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, 2017 and for the three months ended September 30, 2017 and 2016 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, 2017 (fiscal 2017). 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, 2017, 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, 2017 are not necessarily indicative of the results that may be
expected for the entire fiscal year or any future period.
The Company develops sustained-release drug delivery products primarily for the
treatment of chronic eye diseases. The Companys approved products and product candidates 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), the Companys lead product candidate, has an expected new drug application
(NDA) filing date in late December 2017 or early January 2018, and ILUVIEN
®
for diabetic macular edema (DME), the Companys lead licensed product, is sold by
Alimera Sciences, Inc. (Alimera) directly in the U.S. and three European Union (EU) countries. Retisert
®
, an earlier generation product approved in 2005 by the FDA for
the treatment of posterior segment uveitis, is sold in the U.S. by Bausch & Lomb Incorporated (Bausch & Lomb). The Companys development programs are focused primarily on developing sustained release products that
utilize its Durasert technology platform to deliver approved drugs 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 candidate is a tiny micro-insert that delivers a micro-dose of a corticosteroid to the back of the eye on a sustained constant (zero order release) basis. The Company is developing Durasert three-year uveitis independently.
Both Phase 3 clinical trials investigating Durasert three-year uveitis met their primary efficacy endpoint of prevention of recurrence of
disease through six months with statistical significance (p < 0.001, intent to treat analysis) and with safety data consistent with the known effects of ocular corticosteroid use. The same statistical significance for efficacy and encouraging
safety results was maintained through 12 months of
follow-up
for the first Phase 3 clinical trial, and
read-out
at 12 months of
follow-up
for the second Phase 3 trial is expected in the first half of calendar 2018. The Company plans to file an NDA with the FDA in late December 2017 or early January 2018. In Europe, the Company filed a
marketing authorization application (MAA) in June 2017 and subsequently withdrew the application after
out-licensing
the European rights for Durasert three-year uveitis to Alimera. Alimera plans to
submit the Durasert three-year uveitis data under its existing ILUVIEN MAA and, if approved, to commercialize the uveitis indication under the ILUVIEN trademark.
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 corticosteroid, FA. ILUVIEN was developed in collaboration with, and is licensed to and sold by Alimera. ILUVIEN has been sold directly in the United
Kingdom (U.K.) and Germany since 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 in
Australia and New Zealand, Canada, Italy, Spain, France and numerous countries in the Middle East.
7
The Companys development programs are focused primarily on developing sustained release
drug products using its proven Durasert technology platform to deliver small molecule drugs to treat uveitis, wet
age-related
macular degeneration, glaucoma, osteoarthritis and other diseases. A sustained
release implant, surgically administered in an outpatient procedure, delivering a corticosteroid to treat pain associated with severe knee osteoarthritis, was jointly developed by the Company and Hospital for Special Surgery and is currently being
evaluated in an investigator-sponsored safety and tolerability study.
The Company 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. The Company has a history of operating losses and, to date, has not had significant recurring
cash inflows from revenue. The Companys anticipated recurring use of cash to fund operations in combination with no probable source of additional capital raises substantial doubt about its ability to continue as a going concern for one year
from the issuance of its financial statements. The Company believes that its cash and cash equivalents of $11.8 million at September 30, 2017, together with subsequent gross cash proceeds of approximately $6.2 million received from
additional utilization of its
at-the-market
(ATM) equity program (refer to Note 7) and expected proceeds from 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 approximately the second quarter of calendar year 2018. In order to extend the Companys ability to fund
its operations beyond then, including its planned commercial launch of Durasert three-year uveitis in the U.S. if approved by the FDA, managements plans include accessing additional equity financing from the sale of its common stock through an
underwritten public offering, its ATM program or other financing transactions and/or, as applicable, reducing or deferring operating expenses. On November 3, 2017, the Company filed a preliminary proxy statement with the SEC in connection with
its annual meeting of stockholders to be held on December 15, 2017, which includes proposals to (i) ratify the ATM sales pursuant to Australian Securities Exchange (ASX) Listing Rule 7.4 in order to refresh the Companys
capacity to issue shares of common stock up to 15% of the Companys issued capital without prior stockholder approval pursuant to ASX Listing Rule 7.1 and (ii) approve the issuance of equity securities up to an additional 10% of the
Companys issued capital which, if approved, would permit the Company to issue up to 25% of its issued and outstanding capital without any further stockholder approval in the next 12 months, unless such stockholder approval is required by
applicable law, the rules of the ASX or the rules of another stock exchange on which the Companys securities may be listed at the time. The timing and extent of the Companys implementation of these plans is expected to depend on the
amount and timing of cash receipts from existing or any future collaboration or other agreements and/or proceeds from any financing transactions. There is no assurance that the Company will receive significant 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
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
2.
|
License and Collaboration Agreements
|
Alimera
Under a collaboration agreement with Alimera, as amended in March 2008 (the Prior Alimera Agreement), the Company licensed to
Alimera the rights to develop, market and sell certain product candidates, including ILUVIEN, and Alimera assumed all financial responsibility for the development of licensed products. In addition, the Company was 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 could 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 were recouped. In the event that Alimera sublicensed commercialization in any country, the Company was
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 Prior 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.
Revenue under the Prior
Alimera Agreement totaled $90,000 and $20,000 for the three months ended September 30, 2017 and 2016, respectively. In addition to patent fee reimbursements in both periods, the Company received $50,000 of net profits in the three months ended
September 30, 2017 attributable to the fourth quarter of fiscal 2017.
On July 10, 2017, the Company entered into a further
amended and restated collaboration agreement (the Amended Alimera Agreement), pursuant to which the Company (i) licensed its Durasert three-year uveitis product candidate to Alimera for Europe, the Middle East and Africa
(EMEA) and (ii) converted the net profit share arrangement for each licensed product (including ILUVIEN) to a sales-based royalty on a calendar quarter basis commencing July 1, 2017, with payments from Alimera due 60 days
following the end of each quarter.
Sales-based royalties start at the rate of 2%. Commencing January 1, 2019 (or earlier under
certain circumstances), the sales-based royalty will increase to 6% on aggregate calendar year net sales up to $75 million and to 8% on any calendar year sales in excess of $75 million. Alimeras share of contingently recoverable
accumulated ILUVIEN commercialization losses under the original net profit share arrangement, capped at $25 million, are to be reduced as follows: (i) $10.0 million was cancelled in lieu of an upfront license fee on the effective date of
the Amended Alimera Agreement; (ii) for calendar years 2019 and 2020, 50% of earned sales-based royalties in excess of 2% will be offset against the quarterly royalty payments otherwise due from Alimera; (iii) on January 1, 2020,
another $5 million will be cancelled, provided, however, that such date of cancellation may be extended under certain circumstances related to Alimeras regulatory approval process for ILUVIEN for posterior uveitis, with such extension, if
any, subject to mutual agreement by the parties; and (iv) commencing in calendar year 2021, 20% of earned sales-based royalties in excess of 2% will be offset against the quarterly royalty payments due from Alimera until such time as the
balance of the original $25 million of recoverable commercialization losses has been fully recouped.
The Company subsequently
withdrew its previously filed EU marketing approval application and its EU orphan drug designation for posterior uveitis, and Alimera is responsible for filing a Type II variation for ILUVIEN for the treatment of posterior segment uveitis in select
countries in the EU where ILUVIEN is currently approved for the treatment of DME. Delays by Alimera in filing Type II variations in designated EU countries may, under certain circumstances, result in quarterly financial penalty payments by Alimera
to the Company.
Pfizer
In June
2011, the Company and Pfizer, Inc. (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.
9
The estimated selling price of the combined deliverables under the Restated Pfizer Agreement of
$6.7 million was partially 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 have been incurred. No collaborative research and development revenue was recorded during the three months ended September 30, 2016.
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. Pfizer did not
exercise its option and the Restated Pfizer Agreement automatically terminated on December 26, 2016. The remaining deferred revenue balance of $5.6 million was recognized as revenue in the three-month period ended December 31, 2016.
Provided that the Company did not conduct any research and development of the Latanoprost Product through calendar 2017, the Company retained the right thereafter to develop and commercialize the Latanoprost Product on its own or with a partner. By
letter agreement effective as of April 11, 2017, Pfizer officially waived that restriction.
Pfizer owned approximately 4.6% of the
Companys outstanding common stock at September 30, 2017.
Bausch & Lomb
Pursuant to a licensing and development agreement, as amended, Bausch & Lomb has a worldwide exclusive license to make and sell
Retisert in return for royalties based on sales. Royalty income totaled $245,000 and $243,000 for the three months ended September 30, 2017 and 2016, respectively. Accounts receivable from Bausch & Lomb totaled $246,000 at each of
September 30, 2017 and June 30, 2017.
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, the most recent of which was received in December 2016. 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. There was no revenue related to the OncoSil agreement in either of the three-month periods ended September 30, 2017 and 2016. As of September 30, 2017, 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 $50,000 and $8,000 for the three-months ended September 30, 2017 and 2016, respectively. Deferred revenue for these agreements totaled $10,000 and $50,000 at
September 30, 2017 and June 30, 2017, respectively. The Company received $750,000 in October 2017 in connection with a new feasibility study agreement.
10
The reconciliation of intangible assets for the three months ended
September 30, 2017 and for the year ended June 30, 2017 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Year Ended
|
|
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
Patented technologies
|
|
|
|
|
|
|
|
|
Gross carrying amount at beginning of period
|
|
$
|
35,610
|
|
|
$
|
36,196
|
|
Foreign currency translation adjustments
|
|
|
589
|
|
|
|
(586
|
)
|
|
|
|
|
|
|
|
|
|
Gross carrying amount at end of period
|
|
|
36,199
|
|
|
|
35,610
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization at beginning of period
|
|
|
(35,246
|
)
|
|
|
(35,094
|
)
|
Amortization expense
|
|
|
(182
|
)
|
|
|
(724
|
)
|
Foreign currency translation adjustments
|
|
|
(587
|
)
|
|
|
572
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization at end of period
|
|
|
(36,015
|
)
|
|
|
(35,246
|
)
|
|
|
|
|
|
|
|
|
|
Net book value at end of period
|
|
$
|
184
|
|
|
$
|
364
|
|
|
|
|
|
|
|
|
|
|
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 $182,000 and $183,000 for the three months ended September 30, 2017 and 2016, respectively. The carrying value of intangible assets at September 30, 2017 of $184,000
(approximately $133,000 attributable to the Durasert technology and $51,000 attributable to the Tethadur technology) is expected to be amortized on a straight-line basis over the remaining estimated useful life of 3 months.
4.
|
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 and cash equivalents. At September 30, 2017 and June 30, 2017, substantially all of the Companys interest-bearing cash equivalent balances were concentrated in one U.S. Government money market fund that has
investments consisting primarily of U.S. Government Agency debt, U.S. Treasury Repurchase Agreements and U.S. Government Agency Repurchase Agreements. These deposits may be redeemed upon demand and, therefore, generally have minimal risk.
The Companys cash equivalents are classified within Level 1 on the basis of valuations using quoted market prices. The following
tables summarize the Companys assets carried at fair value measured on a recurring basis at September 30, 2017 and June 30, 2017 by valuation hierarchy (in thousands):
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
Total carrying
|
|
|
active markets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
|
|
value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
10,546
|
|
|
$
|
10,546
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,546
|
|
|
$
|
10,546
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
Quoted prices in
|
|
|
Significant other
|
|
|
Significant
|
|
|
|
Total carrying
|
|
|
active markets
|
|
|
observable inputs
|
|
|
unobservable inputs
|
|
|
|
value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
13,521
|
|
|
$
|
13,521
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,521
|
|
|
$
|
13,521
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses consisted of the following at September 30, 2017
and June 30, 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
June 30,
2017
|
|
Clinical trial costs
|
|
$
|
1,310
|
|
|
$
|
1,984
|
|
Personnel costs
|
|
|
749
|
|
|
|
1,632
|
|
Professional fees
|
|
|
424
|
|
|
|
590
|
|
Other
|
|
|
30
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,513
|
|
|
$
|
4,224
|
|
|
|
|
|
|
|
|
|
|
In January 2017, the Company entered into retention bonus agreements with five employees. Under these
agreements, subject to continuing employment (a) cash payments totaling $320,000 will be made on December 22, 2017 and (b) restricted stock units (RSUs) of an equal value will be granted at that date with a
one-year
vesting period. Included in personnel costs in the above table were $240,000 and $160,000 at September 30, 2017 and June 30, 2017, respectively, representing pro rata accrual of the cash bonus
component.
In July 2016, the Company announced its plan to consolidate 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 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 for the three months ended
September 30, 2016 is as follows (in thousands):
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
June 30, 2016
|
|
|
Charged to
Expense
|
|
|
Payments
|
|
|
Balance at
September 30, 2016
|
|
Termination benefits
|
|
$
|
118
|
|
|
$
|
273
|
|
|
$
|
(391
|
)
|
|
$
|
|
|
Facility closure
|
|
|
40
|
|
|
|
57
|
|
|
|
(44
|
)
|
|
|
53
|
|
Other
|
|
|
29
|
|
|
|
106
|
|
|
|
(80
|
)
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
187
|
|
|
$
|
436
|
|
|
$
|
(515
|
)
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded approximately $436,000 of restructuring costs during the three months 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, for the three months ended September 30,
2016, 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 paid all of the restructuring costs associated with the plan of consolidation as of March 31, 2017.
In February 2017, the Company entered into an ATM program
pursuant to which, under its Form
S-3
shelf registration statement, 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
$20.0 million. The Company will pay 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 ASX listing rules, as defined,
limiting the number of shares the Company may issue in any
12-month
period without stockholder approval, as well as other applicable rules and regulations of the ASX and NASDAQ Global Market.
During the three months ended September 30, 2017, the Company sold 843,784 shares of common stock under the ATM program at a weighted
average price of $1.24 per share for gross proceeds of approximately $1.0 million. Share issue costs, including sales agent commissions, totaled $81,000.
From October 1, 2017 through November 7, 2017, the Company sold an additional 5,056,216 shares of common stock at a weighted average price of
$1.23 per share for gross proceeds of approximately $6.2 million under its ATM program. On account of the ASX listing rules noted above, and after aggregating all of the shares sold under the ATM program from July 2017 through November 7, 2017,
the Company may not issue additional shares of common stock without obtaining stockholder approval of any further issuances of common stock during the ensuing
12-month
period.
On November 3, 2017, the Company filed a preliminary proxy statement with the SEC in connection with its annual meeting of stockholders
to be held on December 15, 2017, which includes proposals to (i) ratify the ATM sales pursuant to ASX Listing Rule 7.4 in order to refresh the Companys capacity to issue shares of common stock up to 15% of the Companys issued
capital without prior stockholder approval pursuant to ASX Listing Rule 7.1 and (ii) approve the issuance of additional equity securities up to an additional 10% of the Companys issued capital which, if approved, would permit the Company
to issue up to 25% of its issued and outstanding capital without any further stockholder approval in the next 12 months, unless such stockholder approval is required by applicable law, the rules of the ASX or the rules of another stock exchange on
which the Companys securities may be listed at the time.
Warrants to Purchase Common Shares
The following table provides a reconciliation of warrants to purchase common stock for the three months ended September 30, 2017 and 2016:
13
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance at beginning of period
|
|
|
623,605
|
|
|
$
|
2.50
|
|
|
|
623,605
|
|
|
$
|
2.50
|
|
Expired
|
|
|
(623,605
|
)
|
|
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance and exercisable at end of period
|
|
|
|
|
|
$
|
|
|
|
|
623,605
|
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 7, 2017, all outstanding warrants expired unexercised.
2016 Long-Term Incentive Plan
The 2016
Long-Term Incentive Plan (the 2016 Plan), approved by the Companys stockholders on December 12, 2016 (the Adoption Date), provides for the issuance of up to 3,000,000 shares of common stock reserved for issuance
under the 2016 Plan plus any additional shares of common stock that were available for grant under the 2008 Incentive Plan (the 2008 Plan) at the Adoption Date or would otherwise become available for grant under the 2008 Plan as a result
of termination or forfeiture of awards under the 2008 Plan following the Adoption Date. At September 30, 2017, a total of 5,058,977 shares of common stock were authorized for issuance under the 2016 Plan, which included 1,155,530 stock options
that were forfeited under the 2008 Plan during the three months ended September 30, 2017. At September 30, 2017, a total of 4,118,477 shares were available for new awards.
During the three months ended September 30, 2017, no equity awards were issued under the 2016 Plan and no previous awards issued on
June 27, 2017 became vested or were forfeited. The intrinsic value of the outstanding stock options at September 30, 2017 was $0.
At September 30, 2017, a total of 940,500 awards were outstanding, all of which were granted on June 27, 2017 and consisted of the
following: (i) 482,000 stock options granted at an exercise price of $1.77 per share with ratable annual vesting over 3 years and a
10-year
term; (ii) 248,500 Restricted Stock Units (RSUs) to
employees with ratable annual vesting over 3 years and (iii) 210,000 Performance Stock Units (PSUs) to certain employees. The performance conditions associated with the PSU awards are as follows: (a) for one third of the PSUs, upon
an FDA acceptance of the Companys NDA submission of Durasert three-year uveitis for review on or before March 31, 2018 and (b) for
two-thirds
of the PSUs, upon an FDA approval of Durasert
three-year uveitis on or before March 31, 2019. For each performance criteria that is achieved, 50% of the underlying stock units that are associated with that performance condition will vest at the achievement date and 50% will vest on the
first anniversary of such date. At September 30, 2017, the first performance condition associated with the PSUs was deemed probable of achievement and, accordingly, $30,414 of stock-based compensation was recorded based on the period from the
June 27, 2017 date of grant through September 30, 2017.
2008 Incentive Plan
The 2008 Plan provided for the issuance of stock options and other stock awards to directors, employees and consultants. From December 12,
2016, the Adoption Date of the 2016 Plan, through the balance of fiscal 2017, a total of 903,447 shares that would have been available for grant of future awards under the 2008 Plan were carried over to the 2016 Plan. Effective as of the Adoption
Date, the Compensation Committee terminated the 2008 Plan in all respects, other than with respect to previously-granted awards, and no additional stock options and other stock awards could be issued under the 2008 Plan. During the three months
ended September 30, 2017, an additional 1,155,530 stock options under the 2008 Plan were forfeited and became available for grant under the 2016 Plan. The following table provides a reconciliation of stock option activity under the 2008 Plan
for the three months ended September 30, 2017:
14
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|
|
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Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Outstanding at July 1, 2017
|
|
|
5,563,685
|
|
|
$
|
3.48
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,155,530
|
)
|
|
|
3.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
4,408,155
|
|
|
$
|
3.36
|
|
|
|
5.55
|
|
|
$
|
15
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|
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|
|
|
|
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|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
3,130,063
|
|
|
$
|
3.39
|
|
|
|
4.29
|
|
|
$
|
15
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All option grants have a
10-year
term. A total of 568,942 options
vested during the three months ended September 30, 2017.
Inducement Option Grant
In connection with the September 15, 2016 hire of the Companys President and CEO, the Company granted, as an inducement award,
850,000 options to purchase common stock with ratable vesting over 4 years, an exercise price of $3.63 per share and a
10-year
term. Although the stock options were not awarded under the 2008 Plan, the stock
options are subject to and governed by the terms and conditions of the 2008 Plan. A total of 212,500 of these options vested during the three months ended September 30, 2017.
Restricted Stock Units
During the year
ended June 30, 2017,
the Company issued 700,000 market-based Restricted Stock Units (market-based RSUs) to two employees, which included 500,000 as an inducement grant to the Companys President and CEO, and 200,000
issued under the 2008 Plan. The market-based RSUs vest based upon a relative percentile rank of the
3-year
change in the closing price of the Companys common stock compared to that of the companies that
make up the NASDAQ Biotechnology Index. The Company estimated the fair value of the market-based RSUs using a Monte Carlo valuation model on the respective dates of grant.
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, 2017 and 2016, as follows (in thousands):
|
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|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Compensation expense included in:
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
304
|
|
|
$
|
236
|
|
General and administrative
|
|
|
377
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
681
|
|
|
$
|
734
|
|
|
|
|
|
|
|
|
|
|
In connection with termination benefits provided to the Companys former Chief Executive Officer, the
vesting of certain options was 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 the former U.K. employees was 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 expense and an approximate $35,000 reduction of stock-based compensation expense included in research and development expense for the three months ended
September 30, 2016 in the table above.
15
At September 30, 2017, there was approximately $3.6 million of unrecognized
compensation expense related to outstanding stock options under the 2008 Plan, the inducement stock option grant to the Companys President and CEO, the market-based RSU awards and the stock options, RSU awards and PSU awards issued under the
2016 Plan, which is expected to be recognized as expense over a weighted-average period of approximately 1.9 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 did not record any
income tax expense or benefit for the three months ended September 30, 2017 and 2016.
For the three months ended September 30,
2017 and 2016, the Company had no significant unrecognized tax benefits. At September 30, 2017 and June 30, 2017, the Company had no accrued penalties or interest related to uncertain tax positions.
9.
|
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.
Commencing July 1, 2017, the Company leases approximately 3,000 square feet of office space in Liberty Corner, New Jersey under a lease
term extending through June 2022, with two five-year renewal options at 95% of the then-prevailing market rates. 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.
Legal Proceedings
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, 2017 and 2016 as their inclusion would be anti-dilutive.
16
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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|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Options outstanding
|
|
|
5,740,155
|
|
|
|
5,780,391
|
|
Warrants outstanding
|
|
|
|
|
|
|
623,605
|
|
Restricted stock units outstanding
|
|
|
948,500
|
|
|
|
|
|
Performance stock units outstanding
|
|
|
210,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,898,655
|
|
|
|
6,403,996
|
|
|
|
|
|
|
|
|
|
|
17