180

Unamortized discount

(140)

(173)

25,170

25,007

Less: current portion

(6,206)

Long-term notes payable

$

18,964

$

25,007

As of September 30, 2020, the annual repayment requirements for the Credit Facility, inclusive of the final payment of $875 due at expiration, were as follows:

Interest and

Year Ending December 31,

    

Principal

    

Final Payment

    

Total

2020 (October 1 through December 31)

$

$

624

$

624

2021

8,333

2,094

10,427

2022

8,333

1,270

9,603

2023

8,334

1,320

9,654

$

25,000

$

5,308

$

30,308

Interest paid amounted to $1,769 and $1,850 for the nine months ended September 30, 2020 and 2019, respectively.

On April 22, 2020, in accordance with the Credit Agreement, the Company obtained consent from MidCap Financial Trust permitting the Company to secure a loan under the Paycheck Protection Program of the Coronavirus Aid, Relief and Economic Stability Act. The Company received loan proceeds of $3,201 (the “PPP Loan”) on April 23, 2020 pursuant to this program. However, based on updated guidance related to this program, the Company repaid the PPP Loan in full on May 5, 2020.

10. Common Stock

In May 2020, the Company entered into an underwriting agreement with Jefferies LLC (“Jefferies”) and Piper Sandler & Co. (“the Underwriters”), in connection with an underwritten public offering of 8,181,819 shares of the Company’s common stock. Under the terms of this underwriting agreement, the Company also granted the Underwriters an option to purchase up to an additional 1,227,272 shares of common stock at the public offering price, less the underwriting discounts and commissions. The Underwriters subsequently exercised this option to purchase such option shares in full. The public offering price of the shares in this offering was $5.50 per share, and the Underwriters purchased all of the shares from the Company at a price of $5.17 per share. After deducting underwriting discounts and commissions and offering expenses, the Company received net proceeds from the offering of $48,327.

On April 5, 2019, the Company entered into an Open Market Sales AgreementSM (the “2019 Sales Agreement”) with Jefferies, under which the Company may offer and sell its common stock having aggregate proceeds of up to $50,000 from time to time through Jefferies, acting as agent. In the three and nine months ended September 30, 2020, the Company sold none and 2,984,381 shares of common stock under the 2019 Sales Agreement, resulting in net proceeds of approximately $0 and $14,358 after commissions and expenses. Through September 30, 2020, the Company sold 10,321,840 shares of common stock under the 2019 Sales Agreement, resulting in net proceeds of approximately $46,984 after underwriting discounts and commissions and offering expenses.

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11. Net Loss Per Share

Basic and diluted net loss per share was calculated as follows for the three and nine months ended September 30, 2020 and 2019.

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

2020

    

2019

Numerator:

 

Net loss

$

(11,944)

$

(18,778)

$

(70,024)

$

(60,355)

Denominator:

 

  

 

 

  

 

Weighted average common shares outstanding, basic

 

62,992,558

 

46,944,536