NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Operations and Basis of Presentation
|
The accompanying condensed consolidated financial
statements of pSivida Corp. and subsidiaries (the Company) as of September 30, 2016 and for the three months ended September 30, 2016 and 2015 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 Companys audited consolidated
financial statements and footnotes included in its Annual Report on Form 10-K for the fiscal year ended June 30, 2016 (fiscal 2016). 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 June 30, 2016, and include all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair presentation of the Companys financial position,
results of operations, comprehensive loss and cash flows for the periods indicated. The preparation of financial statements in accordance with 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 September 30, 2016 are not necessarily indicative of the results that may be expected for the entire fiscal year or any future period.
The Company currently develops proprietary sustained-release drug products for the treatment of chronic eye diseases. The Companys
products deliver drugs at a controlled and steady rate for months or years. The Company has developed three of only four sustained-release products approved by the U.S. Food and Drug Administration (FDA) for treatment of back-of-the-eye
diseases. Durasert three-year non-erodible fluocinolone acetonide (FA) insert for posterior segment uveitis (Durasert three-year uveitis) (formerly known as Medidur), the Companys lead product candidate, is
in pivotal Phase 3 clinical trials, and ILUVIEN
®
for diabetic macular edema (DME), the Companys most recent out-licensed product, is sold in the U.S. and three European Union
(EU) countries. The Companys development programs are focused on developing sustained release products that utilize its core technologies to deliver approved drugs and biologics to treat chronic diseases. The Companys
strategy includes developing products independently while continuing to leverage its technology platforms through collaborations and license agreements.
Durasert three-year uveitis, the Companys most advanced development product candidate, is designed to treat chronic non-infectious
uveitis affecting the posterior segment of the eye (posterior segment uveitis) for three years from a single administration. Injected into the eye in an office visit, this product is a tiny micro-insert that delivers a micro-dose of a
corticosteroid to the back of the eye on a sustained basis. The Company is developing Durasert three-year uveitis independently.
The
first of two Phase 3 trials investigating Durasert three-year uveitis met its primary efficacy endpoint of prevention of recurrence of disease through six months with high statistical significance (p < 0.001, intent to treat analysis) and with
safety data consistent with the known effects of ocular corticosteroid use. The same high statistical significance for efficacy and encouraging safety results were maintained through 12 months of follow-up. Due to the high level of statistical
significance achieved, the Company plans to file its EU marketing approval application (MAA) based on data from the first Phase 3 trial, rather than two trials. The Company expects to file the MAA in the first half of 2017. The second
Phase 3 trial completed its target enrollment of 150 patients at the end of September 2016. This trial has the same trial design and the same endpoint as the first Phase 3 trial, and a read-out of its top-line results is expected by the end of
the first half of 2017. Assuming favorable results, the Company plans to file a new drug application (NDA) with the FDA in the second half of 2017. A utilization study of the Companys new Durasert three-year uveitis inserter
with a smaller diameter needle, which is required for both the MAA and NDA, met its primary endpoint, i.e., ease of intravitreal administration.
ILUVIEN is an injectable, sustained-release micro-insert that provides three years of treatment of DME from a single injection. ILUVIEN is
based on the same technology as the Durasert three-year uveitis insert, and delivers the same steroid, FA, although it is injected using an inserter with a larger diameter needle. ILUVIEN was developed in collaboration with, and is licensed to and
sold by, Alimera Sciences, Inc. (Alimera). The Company is entitled to a share of the net profits (as defined) from Alimeras sales of ILUVIEN on a quarter-by-quarter, country-by-country basis. ILUVIEN has been sold in the United
Kingdom (U.K) and Germany since June 2013 and in the U.S. and Portugal since 2015, and also has marketing approvals in 14 other European countries. Alimera has sublicensed distribution, regulatory and reimbursement matters for ILUVIEN
for DME in Australia and New Zealand, Canada, Italy and the Middle East.
7
The Companys FDA-approved
Retisert
®
is an implant that provides sustained treatment of posterior segment uveitis for 30 months. Administered in a surgical procedure, Retisert delivers the same corticosteroid as the
Durasert three-year non-erodible insert, but in a larger dose. Retisert was co-developed with, and is licensed to, Bausch & Lomb, and the Company receives royalties from its sales.
The Companys development programs are focused on developing sustained release drug products using its proven Durasert technology
platform to deliver small molecule drugs to treat wet and dry age-related macular degeneration (AMD), osteoarthritis and other diseases. A sustained-release surgical implant delivering a corticosteroid to treat pain associated with
severe knee osteoarthritis that was jointly developed by the Company and Hospital for Special Surgery is currently being evaluated in an investigator-sponsored safety and tolerability study. In addition, the Company continues to develop its
Tethadur technology platform designed to deliver large molecules, such as biologics, both locally and systemically.
The Company has
a history of operating losses and has financed its operations primarily from sales of equity securities and the receipt of license fees, milestone payments, research and development funding and royalty income from its collaboration partners and from
proceeds of sales of its equity securities. The Company believes that its cash, cash equivalents and marketable securities of $22.5 million at September 30, 2016, together with expected cash inflows under existing collaboration agreements, will
enable the Company to maintain its current and planned operations (including its two Durasert three-year uveitis Phase 3 clinical trials) through the first quarter of fiscal 2018, and it has the ability to reduce or defer operating expenses as may
be needed to fund its operations into the second fiscal quarter of 2018. This estimate excludes any potential receipts under the Alimera agreement. The Companys ability to fund its planned operations beyond then, including completion of
clinical development of Durasert three-year uveitis, is expected to depend on the amount and timing of cash receipts from Alimeras commercialization of ILUVIEN, proceeds from any future collaboration or other agreements and/or proceeds from
any financing transactions. There is no assurance that the Company will receive significant, if any, revenues from the commercialization of ILUVIEN or financing from any other sources.
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 Companys financial position, results of operations and
cash flows or do not apply to the Companys operations.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
(Topic 606) (ASU 2014-09), which requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the transfer of
promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP. In August 2015, the FASB issued ASU 2015-14, which officially deferred the effective date of ASU 2014-09 by one year, while
also permitting early adoption. As a result, ASU 2014-09 will become effective on July 1, 2018, with early adoption permitted on July 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The
Company is evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In August 2014, the
FASB issued ASU 2014-15,
Presentation of Financial Statements Going Concern
. ASU 2014-15 provides guidance around managements responsibility to evaluate whether there is substantial doubt about an entitys ability to
continue as a going concern and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a companys ability to
continue as a going concern within one year from the date the financial statements are issued. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is
permitted. The Company is evaluating the impact the adoption of this standard will have on its consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms
longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years. As a result, ASU 2016-02 will become effective on July 1, 2019. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered
into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is evaluating the impact the adoption of this standard will have on its consolidated
financial statements.
8
In March 2016, the FASB issued ASU 2016-09,
Compensation Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09 intends to simplify various aspects of how share-based payments are accounted for and presented in the financial statements. The main provisions include: all tax effects
related to stock awards will now be recorded through the statement of operations instead of through equity, all tax-related cash flows resulting from stock awards will be reported as operating activities on the cash flow statement, and entities can
make an accounting policy election to either estimate forfeitures or account for forfeitures as they occur. The amendments in ASU 2016-09 are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal
years, and may be applied prospectively with earlier adoption permitted. As a result, ASU 2016-09 will become effective on July 1, 2017. The Company is evaluating the impact the amendment of this guidance will have on its consolidated financial
statements.
2.
|
License and Collaboration Agreements
|
Alimera
Under the collaboration agreement with Alimera, as amended in March 2008 (the Alimera Agreement), the Company licensed to Alimera
the rights to develop, market and sell certain product candidates, including ILUVIEN, and Alimera assumed all financial responsibility for the development of licensed products. In addition, the Company is entitled to receive 20% of any net profits
(as defined) on sales of each licensed product (including ILUVIEN) by Alimera, measured on a quarter-by-quarter and country-by-country basis. Alimera may recover 20% of previously incurred and unapplied net losses (as defined) for commercialization
of each product in a country, but only by an offset of up to 4% of the net profits earned in that country each quarter, reducing the Companys net profit share to 16% in each country until those net losses are recouped. In the event that
Alimera sublicenses commercialization in any country, the Company is entitled to 20% of royalties and 33% of non-royalty consideration received by Alimera, less certain permitted deductions. The Company is also entitled to reimbursement of certain
patent maintenance costs with respect to the patents licensed to Alimera.
Because the Company has no remaining performance obligations
under the Alimera Agreement, all amounts received from Alimera are generally recognized as revenue upon receipt or at such earlier date, if applicable, on which any such amounts are both fixed and determinable and reasonably assured of
collectability. In instances when payments are received and subject to a contingency, revenue is deferred until such contingency is resolved. See Note 10 regarding net profit share receipts subject to arbitration proceedings.
Revenue under the Alimera Agreement totaled $20,000 and $163,000 for the three months ended September 30, 2016 and 2015, respectively. In
addition to patent fee reimbursements in both periods, the Company earned $157,000 of non-royalty sublicense consideration during the three months ended September 30, 2015.
Pfizer
In June 2011, the Company and
Pfizer entered into an Amended and Restated Collaborative Research and License Agreement (the Restated Pfizer Agreement) to focus solely on the development of a sustained-release bioerodible micro-insert injected into the subconjunctiva
designed to deliver latanoprost for human ophthalmic disease or conditions other than uveitis (the Latanoprost Product). Pfizer made an upfront payment of $2.3 million and the Company agreed to provide Pfizer options under various
circumstances for an exclusive, worldwide license to develop and commercialize the Latanoprost Product.
The estimated selling price of
the combined deliverables under the Restated Pfizer Agreement of $6.7 million is being recognized as collaborative research and development revenue over the estimated performance period using the proportional performance method with costs associated
with developing the Latanoprost Product reflected in operating expenses in the period in which they are incurred. Total deferred revenue was approximately $5.6 million at each of September 30, 2016 and June 30, 2016, with no current portion at those
dates. The Company recorded no collaborative research and development revenue during each of the three-month periods ended September 30, 2016 and 2015.
9
On October 25, 2016, the Company notified Pfizer that it had discontinued development of the
Latanoprost Product, which provided Pfizer a 60-day option to acquire a worldwide license in return for a $10.0 million payment and potential sales-based royalties and development, regulatory and sales performance milestone payments. If Pfizer does
not exercise its option to license the Latanoprost Product, the Restated Pfizer Agreement will automatically terminate and the deferred revenue balance will be recognized as revenue in the quarter ending December 31, 2016. However, the Company would
retain the right, after one year, to develop and commercialize the Latanoprost Product.
Pfizer owned approximately 5.4% of the
Companys outstanding common stock at September 30, 2016.
Bausch & Lomb
Pursuant to a licensing and development agreement, as amended, Bausch & Lomb has a worldwide exclusive license to make and sell Retisert in
return for royalties based on sales. Bausch & Lomb was also licensed to make and sell Vitrasert, an implant for sustained treatment of CMV retinitis, but discontinued sales in the second quarter of fiscal 2013 following patent expiration.
Royalty income totaled $243,000 and $286,000 for the three months ended September 30, 2016 and 2015, respectively. Accounts receivable from
Bausch & Lomb totaled $259,000 at September 30, 2016 and $288,000 at June 30, 2016.
OncoSil Medical
The Company entered into an exclusive, worldwide royalty-bearing license agreement in December 2012, amended and restated in March 2013, with
OncoSil Medical UK Limited (f/k/a Enigma Therapeutics Limited), a wholly owned subsidiary of OncoSil Medical Ltd (OncoSil) for the development of BrachySil, the Companys BioSilicon product candidate for the treatment of pancreatic
and other types of cancer. The Company received an upfront fee of $100,000 and is entitled to 8% sales-based royalties, 20% of sublicense consideration and milestone payments based on aggregate product sales. OncoSil is obligated to pay an annual
license maintenance fee of $100,000 by the end of each calendar year. Annual license maintenance fees of $100,000 were paid in January 2014, January 2015 and December 2015; no revenue related to the OncoSil agreement was paid during the three-month
periods ended September 30, 2016 and 2015. For each calendar year commencing with 2014, the Company is entitled to receive reimbursement of any patent maintenance costs, sales-based royalties and sub-licensee sales-based royalties earned, but
only to the extent such amounts, in the aggregate, exceed the $100,000 annual license maintenance fee. The Company has no consequential performance obligations under the OncoSil license agreement and, accordingly, any amounts to which the Company is
entitled under the agreement are recognized as revenue on the earlier of receipt or when collectability is reasonably assured. As of September 30, 2016, no deferred revenue was recorded for this agreement.
Evaluation Agreements
The Company from
time to time enters into funded agreements to evaluate the potential use of its technology systems for sustained release of third party drug candidates in the treatment of various diseases. Consideration received is generally recognized as revenue
over the term of the feasibility study agreement. Revenue recognition for consideration, if any, related to a license option right is assessed based on the terms of any such future license agreement or is otherwise recognized at the completion of
the evaluation agreement. Revenues under evaluation agreements totaled $8,000 for each of the three-month periods ended September 30, 2016 and 2015.
The reconciliation of intangible assets for the three months ended
September 30, 2016 and for the year ended June 30, 2016 was as follows (in thousands):
10
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2016
|
|
|
Year Ended
June 30, 2016
|
|
Patented technologies
|
|
|
|
|
|
|
|
|
Gross carrying amount at beginning of period
|
|
$
|
36,196
|
|
|
$
|
39,710
|
|
Foreign currency translation adjustments
|
|
|
(635
|
)
|
|
|
(3,514
|
)
|
|
|
|
|
|
|
|
|
|
Gross carrying amount at end of period
|
|
|
35,561
|
|
|
|
36,196
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization at beginning of period
|
|
|
(35,094
|
)
|
|
|
(37,785
|
)
|
Amortization expense
|
|
|
(183
|
)
|
|
|
(756
|
)
|
Foreign currency translation adjustments
|
|
|
626
|
|
|
|
3,447
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization at end of period
|
|
|
(34,651
|
)
|
|
|
(35,094
|
)
|
|
|
|
|
|
|
|
|
|
Net book value at end of period
|
|
$
|
910
|
|
|
$
|
1,102
|
|
|
|
|
|
|
|
|
|
|
The Company amortizes its intangible assets with finite lives on a straight-line basis over their respective
estimated useful lives. Amortization of intangible assets totaled $183,000 and $192,000 for the three months ended September 30, 2016 and 2015, respectively. The carrying value of intangible assets at September 30, 2016 of $910,000 (approximately
$662,000 attributable to the Durasert technology and $248,000 attributable to the Tethadur technology) is expected to be amortized on a straight-line basis over the remaining estimated useful life of 1.25 years, or approximately $728,000 per year.
The amortized cost, unrealized loss and fair value of the
Companys available-for-sale marketable securities at September 30, 2016 and June 30, 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
Corporate bonds
|
|
$
|
3,748
|
|
|
$
|
(1
|
)
|
|
$
|
3,747
|
|
Commercial paper
|
|
|
4,491
|
|
|
|
|
|
|
|
4,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,239
|
|
|
$
|
(1
|
)
|
|
$
|
8,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
Amortized
Cost
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
Corporate bonds
|
|
$
|
5,999
|
|
|
$
|
(2
|
)
|
|
$
|
5,997
|
|
Commercial paper
|
|
|
7,682
|
|
|
|
|
|
|
|
7,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,681
|
|
|
$
|
(2
|
)
|
|
$
|
13,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30, 2016, $2.1 million of marketable securities were purchased and
$7.5 million of such securities matured. At September 30, 2016, the marketable securities had maturities ranging from 3 days to 7.0 months, with a weighted average maturity of 2.3 months.
11
5.
|
Fair Value Measurements
|
The Company accounts for certain assets and liabilities at fair
value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based
on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
|
|
|
Level 1 Inputs are quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets and liabilities.
|
|
|
|
Level 2 Inputs are directly or indirectly observable in the marketplace, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities with
insufficient volume or infrequent transaction (less active markets).
|
|
|
|
Level 3 Inputs are unobservable estimates that are supported by little or no market activity and require the Company to develop its own assumptions about how market participants would price the assets or
liabilities.
|
Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash, cash equivalents and marketable securities. At September 30, 2016 and June 30, 2016, substantially all of the Companys interest-bearing cash equivalent balances were concentrated in one institutional money market fund that
has investments consisting primarily of certificates of deposit, commercial paper, time deposits, U.S. government agencies, treasury bills and treasury repurchase agreements. These deposits may be redeemed upon demand and, therefore, generally have
minimal risk.
The Companys cash equivalents and marketable securities are classified within Level 1 or Level 2 on the basis of
valuations using quoted market prices or alternative pricing sources and models utilizing market observable inputs, respectively. Certain of the Companys corporate debt securities were valued based on quoted prices for the specific securities
in an active market and were therefore classified as Level 1. The remaining marketable securities have been valued on the basis of valuations provided by third-party pricing services, as derived from such services pricing models. Inputs to the
models may include, but are not limited to, reported trades, executable bid and ask prices, broker/dealer quotations, prices or yields of securities with similar characteristics, benchmark curves or information pertaining to the issuer, as well as
industry and economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security, and have been classified as Level 2. The following
tables summarize the Companys assets carried at fair value measured on a recurring basis at September 30, 2016 and June 30, 2016 by valuation hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
Total carrying
value
|
|
|
Quoted prices in
active markets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
13,596
|
|
|
$
|
12,097
|
|
|
$
|
1,499
|
|
|
$
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
3,747
|
|
|
|
2,695
|
|
|
|
1,052
|
|
|
|
|
|
Commercial paper
|
|
|
4,491
|
|
|
|
|
|
|
|
4,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,834
|
|
|
$
|
14,792
|
|
|
$
|
7,042
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
Total carrying
value
|
|
|
Quoted prices in
active markets
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
13,856
|
|
|
$
|
12,957
|
|
|
$
|
899
|
|
|
$
|
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
5,997
|
|
|
|
4,596
|
|
|
|
1,401
|
|
|
|
|
|
Commercial paper
|
|
|
7,682
|
|
|
|
|
|
|
|
7,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,535
|
|
|
$
|
17,553
|
|
|
$
|
9,982
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Accrued expenses consisted of the following at September 30, 2016 and
June 30, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
June 30,
2016
|
|
Clinical trial costs
|
|
$
|
1,895
|
|
|
$
|
1,678
|
|
Personnel costs
|
|
|
1,008
|
|
|
|
1,314
|
|
Professional fees
|
|
|
728
|
|
|
|
535
|
|
Other
|
|
|
57
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,688
|
|
|
$
|
3,583
|
|
|
|
|
|
|
|
|
|
|
In July 2016, the Company announced its plan to consolidate all of its
research and development activities in its U.S. facility. Following employee consultations under local U.K. law, the Company determined to close its U.K. research facility and terminated the employment of all of its U.K. employees. The U.K. facility
lease, set to expire on August 31, 2016, was extended through November 30, 2016 to facilitate an orderly transition and the required restoration of the premises. A summary reconciliation of the restructuring costs is as follows (in thousands):
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|
|
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|
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|
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Balance at
June 30, 2016
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|
Charged to
Expense
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|
|
Payments
|
|
|
Balance at
September 30, 2016
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|
Termination benefits
|
|
$
|
118
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|
|
$
|
273
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|
$
|
(391
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)
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|
$
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|
|
Facility closure
|
|
|
40
|
|
|
|
57
|
|
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|
(44
|
)
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|
|
53
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|
Other
|
|
|
29
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|
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|
106
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|
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|
(80
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)
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
187
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|
$
|
436
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|
$
|
(515
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)
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|
$
|
108
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|
|
|
|
|
|
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|
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The Company recorded approximately $436,000 of restructuring costs during the quarter ended September 30,
2016. These costs consisted of (i) $273,000 of additional employee severance for discretionary termination benefits upon notification of the affected employees in accordance with ASC 420,
Exit or Disposal Cost Obligations
; and (ii) $163,000
of professional fees, travel and lease extension costs.
In addition, the Company recorded $99,000 of non-cash stock-based compensation
expense in connection with the extension of the exercise period for all vested stock options held by the U.K. employees at July 31, 2016 and a $133,000 credit to stock-based compensation expense to account for forfeitures of all non-vested stock
options at that date.
The Company expects to incur approximately $30,000 to $40,000 of additional restructuring charges in the quarter
ending December 31, 2016. The Company expects that substantially all of the restructuring costs associated with the plan of consolidation will be paid by December 31, 2016.
In December 2013, the Company entered into an at-the-market
(ATM) program pursuant to which the Company may, at its option, offer and sell shares of its common stock from time to time for an aggregate offering price of up to $19.2 million, of which approximately $17.6 million remains unsold. In
connection with execution of the ATM program, the Company incurred transaction costs of $153,000. The Company pays the sales agent a commission of up to 3.0% of the gross proceeds from the sale of such shares. The Companys ability to sell
shares under the ATM program is subject to an Australian Securities Exchange (ASX) rule limiting the number of shares the Company may issue in any 12-month period without shareholder approval, as well as other applicable rules and
regulations of ASX and the NASDAQ Global Market. During the three-month periods ended September 30, 2016 and 2015, the Company did not sell any shares under this program.
13
Warrants to Purchase Common Shares
During the three months ended September 30, 2016, a total of 623,605 warrants to purchase common shares were outstanding and exercisable at a
price of $2.50. At September 30, 2016, the remaining term of these warrants was approximately 10 months. During the three months ended September 30, 2015, a total of 1,176,105 warrants to purchase common shares were outstanding and exercisable at a
weighted-average price of $3.67. Of these warrants, 552,500 with an exercise price of $5.00 expired in January 2016.
2008 Incentive Plan
The Companys 2008 Incentive Plan (the 2008 Plan) provides for the issuance of stock options and other stock awards to
directors, employees and consultants. At September 30, 2016, a total of 7,841,255 shares of common stock were authorized for issuance under the 2008 Plan, of which 966,741 were available for grant of future awards. Shares issuable under the 2008
Plan are subject to an annual increase pursuant to the terms of the plan. The following table provides a reconciliation of stock option activity under the 2008 Plan for the three months ended September 30, 2016:
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Number of
Options
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Weighted
Average
Exercise
Price
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Weighted
Average
Remaining
Contractual
Life
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Aggregate
Intrinsic
Value
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(in years)
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(in thousands)
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Outstanding at July 1, 2016
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4,981,421
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$
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3.60
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|
|
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Granted
|
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1,105,300
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|
|
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3.58
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|
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|
|
|
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Exercised
|
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(4,080
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)
|
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2.14
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|
|
|
|
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Forfeited
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(302,250
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)
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|
|
4.18
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Outstanding at September 30, 2016
|
|
|
5,780,391
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|
|
$
|
3.57
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|
|
|
5.13
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|
|
$
|
1,213
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|
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|
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Outstanding at September 30, 2016 vested and unvested and expected to vest
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5,655,685
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$
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3.56
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|
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5.04
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|
|
$
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1,213
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Exercisable at September 30, 2016
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4,091,157
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$
|
3.48
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|
|
|
3.43
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|
|
$
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1,213
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During the three months ended September 30, 2016, the Company granted 1,105,300 options to employees with
ratable annual vesting over 4 years and a 10-year term. The weighted-average grant date fair value of these options was $2.29 per share. A total of 875,003 options vested during the three months ended September 30, 2016. In determining the grant
date fair value of options, the Company uses the Black-Scholes option pricing model. The Company calculated the Black-Scholes value of options awarded during the three months ended September 30, 2016 based on the following key assumptions:
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Option life (in years)
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6.25
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Stock volatility
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|
71%
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Risk-free interest rate
|
|
1.23% - 1.28%
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Expected dividends
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|
0%
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Stock-Based Compensation Expense
The Companys statements of comprehensive loss included total compensation expense from stock-based payment awards for the three months
ended September 30, 2016 and 2015, as follows (in thousands):
14
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Three Months Ended September 30,
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|
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2016
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2015
|
|
Compensation expense included in:
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Research and development
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$
|
236
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$
|
145
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General and administrative
|
|
|
498
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|
|
|
260
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|
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|
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|
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$
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734
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$
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405
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In connection with termination benefits provided to our former Chief Executive Officer, the vesting of certain
non-vested options were accelerated in accordance with the terms of the options, the exercise period for all vested options was extended through September 14, 2017, and all remaining non-vested options were forfeited. Additionally, in connection
with the U.K. restructuring, the exercise period of all vested options held by U.K. employees were extended through June 30, 2017 and all non-vested options were forfeited. These option modifications and forfeitures were accounted for in the quarter
ended September 30, 2016, the net effect of which resulted in an approximate $274,000 increase of stock-based compensation expense included in general and administrative and an approximate $35,000 reduction of stock-based compensation expense
included in research and development in the table above.
At September 30, 2016, there was approximately $2.8 million of unrecognized
compensation expense related to unvested options under the 2008 Plan, which is expected to be recognized as expense over a weighted average period of approximately 2.2 years.
The Company recognizes deferred tax assets and liabilities for estimated
future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of
assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established if, based on managements review of both positive and negative evidence, it is more
likely than not that all or a portion of the deferred tax assets will not be realized. Because of its historical losses from operations, the Company established a valuation allowance for the net deferred tax assets. The Company recorded a net income
tax benefit of $41,000 for the three months ended September 30, 2015. The Company recorded an additional $4,000 of federal alternative minimum tax expense for the three months ended September 30, 2015 as a result of taxable income for the tax year
ended December 31, 2014, which was primarily attributable to revenue recognition of the $25.0 million FDA approval milestone. Earned foreign research and development tax credits totaled $45,000 for the three months ended September 30, 2015.
For the three months ended September 30, 2016 and 2015, the Company had no significant unrecognized tax benefits. At September 30, 2016 and
June 30, 2016, the Company had no accrued penalties or interest related to uncertain tax positions.
10.
|
Commitments and Contingencies
|
Operating Leases
The Company leases approximately 13,650 square feet of combined office and laboratory space in Watertown, Massachusetts under a lease with a
term from March 2014 through April 2019, with a five-year renewal option at market rates. The Company provided a cash-collateralized $150,000 irrevocable standby letter of credit as security for the Companys obligations under the lease. In
addition to base rent, the Company is obligated to pay its proportionate share of building operating expenses and real estate taxes in excess of base year amounts.
In addition, the Company occupied approximately 2,200 square feet of laboratory and office space in Malvern, U.K. under a lease with a term
that was to expire on August 31, 2016. The lease term was extended through November 2016 to facilitate an orderly transition of the closure of the U.K. facility in connection with consolidation of the Companys research and development
activities in its U.S. laboratory facilities.
15
Legal Proceedings
In December 2014, the Company exercised its right under the Alimera Agreement to conduct an audit by an independent accounting firm of
Alimeras commercialization reporting for ILUVIEN for DME for 2014. In April 2016, the independent accounting firm issued its report, which concluded that Alimera under-reported net profits payable to the Company for 2014 by $136,000. In June
2016, Alimera remitted $354,000 to the Company, which consisted of the under-reported net profits plus interest and reimbursement of the audit costs of $204,000. In July 2016, Alimera filed a demand for arbitration with the American Arbitration
Association (AAA) in Boston, Massachusetts to dispute the audit findings and requested a full refund of the $354,000 previously paid to the Company. The Company has filed a motion to dismiss Alimeras demand for arbitration on
grounds that Alimera did not object to the independent accounting firms findings within the time period provided for in the Alimera Agreement and voluntarily paid the amounts due. Alimera requested leave to file an amended demand that includes
a breach of contract claim against the Company for its alleged failure to provide notice of the independent accounting firms report directly to Alimera, and a declaratory judgment count asking the arbitrator to rule (i) on each issue decided
in the audit; and (ii) whether the audit findings have any retroactive or prospective effect. The Company opposed Alimeras request for leave to file an amended demand, other than its request to add a declaratory judgment claim on the
retroactive or prospective effect of the audit findings. The parties have agreed to a 30-day stay of the arbitration proceedings through November 25, 2016 unless extended by mutual agreement. Pending the arbitration outcome, $136,000 of net profits
participation has been recorded as deferred revenue and the remaining $218,000 as accrued expenses at each of September 30, 2016 and June 30, 2016.
The Company is subject to various other routine legal proceedings and claims incidental to its business, which management believes will not
have a material effect on the Companys financial position, results of operations or cash flows.
Basic net loss per share is computed by dividing the net loss by the
weighted average number of common shares outstanding during the period. For periods in which the Company reports net income, diluted net income per share is determined by adding to the basic weighted average number of common shares outstanding the
total number of dilutive common equivalent shares using the treasury stock method, unless the effect is anti-dilutive. Potentially dilutive shares were not included in the calculation of diluted net loss per share for each of the three months ended
September 30, 2016 and 2015 as their inclusion would be anti-dilutive.
Potential common stock equivalents excluded from the calculation
of diluted earnings per share because the effect would have been anti-dilutive were as follows:
|
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|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Options outstanding
|
|
|
5,780,391
|
|
|
|
4,888,975
|
|
Warrants outstanding
|
|
|
623,605
|
|
|
|
1,176,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,403,996
|
|
|
|
6,065,080
|
|
|
|
|
|
|
|
|
|
|