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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2022  

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 34,047,128 shares of the registrant’s common stock, $0.001 par value, outstanding as of April 29, 2022.


 

 

EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Unaudited Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – March 31, 2022 and December 31, 2021

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss – Three months ended March 31, 2022 and 2021

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity – Three months ended March 31, 2022 and 2021

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows – Three months ended March 31, 2022 and 2021

 

6

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

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

 

26

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

34

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

PART II: OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

35

 

 

 

 

 

Item 1A.

 

Risk Factors

 

35

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

35

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

35

 

 

 

 

 

Item 5.

 

Other Information

 

35

 

 

 

 

 

Item 6.

 

Exhibits

 

38

 

 

 

 

 

Signatures

 

40

 

 

 

 

 

Certifications

 

 

 

 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1.

Unaudited Financial Statements

 

EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands except share amounts)

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

101,545

 

 

$

178,593

 

Marketable securities

 

 

89,239

 

 

 

32,965

 

Accounts and other receivables, net

 

 

19,589

 

 

 

18,354

 

Prepaid expenses and other current assets

 

 

5,920

 

 

 

4,217

 

Inventory

 

 

3,336

 

 

 

3,616

 

Total current assets

 

 

219,629

 

 

 

237,745

 

Property and equipment, net

 

 

545

 

 

 

476

 

Operating lease right-of-use assets

 

 

2,097

 

 

 

2,252

 

Intangible assets, net

 

 

22,134

 

 

 

22,749

 

Restricted cash

 

 

150

 

 

 

150

 

Total assets

 

$

244,555

 

 

$

263,372

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

7,302

 

 

$

7,385

 

Accrued expenses

 

 

12,329

 

 

 

14,422

 

Deferred revenue

 

 

1,102

 

 

 

1,069

 

Short-term borrowings

 

 

10,475

 

 

 

 

Other current liabilities

 

 

763

 

 

 

782

 

Total current liabilities

 

 

31,971

 

 

 

23,658

 

Long-term debt

 

 

29,108

 

 

 

36,562

 

Deferred revenue - noncurrent

 

 

14,302

 

 

 

14,560

 

Operating lease liabilities - noncurrent

 

 

1,697

 

 

 

1,860

 

Other long-term liabilities

 

 

658

 

 

 

2,352

 

Total liabilities

 

 

77,736

 

 

 

78,992

 

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, 300,000,000 shares authorized at March 31, 2022 and December 31, 2021; 34,047,128 and 33,905,826 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively

 

 

34

 

 

 

34

 

Additional paid-in capital

 

 

756,070

 

 

 

752,602

 

Accumulated deficit

 

 

(590,073

)

 

 

(569,097

)

Accumulated other comprehensive income

 

 

788

 

 

 

841

 

Total stockholders' equity

 

 

166,819

 

 

 

184,380

 

Total liabilities and stockholders' equity

 

$

244,555

 

 

$

263,372

 

 

See notes to consolidated financial statements

3


EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(In thousands except per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

Product sales, net

 

$

9,010

 

 

$

6,802

 

License and collaboration agreements

 

 

59

 

 

 

341

 

Royalty income

 

 

225

 

 

 

180

 

Total revenues

 

 

9,294

 

 

 

7,323

 

Operating expenses:

 

 

 

 

 

 

 

 

Cost of sales, excluding amortization of acquired intangible assets

 

 

1,777

 

 

 

1,390

 

Research and development

 

 

9,945

 

 

 

5,479

 

Sales and marketing

 

 

6,693

 

 

 

5,659

 

General and administrative

 

 

8,548

 

 

 

5,115

 

Amortization of acquired intangible assets

 

 

615

 

 

 

615

 

Total operating expenses

 

 

27,578

 

 

 

18,258

 

Loss from operations

 

 

(18,284

)

 

 

(10,935

)

Other income (expense):

 

 

 

 

 

 

 

 

Interest and other income, net

 

 

61

 

 

 

1

 

Interest expense

 

 

(1,194

)

 

 

(1,346

)

Loss on extinguishment of debt

 

 

(1,559

)

 

 

 

Total other expense, net

 

 

(2,692

)

 

 

(1,345

)

Net loss

 

$

(20,976

)

 

$

(12,280

)

Net loss per share - basic and diluted

 

$

(0.56

)

 

$

(0.50

)

Weighted average shares outstanding - basic and diluted

 

 

37,253

 

 

 

24,735

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(20,976

)

 

$

(12,280

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

Unrealized loss on available-for-sale securities, net of tax of $0 for periods presented

 

 

(53

)

 

 

 

Comprehensive loss

 

$

(21,029

)

 

$

(12,280

)

 

See notes to consolidated financial statements

4


EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

(In thousands except share data)

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Total

 

 

 

Number of

Shares

 

 

Par Value

Amount

 

 

Paid-In

Capital

 

 

Accumulated

Deficit

 

 

Comprehensive

Income

 

 

Stockholders’

Equity

 

Balance at January 1, 2021

 

 

18,139,981

 

 

$

18

 

 

$

528,362

 

 

$

(510,680

)

 

$

841

 

 

$

18,541

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(12,280

)

 

 

 

 

 

(12,280

)

Issuance of stock, net of issue costs

 

 

10,513,538

 

 

 

11

 

 

 

108,392

 

 

 

 

 

 

 

 

 

108,403

 

Employee stock purchase plan

 

 

27,713

 

 

 

 

 

 

173

 

 

 

 

 

 

 

 

 

173

 

Exercise of stock options

 

 

827

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

10

 

Vesting of stock units

 

 

59,416

 

 

 

 

 

 

(128

)

 

 

 

 

 

 

 

 

(128

)

Stock-based compensation

 

 

 

 

 

 

 

 

988

 

 

 

 

 

 

 

 

 

988

 

Balance at March 31, 2021

 

 

28,741,475

 

 

$

29

 

 

$

637,797

 

 

$

(522,960

)

 

$

841

 

 

$

115,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2022

 

 

33,905,826

 

 

$

34

 

 

$

752,602

 

 

$

(569,097

)

 

$

841

 

 

$

184,380

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(20,976

)

 

 

 

 

 

(20,976

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(53

)

 

 

(53

)

Employee stock purchase plan

 

 

28,504

 

 

 

 

 

 

201

 

 

 

 

 

 

 

 

 

201

 

Exercise of stock options

 

 

4,223

 

 

 

 

 

 

40

 

 

 

 

 

 

 

 

 

40

 

Vesting of stock units

 

 

108,575

 

 

 

 

 

 

(250

)

 

 

 

 

 

 

 

 

(250

)

Stock-based compensation

 

 

 

 

 

 

 

 

3,477

 

 

 

 

 

 

 

 

 

3,477

 

Balance at March 31, 2022

 

 

34,047,128

 

 

$

34

 

 

$

756,070

 

 

$

(590,073

)

 

$

788

 

 

$

166,819

 

 

See notes to consolidated financial statements

5


EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(20,976

)

 

$

(12,280

)

Adjustments to reconcile net loss to cash flows used in

   operating activities:

 

 

 

 

 

 

 

 

Amortization of intangible assets

 

 

615

 

 

 

615

 

Depreciation of property and equipment

 

 

81

 

 

 

72

 

Amortization of debt discount and premium and discount on available-for-sale marketable securities

 

 

110

 

 

 

147

 

Loss on extinguishment of debt

 

 

1,559

 

 

 

 

Stock-based compensation

 

 

3,477

 

 

 

988

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable and other current assets

 

 

(2,937

)

 

 

(2,317

)

Inventory

 

 

280

 

 

 

(248

)

Accounts payable and accrued expenses

 

 

(2,107

)

 

 

(1,798

)

Right-of-use assets and operating lease liabilities

 

 

(35

)

 

 

(38

)

Deferred revenue

 

 

(225

)

 

 

(240

)

Net cash used in operating activities

 

 

(20,158

)

 

 

(15,099

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(62,293

)

 

 

 

Sales and maturities of marketable securities

 

 

6,000

 

 

 

 

Purchases of property and equipment

 

 

(149

)

 

 

 

Net cash used in investing activities

 

 

(56,442

)

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of stock

 

 

 

 

 

115,667

 

Proceeds from issuance of long-term debt

 

 

30,000

 

 

 

 

Payment of equity and debt issue costs

 

 

(352

)

 

 

(6,935

)

Payment of long-term debt

 

 

(38,235

)

 

 

 

Payment of extinguishment of debt costs

 

 

(2,294

)

 

 

 

Borrowings under revolving facility

 

 

11,459

 

 

 

 

Repayment under revolving facility

 

 

(984

)

 

 

 

Net settlement of stock units to satisfy statutory tax withholding

 

 

(250

)

 

 

(128

)

Proceeds from exercise of stock options

 

 

241

 

 

 

183

 

Principal payments on finance lease obligations

 

 

(33

)

 

 

(18

)

Net cash (used in) provided by financing activities

 

 

(448

)

 

 

108,769

 

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

 

 

(77,048

)

 

 

93,670

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

178,743

 

 

 

45,059

 

Cash, cash equivalents and restricted cash at end of period

 

$

101,695

 

 

$

138,729

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash interest paid

 

$

941

 

 

$

1,195

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Stock issuance costs

 

$

 

 

$

329

 

Debt issue costs

 

 

244

 

 

 

 

Accrued term loan exit fee

 

 

600

 

 

 

 

Principal portion of finance lease liabilities

 

$

 

 

$

12

 

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements

6


EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.Operations

The accompanying condensed consolidated financial statements of EyePoint Pharmaceuticals, Inc., a Delaware corporation (together with its subsidiaries, the “Company”), as of March 31, 2022 and for the three months ended March 31, 2022 and 2021 are unaudited. Certain information in the footnote disclosures of these financial statements has been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2021, and include all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair presentation of the Company’s financial position, results of operations, comprehensive loss and cash flows for the periods indicated. The preparation of financial statements in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) requires management to make assumptions and estimates that affect, among other things, (i) reported amounts of assets and liabilities; (ii) disclosure of contingent assets and liabilities at the date of the consolidated financial statements; and (iii) reported amounts of revenues and expenses during the reporting period. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the entire fiscal year or any future period.

The Company is a pharmaceutical company committed to developing and commercializing innovative therapeutics to help improve the lives of patients with serious eye disorders. The Company’s pipeline leverages its proprietary Durasert® technology for sustained intraocular drug delivery including EYP-1901, an investigational sustained delivery anti-VEGF treatment initially targeting wet age-related macular degeneration (“wet AMD”), the leading cause of vision loss among people 50 years of age and older in the United States. The Company also has two commercial products: YUTIQ®, a once every three-year treatment for chronic non-infectious uveitis affecting the posterior segment of the eye, and DEXYCU®, a single dose treatment for postoperative inflammation following ocular surgery. Both commercial products are currently being sold in the United States.

The Company plans to identify and advance additional pipeline product candidates through clinical and regulatory development. This may be accomplished through internal discovery efforts, research collaborations and/or in-licensing arrangements with partner molecules and potential acquisitions of additional ophthalmic products, product candidates or technologies that complement the Company’s current product portfolio.

Effects of the COVID-19 Coronavirus Pandemic

The ongoing COVID-19 coronavirus pandemic (the “Pandemic”) has had a material and adverse impact on the Company’s business. The duration and full extent to which the Pandemic impacts the Company’s business, revenues, financial condition and cash flows depends on future developments that are highly uncertain, subject to change and are difficult to predict, including new information that may emerge concerning the Pandemic, and may cause intermittent or prolonged periods of reduced patient services at the Company’s customers’ facilities, which may negatively affect customer demand. The Company’s revenues, financial condition and cash flows may be adversely affected in the future as well. The Company is continuously monitoring the Pandemic and its potential effect on the Company’s financial position, results of operations and cash flows. This uncertainty could have an impact in future periods on certain estimates used in the preparation of the Company’s periodic financial results, including reserves for variable consideration related to product sales, realizability of certain receivables, assessment for excess or obsolete inventory, and impairment of long-lived assets. Uncertainty around the extent and length of time of the Pandemic, and any future related financial impact cannot be reasonably estimated at this time.

Liquidity

The Company had cash, cash equivalents, and investments in marketable securities of $190.8 million at March 31, 2022. The Company has a history of operating losses and has not had significant recurring cash inflows from revenue. The Company’s operations have been financed primarily from sales of its equity securities, issuance of debt and a combination of license fees, milestone payments, royalty income and other fees received from its collaboration partners. The Company anticipates that it will continue to incur losses as it continues the research and development of its product candidates and the Company does not expect revenues from its product sales to generate sufficient funding to sustain its operations in the near-term. The Company expects to continue fulfilling its funding needs through cash inflows from revenues of its product sales, licensing and research collaboration transactions,

7


additional equity capital raises and other arrangements. The Company believes that its cash, cash equivalents, and investments in marketable securities of $190.8 million at March 31, 2022 coupled with expected cash inflows from its product sales will enable the Company to fund its current and planned operations for at least the next twelve months from the date these consolidated financial statements were issued. Actual cash requirements could differ from management’s projections due to many factors, including the continued effect of the Pandemic on the Company’s business and the medical community, the timing and results of the Company’s clinical trials for EYP-1901, additional investments in research and development programs, the success of ongoing commercialization efforts for YUTIQ and DEXYCU, the actual costs of these ongoing commercialization efforts, competing technological and market developments and the costs of any strategic acquisitions and/or development of complementary business opportunities.

Recently Adopted and Recently Issued Accounting Pronouncements

New accounting pronouncements are issued periodically by the Financial Accounting Standards Board (“FASB”) and are adopted by the Company as of the specified effective dates. Unless otherwise disclosed below, the Company believes that recently issued and adopted 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 May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt – Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2021-04”): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The amendments are designed to clarify an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options that remain equity-classified after modification or exchange. The ASU provides guidance on how an issuer would measure and recognize the effects of these transactions. The standard provides a principles-based framework to determine whether an issuer should recognize the modification or exchange as an adjustment to equity or an expense. The Company adopted ASU 2021-04 on January 1, 2022.

2.

Summary of Significant Accounting Policies

Revenue Recognition

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

Product sales, net — The Company sells YUTIQ and DEXYCU to a limited number of specialty distributors and specialty pharmacies (collectively the “Distributors”) in the U.S., with whom the Company has entered into formal agreements, for delivery to physician practices for YUTIQ and to hospital outpatient departments and ambulatory surgical centers for DEXYCU. The Company recognizes revenue on sales of its products when Distributors obtain control of the products, which occurs at a point in time, typically upon delivery. In addition to agreements with Distributors, the Company also enters into arrangements with healthcare providers, ambulatory surgical centers, 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 from Distributors.

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

8


to the Company’s product sales. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified either as reductions of product revenue and accounts receivable or a current liability, depending on how the amount is to be settled. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the respective underlying contracts. Actual amounts of consideration ultimately received may differ from the Company’s estimates. If actual results in the future vary from the estimates, the Company adjusts 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 the Company’s Distributors. These Distributors charge the Company for the difference between what they pay for the product and the Company’s contracted selling price. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. Reserves for chargebacks consist of amounts that the Company expects to pay for units that remain in the distribution channel inventories at each reporting period-end that the Company expects will be sold under a contracted selling price, and chargebacks that Distributors have claimed, but for which the Company has not yet settled.

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

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

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

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

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

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

9


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

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying the practical expedient in paragraph 606-10-32-18, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less. None of the Company’s contracts contained a significant financing component as of March 31, 2022.

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

Sale of Future Royalties — The Company has sold its rights to receive certain royalties on product sales. In the circumstance where the Company has sold its rights to future royalties under a royalty purchase agreement and also maintains limited continuing involvement in the arrangement (but not significant continuing involvement in the generation of the cash flows that are due to the purchaser), the Company defers recognition of the proceeds it receives for the sale of royalty streams and recognizes such unearned revenue as revenue under the units-of-revenue method over the life of the underlying license agreement. Under the units-of-revenue method, amortization for a reporting period is calculated by computing a ratio of the proceeds received from the purchaser to the total payments expected to be made to the purchaser over the term of the agreement, and then applying that ratio to the period’s cash payment.

Estimating the total payments expected to be received by the purchaser over the term of such arrangements requires management to use subjective estimates and assumptions. Changes to the Company’s estimate of the payments expected to be made to the purchaser over the term of such arrangements could have a material effect on the amount of revenues recognized in any particular period.

Research Collaborations — The Company recognizes revenue over the term of the statements of work under any funded research collaborations. 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 research collaborations.

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

Cost of sales, excluding amortization of acquired intangible assets — Cost of sales, excluding amortization of acquired intangible assets, consist of costs associated with the manufacture of YUTIQ and DEXYCU, certain period costs, product shipping and, as applicable, royalty expense. The inventory costs for YUTIQ include purchases of various components, the active pharmaceutical ingredient (“API”) and internal labor and overhead for the product manufactured in the Company’s Watertown, MA facility. The inventory costs for DEXYCU include purchased components, the API and third-party manufacturing and assembly.

For the three months ended March 31, 2022 and 2021, the Company accrued DEXYCU product revenue-based royalty expense of $674,000 and $455,000, respectively, as a component of cost of sales.

10


3.

Revenue

 

Product Revenue Reserves and Allowances

The Company’s product revenues have been primarily from sales of YUTIQ and DEXYCU in the U.S.

Net product revenues by product for the three months ended March 31, 2022 and 2021 were as follows (in thousands):

 

 

Three Months

Ended

 

 

Three Months

Ended

 

 

 

March 31, 2022

 

 

March 31, 2021

 

YUTIQ (A)

 

$

4,611

 

 

$

3,029

 

DEXYCU (B)

 

 

4,399

 

 

 

3,773

 

Total product sales, net

 

$

9,010

 

 

$

6,802

 

 

 

(A)

Included approximately $56 and $5 of revenue from YUTIQ product sales to Ocumension under a supply agreement for the three months ended March 31, 2022 and 2021, respectively.

 

(B)

No revenue was recognized from DEXYCU product sales to Ocumension under a supply agreement for the three months ended March 31, 2022 and 2021.

 

The following table summarizes activity in each of the product revenue allowance and reserve categories for the three months ended March 31, 2022 and 2021 (in thousands):

 

 

 

Chargebacks,

Discounts

 

 

Government

and Other

 

 

 

 

 

 

 

 

 

 

 

and Fees

 

 

Rebates

 

 

Returns

 

 

Total

 

Beginning balance at January 1, 2022

 

$

1,153

 

 

$

1,821

 

 

$

379

 

 

$

3,353

 

Provision related to sales in the current year

 

 

2,674

 

 

 

2,003

 

 

 

140

 

 

 

4,817

 

Adjustments related to prior period sales

 

 

 

 

 

 

 

 

 

 

 

 

Deductions applied and payments made

 

 

(1,904

)

 

 

(1,693

)

 

 

(87

)

 

 

(3,684

)

Ending balance at March 31, 2022

 

$

1,923

 

 

$

2,131

 

 

$

432

 

 

$

4,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chargebacks,

Discounts

 

 

Government

and Other

 

 

 

 

 

 

 

 

 

 

 

and Fees

 

 

Rebates

 

 

Returns

 

 

Total

 

Beginning balance at January 1, 2021

 

$

574

 

 

$

535

 

 

$

603

 

 

$

1,712

 

Provision related to sales in the current year

 

 

1,041

 

 

 

679

 

 

 

171

 

 

 

1,891

 

Adjustments related to prior period sales

 

 

(50

)

 

 

(22

)

 

 

(100

)

 

 

(172

)

Deductions applied and payments made

 

 

(809

)

 

 

(473

)

 

 

(184

)

 

 

(1,466

)

Ending balance at March 31, 2021

 

$

756

 

 

$

719

 

 

$

490

 

 

$

1,965

 

 

Returns are recorded as a reduction of accounts receivable on the condensed consolidated balance sheets. Chargebacks, discounts and fees and rebates are recorded as a component of accrued expenses on the condensed consolidated balance sheets (See Note 6).

 

License and Collaboration Agreements and Royalty Income

SWK Royalty Purchase Agreement

On December 17, 2020, the Company entered into a royalty purchase agreement (the “RPA”) with SWK Funding LLC (“SWK”). Under the RPA, the Company sold its right to receive royalty payments on future sales of products subject to a licensing and development agreement, as amended, with Alimera Sciences, Inc. (“Alimera”) (the “Amended Alimera Agreement”) for an upfront cash payment of $16.5 million. Except for the rights to the royalties, the Company retains all rights and obligations under the Amended Alimera Agreement, pursuant to which, Alimera owns worldwide rights to the Company’s Durasert technology in ILUVIEN for diabetic macular edema (“DME”) and rights for ILUVIEN (currently marketed by the Company as YUTIQ in the U.S.) for non-infectious posterior uveitis in Europe, the Middle East, and Africa (“EMEA”). Alimera has the sole rights to utilize the

11


intellectual property developed under the Amended Alimera Agreement. There has been no intellectual property developed jointly by Alimera and the Company as part of the Amended Alimera Agreement. The Company cannot utilize the intellectual property for the indication licensed to Alimera in order to manufacture and sell ILUVIEN.

The Company’s ongoing efforts under the Amended Alimera Agreement will consist of continuing to maintain and enforce its patents as well as providing safety data and regulatory support as necessary. None of these obligations require significant efforts on the part of the Company with respect to the generation of sales in the market. The Company will only be required to expend more extensive efforts if litigation were to arise that requires the Company to protect its patents rights pursuant to the terms of the Amended Alimera Agreement. Historically, such a defense has not been required. Similarly, regulatory support and safety data is only provided on an ad-hoc basis depending on the regulatory requests, which has been minimal historically. It remains Alimera’s sole responsibility to manufacture, actively market and promote the products under the Amended Alimera Agreement to generate the sales, which ultimately generate the royalties to be paid to SWK.

The Company classified the proceeds received from SWK as deferred revenue, to be recognized as revenue under the units-of-revenue method over the life of the RPA because of the Company’s limited continuing involvement in the Amended Alimera Agreement. SWK has no recourse and the Company assumes no credit risk in event that Alimera fails to make a royalty payment. The Company must only forward all material correspondence from Alimera to SWK, including royalty reports, notices and any other correspondence with respect to royalties to SWK. SWK has the right to audit and inspect the books and records pertaining to net sales and royalties under the Amended Alimera Agreement. Neither the Company nor SWK has the unilateral ability to cancel the agreement. There is no cap or limitation on the royalties to be received by SWK in the future and its return will reflect all royalties paid by Alimera. Because the transaction was structured as a non-cancellable sale, the Company does not have significant continuing involvement in the generation of the cash flows due to SWK and there is no limitation on the rates of return to SWK, the Company recorded the total proceeds of $16.5 million as deferred revenue under royalty sale agreement. The deferred revenue is being recognized as revenue over the life of the RPA under the "units-of-revenue" method. Under this method, amortization for a reporting period is calculated by computing a ratio of the proceeds received from SWK to the payments expected to be made by Alimera to SWK over the term of the Amended Alimera Agreement, and then applying that ratio to the period’s cash payment.

The Company recognized $225,000 and $180,000 of royalty revenue related to the RPA for the three months ended March 31, 2022 and 2021, respectively, in connection with the royalty payment of $724,000 and $583,000 in the first quarter of 2022 and 2021 from Alimera to SWK, pursuant to the Amended Alimera Agreement, respectively. As of March 31, 2022, the Company had $1.1 million and $14.3 million as current and non-current deferred revenue recognized under royalty sale agreement, respectively. As of December 31, 2021, the Company classified $1.1 million and $14.6 million as current and non-current deferred revenue recognized under royalty sale agreement, respectively.

Ocumension Therapeutics

 

In November 2018, the Company entered into an exclusive license agreement with Ocumension Therapeutics (“Ocumension”) for the development and commercialization of its three-year micro insert using the Durasert technology for the treatment of chronic non-infectious uveitis affecting the posterior segment of the eye (YUTIQ in the U.S.) in Mainland China, Hong Kong, Macau and Taiwan. The Company received a one-time upfront payment of $