Item 7. Management’s Discussion and Analysis
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties and should be read together with the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
Our Company
We are a biopharmaceutical company committed to redefining the retina experience. AXPAXLI (axitinib intravitreal hydrogel, also known as OTX-TKI), our product candidate for retinal disease, is based on our proprietary ELUTYX bioresorbable hydrogel-based formulation technology. AXPAXLI is currently in two repeat-dosing Phase 3 clinical trials for the treatment of wet age-related macular degeneration, or wet AMD, which we refer to as the SOL-1 and the SOL-R trials. We have also completed a Phase 1 clinical trial of AXPAXLI for the treatment of non-proliferative diabetic retinopathy, or NPDR, which we refer to as the HELIOS trial. We intend to meet with the U.S. Food and Drug Administration, or FDA, in the first half of 2025 to discuss the design of a potential registrational clinical program for AXPAXLI for the treatment of NPDR and diabetic macular edema, or DME, and then evaluate our next steps.
We also leverage the ELUTYX technology in our commercial product DEXTENZA, an FDA-approved corticosteroid for the treatment of ocular inflammation and pain following ophthalmic surgery and for the treatment of ocular itching associated with allergic conjunctivitis, and our product candidate PAXTRAVA (travoprost intracameral hydrogel also known as OTX-TIC), which is currently in a Phase 2 clinical trial for the treatment of open-angle glaucoma, or OAG, or ocular hypertension, or OHT.
Key Business and Financial Developments
AXPAXLI for the treatment of wet AMD
In December 2024, the SOL-1 trial, our first registrational Phase 3 clinical trial of AXPAXLI for the treatment of wet AMD, completed randomization of more than 300 evaluable treatment-naïve subjects with a diagnosis of wet AMD in the study eye.
On January 14, 2025, we announced that, as of January 10, 2025, we had enrolled 311 subjects across various stages of loading and randomization in the SOL-R trial, our repeat-dosing registrational Phase 3 clinical trial of AXPAXLI for the treatment of wet AMD.
On February 24, 2025, we received an agreement letter regarding a second modification of our Special Protocol Assessment, or SPA, agreement for our SOL-1 trial from the FDA that allows us to add a repeat dose of AXPAXLI at each of Week 52 and Week 76 for the AXPAXLI arm to generate the required safety data for subjects re-dosed with AXPAXLI through Week 104 to support long-term dosing. As of March 3, 2025, subject retention in the SOL-1 trial has been exceptional, and the vast majority of supplemental treatments, reviewed on a masked basis, have been in accordance with pre-specified criteria under the trial protocol. Because the inclusion of re-dosing requires all data to be masked until Week 52, we now expect topline results for SOL-1 to be available in the first quarter of 2026. The optimized design of the SOL-1 trial enhances the potential for a 6 - 12 month dosing label for AXPAXLI for the treatment of wet AMD and also provides insights into the long-term durability of AXPAXLI.
We previously intended to randomize 825 subjects in the SOL-R trial. The inclusion of re-dosing in the SOL-1 trial and the exceptional subject retention to date in the SOl-1 trial allow us to reduce the SOL-R trial size to 555 subjects.
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AXPAXLI for the treatment of NPDR and DME
We have completed the HELIOS trial of AXPAXLI for the treatment of NPDR. We intend to meet with the FDA in the first half of 2025 to discuss the design of a potential registrational clinical program for AXPAXLI for the treatment of NPDR and DME and then evaluate our next steps.
Commercial
Our net product revenue is generated from the sale of DEXTENZA to specialty distributors, or SDs, for resale to certain ambulatory surgery centers, or ASCs, certain hospital outpatient departments, or HOPDs, and certain physicians’ offices, and from the direct sale by us to ASCs and physicians’ offices. Our net product revenue was $63.5 million for the year ended December 31, 2024, reflecting an increase of $5.6 million or 9.7% over the year ended December 31, 2023.
Pursuant to 42 U.S.C. par. 1395 et seq., or the Medicare Statute, physician administered non-opioid pain medications will receive separate payment in both the ASC and HOPD settings of care effective as of January 1, 2025. The Medicare Statute allows for continued separate payment of DEXTENZA in the ASC setting for 2025, and it re-establishes the separate payment of DEXTENZA in the HOPD setting that was lost for 2024. Additionally, the Medicare Statute limits the separate payment for physician administered non-opioid pain medications. In November 2024, the Centers for Medicare & Medicaid Services, or CMS, released the final Medicare Physician Fee Schedule, or MPFS, for the calendar year 2025, which results in a marginal decrease in physician payments for DEXTENZA. Effective January 2025, a clinician’s cost for DEXTENZA is included in the cost performance category of CMS’ Merit-based Incentive Payment System, or MIPS. For eligible clinicians, CMS calculates the MIPS final score based on four performance categories, which is then used by CMS to determine the payment adjustment applied to the clinicians’ Medicare Part B claims, with clinicians that incur costs above or below national average spending being penalized or incentivized, respectively.
We believe that DEXTENZA is currently used in less than 5% of cataract procedures and that commercial growth may be driven by a continued focus on sales to ASCs, specifically corporate accounts that own and control multiple ASCs and HOPDs.
In June 2024, we submitted the data for our clinical trial to evaluate DEXTENZA in pediatric subjects following cataract surgery to the FDA to fulfill a post-approval requirement of the FDA in connection with the FDA’s prior approval of DEXTENZA for the treatment of inflammation and pain following ophthalmic surgery in adults. We anticipate receiving the FDA’s decision on the pediatric labeling for DEXTENZA during the second quarter of 2025.
Reduction in Force
In May 2024, our board of directors approved a strategic reduction in force to eliminate 37 full-time employees, primarily in research and development and technical operations and representing approximately 13% of our workforce, as part of an initiative to prioritize our resources on the clinical development of AXPAXLI for the treatment of wet AMD, or the Strategic Restructuring. We completed the Strategic Restructuring, recorded the related restructuring charges of $1.6 million, resulting primarily from garden leaves and severance benefits, and paid all previously accrued restructuring charges in the year ended December 31, 2024.
2024 Private Placement
In February 2024, we sold in a private placement 32,413,560 shares of our common stock at $7.52 per share and, in lieu of common stock to certain investors, pre-funded warrants to purchase up to an aggregate of 10,805,957 shares of our common stock at a price of $7.519 per pre-funded warrant for total net proceeds to us of approximately $316.4 million, after deducting placement agent fees and other offering expenses, or the 2024 Private Placement. Each pre-funded warrant has an exercise price of $0.001 per share, is currently exercisable and will remain exercisable until exercised in full.
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Convertible Notes
In March 2024, the holder of our $37.5 million unsecured senior subordinated convertible notes, or the Convertible Notes, converted the principal amount of the Convertible Notes, and we issued to the holder of the Convertible Notes 5,769,232 shares of our common stock with a total fair value of $52.5 million and paid $11.4 million for accrued interest. The accounting for the extinguishment of the Convertible Notes resulted in a non-cash loss of $28.0 million.
Components of our Financial Performance
Revenue
We recognize product revenue when we sell DEXTENZA in the United States to a network of SDs who then resell the product to ASCs, HOPDs, and physicians’ offices, and when we sell DEXTENZA on a direct basis to a small number of ASCs and physicians’ offices. We record DEXTENZA product sales net of estimated chargebacks, rebates, distribution fees and product returns. These deductions are generally referred to as gross-to-net deductions.
Operating Expenses
Cost of Product Revenue
Cost of product revenue consists primarily of costs of DEXTENZA product revenue, which include:
● Direct materials costs;
● Royalties;
● Direct labor, which includes employee-related expenses, including salaries, related benefits and payroll taxes, and stock-based compensation expense for employees engaged in the production process;
● Manufacturing overhead costs, which includes rent, depreciation, and indirect labor costs associated with the production process;
● Transportation costs; and
● Cost of scrap material.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
● expenses incurred in connection with the clinical trials of our product candidates, including with the investigative sites that conduct our clinical trials and under agreements with contract research organizations, or CROs;
● employee-related expenses, including salaries, related benefits and payroll taxes, travel and stock-based compensation expense for employees engaged in research and development, clinical and regulatory and other related functions;
● expenses relating to regulatory activities, including filing fees paid to the FDA for our submissions for product approvals;
● expenses associated with developing our pre-commercial manufacturing capabilities and manufacturing clinical study materials;
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● ongoing research and development activities relating to our core bioresorbable hydrogel technology and improvements to this technology;
● facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and supplies;
● costs relating to the supply and manufacturing of product inventory, prior to approval by the FDA or other regulatory agencies of our products; and
● expenses associated with preclinical development activities.
We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites.
Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical trials and regulatory fees. We do not allocate employee and contractor-related costs, costs associated with our proprietary bioresorbable hydrogel-based formulation technology ELUTYX, costs related to manufacturing or purchasing clinical trial materials, and facility expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple product development programs and, as such, are not separately classified. We use internal resources in combination with third-party CROs, including clinical monitors and clinical research associates, to manage our clinical trials, monitor subject enrollment and perform data analysis for many of our clinical trials. These employees work across multiple development programs and, therefore, we do not track their costs by program.
The successful development and commercialization of our products or product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:
● the scope, progress, outcome and costs of our clinical trials and other research and development activities;
● the timing, receipt and terms of any marketing approvals;
● the efficacy and potential advantages of our products or product candidates compared to alternative treatments, including any standard of care;
● the market acceptance of our products or product candidates; and
● significant and changing government regulation.
Any changes in the outcome of any of these variables with respect to the development of our product candidates in clinical and preclinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate. We anticipate that our research and development expenses will increase in the future as we support our continued development of our product candidates.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of salaries and related costs for personnel in selling and marketing functions as well as consulting, advertising and promotion costs.
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General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance, information technology, human resources and administrative functions. General and administrative expenses also include insurance, facility-related costs and professional fees for legal, patent, consulting and accounting and audit services.
Other Income (Expense)
Interest Expense . Interest expense is incurred on our debt. In August 2023, we entered into a credit and security agreement, or the Barings Credit Agreement, with Barings Finance LLC, or Barings, as administrative agent, and the lenders party thereto, providing for a secured term loan facility, or the Barings Credit Facility, in the aggregate principal amount of $82.5 million. For the year ended December 31, 2024, our interest-bearing debt included the Barings Credit Facility ($82.5 million outstanding principal) and the Convertible Notes (through March 28, 2024, no outstanding principal thereafter). For the year ended December 31, 2023, our interest-bearing debt included the Barings Credit Facility (from August 2, 2023), the Convertible Notes, and our obligations under a credit and security agreement with MidCap Financial Trust, as administrative agent, and other lenders that we entered into in 2014, or, as amended, the MidCap Credit Agreement, establishing a credit facility, or the MidCap Credit Facility ($25.0 million outstanding principal through August 2, 2023, no outstanding principal thereafter).
Change in Fair Value of Derivative Liabilities. In August 2023, in connection with entering into the Barings Credit Agreement, we identified an embedded derivative liability, or the Royalty Fee Derivative Liability, which we are required to measure at fair value at inception and then at the end of each reporting period until the embedded derivative is settled. In 2019, in connection with the issuance of our Convertible Notes, we identified an embedded derivative liability, or the Conversion Option Derivative Liability, which we are required to measure at fair value at inception and then at the end of each reporting period until the embedded derivative is settled. The settlement of the Conversion Option Derivative Liability occurred on March 28, 2024. The changes in fair value of these derivative liabilities are recorded through the consolidated statement of operations and comprehensive loss and are presented under the caption “change in fair value of derivative liabilities”.
Gains and Losses from Debt Extinguishment . In March 2024, the holder of the Convertible Notes converted the Convertible Notes. In connection with the conversion, our obligations under the Convertible Notes extinguished, resulting in a non-cash loss on extinguishment. In August 2023, we amended the Convertible Notes and accounted for the amendment, or the Convertible Notes Amendment, as an extinguishment of debt in accordance with the guidance in Accounting Standards Codification Topic 470-50 Debt . Application of this accounting standard resulted in a non-cash gain on extinguishment. In August 2023, we also extinguished our obligations under the MidCap Credit Facility, resulting in a non-cash loss on extinguishment.
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Results of Operations
The following table summarizes our results of operations for the years ended December 31, 2024, 2023 and 2022:
Year Ended
December 31,
Increase (Decrease)
2024
2023
2022
2024 - 2023
2023 - 2022
(in thousands)
Revenue:
Product revenue, net
$
63,461
$
57,870
$
50,457
$
5,591
$
7,413
Collaboration revenue
262
573
1,037
(311)
(464)
Total revenue, net
63,723
58,443
51,494
5,280
6,949
Costs and operating expenses:
Cost of product revenue
5,626
5,281
4,540
345
741
Research and development
127,635
61,055
53,462
66,580
7,593
Selling and marketing
41,590
40,549
39,922
1,041
627
General and administrative
60,653
33,940
32,224
26,713
1,716
Total costs and operating expenses
235,504
140,825
130,148
94,679
10,677
Loss from operations
(171,781)
(82,382)
(78,654)
(89,399)
(3,728)
Other income (expense):
Interest income
20,282
3,983
798
16,299
3,185
Interest expense
(13,577)
(11,338)
(7,022)
(2,239)
(4,316)
Change in fair value of derivative liabilities
(480)
(5,188)
13,841
4,708
(19,029)
Gains and losses on extinguishment of debt, net
(27,950)
14,190
—
(42,140)
14,190
Other expense, net
—
(1)
(1)
1
—
Total other income, net
(21,725)
1,646
7,616
(23,371)
(5,970)
Net loss
$
(193,506)
$
(80,736)
$
(71,038)
$
(112,770)
$
(9,698)
Product Revenue, net
Our product revenue, net was $63.5 million and $57.9 million for the years ended December 31, 2024 and 2023, respectively, reflecting an increase of $5.6 million year-over-year. All of our product revenue, net, was attributable to sales of DEXTENZA.
Our total gross-to-net provisions, or GTN Provisions, for the years ended December 31, 2024 and 2023 were 38.5% and 30.1%, respectively, of gross DEXTENZA product sales. We increased the wholesale acquisition cost, or WAC, for DEXTENZA effective April 2024 and again effective October 2024. Concurrently with the increases of the WAC, and additionally at other points in time in 2024, we also increased the off-invoice discount, or OID, for DEXTENZA as part of our overall pricing strategy. The OID amounts are generally determined at the time of resale by SDs or direct sales to ASCs or physicians’ offices by us. The GTN Provisions relative to gross DEXTENZA product sales increased as a result of the changes in the OID and are expected to increase with any additional anticipated OID increases, and we expect that GTN Provisions relative to gross DEXTENZA product sales will remain at this increased level, or might increase further, for 2025 and beyond.
Collaboration Revenue
We recognized $0.3 million of collaboration revenue related to the performance obligation under our license agreement with AffaMed to conduct a Phase 2 clinical trial of PAXTRAVA during the year ended December 31, 2024 compared to $0.6 million in the year ended December 31, 2023. We recognize collaboration revenue based on a cost-to-cost method.
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Research and Development Expenses
Year Ended
December 31,
Increase (Decrease)
2024
2023
2022
2024 - 2023
2023 - 2022
(in thousands)
Direct research and development expenses by program:
AXPAXLI for wet AMD
$
57,507
$
8,750
$
5,296
$
48,757
$
3,454
AXPAXLI for NPDR
2,301
2,868
659
(567)
2,209
PAXTRAVA for OAG or OHT
2,331
3,600
2,835
(1,269)
765
DEXTENZA for post-surgical ocular inflammation and pain
2,115
2,224
1,649
(109)
575
OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease
499
837
328
(338)
509
OTX-CSI for treatment of dry eye disease
—
161
453
(161)
(292)
DEXTENZA for ocular itching associated with allergic conjunctivitis
—
—
21
—
(21)
Preclinical programs
853
1,501
1,947
(648)
(446)
Unallocated expenses:
—
Personnel costs
37,818
27,068
25,106
10,750
1,962
All other costs
24,211
14,046
15,168
10,165
(1,122)
Total research and development expenses
$
127,635
$
61,055
$
53,462
$
66,580
$
7,593
Research and development expenses were $127.6 million and $61.1 million for the years ended December 31, 2024 and 2023, respectively, reflecting an increase of $66.6 million year-over-year.
Within research and development expenses, direct expenses for clinical programs increased $46.3 million, unallocated expenses increased $20.9 million, and expenses for preclinical programs decreased $0.6 million.
For the year ended December 31, 2024, we incurred $65.6 million in direct research and development expenses for our products and product candidates compared to $19.9 million for the year ended December 31, 2023. The increase of $45.7 million is related to timing and conduct of our various clinical trials for our product candidates, including the progression of the SOL-1 trial, which was fully randomized by December 2024, the initiation of the SOL-R trial, the completion of the HELIOS trial, and development activities related to our preclinical programs.
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We expect that direct research and development expenses for our products and product candidates will increase significantly for 2025 as we progress with the SOL-1 and the SOL-R trials; complete our other ongoing clinical trials; and initiate any other clinical trials of our product candidates that we might determine in the future to conduct, partially offset by reduced costs related to preclinical programs as a result of the Strategic Restructuring. We expect that personnel costs will increase for 2025 and beyond, as we have strengthened in 2024, and may continue to further strengthen in 2025, our clinical leadership team and our clinical teams dedicated to the SOL-1 and SOL-R trials, with the addition of several retinal disease experts and other key professionals. The anticipated increase will be partially offset by reduced personnel costs as a result of the Strategic Restructuring. We do not anticipate to incur significant research and development costs for our former product candidates OTX-DED and OTX-CSI in 2025 and beyond.
Selling and Marketing Expenses
Year Ended
December 31,
Increase (Decrease)
2024
2023
2022
2024 - 2023
2023 - 2022
(in thousands)
Personnel-related (including stock-based compensation)
$
27,576
$
27,434
$
26,679
$
142
$
755
Professional fees
8,899
8,287
9,077
612
(790)
Facility-related and other
5,115
4,828
4,166
287
662
Total selling and marketing expenses
$
41,590
$
40,549
$
39,922
$
1,041
$
627
Selling and marketing expenses were $41.6 million and $40.5 million for the years ended December 31, 2024 and 2023, respectively, reflecting an increase of $1.0 million year-over-year.
The increase was primarily due to an increase of $0.6 million in professional fees, an increase in facility-related and other costs of $0.3 million, and an increase in personnel costs, including stock-based compensation, of $0.1 million.
We expect our selling and marketing expenses to remain stable or increase slightly for 2025 as we continue to support the commercialization of DEXTENZA.
General and Administrative Expenses
Year Ended
December 31,
Increase (Decrease)
2024
2023
2022
2024 - 2023
2023 - 2022
(in thousands)
Personnel-related (including stock-based compensation)
$
40,273
$
21,356
$
18,227
$
18,917
$
3,129
Professional fees
15,568
10,821
11,634
4,747
(813)
Facility-related and other
4,812
1,763
2,363
3,049
(600)
Total general and administrative expenses
$
60,653
$
33,940
$
32,224
$
26,713
$
1,716
General and administrative expenses were $60.7 million and $33.9 million for the years ended December 31, 2024 and 2023, respectively, reflecting an increase of $26.7 million year-over-year.
The increase was primarily due to an increase of $18.9 million in personnel-related costs including stock-based compensation, an increase in professional fees of $4.7 million and an increase of $3.0 million in facility related and other costs. Personnel-related costs, including stock-based compensation, for the year ended December 31, 2024 include $1.6 million related to wages, severance, and other benefits under the Strategic Restructuring, and $9.3 million related to accrued severance and acceleration of stock-based compensation for certain former members of our senior leadership team who departed during the year ended December 31, 2024 separate from the Strategic Restructuring.
We anticipate that the level of our general and administrative expenses, exclusive of the one-time charges related to restructuring activities, will increase for 2025, as we have recently strengthened, and will continue to further
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strengthen, our leadership team and other certain functions that support our clinical trials of AXPAXLI, including the SOL-1 trial and the SOL-R trial, and our business in general.
Other Income (Expense), Net
Interest Income . Interest income was $20.3 million and $4.0 million for the years ended December 31, 2024 and 2023, respectively, reflecting an increase of $16.3 million year-over-year. The increase is primarily due to a higher average balance of cash and cash equivalents held by us, and higher interest rates.
Interest Expense . Interest expense was $13.6 million and $11.3 million for the years ended December 31, 2024 and 2023, respectively, reflecting an increase of $2.2 million year-over-year. The increase is primarily due to higher average balances of debt outstanding as a result of us drawing $82.5 million of debt under the Barings Credit Facility in August 2023, partially offset by us paying off the MidCap Credit Facility, of $25.0 million in August 2023, and the conversion of the Convertible Notes of $37.5 million in March 2024, and higher interest rates.
Change in Fair Value of Derivative Liabilities. We recognized a net loss from the change in fair values of our derivative liabilities of $0.5 million for the year ended December 31, 2024, compared to a net loss of $5.2 million for the year ended December 31, 2023. The net loss for 2024 comprises of a gain of $2.6 million from the change in the fair value of the Conversion Option Derivative Liability, a loss of $0.9 million from the change in the fair value of the Royalty Fee Derivative Liability, and an expense of $2.2 million related to royalty fees under the Barings Credit Agreement that we paid or accrued. The net loss for 2023 comprises of a loss of $4.5 million from the change in the fair value of the Conversion Option Derivative Liability and $0.9 million related to royalty fees under the Barings Credit Agreement that we paid or accrued, partially offset by a gain of $0.2 million from the change in the fair value of the Royalty Fee Derivative Liability.
Gains and Losses on Extinguishment of Debt, Net. We recognized a non-cash loss on extinguishment of debt of $28.0 million for the year ended December 31, 2024, compared to a gain, net, on extinguishment of debt of $14.2 million for the year ended December 31, 2023. The net loss for the year ended December 31, 2024 results from the conversion of the Convertible Notes in March 2024. The net gain for the year ended December 31, 2023 results from the accounting for the Convertible Notes Amendment, which resulted in a non-cash gain on extinguishment of debt of $14.9 million, and for the extinguishment of our obligations under the MidCap Credit Agreement, which resulted in a loss on extinguishment of debt of $0.7 million.
Comparison of the Years Ended December 31, 2023 and 2022
A discussion of changes in our results of operations during the year ended December 31, 2023 compared to the year ended December 31, 2022 has been omitted from this Annual Report on Form 10-K but may be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 11, 2024, which discussion is incorporated herein by reference and which is available free of charge on the SECs website at www.sec.gov.
Liquidity and Capital Resources
Sources of Liquidity
We have financed our operations primarily through private placements of our preferred stock, public offerings and private placements of our common stock and pre-funded warrants to purchase our common stock, borrowings under credit facilities, the private placements of our convertible notes, and sales of our products.
As of December 31, 2024, we had cash and cash equivalents of $392.1 million, and outstanding notes payable with a principal amount of $82.5 million par value under the Barings Credit Facility.
In February 2024, we sold 32,413,560 shares of our common stock at $7.52 per share and, in lieu of common stock to certain investors, pre-funded warrants to purchase up to an aggregate of 10,805,957 shares of our common stock at a price of $7.519 per pre-funded warrant for total net proceeds of approximately $316.4 million, after deducting placement agent fees and other offering expenses, in the 2024 Private Placement. Each pre-funded warrant has an exercise price of $0.001 per share, is currently exercisable and will remain exercisable until exercised in full.
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On December 18, 2023, we sold 35,420,000 shares of our common stock in an underwritten public offering at a public offering price of $3.25 per share. The total net proceeds of the public offering to us were approximately $107.7 million, after deducting underwriting discounts and commissions and other offering expenses payable by us.
In August 2023, we entered into the Barings Credit Agreement with Barings as administrative agent, and the lenders party thereto, providing for the Barings Credit Facility in the aggregate principal amount of $82.5 million. We borrowed the full amount of $82.5 million at closing and received proceeds of $77.3 million, after the application of an original issue discount and fees.
In August 2021, we entered into an Open Market Sale Agreement, or the 2021 Sales Agreement, with Jefferies LLC, or Jefferies, under which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through Jefferies, acting as agent. We did not offer or sell shares of our common stock under the 2021 Sales Agreement during the year ended December 31, 2024. During the year ended December 31, 2023, we sold 1,514,926 shares of common stock under the 2021 Sales Agreement, resulting in net proceeds to us, after accounting for issuance costs, of $9.5 million.
In connection with entering the Barings Credit Facility, in August 2023, we paid MidCap Financial Trust, as administrative agent, and our other lenders an aggregate of $26.2 million in satisfaction of our obligations under the MidCap Credit Facility.
Funding Requirements
We have a history of incurring significant operating losses. Our net losses were $193.5 million, $80.7 million, and $71.0 million for the years ended December 31, 2024, 2023 and 2022, respectively. As of December 31, 2024, we had an accumulated deficit of $891.1 million.
We expect to continue to incur losses in connection with our ongoing activities, particularly as we advance the clinical trials of our product candidates in development, including AXPAXLI, and increase our sales and marketing resources to support the commercialization of DEXTENZA and the potential launch of our product candidates, subject to receiving FDA approval.
We anticipate we will incur substantial expenses if and as we:
● continue our ongoing clinical trials, including the SOL-1 and the SOL-R trials, our two registrational Phase 3 clinical trials of AXPAXLI for the treatment of wet AMD;
● initiate any additional clinical trials we might determine in the future to conduct for our product candidates, including any clinical trials that we might conduct for AXPAXLI for the treatment of NPDR and DME;
● scale up our manufacturing processes and capabilities to support sales of commercial products, clinical trials of our product candidates, including AXPAXLI, and commercialization of any of our product candidates for which we obtain marketing approval, and expand our facilities to accommodate this scale up and any corresponding growth in personnel;
● scale up our sales, marketing and distribution capabilities to prepare for commercialization of any product candidates for which we intend to obtain marketing approval;
● seek marketing approvals for any of our product candidates that successfully complete clinical development;
● continue to monitor subjects according to the applicable clinical trial protocols, or prepare submission documentation such as clinical study reports, for our clinical trials that have been completed;
● continue to commercialize DEXTENZA in the United States;
● maintain, expand and protect our intellectual property portfolio;
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● expand our operational, quality assurance, financial, administrative and management systems and personnel, including personnel to support our clinical development, manufacturing and commercialization efforts;
● defend ourselves against legal proceedings, if any;
● make investments to improve our defenses against cybersecurity threats and establish and maintain cybersecurity insurance;
● increase our product liability and clinical trial insurance coverage as we expand our clinical trials and commercialization efforts; and
● continue to operate as a public company.
The amount and timing of these expenses determines our future capital requirements.
Based on our current operating plan, which includes estimates of anticipated cash inflows from DEXTENZA product sales and cash outflows from operating expenses and capital expenditures and reflects our observance of the minimum liquidity covenant of $20.0 million under the Barings Credit Agreement, we believe that our existing cash and cash equivalents as of December 31, 2024 will enable us to fund our planned operating expenses, debt service obligations and capital expenditure requirements into 2028. Our planned operating expenses do not include the expenses necessary to conduct a clinical trial of AXPAXLI for NPDR and DME, or to build out our manufacturing capabilities beyond the buildout of our existing manufacturing facilities. We have based our estimates on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.
Our future capital requirements will depend on many factors, including:
● the progress, costs and outcome of our ongoing clinical trials of AXPAXLI for the treatment of wet AMD;
● the timing, scope, progress, costs and outcome of a potential registrational clinical program of AXPAXLI for the treatment of NPDR and DME;
● the costs, timing and outcome of regulatory review of AXPAXLI or our other product candidates by the FDA, the European Medicines Agency, or EMA, or other regulatory authorities;
● the scope, progress, costs and outcome of preclinical development and any additional clinical trials we might determine in the future to conduct for our other product candidates, including PAXTRAVA for the reduction of intraocular pressure, or IOP, in patients with primary open-angle glaucoma, or OAG, or ocular hypertension, or OHT;
● the level of product sales from DEXTENZA and any additional products for which we obtain marketing approval in the future and the level of third-party reimbursement of such products;
● the costs of sales, marketing, distribution and other commercialization efforts with respect to DEXTENZA and any of our product candidates for which we obtain marketing approval in the future, including cost increases due to inflation;
● the costs of scaling up our manufacturing processes and capabilities to support sales of commercial products, clinical trials of our product candidates, including AXPAXLI, and commercialization of any of our product candidates for which we obtain marketing approval, including AXPAXLI, and of expanding our facilities to accommodate this scale up and any corresponding growth in personnel;
● the extent of our debt service obligations and our ability, if desired, to refinance any of our existing debt on terms that are more favorable to us;
● the amounts we are entitled to receive, if any, as reimbursements for clinical trial expenditures, development, regulatory, and sales milestone payments, and royalty payments under our license agreement with AffaMed;
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● the extent to which we choose to establish additional collaboration, distribution or other marketing arrangements for our products and product candidates;
● the costs and outcomes of any legal actions and proceedings;
● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and
● the extent to which we acquire or invest in other businesses, products and technologies.
Until such time, if ever, as we can generate product revenues sufficient to achieve profitability, we expect to finance our cash needs through equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, royalty agreements, and marketing and distribution arrangements. We do not have any committed external source of funds, although our license agreement with AffaMed provides for AffaMed’s reimbursement of certain clinical expenses incurred by us in connection with our collaboration and for our potential receipt of development and sales milestone payments and royalty payments. To the extent that we raise additional capital through the sale of equity, preferred equity or convertible debt securities, our securityholders’ ownership interests will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our existing securityholders’ rights as holders or beneficial owners of our common stock. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. The covenants under the Barings Credit Facility and our pledge of our assets as collateral to secure our obligations under the Barings Credit Facility pursuant to which we have a total borrowing capacity of $82.5 million, which has been fully drawn down, may limit our ability to obtain additional debt or other financing. If we raise additional funds through collaborations, strategic alliances, licensing arrangements, royalty agreements or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, products or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.
Cash Flows
The following table summarizes our sources and uses of cash for each of the periods presented:
Year Ended December 31,
2024
2023
2022
Cash used in operating activities
$
(134,677)
$
(70,234)
$
(59,603)
Cash used in investing activities
(1,288)
(6,087)
(3,715)
Cash provided by financing activities
332,110
169,828
1,454
Net increase in cash and cash equivalents
$
196,145
$
93,507
$
(61,864)
Operating activities. Net cash used in operating activities was $134.7 million for the year ended December 31, 2024, primarily resulting from our net loss of $193.5 million and net unfavorable changes in operating assets and liabilities of $10.2 million, partially offset by non-cash adjustments of $69.1 million. Our net loss was primarily attributed to operating expenses of $235.5 million, which we incurred primarily for research and development activities, selling and marketing activities, and general and administrative activities, and non-operating expenses of $21.7 million, partially offset by $63.7 million of revenue. Non-cash adjustments primarily include losses on extinguishment of debt of $28.0 million, stock-based compensation expense of $33.1 million, depreciation and amortization expense of $3.8 million, non-cash interest expense of $3.7 million, and a net non-cash loss related to changes in the fair value of our derivative liabilities of $0.5 million. Net cash used by net unfavorable changes in our operating assets and liabilities during the year ended December 31, 2024 consisted primarily of increases of accounts receivable of $6.2 million, resulting from increased sales of DEXTENZA, and increases of prepaid expenses and other current assets of $5.7 million, resulting predominantly from our clinical development activities, partially offset by other decreases, net, of $1.6 million.
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Net cash used in operating activities was $70.2 million for the year ended December 31, 2023, primarily resulting from our net loss of $80.7 million and net unfavorable changes in operating assets and liabilities of $7.4 million, partially offset by non-cash adjustments of $17.9 million. Our net loss was primarily attributed to operating expenses of $140.8 million, which we incurred primarily for research and development activities, selling and marketing activities, and general and administrative activities, partially offset by $58.4 million of revenue and a net non-operating income of $1.6 million. Non-cash adjustments primarily include a net gain on extinguishment of debt of $14.2 million, stock-based compensation expense of $17.8 million, non-cash interest expense of $6.1 million, non-cash expenses related to changes in the fair value of our derivative liabilities of $5.2 million, and depreciation and amortization expense of $3.0 million. Net cash used by net unfavorable changes in our operating assets and liabilities during the year ended December 31, 2023 consisted primarily of increases of accounts receivables of $4.9 million, increases of prepaid expenses and other current assets of $3.8 million, partially offset by increases of other items, net, of $1.2 million.
Net cash used in operating activities was $59.6 million for the year ended December 31, 2022, primarily resulting from our net loss of $71.0 million, partially offset by non-cash adjustments of $10.1 million and net favorable changes in operating assets and liabilities of $1.3 million. Our net loss was primarily attributed to operating expenses of $130.1 million, which we incurred primarily for research and development activities, selling and marketing activities, and general and administrative activities, partially offset by $51.5 million of revenue and a net non-operating income of $7.6 million. Non-cash adjustments primarily include stock-based compensation expense of $17.0 million, non-cash income related to changes in the fair value of our derivative liabilities of $13.8 million, non-cash interest expense of $4.9 million, and depreciation and amortization expense of $2.1 million. Net cash provided by net favorable changes in our operating assets and liabilities during the year ended December 31, 2022 consisted primarily of increases of accrued expenses of $1.6 million, partially offset by decreases of other items, net, of $0.3 million.
Investing activities. Net cash used in investing activities was $1.3 million for the year ended December 31, 2024, consisting of cash used to purchase property and equipment and leasehold improvements. Net cash used in investing activities was $6.1 million for the year ended December 31, 2023, consisting of cash used to purchase property and equipment and leasehold improvement. Net cash used in investing activities was $3.7 million for the year ended December 31, 2022, consisting of cash used to purchase property and equipment.
Financing activities. Net cash provided by financing activities for the year ended December 31, 2024 was $332.1 million and consisted of total net proceeds from the issuance of common stock and pre-funded warrants in a private placement of approximately $316.4 million, proceeds from the exercise of stock options of $14.7 million, and proceeds from issuing shares under our Employee Stock Purchase Plan, or ESPP, of $1.0 million.
Net cash provided by financing activities for the year ended December 31, 2023 was $169.8 million and consisted of proceeds from the issuance of common stock in public offerings of $117.3 million, drawings under the Barings Credit Facility of $77.3 million, net of issuance costs, proceeds from the issuance of common stock pursuant to our employee stock purchase plan of $0.9 million and proceeds from the exercise of stock options of $0.6 million, partially offset by repayment of the MidCap Credit Facility of $26.1 million.
Net cash provided by financing activities for the year ended December 31, 2022 was $1.5 million and consisted of proceeds from the issuance of common stock pursuant to our employee stock purchase plan of $0.9 million and proceeds from the exercise of stock options of $0.5 million.
Contractual Obligations and Commitments
Less Than
1 to 3
3 to 5
More than
Total
1 Year
Years
Years
5 Years
(in thousands)
Operating lease commitments
$
8,737
$
2,722
5,265
750
—
Barings Credit Agreement
82,474
—
—
82,474
—
Total
$
91,211
$
2,722
$
5,265
$
83,224
$
—
The table above includes our enforceable and legally binding obligations and future commitments at December 31, 2024, as well as obligations related to contracts that we are likely to continue, regardless of the fact that they may be cancelable at December 31, 2024. Some of the figures that we include in this table are based on management’s estimates and assumptions about these obligations, including their duration, and other factors. Because
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these estimates and assumptions are necessarily subjective, the amounts we will actually pay in future periods may vary from those reflected in the table.
We enter into contracts in the normal course of business to assist in the performance of our research and development activities and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts which are not included in contractual obligations and commitments.
Operating lease commitments represent payments due under our leases of office, laboratory and manufacturing space in Bedford, Massachusetts that expire in July 2027 and July 2028, and leases of equipment that expire between 2026 and 2028.
The commitments under the Barings Credit Agreement represent repayment of principal only. Future payments of interest under the Barings Credit Agreement depends on the level of the Secured Overnight Financing Rate, or SOFR, and future payments of royalty fees depend on our future revenue from DEXTENZA, both of which cannot be estimated at this time.
We have in-licensed a significant portion of our intellectual property from Incept, an intellectual property holding company, under an amended and restated license agreement, or the License Agreement, that we entered into with Incept in January 2012, which was most recently amended in September 2018. We are obligated to pay Incept a royalty equal to a low-single-digit percentage of net sales made by us or our affiliates of any products , devices, materials, or components thereof, or the Licensed Products, including or covered by Original IP (as defined in the License Agreement), excluding the Shape-Changing IP (as defined in the License Agreement), in the Ophthalmic Field of Use (as defined in the License Agreement). We are obligated to pay Incept a royalty equal to a mid-single-digit percentage of net sales made by us or our affiliates of any Licensed Products including or covered by Original IP, excluding the Shape-Changing IP, in the Additional Field of Use (as defined in the License Agreement). We are obligated to pay Incept a royalty equal to a low-single-digit percentage of net sales made by us or our affiliates of any Licensed Products including or covered by Incept IP (as defined in the License Agreement) or Joint IP (as defined in the License Agreement) in the field of drug delivery. Any sublicensee of ours also will be obligated to pay Incept a royalty on net sales of Licensed Products made by it and will be bound by the terms of the agreement to the same extent as we are. We are obligated to reimburse Incept for our share of the reasonable fees and costs incurred by Incept in connection with the prosecution of the patent applications licensed to us under the agreement. Our share of these fees and costs is equal to the total amount of such fees and costs divided by the total number of Incept’s exclusive licensees of the patent application. We have not included in the table above any payments to Incept under this license agreement as the amount, timing and likelihood of such payments are not known.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission, such relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balance sheets.
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Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued research and development expenses and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize product revenue from the sales of DEXTENZA product.
In November 2018, the FDA approved DEXTENZA for the treatment of ocular pain following ophthalmic surgery. We entered into a limited number of arrangements with specialty distributors in the United States to distribute DEXTENZA. Accounting Standards Codification 606 – Revenue from Contracts with Customers , or Topic 606, applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance arrangements and financial instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services.
To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to arrangements that meet the definition of a contract with a customer under Topic 606, including when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. For a complete discussion of accounting for product revenue, see Product Revenue, Net (below).
Product Revenue, Net — We derive our product revenues from the sale of DEXTENZA in the United States to customers, which includes a limited number of specialty distributors, who then subsequently resell DEXTENZA to ASCs, HOPDs, and physicians’ offices. We also sell DEXTENZA directly to a small population of ASCs and physicians’ offices, based on individually negotiated direct distribution agreements. In addition, we enter into arrangements with health care providers and payors that provide for government mandated or privately negotiated rebates and chargebacks with respect to the purchase of DEXTENZA.
We recognize revenue on product sales when the customer obtains control of our product, which occurs at a point in time (upon delivery to the customer). We have determined that the delivery of DEXTENZA to our customers constitutes a single performance obligation. There are no other promises to deliver goods or services beyond what is specified in each accepted customer order. We have assessed the existence of a significant financing component in the agreements with our customers. The trade payment terms with our customers do not exceed one year and therefore we have elected to apply the practical expedient and no amount of consideration has been allocated as a financing component. Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances.
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Transaction Price, including Variable Consideration — Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, government chargebacks, discounts and rebates, and other incentives, such as voluntary patient assistance, and other fee-for-service amounts that are detailed within contracts between us and our customers relating to our sale of DEXTENZA. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable or a current liability. These estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the respective underlying contracts.
The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price, only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our original estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Discounts and Allowances —We compensate (through trade discounts and allowances) our customers for sales order management, data, and distribution services. However, we have determined such services received to date are not distinct from our sale of products to the customer and, therefore, these payments have been recorded as a reduction of revenue within the statement of operations and comprehensive loss, as well as a reduction to trade receivables, net on the consolidated balance sheets.
Product Returns — Consistent with industry practice, we generally offer customers a limited right of return for product that has been purchased from us in certain circumstances as further discussed below. We estimate the amount of our product sales that may be returned by our customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as within accrued expenses and other current liabilities, in the accompanying consolidated balance sheets. We currently estimate product return reserves using available industry data and our own sales information, including our visibility into the inventory remaining in the distribution channel. We have received minimal returns to date and believe the returns of DEXTENZA will be minimal.
Government Chargebacks — Chargebacks for fees and discounts to qualified government healthcare providers represent the estimated obligations resulting from contractual commitments to sell products to qualified U.S. Department of Veterans Affairs hospitals and 340B entities at prices lower than the list prices charged to customers who directly purchase the product from us. The 340B Drug Discount Program is a U.S. federal government program created in 1992 that requires drug manufacturers to provide outpatient drugs to eligible health care organizations and covered entities at significantly reduced prices. Customers charge us for the difference between what they pay for the product and the statutory selling price to the qualified government entity. These allowances are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and trade receivables, net. Chargeback amounts are generally determined at the time of resale to the qualified government healthcare provider by customers, and we generally issue credits for such amounts within a few weeks of the customer’s notification to us of the resale. Allowances for chargebacks consist of credits that we expect to issue for units that remain in the distribution channel inventories at each reporting period-end that we expect will be sold to qualified healthcare providers, and chargebacks that customers have claimed, but for which we have not yet issued a credit.
Government Rebates — We are subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities on the consolidated balance sheets. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. For Medicaid programs, we estimate the portion of sales attributed to Medicaid patients and record a liability for the rebates to be paid to the respective state Medicaid programs. Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.
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Purchaser/Provider Discounts and Rebates —We offer rebate payments for which ASCs, HOPDs and other prescribers qualify by meeting quarterly purchase volumes of DEXTENZA under our volume-based rebate program. We calculate rebate payment amounts due under this program quarterly, based on actual qualifying purchases and apply a contractual discount rate. In the third quarter of 2022, we implemented a separate off-invoice discount, or OID, rebate program whereby end- users receive the discounted price immediately upon purchase, rather than having to wait until the end of the quarter for a rebate payment. The OID amounts are generally determined at the time of resale by specialty distributors, or SDs, or direct sales to ASCs by us. We generally issue credits for such amounts within a few weeks of the SD’s notification to us of the resale. We include the OID on the invoice when we sell to an ASC directly. The calculation of the accrual for all rebates is based on an estimate of claims that we expect to receive associated with product that has been recognized as revenue but also remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as an accrued expenses and other current liabilities for volume-based rebates and as a reduction of accounts receivable for OID rebates.
Other Incentives — Other incentives which we offer include voluntary patient assistance programs, such as the co-pay assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payors. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as accrued expenses and other current liabilities on the consolidated balance sheets.
Derivative Liabilities
The Barings Credit Agreement contains the Royalty Fee Derivative Liability, an embedded obligation to pay the Royalty Fee, that meets the criteria to be bifurcated and accounted for separately from the Barings Credit Facility. Royalty payments are estimated using a Monte Carlo simulation. The main inputs when determining the fair value of the Royalty Fee Derivative Liability are the amount and timing of our expected future revenue, the estimated volatility of these revenues, and the discount rate corresponding to the risk of revenue. We measure the value of the Royalty Fee Derivative Liability at its estimated fair value and recognize changes in the estimated fair value in other income (expense), net in the consolidated statements of operations and comprehensive loss during the period of change. The Royalty Fee Derivative Liability is recognized as a derivative liability in our consolidated balance sheet.
Recently Issued Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 2 – Summary of Significant Accounting Policies to the current period’s consolidated financial statements.