KALA_Current_Folio_10Q

Table of Contents

 

 

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 September 30, 2019

OR

 

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

 

For the transition period from           to       

Commission file number 001-38150

 


 

 

KALA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 


 

 

 

Delaware

27-0604595

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

 

 

490 Arsenal Way, Suite 120

 

Watertown, MA

02453

(Address of principal executive offices)

(Zip Code)

 

(781) 996-5252

(Registrant’s telephone number, including area code)

 


 

 

 

 

 

 

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

Title of each class

Common Stock, $0.001 par value per share 

Trading symbol(s)

KALA

Name of each exchange on which registered

The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted  pursuant to Rule 405 of Regulation S-T 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 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 34,543,759 shares of Common Stock, $0.001 par value per share, outstanding as of November 4, 2019

 

 

 

 

 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

    

Page

PART I – FINANCIAL INFORMATION 

      

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018

 

3

 

 

 

 

 

Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2019 and 2018

 

4

 

 

 

 

 

Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and nine months ended September 30, 2019 and 2018

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2. 

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

 

23

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

Item 4. 

Controls and Procedures

 

36

 

 

 

 

PART II – OTHER INFORMATION 

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

36

 

 

 

 

Item 1A. 

Risk Factors

 

37

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

84

 

 

 

 

Item 6. 

Exhibits

 

86

 

 

 

 

SIGNATURES 

 

 

87

 

 

2

Table of Contents

PART I – FINANCIAL INFORMATION

Item  1 Financial Statements

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

97,556

 

$

170,898

Accounts receivable, net

 

 

7,171

 

 

 —

Inventory

 

 

5,557

 

 

4,095

Prepaid expenses and other current assets

 

 

2,202

 

 

2,035

Total current assets

 

 

112,486

 

 

177,028

Noncurrent assets:

 

 

 

 

 

 

Property and equipment, net

 

 

2,699

 

 

2,166

Long-term inventory

 

 

3,000

 

 

 —

Right-of-use assets

 

 

30,248

 

 

29,566

Restricted cash

 

 

12,580

 

 

12,206

Total assets

 

$

161,013

 

$

220,966

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

2,162

 

$

5,446

Accrued expenses and other current liabilities

 

 

14,555

 

 

11,101

Current portion of lease liabilities

 

 

1,279

 

 

463

Total current liabilities

 

 

17,996

 

 

17,010

Long-term liabilities:

 

 

 

 

 

 

Long-term lease liability - less current portion

 

 

29,026

 

 

28,752

Long-term debt

 

 

70,935

 

 

70,226

Total long-term liabilities

 

 

99,961

 

 

98,978

Total liabilities

 

 

117,957

 

 

115,988

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Common stock, $0.001 par value; 120,000,000 shares authorized as of September 30, 2019 and December 31, 2018; 34,543,759 and 33,863,077 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively

 

 

35

 

 

34

Additional paid-in capital

 

 

316,519

 

 

306,053

Accumulated deficit

 

 

(273,498)

 

 

(201,109)

Total stockholders' equity

 

 

43,056

 

 

104,978

Total liabilities and stockholders' equity

 

$

161,013

 

$

220,966

 

 

 

 

 

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

3

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KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2019

    

2018

    

2019

    

2018

 

 

 

 

 

 

 

 

 

Product revenues, net

 

$

1,451

 

$

 —

 

$

4,894

 

$

 —

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

668

 

 

 —

 

 

1,261

 

 

 —

Selling, general and administrative

 

 

15,280

 

 

8,469

 

 

50,523

 

 

21,102

Research and development

 

 

7,070

 

 

7,027

 

 

21,137

 

 

20,051

Total costs and expenses

 

 

23,018

 

 

15,496

 

 

72,921

 

 

41,153

Loss from operations

 

 

(21,567)

 

 

(15,496)

 

 

(68,027)

 

 

(41,153)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

571

 

 

325

 

 

1,973

 

 

848

Interest expense

 

 

(2,180)

 

 

(432)

 

 

(6,335)

 

 

(1,214)

Total other expense

 

 

(1,609)

 

 

(107)

 

 

(4,362)

 

 

(366)

Net loss

 

$

(23,176)

 

$

(15,603)

 

$

(72,389)

 

$

(41,519)

Net loss per share—basic and diluted

 

$

(0.68)

 

$

(0.63)

 

$

(2.13)

 

$

(1.69)

Weighted average shares outstanding—basic and diluted

 

 

34,168,282

 

 

24,600,080

 

 

33,977,477

 

 

24,570,081

 

See accompanying notes to these unaudited condensed consolidated financial statements.

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KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

 

 

 

Total

 

 

$0.001 Par Value

 

Paid-In

 

Accumulated

 

Stockholders'

 

 

Shares

 

Amount

 

Capital

 

Deficit

 

Equity

Three Months Ended September 30, 2018

 

 

 

 

                   

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2018

  

24,592,274

  

$

25

  

$

228,355

  

$

(160,287)

  

$

68,093

Exercise of stock options

 

53,268

 

 

 —

 

 

113

 

 

 —

 

 

113

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,331

 

 

 —

 

 

2,331

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(15,603)

 

 

(15,603)

Balance as of September 30, 2018

 

24,645,542

 

$

25

 

$

230,799

 

$

(175,890)

 

$

54,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2019

 

33,882,967

 

$

34

 

$

311,354

 

$

(250,322)

 

$

61,066

At the market offering, net of sales agent commission of $0.1 million

 

532,304

 

 

 1

 

 

2,129

 

 

 —

 

 

2,130

Exercise of stock options

 

4,824

 

 

 —

 

 

 3

 

 

 —

 

 

 3

Issuance under employee stock purchase plan

 

123,664

 

 

 —

 

 

545

 

 

 —

 

 

545

Stock-based compensation expense

 

 —

 

 

 —

 

 

2,488

 

 

 —

 

 

2,488

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(23,176)

 

 

(23,176)

Balance as of September 30, 2019

 

34,543,759

 

$

35

 

$

316,519

 

$

(273,498)

 

$

43,056

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2017

 

24,538,309

 

$

25

 

$

224,025

 

$

(134,371)

 

$

89,679

Exercise of stock options

 

107,233

 

 

 —

 

 

291

 

 

 —

 

 

291

Stock-based compensation expense

 

 —

 

 

 —

 

 

6,483

 

 

 —

 

 

6,483

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(41,519)

 

 

(41,519)

Balance as of September 30, 2018

 

24,645,542

 

$

25

 

$

230,799

 

$

(175,890)

 

$

54,934

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2018

 

33,863,077

 

$

34

 

$

306,053

 

$

(201,109)

 

$

104,978

At the market offering, net of sales agent commission of $0.1 million

 

532,304

 

 

 1

 

 

2,129

 

 

 

 

 

2,130

Exercise of stock options

 

24,714

 

 

 —

 

 

42

 

 

 —

 

 

42

Issuance under employee stock purchase plan

 

123,664

 

 

 —

 

 

545

 

 

 —

 

 

545

Stock-based compensation expense

 

 —

 

 

 —

 

 

7,750

 

 

 —

 

 

7,750

Net loss

 

 —

 

 

 —

 

 

 

 

 

(72,389)

 

 

(72,389)

Balance as of September 30, 2019

 

34,543,759

 

$

35

 

$

316,519

 

$

(273,498)

 

$

43,056

 

See accompanying notes to these unaudited condensed consolidated financial statements

 

 

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KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 

 

    

2019

 

2018

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(72,389)

 

$

(41,519)

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

 

 

 

 

 

 

Depreciation

 

 

614

 

 

243

Non-cash operating lease cost

 

 

1,307

 

 

283

Amortization of debt discount and other non-cash interest

 

 

709

 

 

75

Stock-based compensation

 

 

7,666

 

 

6,417

Loss on disposal of fixed asset

 

 

 —

 

 

 9

Change in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(7,171)

 

 

 —

Prepaid expenses and other current assets

 

 

(167)

 

 

(3,350)

Inventory

 

 

(4,379)

 

 

(910)

Accounts payable

 

 

(3,284)

 

 

(220)

Accrued expenses

 

 

3,454

 

 

1,143

Lease liabilities and other long-term liabilities

 

 

(868)

 

 

(303)

Net cash used in operating activities

 

 

(74,508)

 

 

(38,132)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,147)

 

 

(668)

Net cash used in investing activities

 

 

(1,147)

 

 

(668)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from venture debt, net of debt issuance costs of $50

 

 

 —

 

 

2,728

Payment of principal and prepayment penalty on venture debt

 

 

 —

 

 

(1,667)

Payment of principal on finance lease

 

 

(30)

 

 

 —

Payment of deferred offering costs

 

 

 —

 

 

(163)

Proceeds from common stock offerings, net of offering cost

 

 

2,130

 

 

 —

Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan

 

 

587

 

 

291

Net cash provided by financing activities

 

 

2,687

 

 

1,189

Net decrease in cash and restricted cash:

 

 

(72,968)

 

 

(37,611)

 Cash and restricted cash at beginning of period

 

 

183,104

 

 

114,699

 Cash and restricted cash at end of period

 

 

110,136

 

 

77,088

Reconciliation of cash and restricted cash:

 

 

 

 

 

 

 Cash and restricted cash at end of period

 

 

110,136

 

 

77,088

 Less restricted cash

 

 

(12,580)

 

 

(2,178)

 Cash at end of period

 

$

97,556

 

$

74,910

Non-cash investing and financing activities:

 

 

 

 

 

 

 Right-of-use asset obtained in exchange for finance lease obligation

 

$

136

 

$

 —

 Purchases of property and equipment in accounts payable

 

 

 —

 

 

110

 

 

 

 

 

 

 

Supplemental disclosure:

 

 

 

 

 

 

 Cash paid for interest

 

$

5,626

 

$

1,138

 Right-of-use assets obtained in exchange of operating lease obligations

 

 

1,852

 

 

 —

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

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KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business Kala Pharmaceuticals, Inc. (the “Company”) was incorporated on July 7, 2009, and is a biopharmaceutical company focused on the development and commercialization of therapeutics using its AMPPLIFYTM mucus-penetrating particle (“MPP”) Drug Delivery Technology, with an initial focus on the treatment of eye diseases. The Company has applied the AMPPLIFY technology to loteprednol etabonate (“LE”), a corticosteroid designed for ocular applications, resulting in the U.S. Food and Drug Administration’s (the “FDA”) approval of INVELTYS ® (loteprednol etabonate ophthalmic suspension) 1% as the first and only topical twice-daily ocular corticosteroid for treatment of post-operative inflammation and pain following ocular surgery, and the development of its lead product candidate, KPI-121 0.25%, which we plan to commercialize under the brand name EYSUVISTM (loteprednol etabonate ophthalmic suspension) 0.25%, for the temporary relief of the signs and symptoms of dry eye disease. On October 16, 2018, the Company submitted a New Drug Application (“NDA”) to the FDA for EYSUVIS. On August 8, 2019, the Company announced that it received a complete response letter (“CRL”) from the FDA regarding this NDA. The FDA indicated that efficacy data from an additional clinical trial will be needed to support a resubmission of the NDA. Based upon the previous recommendation of the FDA, the Company initiated an additional Phase 3 clinical trial (“STRIDE 3”) (STRIDE- Short Term Relief In  Dry Eye), in the third quarter of 2018, which the Company expects will serve as the basis for its response to the CRL. The Company is targeting topline data for STRIDE 3 in the first quarter of 2020. The Company is evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosing regimens for the temporary relief of the signs and symptoms of dry eye disease and for potential chronic treatment of dry eye disease. The Company is also evaluating compounds in its receptor Tyrosine Kinase Inhibitor program (the “rTKI program”), that inhibit the vascular endothelial growth factor (“VEGF”), pathway, for the potential treatment of a number of retinal diseases. 

 

In January 2019, the Company launched its first commercial product, INVELTYS, in the United States. The Company is currently engaged in the commercialization of INVELTYS, research and development activities, raising capital and recruiting skilled personnel. The Company is subject to a number of risks similar to those of other companies conducting high‑risk, research and development of pharmaceutical product candidates and launching a product for the first time. Principal among these risks are dependence on key individuals and intellectual property, competition from other products and companies and the technical risks associated with the successful research, development and marketing of its product candidates. The Company’s success is dependent upon its ability to raise additional capital in order to fund ongoing and future research and development, obtain regulatory approval of its product candidates, successfully commercialize its products, generate revenue, meet its obligations, and, ultimately, attain profitable operations.

Liquidity— Since inception, the Company has incurred significant losses from operations and negative cash flows from operations. As of September 30, 2019, the Company had an accumulated deficit of $273.5 million. The Company has generated only limited revenues to date from product sales and has financed operations primarily through proceeds from its initial public offering of common stock (“IPO”), private placements of preferred stock, convertible debt financings, borrowings under credit facilities, warrants, public common stock offerings and sales of its common stock under its at-the-market offering facility. The Company has devoted substantially all of its financial resources and efforts to research and development, including preclinical studies and clinical trials and engaging in activities to launch and commercialize INVELTYS. The Company expects to continue to incur significant expenses and operating losses over the next several years. Net losses may fluctuate significantly from quarter-to-quarter and year-to-year.

The Company believes that its existing cash on hand as of September 30, 2019, will enable it to fund its planned operating expenses, debt service obligations and capital expenditure requirements for at least twelve months from the date these condensed consolidated financial statements were issued. This evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the condensed consolidated financial statements are issued. As a result, the Company could deplete its available capital resources sooner than it currently expects.

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KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Use of Estimates—The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expense, and related disclosures. The Company bases estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. Estimates and assumptions relied upon in preparing these condensed consolidated financial statements relate to, but are not limited to, revenue recognition, inventory, the present value of lease liabilities and the corresponding right-of-use assets, the fair value of warrants, stock compensation, accrued expenses and the recoverability of the Company’s net deferred tax assets and related valuation allowance. Actual results may differ from these estimates under different assumptions or conditions.

Net Loss per Share—Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including the assumed exercise of stock options and warrants.

Basic and diluted shares outstanding are the same for each period presented as all common stock equivalents would be antidilutive due to the net losses incurred.

Unaudited Interim Financial Information—The condensed consolidated financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. The accompanying condensed consolidated financial statements reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations, statement of stockholders’ equity and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Annual Report”).

The unaudited condensed consolidated financial statements include the accounts of Kala Pharmaceuticals, Inc. and its wholly owned subsidiary, Kala Pharmaceuticals Security Corporation. All intercompany transactions and balances have been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in the Annual Report. There have been no material changes to the significant accounting policies during the period ended September 30, 2019 other than those noted below.

Revenue

The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to be entitled in exchange for those goods or services. The Company performs the following five steps to recognize revenue under ASC Topic 606: (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

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KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

recognizes revenue when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services that will be transferred to the customer.

Product revenues, net

The Company sells INVELTYS to wholesalers and/or specialty distributors in the United States (collectively, “Customers”). These Customers subsequently resell the Company’s products to specialty and other retail pharmacies. In addition to agreements with Customers, the Company enters into arrangements with payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts for the purchase of the Company’s products.

The goods promised in the Company’s product sales contracts represent a single performance obligation; as the promise to transfer the individual products to the Customer is not separately identifiable from other promises in the contracts and, therefore, not distinct. The Company recognizes revenue from product sales at the point the Customer obtains control of the product, which occurs upon delivery. The transaction price (“net sales price”) that is recognized as revenue for product sales includes the selling price to the Customer and an estimate of variable consideration. Components of variable consideration include prompt pay and other discounts, product returns, government rebates, third-party payor rebates, coverage gap rebates, incentives such as patient co-pay assistance, and other fees paid to Customers where a distinct good or service is not received. Variable consideration is recorded on the consolidated balance sheet as either a reduction of accounts receivable, if payable to a Customer, or as a current liability, if payable to a third-party other than a Customer. The Company considers all relevant information when estimating variable consideration such as assessment of its current and anticipated sales and demand forecasts, information from third parties regarding the payor mix for products, information from third parties regarding the units remaining in the distribution channel, specific known market events and trends, industry data and current contractual and statutory requirements that are reasonably available. The Company includes estimated amounts in the net sales price to the extent it is determined probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.

Product revenues, net for the three months ended September 30, 2019 includes an adjustment to decrease net revenue by $0.6 million as a result of an adjustment to the estimated number of prescriptions reported by our third-party data provider for the first two quarters of 2019, which resulted in a change in the estimated payor mix for INVELTYS.

Payment terms with Customers do not exceed one year and, therefore, the Company does not account for a significant financing component in its arrangements. The Company expenses incremental cost of obtaining a contract with a Customer when incurred as the period of benefit is less than one year. 

Reserves for Variable Consideration:

Trade Discounts and Allowances

The Company provides its Customers with certain trade discounts and allowances including discounts for prompt payments and fees paid for distribution, data and administrative services. These discounts and fees are based on contractually-determined percentages and are recorded as a reduction of revenue and accounts receivable in the period in which the related product revenue is recognized.

Chargebacks

Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchase the product from the Company. Customers charge the Company for the difference between what

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they pay for the product and the ultimate selling price to the qualified healthcare providers. These components of variable consideration are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Reserves for chargebacks consist of credits the Company expects to issue for units that remain in the distribution channel at the end of each reporting period and that the Company expects will be sold to qualified healthcare providers, as well as chargebacks that Customers have claimed, but for which the Company has not yet issued a credit.

Product Returns

Consistent with industry practice, the Company has a product returns policy that provides Customers a right of return for product purchased within a specified period prior to and subsequent to the product’s expiration date. The Company estimates the amount of its products that may be returned and presents this amount as a reduction of revenue in the period the related product revenue is recognized, in addition to establishing a liability. The Company’s estimates for product returns are based upon available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel.

Commercial Payor and Medicare Part D Rebates 

The Company contracts with certain third-party payors, primarily pharmacy benefit managers (“PBMs”) and health plans (“Plans”), for the payment of rebates with respect to utilization of its product. These rebates are based on contractual percentages applied to the amount of product prescribed to patients who are covered by the PBMs or the Plans with which it contracts. The Company estimates the rebates for commercial and Medicare Part D payors based on the contractual discount percentage, the various payor mix for INVELTYS as well as future rebates that will be made for product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. The Company also estimates the number of patients in the prescription drug coverage gap for whom it will owe an additional liability under the Medicare Part D program. Such estimates 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.

Government Rebates

The Company is subject to discount obligations under Medicaid and other government programs. For Medicaid, reserves are based on estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Centers for Medicaid and Medicare Services. The Company’s liability for these rebates consists of estimates of claims for the current period and estimated future claims that will be made for product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. 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.

Co-pay Assistance Program

The Company offers a co-pay assistance program (the “co-pay program”), which is intended to provide financial assistance to patients who may or may not be covered by commercial insurance or who opt out of Medicare Part D programs. The calculation of accruals for the co-pay program is based on actual claims processed during the period as well as an estimate of the number and cost per claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. Allowances for estimated co-pay claims 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.

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Accounts Receivable, net

Accounts receivable are reported on the consolidated balance sheets at outstanding amounts due from Customers for product sales. The Company deducts sales discounts for prompt payments and contractual fees for service arrangements from accounts receivable. The Company evaluates the collectability of accounts receivable on a regular basis, by reviewing the financial condition and payment history of Customers, an overall review of collections experience on other accounts, and economic factors or events expected to affect future collections experience. An allowance for doubtful accounts is recorded when a receivable is deemed to be uncollectible.

The Company recorded no allowance for doubtful accounts as of September 30, 2019. The Company recorded an allowance of approximately $1.1 million for expected sales discounts, related to prompt pay discounts and contractual fee for service arrangements, to wholesalers and distributors as of September 30, 2019.

Cost of Product Revenues

The cost of product revenues consists primarily of materials, third-party manufacturing costs, freight and distribution costs, royalty expense, allocation of labor, quality control and assurance, spoilage and other manufacturing overhead costs. The Company expenses costs of product revenues related to product candidates as research and development expenses prior to regulatory approval in the respective territory. The Company received U.S. regulatory approval for INVELTYS on August 22, 2018.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 states that an entity should recognize revenue based on the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The FASB subsequently issued amendments to ASU 2014-09 that had the same effective date of January 1, 2018. Revenue from sales of INVELTYS, as well as any other future revenue arrangements, are and will be recognized under the provisions of ASU 2014-09. While the Company adopted ASU 2014-09 effective January 1, 2018, the Company did not generate any revenue from product sales prior to 2019.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 substantially aligns accounting for share-based payments to employees and non-employees. This ASU became effective for annual periods beginning after December 15, 2018, including interim periods within that period, and early adoption is permitted. The new standard was effective on January 1, 2019 and the adoption of ASU 2018-07 did not have an impact on the Company’s condensed consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement  (“ASU 2018-13”). ASU 2018-13 is intended to improve the effectiveness of disclosures in the notes to financial statements related to fair value measurements in Topic 820. This ASU will become effective for annual periods beginning after December 15, 2019, including interim periods within that period, and early adoption is permitted. The Company is evaluating the effect of this new guidance on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15,  Intangibles - Goodwill and Other - Internal-Use Software -Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the accounting for implementation costs incurred in a hosting

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arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This ASU will become effective for annual periods beginning after December 15, 2019, including interim periods within that period, and early adoption is permitted. The Company does not expect the adoption of ASU 2018-15 to have a material effect on its condensed consolidated financial statements.

3. INVENTORY

Inventory is stated at the lower of cost or net realizable value, on a first in, first out basis. Costs include amounts related to third-party manufacturing, freight and distribution costs, allocation of labor, quality control and quality assurance and other manufacturing overhead. Capitalization of costs as inventory begins when the product has received regulatory approval in the United States. The Company expensed inventory costs related to product candidates as research and development expenses prior to regulatory approval. For INVELTYS, capitalization of costs as inventory began upon U.S. regulatory approval on August 22, 2018. Inventory produced that will be used in a promotional sample program is expensed to selling, general and administrative expense when it is selected for use and shipped as part of a marketing program.

Current inventory and long-term inventory consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

 

 

 

 

 

 

 

Raw materials

 

$

690

 

$

350

Work in progress

 

 

5,186

 

 

3,357

Finished goods

 

 

2,681

 

 

388

Total inventory

 

$

8,557

 

$

4,095

 

 

 

 

 

 

 

 

As of September 30, 2019, the Company had $5.6 million of current inventory and $3.0 million of long-term inventory.

4. ACCRUED EXPENSES

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

 

 

 

 

 

 

 

Compensation and benefits

 

$

5,267

 

$

5,352

Accrued revenue reserves (1)

 

 

5,408

 

 

 —

Development costs

 

 

1,286

 

 

1,223

Professional services

 

 

678

 

 

1,019

Commercial cost

 

 

749

 

 

1,722

Contract manufacturing

 

 

704

 

 

434

Payable related to construction of facility

 

 

 —

 

 

1,026

Other

 

 

463

 

 

325

Accrued expenses

 

$

14,555

 

$

11,101


(1) As of September 30, 2019, $0.9 million of additional revenue reserves were in accounts payable.

 

 

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5. LEASES

Operating leases

The Company entered into a three‑year lease agreement for its former headquarters (the “Waltham Lease”) on September 30, 2013, with a commencement date of February 1, 2014. On June 30, 2016, the lease was amended to extend the term from January 31, 2017 to January 31, 2019. In connection with the lease agreement, the Company issued a letter of credit to the landlord for $0.1 million. The Company secured the letter of credit for the full amount of the letter with cash on deposit, which was reported as restricted cash as of December 31, 2018. Upon the expiration of the lease term on January 31, 2019, the deposit was returned. With the adoption of ASU 2016-02, Leases, the Company has recorded a right-of-use asset and corresponding lease liability as of December 31, 2018.

On March 15, 2018, the Company entered into a lease agreement with Duffy Associates, LLC for the lease of a portion of the building located at 465 Waverley Oaks Road, Suite 301, Waltham, Massachusetts (the “Waverley Oaks Lease”). The term of the Waverley Oaks Lease was one-year, and as a result, a right-of-use asset and corresponding lease liability was not recorded.

On February 28, 2018, the Company entered into a lease agreement with 480 Arsenal Group LLC for the lease of a portion of the building located at 490 Arsenal Way, Watertown, Massachusetts (the “Watertown Lease”) to be used as its new corporate headquarters. The Company recognized the right-of-use asset and corresponding lease liability on November 15, 2018, by calculating the present value of lease payments, discounted at 9.9%, the Company’s estimated incremental borrowing rate, over the 13-year expected term.

In connection with the Watertown Lease, the Company issued a letter of credit to the landlord for $2.0 million. The Company secured the letter of credit for the full amount of the letter with cash on deposit, which is reported as restricted cash as of September 30, 2019 and December 31, 2018.

For the nine months ended September 30, 2019, the variable lease expense for the Watertown Lease, which includes common area maintenance and real estate taxes was $0.9 million. The remaining lease term was 12.1 years as of September 30, 2019.

Vehicle Fleet lease

During the nine months ended September 30, 2019, the Company entered into a master fleet lease agreement (the “Vehicle Fleet Lease”), pursuant to which it currently leases approximately 65 vehicles. In connection with the Vehicle Fleet Lease, the company issued a letter of credit for $0.5 million, which was reported as restricted cash on the balance sheet. The lease has an expected term of three years, which commenced upon the delivery of the vehicles in March 2019. As of September 30, 2019, the remaining lease term was 2.4 years.

 

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The components of lease expense and related cash flows were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

    

2019

    

2018

    

2019

    

2018

Lease cost

    

 

  

    

 

  

    

 

  

    

 

  

Operating lease cost

 

$

1,185

 

$

99

 

$

3,428

 

$

296

Short-term lease cost

 

 

 

 

55

 

 

 

 

117

Total lease cost

 

$

1,185

 

$

154

 

$

3,428

 

$

413

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash outflows from operating leases

 

$

1,443

 

$

103

 

$

3,097

 

$

307

 

Future minimum commitments due under the Company’s lease agreements as of September 30, 2019 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

Years Ending December 31,

 

 

Operating  Lease
Obligations (1)

 

 

Finance Lease Obligation (2)

 

 

Total

2019 (remaining three months)

 

1,025

 

11

 

1,036

2020

 

 

4,141

 

 

41

 

 

4,182

2021

 

 

4,233

 

 

41

 

 

4,274

2022

 

 

4,021

 

 

41

 

 

4,062

2023

 

 

3,960

 

 

 —

 

 

3,960

Thereafter

 

 

35,415

 

 

 —

 

 

35,415

Present value adjustment

 

 

(22,601)

 

 

(23)

 

 

(22,624)

Present value of lease payments

 

30,194

 

111

 

30,305


(1)

Future minimum lease payments under the Company’s Watertown Lease and its Vehicle Fleet Lease.

(2)

Future minimum lease payments under the Company’s finance lease obligation.

 

 

6. DEBT

2014 Debt Facility

In November 2014, the Company entered into a venture debt facility (“2014 Debt Facility”), which was subsequently amended in October 2016, November 2017 and March 2018. The 2014 Debt Facility, as amended, increased the initial commitment under the debt facility to a total of $20.0 million of funding and extended the interest-only end date for 12 months following the execution of the March 2018 amendment. The maturity date of the 2014 Debt Facility was also extended from October 13, 2020 to March 29, 2022.

The unpaid principal balance under the 2014 Debt Facility was $20.0 million as of September 30, 2018. The unamortized discount was $0.2 million as of September 30, 2018. During the three months ended September 30, 2018, the Company recognized contractual coupon interest expense of $0.4 million. During the nine months ended September 30, 2018, the Company recognized interest expense of $1.2 million which consisted of amortization of the debt discount of $0.1 million and the contractual coupon interest expense of $1.1 million. On October 1, 2018, the Company repaid the outstanding principal balance under the 2014 Debt Facility of $20.0 million. In connection with the repayment of the 2014 Debt Facility, the Company paid a prepayment fee of $0.2 million.

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Athyrium Credit Facility

On October 1, 2018, the Company entered into a credit agreement (the “Athyrium Credit Facility”), with Athyrium Opportunities III Acquisition LP (“Athyrium”) for up to $110.0 million. The Athyrium Credit Facility provides for a Term Loan A in the aggregate principal amount of $75.0 million (the “Term Loan A”), and a Term Loan B in the aggregate principal amount of $35.0 million (the “Term Loan B”). On October 1, 2018, the Company borrowed the entire principal amount of the Term Loan A. The Company may draw down the Term Loan B upon either (i) FDA approval of EYSUVIS for a dry eye disease indication or (ii) reaching certain net product revenues for INVELTYS, in each case on or prior to June 30, 2020. The maturity date of the Athyrium Credit Facility is October 1, 2024. 

The Term Loan A bears interest at a rate of 9.875% per annum, with quarterly, interest-only payments until the fourth anniversary of the Term Loan A. The unpaid principal amount of the Term Loan A is due and payable in quarterly installments starting on the fourth anniversary of the loan.  The Company may make voluntary prepayments, in whole or in part, and subject to certain exceptions, is required to make mandatory prepayments upon the occurrence of certain events of default as defined in the agreement, including but not limited to, the occurrence of a change of control. In addition, upon payment or repayment of any outstanding balance under the Athyrium Credit Facility, the Company will have to pay a 1% exit fee of the total principal payments (whether mandatory, voluntary, or at maturity) made throughout the term. The exit fee of $0.8 million based on the $75.0 million principal amount outstanding, will be accreted to the carrying amount of the debt using the effective interest method over the term of the loan.

All mandatory and voluntary prepayments of the Athyrium Credit Facility are subject to the payment of prepayment premiums as follows: (i) if prepayment occurs prior to the second anniversary of the applicable date of issuance, an amount equal to the amount by which (a) the present value of 105% of the principal prepaid plus all interest that would have accrued on such principal through such second anniversary exceeds (b) the amount of principal prepaid, (ii) if prepayment occurs on or after the second anniversary of the applicable date of issuance but prior to the third anniversary of such issuance, an amount equal to 3% of the principal prepaid, and (iii) if prepayment occurs on or after the third anniversary of the applicable date of issuance but prior to the fourth anniversary of such issuance, an amount equal to 2% of the principal prepaid. No prepayment premium is due on any principal prepaid after the fourth anniversary of the applicable date of issuance.

The Athyrium Credit Facility includes features requiring (1) additional interest rate upon an event of default accrued at an additional 3%, or a total interest rate of 12.875%, and (2) the lender’s right to declare all outstanding principal and interest immediately payable upon an event of default. These two features were analyzed and determined to be embedded derivatives to be valued as separate financial instruments. These embedded derivatives were bundled and valued as one compound derivative in accordance with the applicable accounting guidance for derivatives and hedging transactions. The Company determined that, due to the unlikely event of default, the embedded derivatives have a de minimus value as of September 30, 2019. The derivative liability will be remeasured at fair value at each reporting date, with changes in fair value being recorded as other income (expense) in the consolidated statements of operations.

The Athyrium Credit Facility is secured by a pledge of substantially all of the Company’s assets and contains affirmative and negative covenants customary for financings of this type, including limitations on the Company’s and its subsidiaries’ ability to, among other things, incur and prepay additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, change in the nature of business, enter into sale and leaseback transactions, make distributions, and enter into affiliate transactions, in each case, subject to certain exceptions. In addition, the Athyrium Credit Facility also contains a financial covenant requiring the Company to maintain at least $10.0 million of cash and cash equivalents. As a result of this financial covenant, the Company has recorded $10.0 million as restricted cash as of September 30, 2019 and December 31, 2018. 

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In connection with the Athyrium Credit Facility, the Company issued a warrant (“Warrant”), to purchase up to 270,835 shares of the Company’s common stock, at an exercise price per share of $12.18456. The Warrant is immediately exercisable as to 184,660 shares and will become exercisable as to the remaining 86,175 shares only upon the Company’s draw of the Term Loan B. The Warrant is exercisable through October 1, 2025 and is classified as an equity instrument. The Company allocated the proceeds from the Term Loan A to the Warrant using the relative fair value method. The fair value of the Warrant of $1.9 million was recognized as equity and a corresponding debt discount.

In addition, the Company paid certain fees to Athyrium and other third-party service providers in the aggregate amount of $3.0 million. These fees paid to Athyrium were recorded as a debt discount while the fees paid to other third-party service providers were recorded as debt issuance cost, respectively, in the aggregate amount of $3.0 million. These costs, along with the fair value of the Warrant of $1.9 million are being amortized using the effective interest method over the term of the Athyrium Credit Facility. The amortization of debt discount and debt issuance cost is included in interest expense within the Condensed Consolidated Statements of Operations. As of September 30, 2019, the effective interest rate was 11.63%, which takes into consideration the non-cash accretion of the exit fee and the amortization of the debt discount and issuance costs. During the three months ended September 30, 2019, the Company recognized interest expense of $2.1 million which consisted of amortization of the debt discount of $0.2 million, and the contractual coupon interest expense of $1.9 million. During the nine months ended September 30, 2019, the Company recognized interest expense of $6.2 million which consisted of amortization of the debt discount of $0.6 million, and the contractual coupon interest expense of $5.6 million.

The components of the carrying value of the debt as of September 30, 2019, and December 31, 2018 are detailed below (in thousands):

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31,

 

    

2019

    

2018

Principal loan balance

 

$

75,000

 

$

75,000

Unamortized debt discount and issuance cost

 

 

(4,211)

 

 

(4,806)

Cumulative accretion of exit fee

 

 

146

 

 

32

Long-term debt, net

 

$

70,935

 

$

70,226

 

 

 

 

 

 

 

 

 

The annual principal payments due under the Athyrium Credit Facility as of September 30, 2019 were as follows (in thousands):

 

 

 

 

Years Ending December 31,

    

 

 

2019 (remaining three months)

 

 

 —

2020

 

 

 —

2021

 

 

 —

2022

 

 

16,665

2023

 

 

33,330

Thereafter

 

 

25,005

Total

 

$

75,000

 

 

 

 

 

7. WARRANTS

The Company issued warrants in connection with debt transactions that were completed prior to 2017. Upon the completion of the IPO, the Company’s then outstanding warrants to purchase preferred stock converted into warrants to

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purchase common stock. The Company also issued the Warrant to purchase common stock in connection with the Athyrium Credit Facility, described further in Note 6.

The following table summarizes the common stock warrants outstanding as of September 30, 2019 and December 31, 2018, each exercisable into the number of shares of common stock set forth below as of the specified dates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Exercisable at

 

 

Exercise

    

Expiration

    

Exercisable

    

September 30, 

    

 

December 31, 

Issued

 

Price

 

Date

 

From

 

2019

 

 

2018

2013

 

$

7.50

 

April 2021

 

July 2017

 

82,816

 

 

82,816

2014

 

$

7.50

 

November 2024

 

July 2017

 

16,000

 

 

16,000

2016

 

$

8.27

 

October 2026

 

September 2017

 

14,512

 

 

14,512

2018

 

$

12.18

 

October 2025

 

October 2018

 

184,660

 

 

184,660

2018

 

$

12.18

 

October 2025

 

(1)

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

297,988

 

 

297,988


(1)

As of September 30, 2019 and December 31, 2018, warrants outstanding to acquire 86,175 shares of common stock are not exercisable and are only exercisable upon draw down of the Term Loan B.

 

8. EQUITY FINANCINGS

On August 9, 2018, the Company filed a shelf registration statement on Form S-3 with the SEC, which was declared effective on August 27, 2018 (the “Shelf Registration”). Under the Shelf Registration, the Company may offer and sell up to $250.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities, purchase contracts, purchase units or any combination of such securities during the three-year period that commenced upon the Shelf Registration becoming effective. On October 5, 2018, the Company sold 7,500,000 shares of the Company’s common stock (the “Shares”) in an underwritten offering pursuant to the Shelf Registration at a public offering price of $8.25 per share, before underwriting discounts and commissions. In addition, the underwriters were granted an overallotment option to purchase an additional 1,125,000 shares of the common stock at the same public offering price, less underwriting discounts and commissions (the “Overallotment Shares”). On October 11, 2018, the underwriters exercised in full their option to purchase the Overallotment Shares. The total number of Shares and Overallotment Shares sold by the Company in the offering was 8,625,000 shares, resulting in net proceeds to the Company, after underwriting discounts and offering expenses, of approximately $66.1 million.

In connection with the filing of the Shelf Registration, the Company entered into a sales agreement with Jefferies, LLC (the “Sales Agreement”) pursuant to which the Company may issue and sell, from time to time, up to an aggregate of $50.0 million of its common stock in an at-the-market equity offering (“ATM Offering”) through Jefferies, LLC, as sales agent. During the fourth quarter of 2018, the Company issued an aggregate of 518,135 shares of its common stock under the ATM Offering, resulting in net proceeds to the Company of $4.6 million. During the third quarter of 2019, the Company issued an aggregate of 532,304 shares of its common stock under the ATM Offering, resulting in net proceeds to the Company of $2.1 million.

As of September 30, 2019, excluding the funds designated to be offered under the Company’s ATM Offering, there was approximately $128.8 million of securities available to be issued under the Shelf Registration.

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9. STOCK‑BASED COMPENSATION

Stock Incentive Plans—In December 2009, the Board of Directors (the “Board”) adopted the 2009 Employee, Director and Consultant Equity Incentive Plan (the “2009 Plan”) for the issuance of common stock and stock options to employees, officers, directors, consultants, and advisors.

In July 2017, the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) became effective. The 2017 Plan was established to provide equity-based ownership opportunities for employees, officers, directors, consultants, and advisors. As of September 30, 2019, there were 665,522 shares of common stock available for grant under the 2017 Plan. In addition, any shares of common stock subject to awards under the 2009 Plan that expire, are forfeited, or are otherwise surrendered, without having been fully exercised or resulting in any common stock being issued will become available for issuance under the prior plan, up to an additional 2,538,468 shares, which is the number of shares issuable pursuant to outstanding awards granted under the prior plan.

Also approved under the 2017 Plan is an annual increase for each of the years through December 31, 2027, equal to the least of (i) 3,573,766 shares of common stock, (ii) 4% of the shares of common stock outstanding on December 31 of the prior year and (iii) an amount determined by the Board. 

Under the plans, the Board determines the number of shares of common stock to be granted pursuant to the awards, as well as the exercise price and terms of such awards. The exercise price of incentive stock options cannot be less than the fair value of the common stock on the date of grant. Stock options awarded under the plans expire 10 years after the grant date, unless the Board sets a shorter term. Options granted under the plans generally vest over a four‑year period. A portion of the unvested stock options will vest upon the sale of all or substantially all of the stock or assets of the Company.

In the past, the Company had granted stock options which contain performance‑based vesting criteria. These criteria were milestone events that were specific to the Company’s corporate goals. Stock‑based compensation expense associated with performance‑based stock options is recognized if the achievement of the performance condition is considered probable using management’s best estimates. As of September 30, 2019, there were no performance-based awards outstanding.

Employee Stock Purchase PlanIn 2017, the Company approved the 2017 Employee Stock Purchase Plan, which was amended and restated in December 2018 (as amended, the “ESPP”). The ESPP reserved an aggregate of 223,341 shares of common stock and provides for an annual increase on the first day of each fiscal year, beginning on January 1, 2019 and ending on December 31, 2029, in an amount equal to the lowest of: (1) 893,441 shares of the Company’s common stock; (2) 1% of the total number of shares of the Company’s common stock outstanding on the first day of the applicable fiscal year; and (3) an amount determined by the Company’s board of directors. 

The ESPP provides for two six-month offering periods each year; the first offering period begins on the first trading day on or after each January 1; the second offering period begins on the first trading day on or after each July 1. Under the ESPP, participating employees can authorize the Company to withhold a portion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock. At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lesser of the closing price of the common stock on (i) the first business day of the plan period or (ii) the exercise date. The fair value of the purchase rights granted under the ESPP was estimated on the date of grant, using the Black-Scholes option-pricing model. The first offering period for 2019 ended on June 30, 2019. In July 2019, employees of the Company purchased an aggregate of 123,664 shares under the ESPP.

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Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Inducement Stock Option Awards—During the three months ended September 30, 2019 and 2018, the Company granted non-statutory stock options to purchase an aggregate of 27,000 shares and 69,500 shares of the Company’s common stock, respectively. During the nine months ended September 30, 2019 and 2018, the Company granted non-statutory stock options to purchase an aggregate of 175,500 shares and 219,500 shares of the Company’s common stock, respectively. These stock options will vest over a four-year period, with 25% of the shares underlying each option award vesting on the one-year anniversary of the applicable employees’ new hire date and the remaining 75% of the shares underlying each award vesting monthly thereafter for three-years. Vesting of each option is subject to such employee’s continued service with the Company through the applicable vesting dates. These stock options were granted outside of the 2017 Plan as an inducement material to each employee’s acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4).

A summary of option activity for employee and non‑employee awards under the 2009 Plan, the 2017 Plan and inducement grants for the nine months ended September 30, 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

 

    

Shares

    

Price

    

Term

    

Value

 

 

 

 

 

 

 

(Years)

 

 

(in thousands)

Outstanding at January 1, 2019

 

5,111,690

 

$

8.96

 

8.0

 

$

3,771

Granted

 

2,116,425

 

 

5.24

 

 

 

 

 

Exercised

 

(24,714)

 

 

1.70

 

 

 

 

 

Forfeited

 

(207,632)

 

 

12.64

 

 

 

 

 

Outstanding at September 30, 2019

 

6,995,769

 

$

7.76

 

7.8

 

$

1,429

Vested or expected to vest at September 30, 2019

 

6,995,769

 

$

7.76

 

7.8

 

$

1,429

Options exercisable at September 30, 2019

 

3,683,751

 

$