OCULAR THERAPEUTIX, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onFebruary 28, 2022 . Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties and should be read together with the "Risk Factors" section of this Quarterly Report on Form 10-Q 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
We are a biopharmaceutical company focused on the formulation, development, and commercialization of innovative therapies for diseases and conditions of the eye using our proprietary bioresorbable hydrogel-based formulation technology. Core to our strategy is to continue to (i) build upon our experience commercializing ophthalmology products that can be administered primarily in the surgical and/or office settings and (ii) develop a clinical pipeline of innovative ophthalmology products that address large areas of unmet need. We currently have one FDA-approved product in commercialization inthe United States , DEXTENZA®, an intracanalicular insert for the treatment of both post-surgical ocular inflammation and pain and ocular itching associated with allergic conjunctivitis. We also have an additional FDA-approved product, ReSure Sealant, an ophthalmic device designed to prevent wound leaks in corneal incisions following cataract surgery that is not commercially available inthe United States and that we are not currently manufacturing. We also have product candidates in preclinical and clinical development designed to utilize our proprietary, bioresorbable hydrogel technology to treat retinal diseases including wet age-related macular degeneration, or wet AMD, diabetic retinopathy, and other retinal diseases; glaucoma or ocular hypertension; and ocular surface diseases and conditions, including dry eye disease. In addition, we have preclinical programs to develop a gene delivery therapy product candidate for targeting inherited and acquired ocular diseases and to develop a product candidate for the treatment of dry age-related macular degeneration, or dry AMD, through complement inhibition. Our current products and product candidates in clinical development incorporate therapeutic agents that have previously received regulatory approval from the FDA, including small molecules and proteins, into our proprietary bioresorbable hydrogel-based formulation technology in our internal drug development activities, with the goal of providing local programmed-release to tailor the duration and amount of drug to be delivered to the eye. We believe that our local programmed-release drug delivery technology has the potential to treat conditions and diseases of both the front and the back of the eye and can be administered through a range of different modalities including intravitreal implants, suprachoroidal implants, intracameral implants and intracanalicular inserts.
Our core pipeline assets include four programs in clinical development:
?OTX-TKI, an axitinib intravitreal implant being developed for the treatment of wet AMD, diabetic retinopathy and other retinal diseases;
?OTX-TIC, a travoprost intracameral implant being developed for the reduction of intraocular pressure, or IOP, in patients with primary open-angle glaucoma or ocular hypertension;
?OTX-DED, a dexamethasone intracanalicular insert being developed for the short-term treatment of the signs and symptoms of dry eye disease; and
?OTX-CSI, a cyclosporine intracanalicular insert being developed for the chronic
treatment of dry eye disease.
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Commercial Portfolio
Post-Surgical Ocular Inflammation and Pain
Ocular Itching Associated with Allergic Conjunctivitis
DEXTENZA (dexamethasone ophthalmic insert) 0.4mg for intracanalicular use for the Treatment of Post-Surgical Ocular Inflammation and Pain or Ocular Itching Associated with Allergic Conjunctivitis DEXTENZA incorporates the FDA-approved corticosteroid dexamethasone as a preservative-free active pharmaceutical ingredient into a hydrogel, drug-eluting intracanalicular insert for the treatment of post-surgical ocular inflammation and pain. The FDA approved a new drug application, or NDA, for DEXTENZA for the treatment of post-surgical ocular pain inNovember 2018 and approved a supplemental new drug application, or sNDA, for DEXTENZA for the treatment of post-surgical ocular inflammation inJune 2019 . InJuly 2019 , we commercially launched DEXTENZA inthe United States . DEXTENZA is the first FDA-approved, physician-administered intracanalicular insert delivering dexamethasone to treat post-surgical ocular inflammation and pain for up to 30 days with a single administration. InOctober 2021 , the FDA approved an sNDA for DEXTENZA to include the treatment of ocular itching associated with allergic conjunctivitis as an additional indication. With the approval, DEXTENZA is the first FDA-approved, physician-administered intracanalicular insert for the delivery of a preservative-free drug for the treatment of ocular itching associated with allergic conjunctivitis with a single administration for up to 30 days. DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis also represents our first indication approved to be administered in an ophthalmology or optometric office during a routine, non-surgical appointment. In the first quarter of 2022, we commercially launched DEXTENZA inthe United States for the treatment of ocular itching associated with allergic conjunctivitis. We have established a separate, smaller office sales force team, dedicated to calling on ophthalmology and optometric offices which is comprised of Key Account Managers and supported by the field reimbursement team. This dedicated sales force could also support our broader pipeline of product candidates in the future, as we believe certain of our other product candidates, if approved, would be primarily used in the office setting. In November of 2022, theCenters for Medicare & Medicaid Services issued the calendar year 2023 hospital outpatient prospective payment system (OPPS) rules, confirming that DEXTENZA will continue to be separately payable in ambulatory surgery centers under the non-opioid supply provision through 2023. In addition, physician reimbursement for the insertion of DEXTENZA remains available under the product's Category 1 code, which became effectiveJanuary 1, 2022 , ensuring more reliable payment to physicians for DEXTENZA placement across all payer types and in all settings of care. We are currently conducting one clinical trial of DEXTENZA as a post-approval requirement of the FDA in accordance with the Pediatric Research Equity Act of 2003, in connection with theFDA's approval of DEXTENZA. InSeptember 2020 , we announced that we had dosed the first pediatric subjects in aU.S. -based, randomized, multicenter Phase 3 clinical trial evaluating DEXTENZA for the treatment of post-surgical ocular inflammation and pain in children following cataract surgery. We intend to enroll approximately 60 subjects in this clinical trial. It is designed to evaluate the safety and biological activity of DEXTENZA compared to an active control, prednisolone acetate suspension eye drops, for the treatment of inflammation and pain following ocular surgery for pediatric cataract in children between zero and five years of age. The primary endpoint is the absence of pain at day eight post-treatment as measured by a FLACC (Face, Legs, Activity, Cry, Consolability) score of zero. Enrollment is ongoing. The FDA has agreed that this Phase 3 clinical trial evaluating DEXTENZA for the treatment of post-surgical ocular inflammation and pain in children following cataract surgery will also satisfy the post-approval requirement for a pediatric trial as it relates to the approval for ocular itching associated with allergic conjunctivitis.
Prevention of Wound Leaks Following Cataract Surgery
ReSure Sealant
In 2014, we commercially launched ReSure Sealant inthe United States as a device approved to prevent wound leaks in corneal incisions following cataract surgery. In the pivotal clinical trials that formed the basis for FDA approval, ReSure Sealant provided superior wound closure and a better safety profile
than
sutured closure.
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We have received only limited revenues from ReSure Sealant to date as the
product is only used in a minority of cataract surgeries and, currently, there
is no direct separate reimbursement for the product-meaning ReSure Sealant is
only reimbursed as part of a bundled payment for the associated surgery. As of
the fourth quarter of 2021, we suspended the production of ReSure Sealant in
order to focus our manufacturing resources on the commercialization of DEXTENZA.
Currently, ReSure Sealant is not commercially available in the United States .
Clinical Portfolio
Retinal Disease Programs
OTX-TKI (axitinib intravitreal implant)
Our product candidate OTX-TKI is a preformed, bioresorbable hydrogel fiber implant incorporating axitinib, a small molecule tyrosine kinase inhibitor, or TKI, with anti-angiogenic properties delivered by intravitreal injection and designed for a duration of six months or longer. We are conducting a Phase 1 clinical trial of OTX-TKI inAustralia and a Phase 1 clinical trial inthe United States . Our Phase 1 clinical trial of OTX-TKI inAustralia is comprised of four cohorts consisting of subjects with pre-existing intraretinal and/or subretinal fluid: a lower dose cohort of 200 µg with six subjects; a higher dose cohort of 400 µg with seven subjects; a third cohort with two parallel arms, one arm of six subjects receiving a concomitant anti-VEGF injection with 400 µg of OTX-TKI and the other arm of six subjects receiving a 600 µg of OTX-TKI with no anti-VEGF injection; and a fourth cohort with two parallel arms, one arm of six subjects receiving a 600 µg single implant of OTX-TKI and the other arm of six subjects receiving a 600 µg single implant of OTX-TKI with anti-VEGF injection. In this trial, we are evaluating whether OTX-TKI can reduce existing fluid levels. This trial's enrollment is complete. Following completion of the trial, we plan to continue to follow subjects at least until their respective seventeen month anniversaries of initial dosing, in accordance with the clinical trial protocol. At the Angiogenesis, Exudation, and Degeneration 2022 Meeting held inFebruary 2022 , we presented interim data from the ongoing Phase 1 clinical trial of OTX-TKI for the treatment of wet AMD conducted inAustralia . In subjects with subretinal and/or intraretinal fluid due to wet AMD, OTX-TKI was observed to be generally well tolerated. This data also showed a preliminary signal of biological activity as observed by a clinically meaningful decrease in intraretinal and/or subretinal fluid. We observed extended duration of activity of six months or more for over 60% of subjects across all cohorts and for over 80% of subjects in cohort 3a, in which we administered a 600 ?g dose. We believe that a six-month duration of activity could represent a compelling drug product profile. Our Phase 1 clinical trial of OTX-TKI inthe United States enrolled a total of 21 subjects at six clinical sites, comprising two arms consisting of subjects previously treated with, and responsive to, a standard of care anti-VEGF therapy: a 16-subject arm receiving 600 µg OTX-TKI in combination with a single anti-VEGF injection at month one and a five-subject arm receiving on-label aflibercept at eight-week intervals. In this trial, we are evaluating how long we are able to maintain subjects without the need for retreatment. This trial was fully enrolled as ofFebruary 2022 . InSeptember 2022 , we announced interim seven-month data from the ongoing Phase 1 clinical trial of OTX-TKI inthe United States . As of theAugust 24, 2022 data cutoff date, the interim data showed that the single 600 µg OTX-TKI implant was generally well tolerated with a favorable safety profile. There were no drug-related ocular or systemic serious adverse events, or SAEs, observed. One SAE of endophthalmitis was observed in the OTX-TKI arm which occurred following the aflibercept injection required by the clinical trial protocol at month one and was assessed by the investigator as related to the injection procedure. There were no reported adverse events such as elevated IOP, retinal detachment, retinal vasculitis, or implant migration into the anterior chamber observed in the OTX-TKI arm, and no subjects dropped out of either arm. There was one subject randomized to the OTX-TKI arm who was inadvertently given aflibercept instead of sham injections at the subject's month three and month five visits. Since this subject was not treated according to protocol, the subject was excluded from the analysis of biological activity, which comprised 15 out of the 16 subjects in the OTX-TKI arm and all five subjects in the aflibercept arm, but the subject was included in the safety analysis which comprised all 16 subjects in the OTX-TKI arm and all five subjects in the aflibercept arm. 22 Table of Contents The interim results showed subjects treated with a single 600 µg OTX-TKI implant demonstrated stable and sustained best corrected visual acuity (BCVA) (mean change from baseline of -1.3 letters) and central subfield thickness (CSFT) (mean change from baseline of +9.2 µm) in the OTX-TKI arm at seven months, which was comparable with the aflibercept arm dosed every eight weeks (mean change from BVCA baseline of -1 letter; mean change from CSFT baseline of +0.4 µm). The data also showed that 80% of subjects in the OTX-TKI arm were rescue-free up to six months and 73% of subjects in the OTX-TKI arm were rescue-free up to seven months. Four subjects were rescued in the OTX-TKI arm. One subject, the subject who experienced endophthalmitis, was rescued twice. None of these rescues met the preestablished rescue criteria set forth in the clinical trial protocol and were instead initiated at investigator discretion. We plan to complete our analysis of the interim data from the Phase 1 U.S.-based trial and meet with the FDA to discuss potential future clinical trial requirements. Subject to those discussions, we currently plan to initiate a Phase 2/3U.S. -based clinical trial to evaluate OTX-TKI for the treatment of wet AMD in the third quarter of 2023. We also plan to continue to follow subjects in theU.S. -based Phase 1 clinical trial at least until their respective one-year anniversaries of initial dosing, in accordance with the clinical trial protocol. In addition, we plan to provide a second data update of the Phase 1 U.S. based clinical trial of OTX-TKI for the treatment of wet AMD at the Angiogenesis, Exudation, and Degeneration 2023 Annual Meeting inFebruary 2023 that we expect will include Month 10 safety and efficacy data. Given our belief in the potential broad applicability of OTX-TKI to other retinal diseases, we also plan to initiate a Phase 1 U.S.-based clinical trial to evaluate OTX-TKI for the treatment of diabetic retinopathy in the first quarter of 2023. We intend to conduct the Phase 1 clinical trial initially under an existing exploratory IND, or eIND, and anticipate the trial will enroll a total of approximately twenty subjects randomized to either a single 600 µg implant of OTX-TKI or sham control. Assuming positive topline data results from the Phase 1 clinical, and subject to a follow-up meeting with the FDA, we believe we could be in a position to initiate our first Phase 3 pivotal clinical trial of OTX-TKI for the treatment of diabetic retinopathy in the first quarter of 2024.
OTX-TKI is protected by a composition of matter patent,
Glaucoma Program
OTX-TIC (travoprost intracameral implant)
Our product candidate OTX-TIC is a bioresorbable hydrogel implant incorporating travoprost that is designed to be administered by a physician as an intracameral injection with an initial target duration of drug release of four to six months. In the fourth quarter of 2021, we initiated a randomized, double-masked, controlled Phase 2 clinical trial in which we plan to enroll approximately 105 subjects with open-angle glaucoma or ocular hypertension at 15 to 20 sites between three arms of approximately 35 subjects each to evaluate two formulations of OTX-TIC for the treatment of open-angle glaucoma or ocular hypertension in patients compared to DURYSTA™. We dosed the first patient in the first quarter of 2022 and currently expect to disclose topline data in the fourth quarter of 2023. At the Glaucoma 360 Meeting inFebruary 2022 , we presented interim data from a Phase 1 clinical trial evaluating OTX-TIC for the treatment of open-angle glaucoma or ocular hypertension. In this clinical trial, OTX-TIC was observed to cause a clinically meaningful decrease in IOP for six months or longer in patients while preserving corneal health. We believe these results are comparable to the decrease in IOP seen with topical travoprost, the current standard of care, and represent OTX-TIC's potential for a unique and differentiated drug product profile. OTX-TIC was observed to be generally well tolerated with a favorable safety profile to date and endothelial cell counts, pachymetry assessments, and slit lamp examinations in subjects indicated no changes from baseline. As a result, we are developing OTX-TIC for potential
chronic or repeat dosing.
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Ocular Surface Disease Programs
Dry Eye Disease
OTX-DED (dexamethasone intracanalicular insert)
Our product candidate OTX-DED incorporates the FDA-approved corticosteroid dexamethasone as a preservative-free active pharmaceutical ingredient in a hydrogel, drug-eluting intracanalicular insert. OTX-DED incorporates the same active drug as DEXTENZA but includes a lower dose of the drug, is administered in the office setting as a smaller insert and is designed to release dexamethasone over a period of two to three weeks, compared with up to thirty days in the case of DEXTENZA. We announced the topline results for a Phase 2 clinical trial evaluating OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease inDecember 2021 . The clinical trial achieved its pre-specified primary endpoint. While the clinical trial was not powered to show statistical significance, the topline results demonstrated a statistically significant change of bulbar conjunctival hyperemia from baseline to day 15 compared to vehicle hydrogel using a central reading photographic assessment in the modified ITT population. Both formulations of OTX-DED were observed to have a favorable safety profile and to be generally well tolerated. Based on the data from the Phase 2 clinical trial, we intend to conduct a small trial in connection with our efforts to develop an appropriate placebo comparator that may be used in both the OTX-DED and OTX-CSI programs. Specifically, we intend to evaluate the performance of OTX-DED versus placebo inserts, namely fast-dissolving collagen plugs, and no inserts at all, to explain the placebo performance seen in both the OTX-DED and the OTX-CSI Phase 2 trials in which the vehicle hydrogel placebo insert or placebo comparator vehicle remained in the canaliculus longer than anticipated, performing more like an active comparator than a placebo. We currently expect to begin this trial in the first half of 2023.
OTX-CSI (cyclosporine intracanalicular insert)
Our product candidate OTX-CSI incorporates the FDA-approved immunomodulator cyclosporine as a preservative-free active pharmaceutical ingredient into a hydrogel, drug-eluting intracanalicular insert. The product candidate is designed for a duration of three to four months for patients suffering from moderate to severe dry eye and to be administered in the office setting as a bioresorbable intracanalicular insert.
We announced topline results from a Phase 2 clinical trial evaluating two different formulations of OTX-CSI for the chronic treatment of dry eye disease inOctober 2021 . The study did not show separation between the OTX-CSI treated subjects (both formulations) and the vehicle hydrogel placebo insert treated subjects for the primary endpoint of increased tear production at 12 weeks. The study did show an improvement compared with baseline in signs of dry eye disease as measured by total corneal fluorescein staining, or CFS, and symptoms of dry eye disease as measured by the Visual Analog Score, or VAS, eye dryness in subjects treated with the OTX-CSI insert (both formulations) starting as early as two weeks after insertion and continuing over the 12 week study period. However, these improvements in OTX-CSI treated subjects were not statistically significant compared with the results of the vehicle insert in subjects with respect to either the signs of dry eye disease as measured by CFS or the symptoms of dry eye disease as measured by VAS eye dryness. Also, the trial results indicated that the durability of the OTX-CSI inserts was shorter than expected. Overall, the OTX-CSI insert (both formulations) was observed to be generally well tolerated with a favorable safety profile to date.
We are continuing formulation work to extend the durability of the OTX-CSI insert and select the most appropriate formulations to move forward.
AffaMed License Agreement
InOctober 2020 , we entered into a license agreement and collaboration withAffaMed Therapeutics Limited , or AffaMed, for the development and commercialization of DEXTENZA and OTX-TIC in mainlandChina ,Taiwan ,Hong Kong ,Macau ,South Korea , and the countries of theAssociation of Southeast Asian Nations . Under the terms of the agreement, we received an upfront payment of$12 million and became eligible to receive development, regulatory and commercial milestone payments and clinical development support payments of up to$91 million in the aggregate, as 24
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well as royalties from future product sales. In the fourth quarter of 2021, we received a$1 million milestone payment upon the approval by the FDA of an sNDA for DEXTENZA to include the treatment of ocular itching associated with allergic conjunctivitis as an additional indication; in the second quarter of 2022, we received another$2 million clinical support payment in connection with dosing the first subject in a Phase 2 clinical trial evaluating OTX-TIC for the treatment of open-angle glaucoma or ocular hypertension. Royalties are tiered and will range from the low teens to low twenty percent range. In return, we agreed to grant AffaMed exclusive rights to develop and commercialize DEXTENZA for the treatment of post-surgical inflammation and pain following ophthalmic surgery and ocular itching in patients with allergic conjunctivitis, and OTX-TIC for the reduction of elevated IOP in patients with primary open-angle glaucoma or ocular hypertension in specified Asian markets. We retain the right to develop and commercialize DEXTENZA and OTX-TIC in all other global markets. InJanuary 2022 , AffaMed announced that it had dosed its first patient in a real-world setting study conducted inChina evaluating the safety and efficacy of DEXTENZA® (0.4mg dexamethasone ophthalmic insert) for the treatment of ocular inflammation and pain post-cataract surgery. This prospective, single-arm, real-world trial is designed to assess the safety and efficacy of DEXTENZA for the treatment of ocular inflammation and pain following cataract surgery in approximately 120 patients at the Bo'aoSuper Hospital . The trial's primary efficacy endpoint is the absence of anterior chamber cells in the study eye at Day 14, and the key secondary endpoint is the absence of pain in the study eye at Day 8. InApril 2022 , AffaMed announced that DEXTENZA has been approved inMacau ,China for the treatment of ocular inflammation and pain following ophthalmic surgery. We do not expect that DEXTENZA sales inMacau will result in material revenues to us.
Mosaic Biosciences Agreement
InJune 2021 , we entered into an agreement withMosaic Biosciences, Inc. , or Mosaic, to identify new targets and discover novel therapeutic agents aimed at the treatment of dry AMD. Our collaboration with Mosaic has yielded lead compounds that Mosaic has humanized and is now optimizing for our preclinical complement inhibitor program for the treatment of dry AMD. We believe that product candidates with these compounds have the potential to be best-in-class in the complement space with targeted dosing every three to four months.
Business Update Regarding COVID-19
The pandemic caused by an outbreak of a new strain of coronavirus, or the COVID-19 pandemic, that is affecting theU.S. and global economy and financial markets and the related responses of government, businesses and individuals are impacting our employees, patients, customers, communities and business operations. The implementation of travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders and shutdowns, for example, affected our business in 2020 and 2021. During the first nine months of 2022, the COVID-19 pandemic and related employee recruitment and retention challenges for ambulatory surgical centers, or ASCs, and hospital out-patient departments, or HOPDs, slowed the overall pace of cataract procedures performed inthe United States , thereby reducing the number of opportunities for ophthalmologists to use DEXTENZA as a treatment for post-surgical ocular inflammation and pain. In addition, recruitment and retention challenges with regards to our own sales force have adversely affected our ability to market DEXTENZA to ophthalmologists and in the office setting. The full extent to which the COVID-19 pandemic will continue to directly or indirectly impact our business, results of operations and financial condition and those of our customers, vendors, suppliers, and collaboration partners will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. Management continues to actively monitor this situation and the possible effects on our financial condition, liquidity, operations, suppliers, industry, and workforce. For additional information on risks posed by the COVID-19 pandemic, please see "Item 1A - Risk Factors - Risks Related to the Coronavirus Pandemic," included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onFebruary 28, 2022 .
Financial Position
Our ability to generate product revenues sufficient to achieve profitability will depend heavily on our continued commercialization of DEXTENZA for the treatment of ocular inflammation and pain following ophthalmic surgery and
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for the treatment of ocular itching associated with allergic conjunctivitis, and our obtaining marketing approval for and commercializing other products with significant market potential, including OTX-TKI for the treatment of wet AMD, diabetic retinopathy and other retinal diseases, OTX-TIC for the treatment of open-angle glaucoma or ocular hypertension, OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease, and OTX-CSI for the chronic treatment of dry eye disease. Our net loss was$24.2 million and$55.5 million for the three and nine months endedSeptember 30, 2022 , respectively. Our net income was$2.7 million for the three months endedSeptember 30, 2021 and our net loss was$2.7 million for the nine months endedSeptember 30, 2021 . As ofSeptember 30, 2022 , we had an accumulated deficit of$601.3 million . Our total costs and operating expenses were$33.5 million and$96.7 million for the three and nine months endedSeptember 30, 2022 including$4.7 million and$14.3 million in non-cash stock-based compensation expense and depreciation and amortization expense, respectively. Our total costs and operating expenses were$31.7 million and$91.2 million for the three and nine months endedSeptember 30, 2021 including$4.4 million and$13.0 million in non-cash stock-based compensation expense and depreciation and amortization expense, respectively. Our operating expenses have grown as we continue to commercialize DEXTENZA following its entry into the market inJuly 2019 ; pursue the clinical development of OTX-TKI, OTX-TIC, OTX-DED, and OTX-CSI; research and develop other product candidates; and seek marketing approval for any product candidate for which we obtain favorable pivotal clinical trial results. We expect to incur substantial sales and marketing expenses in connection with the ongoing commercialization of DEXTENZA and that of any other product candidate for which we may receive approval. Although we expect to continue to generate revenue from sales of DEXTENZA, we will need to obtain substantial additional funding to support our continuing operations and the ongoing commercialization of DEXTENZA. If we are unable to raise capital through equity offerings, debt financings, government or other third-party funding, collaborations, strategic alliances, licensing arrangements, royalty agreements, and marketing and distribution arrangements when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or commercialization efforts or to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. ThroughSeptember 30, 2022 , we have financed our operations primarily through sales of our products, public offerings of our common stock, private placements of our convertible notes, borrowings under credit facilities and private placements of our preferred stock, which has resulted in net proceeds of$641.4 million to us. InAugust 2021 , we andJefferies LLC , or Jefferies, entered into an Open Market Sale Agreement, or the 2021 Sales Agreement, 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. In connection with entering into the 2021 Sales Agreement, we and Jefferies terminated our prior Open Market Sale Agreement which we had entered into in 2019. As ofNovember 4, 2022 , we have not sold any shares of our common stock under the 2021 Sales Agreement. DEXTENZA and all of our product candidates are designed to be medical-benefit "buy-and-bill" products with associated procedure codes. Products with these characteristics are designed to be attractive not only to physicians, optometrists, and patients but also to the sites of care that participate in utilization. We primarily derive our product revenues from the sale of DEXTENZA inthe United States to a network of specialty distributors, who then sell DEXTENZA to ASCs, HOPDs, and ophthalmology and optometric offices. We also sell directly to a small population of ASCs. In addition to distribution agreements with specialty distributors and a limited number of direct agreements with ASCs, we enter into arrangements with government payors that provide for government-mandated rebates and chargebacks with respect to the purchase of DEXTENZA. In-market unit sales figures-unit sales from specialty distributors to ASCs and HOPDs-for July, August andSeptember 2022 were 8,348, 9,410 and 8,649 units, respectively. In-market unit sales forOctober 2022 were approximately 11,500 units. Based on our current plans and forecasted expenses, which includes estimates of anticipated cash inflows from DEXTENZA product sales and cash outflows from operating expenses, we believe that our existing cash and cash equivalents of$121.0 million as ofSeptember 30, 2022 will enable us to fund our planned operating expenses, debt service obligations and capital expenditure requirements through 2023. This estimate is based on our current operating plan which includes estimates of anticipated cash inflows from DEXTENZA product sales, and cash outflows from both operating expenses and capital expenditures. These estimates are subject to various assumptions including those related to the severity and duration of the COVID-19 pandemic, the revenues and expenses associated with the commercialization of DEXTENZA, the pace of our research and clinical development programs, and other aspects of 26
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our business. These and other assumptions upon which we have based our estimate may prove to be wrong, and we could use our capital resources sooner than we currently expect and would therefore need to raise additional capital to support our ongoing operations or adjust our plans accordingly. See "-Liquidity and
Capital Resources." Financial Operations Overview Revenue
InJune 2019 , we began to recognize revenue from the sales of DEXTENZA for the treatment of post-surgical ocular inflammation and pain. Following theFDA's approval of our sNDA inOctober 2021 , we launched DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis, our first in-office indication. We began to recognize revenue from the sales of ReSure Sealant for the prevention of wound leaks in corneal incisions following cataract surgery in 2014, although we have received only limited revenues from ReSure Sealant to date. As of the fourth quarter of 2021, we suspended the production of ReSure Sealant in order to focus our manufacturing resources on the commercialization of DEXTENZA. For the three and nine months endedSeptember 30, 2022 , three specialty distributor customers accounted for 42%, 30% and 14%, and 41%, 27% and 18%, respectively, of our total gross product revenue, and no other customer accounted for more than 10% of our total gross product revenue. AtSeptember 30, 2022 , the three specialty distributor customers accounted for 44%, 30%, and 15% of our total accounts receivable, and no other customer accounted for more than 10% of our total accounts receivable atSeptember 30, 2022 . For the three months and nine months endedSeptember 30, 2021 , three specialty distributor customers accounted for 44%, 28%, and 16%, and 44%, 26% and 15%, respectively, of our total gross product revenue, and no other customer accounted for more than 10% of our total gross product revenue. AtDecember 31, 2021 , three specialty distributor customers accounted for 42%, 26% and 21% of our total accounts receivable. No other customer accounted for more than 10% of our accounts receivable atDecember 31, 2021 .
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:
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;
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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;
? 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;
? 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 platform technology, 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
28
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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.
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, legal and administrative functions. General and administrative expenses also include insurance, facility-related costs and professional fees, costs associated with intellectual property, consulting and accounting and audit services. We anticipate that our general and administrative expenses will increase in the future as we support our continued development and commercialization of our product candidates. We also anticipate that we will continue to incur increased accounting, audit, legal, intellectual property, regulatory, compliance, director and officer insurance costs as well as investor and public relations expenses associated with being a public company.
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. Selling and marketing expenses for DEXTENZA increased in 2021 in connection with the continued commercialization of DEXTENZA for the treatment of ocular inflammation and pain, focused on ASCs and HOPDs, and the preparations for the commercial launch of DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis focused on the offices of ophthalmologists and optometrists. We anticipate that our selling and marketing expenses associated with DEXTENZA will continue to increase, particularly as we continue to grow our salesforce supporting DEXTENZA in 2022 and beyond and incur additional marketing expenses in connection with the commercialization of DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis.
Other Income (Expense)
Interest Expense. Interest expense is incurred on our debt. InJune 2021 , we amended and restated our credit and security agreement, which we refer to as our Credit Agreement, to increase the aggregate principal amount borrowed under our credit facility, which we refer to as our Credit Facility, to$25.0 million , extend the interest-only payment period toMay 1, 2024 , and extend the maturity date toNovember 2025 . In the event we achieve certain milestones under the Credit Agreement, we have the right to extend throughApril 1, 2026 . InMarch 2019 , we issued$37.5 million of unsecured senior subordinated convertible notes, or the 2026 Convertible Notes. The 2026 Convertible Notes accrue interest at an annual rate of 6% of the outstanding principal amount, payable in cash at maturity, onMarch 1, 2026 , unless earlier converted, repurchased or redeemed. Change in Fair Value of Derivative Liability. In 2019, in connection with the issuance of our 2026 Convertible Notes, we identified an embedded 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 changes in fair value are recorded through the condensed consolidated statement of operations and comprehensive income (loss) and are presented under the caption change in fair value of derivative liability.
Critical Accounting Policies and Significant Judgments and Estimates
Our condensed consolidated financial statements are prepared in accordance withU.S. generally accepted accounting principles. The preparation of our condensed 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 condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments. 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. 29
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Our critical accounting policies, which include those related to revenue recognition and our derivative liability, are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Significant Judgments and Estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSEC onFebruary 28, 2022 and in the notes to the financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. There have been no significant changes to our critical accounting policies since the beginning
of this fiscal year. Results of Operations
Comparison of the Three Months Ended
The following table summarizes our results of operations for the three months
ended
Three Months Ended
September 30, Increase
2022 2021 (Decrease)
(in thousands)
Revenue:
Product revenue, net $ 11,913 $ 12,153 $ (240)
Collaboration revenue 52 - 52
Total revenue, net 11,965 12,153 (188)
Costs and operating expenses:
Cost of product revenue 1,073 1,310 (237)
Research and development 13,719 12,719 1,000
Selling and marketing 10,186 9,576 610
General and administrative 8,531 8,077 454Total costs and operating expenses 33,509 31,682
1,827
Loss from operations (21,544) (19,529) (2,015)
Other income:
Interest income 285 7 278
Interest expense (1,797) (1,658) (139)Change in fair value of derivative liability (1,133) 23,837
(24,970) Other income (expense), net 1 - 1 Total other income, net (2,644) 22,186 (24,830) Net (loss) income$ (24,188) $ 2,657 $ (26,845) Gross-to-Net Deductions 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. Our total gross-to-net provisions for the three months endedSeptember 30, 2022 and 2021 were 24.3% and 22.2%, respectively, of gross DEXTENZA product sales.
Net Revenue
We generated$11.9 million of net product revenue during the three months endedSeptember 30, 2022 from sales of our products, all of which was attributable to sales of DEXTENZA. We generated$12.2 million of net product revenue during the three months endedSeptember 30, 2021 from sales of our products, of which$11.9 million was attributable to sales of DEXTENZA and$0.3 million was attributable to sales of ReSure Sealant. We believe that DEXTENZA net product revenues in the third quarter of 2022 were adversely affected by recruitment and retention challenges at ASCs and HOPDs, recruitment and retention challenges among our sales force and a reduction in the physician payment for the insertion of DEXTENZA when our procedure code was converted from a T-code into a category 1 code effectiveJanuary 1, 2022 . 30 Table of Contents Collaboration Revenue We recognized$0.1 million of collaboration revenue related to the performance obligation under our license agreement with AffaMed to conduct a Phase 2 clinical trial of OTX-TIC during the three months endedSeptember 30, 2022 . We recognize collaboration revenue based on a cost-to-cost method. There was no collaboration revenue for the three months endedSeptember 30, 2021 .
Research and Development Expenses
Three Months Ended
September 30, Increase
2022 2021 (Decrease)
(in thousands)
Direct research and development expenses by program:
OTX-TKI for wet AMD $ 1,472 $ 572 $ 900
OTX-TIC for glaucoma or ocular hypertension 798 755 43
OTX-CSI for treatment of dry eye disease 48 832 (784)
OTX-DED for the short-term treatment of the signs
and symptoms of dry eye disease 10 1,037 (1,027) DEXTENZA for post-surgical ocular inflammation and pain
457 445 12
DEXTENZA for ocular itching associated with allergic
conjunctivitis - 2 (2)
Preclinical programs 604 217 387
Unallocated expenses:
Personnel costs 6,204 5,373 831
All other costs 4,126 3,486 640
Total research and development expenses $ 13,719 $
12,719
Research and development expenses were$13.7 million for the three months endedSeptember 30, 2022 , compared to$12.7 million for the three months endedSeptember 30, 2021 . The increase of$1.0 million was primarily due to an increase of$1.5 million in unallocated expenses offset by a decrease of$0.5 million in clinical related programs. For the three months endedSeptember 30, 2022 , we incurred$3.4 million in direct research and development expenses for our products and product candidates compared to$3.9 million for the three months endedSeptember 30, 2021 . The decrease of$0.5 million is related to timing and conduct of our various clinical trials for our product candidates and development activities related to our preclinical programs. We expect that clinical trial expenses will increase for our product candidates, including OTX-TKI due to the ongoing Phase 1 clinical trial inthe United States for the treatment of wet AMD, our planned Phase 2 clinical trial inthe United States for the treatment of wet AMD, and our planned Phase 1 clinical inthe United States for the treatment of diabetic retinopathy, and OTX-TIC due to the ongoing Phase 2 clinical trial, and for DEXTENZA due to the ongoing Phase 3 clinical trial to evaluate DEXTENZA in pediatric subjects following cataract surgery in accordance with theFDA's post-approval requirement. In addition, we have adopted a plan to progress the development of OTX-CSI, including formulation work to improve product retention. We are also planning to conduct a small trial in connection with our efforts to develop an appropriate placebo comparator that may be used in both the OTX-DED and OTX-CSI programs. 31
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Selling and Marketing Expenses
Three Months Ended
September 30, Increase
2022 2021 (Decrease)
(in thousands)
Personnel related (including stock-based
compensation) $ 6,907 $ 6,173 $ 734
Professional fees 2,170 2,114 56
Facility related and other 1,109 1,289 (180)
Total selling and marketing expenses $
10,186
Selling and marketing expenses were
We expect our selling and marketing expenses to increase in the remainder of 2022 and beyond as we continue to support the commercialization of DEXTENZA.
General and Administrative Expenses
Three Months Ended
September 30, Increase
2022 2021 (Decrease)
(in thousands)
Personnel related (including stock-based compensation) $ 4,727 $ 4,315 $ 412
Professional fees 3,105 3,005 100
Facility related and other 699 757 (58)Total general and administrative expenses$ 8,531 $
8,077
General and administrative expenses were
Other Income (Expense), Net
Other income, net was$2.6 million for the three months endedSeptember 30, 2022 , compared to other expense, net gain was$22.2 million for the three months endedSeptember 30, 2021 . The change of$24.8 million was due primarily to the change in fair value of the derivative liability associated with the 2026 Convertible Notes of$25.0 million due primarily to a decrease in our common stock price fromJuly 1, 2022 toSeptember 30, 2022 as compared to the prior period. 32 Table of Contents
Comparison of the Nine Months Ended
The following table summarizes our results of operations for the nine months
ended
Nine Months Ended
September 30, Increase
2022 2021 (Decrease)
(in thousands)
Revenue:
Product revenue, net $ 36,555 $ 31,214 $ 5,341
Collaboration revenue 864 - 864
Total revenue, net 37,419 31,214 6,205
Costs and operating expenses:
Cost of product revenue 3,528 3,298 230
Research and development 39,919 37,505 2,414
Selling and marketing 29,390 26,054 3,336
General and administrative 23,875 24,345 (470)Total costs and operating expenses 96,712 91,202
5,510
Loss from operations (59,293) (59,988) 695
Other income (expense):
Interest income 375 27 348
Interest expense (5,175) (4,991) (184)Change in fair value of derivative liability 8,598 62,249
(53,651)
Other income (expense), net (1) -
(1)
Total other income (expense), net 3,797 57,285
(53,488) Net loss$ (55,496) $ (2,703) $ (52,793) Gross-to-Net Deductions 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. Our total gross-to-net provisions for the nine months endedSeptember 30, 2022 and 2021 were 23.1% and 24.2%, respectively, of gross DEXTENZA product sales. Net Revenue
During the nine months endedSeptember 30, 2022 , we generated$36.6 million in net product revenue from sales of our products, all of which was attributable to sales of DEXTENZA. During the nine months endedSeptember 30, 2021 , we generated$31.2 million of net revenue from sales of our products, of which$29.7 million was attributable to sales of DEXTENZA and$1.5 million was attributable to sales of ReSure Sealant. We believe the growth in revenue for DEXTENZA was primarily due to increased market acceptance and our ongoing commercialization efforts.
Collaboration Revenue
We recognized$0.9 million of collaboration revenue related to the performance obligation under our license agreement with AffaMed to conduct a Phase 2 clinical trial of OTX-TIC during the nine months endedSeptember 30, 2022 . We recognize collaboration revenue based on a cost-to-cost method. There was no collaboration revenue for the nine months endedSeptember 30, 2021 . 33
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Research and Development Expenses
Nine Months Ended
September 30, Increase
2022 2021 (Decrease)
(in thousands)Direct research and development expenses by program: OTX-TKI for wet AMD
$ 4,016 $ 3,655 $ 361 OTX-TIC for glaucoma or ocular hypertension 1,988 2,259 (271) OTX-CSI for treatment of dry eye disease 189 2,729 (2,540) OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease 317
3,063 (2,746) DEXTENZA for post-surgical ocular inflammation and pain
1,255 1,228 27
DEXTENZA for ocular itching associated with allergic
conjunctivitis 21 78 (57)
ReSure Sealant - 59 (59)
Preclinical programs 1,341 688 653
Unallocated expenses:
Personnel costs 19,067 15,342 3,725
All other costs 11,725 8,404 3,321
Total research and development expenses $ 39,919 $
37,505
Research and development expenses were$39.9 million for the nine months endedSeptember 30, 2022 , compared to$37.5 million for the nine months endedSeptember 30, 2021 . The increase of$2.4 million was primarily due to an increase of$7.0 million in unallocated expenses and offset by a decrease of$4.7 million in clinical related programs. For the nine months endedSeptember 30, 2022 , we incurred$9.1 million in direct research and development expenses for our products and product candidates compared to$13.8 million for the nine months endedSeptember 30, 2021 . The decrease of$4.7 million is related to timing and start of our various clinical trials for our product candidates and development activities related to our preclinical programs. We expect that clinical trial expenses will increase for our product candidates, including OTX-TKI due to the ongoing Phase 1 clinical trial inthe United States for the treatment of wet AMD, our planned Phase 2 clinical trial inthe United States for the treatment of wet AMD and our planned Phase 1 clinical inthe United States for the treatment of diabetic retinopathy, and OTX-TIC due to the ongoing Phase 2 clinical trial, and for DEXTENZA due to the ongoing Phase 3 clinical trial to evaluate DEXTENZA in pediatric subjects following cataract surgery in accordance with theFDA's post-approval requirement. We are also planning to conduct a small trial in connection with our efforts to develop an appropriate placebo comparator that may be used in both the OTX-DED and OTX-CSI programs.
Selling and Marketing Expenses
Nine Months Ended
September 30, Increase
2022 2021 (Decrease)
(in thousands)
Personnel related (including stock-based compensation) $ 19,487 $ 17,384 $ 2,103
Professional fees 6,875 5,544 1,331
Facility related and other 3,028 3,126 (98)
Total selling and marketing expenses $ 29,390 $ 26,054 $ 3,336 Selling and marketing expenses were$29.4 million for the nine months endedSeptember 30, 2022 , compared to$26.1 million for the nine months endedSeptember 30, 2021 . The increase of$3.3 million was primarily due to increases of$2.1 million in personnel costs with the expansion of the commercial workforce to support DEXTENZA and$1.3 million in professional fees related to trade shows, conferences and advertising fees. 34
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General and Administrative Expenses
Nine Months Ended
September 30, Increase
2022 2021 (Decrease)
(in thousands)
Personnel related (including stock-based compensation) $ 13,844 $ 12,720 $ 1,124
Professional fees 8,659 9,716 (1,057)
Facility related and other 1,372 1,909 (537)
Total general and administrative expenses $ 23,875 $ 24,345 $ (470) General and administrative expenses were$23.9 million for the nine months endedSeptember 30, 2022 , compared to$24.3 million for the nine months endedSeptember 30, 2021 . The decrease of$0.5 million was primarily due to a decrease of$1.1 million in professional fees primarily related to legal fees and other professional service costs and$0.5 million in facility related and other costs offset by an increase of$1.1 million of personnel related costs, including stock-based compensation.
Other Income (Expense), Net
Other income, net was$3.8 million for the nine months endedSeptember 30, 2022 , compared to$57.3 million other income, net for the nine months endedSeptember 30, 2021 . The decrease of$53.5 million was due primarily to the change in fair value of the derivative liability associated with the 2026 Convertible Notes of$53.7 million .
Liquidity and Capital Resources
We have a history of incurring significant operating losses. Our net loss was$24.2 million for the three months endedSeptember 30, 2022 , primarily due to a loss from operations of$21.5 million , net interest expense of$1.5 million and a change of$1.1 million in the fair value of our derivative liability related to unsecured senior subordinated convertible notes, or the 2026 Convertible Notes, during the period. Our net loss was$55.5 million for the nine months endedSeptember 30, 2022 , primarily due to a loss from operations of$59.3 million offset by a change of$8.6 million in the fair value of our derivative liability related to the 2026 Convertible Notes during the period. Our net loss was$2.7 million for the nine months endedSeptember 30, 2021 primarily due to a loss from operations of$60.0 million offset by a change of$62.2 million in the fair value of our derivative liability related to the 2026 Convertible Notes during the period. Our net losses were$6.6 million and$155.6 million for the years endedDecember 31, 2021 and 2020, respectively. As ofSeptember 30, 2022 , we had an accumulated deficit of$601.3 million . We commercially launched DEXTENZA for the treatment of post-surgical ocular inflammation and pain inJuly 2019 , and we commercially launched DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis in the first quarter of 2022. All of our product candidates are in various phases of clinical and preclinical development. Our ability to generate product revenues sufficient to achieve profitability will depend heavily on our continued commercialization of DEXTENZA for the treatment of ocular inflammation and pain following ophthalmic surgery and ocular itching associated with allergic conjunctivitis and our obtaining marketing approval for and commercializing other products with significant market potential, including OTX-TKI for the treatment of wet AMD, diabetic retinopathy and other retinal diseases, OTX-TIC for the treatment of open-angle glaucoma or ocular hypertension, and OTX-DED and OTX-CSI for the treatment of dry eye disease. We believe that recruitment and retention challenges at ASCs and HOPDs and recruitment and retention challenges among our sales force have impacted revenue for the first nine months of 2022, and we anticipate that such challenges may continue beyond the end of 2022. Under our Credit Agreement, we have a term loan in the aggregate principal amount of approximately$20.8 million , which was rolled over from our prior borrowings under our Credit Facility, and an additional term loan in the principal amount of approximately$4.2 million . We refer to these term loans together as the Term Loans. The aggregate principal amount of the Term Loans available under the Credit Facility, or the Total Credit Facility Amount, is$25.0 million , the entirety of which was drawn at the closing of the most recent amendment to our Credit Facility inJune 2021 . As ofSeptember 30, 2022 , the interest rate was 9.31%. Under the current terms of our Credit Facility, we are permitted to make interest-only payments on the Term Loans on a monthly basis untilMay 1, 2024 . Thereafter, in addition to the monthly interest payments, we are required to make principal payments on the Term Loans in accordance with the amortization schedules set forth in the Credit Agreement. Remaining unpaid principal and accrued interest outstanding 35
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on the maturity date is due on the maturity date, which shall beNovember 30, 2025 , unless we are able to provide the Administrative Agent evidence reasonably satisfactory to it, byNovember 15, 2025 , that the outstanding principal amount of the 2026 Convertible Notes has been converted into equity interests of ours and that such indebtedness is otherwise indefeasibly satisfied in full, in which case the term is automatically extended untilApril 1, 2026 . InMarch 2019 , we issued$37.5 million of the 2026 Convertible Notes. The 2026 Convertible Notes accrue interest at an annual rate of 6% of the outstanding principal amount, payable at maturity, onMarch 1, 2026 , unless earlier converted, repurchased or redeemed. The holders of the 2026 Convertible Notes may convert all or part of the outstanding principal amount of their 2026 Convertible Notes into shares of our common stock, par value$0.0001 per share, prior to maturity and provided that no conversion results in a holder beneficially owning more than 19.99% of our issued and outstanding common stock. The conversion rate is initially 153.8462 shares of our common stock per$1,000 principal amount of the 2026 Convertible Notes, which is equivalent to an initial conversion price of$6.50 per share. The conversion rate is subject to adjustment in customary circumstances such as stock splits or similar changes to our capitalization, none of which have occurred to date. ThroughSeptember 30, 2022 , we have financed our operations primarily through sales of our products, private placements of our preferred stock, public offerings of our common stock, private placements of our convertible notes and borrowings under credit facilities, which has resulted in net proceeds of$641.4 million to us. As ofSeptember 30, 2022 , we had cash and cash equivalents of$121.0 million ; outstanding debt of$25.2 million , net of unamortized discount; and the 2026 Convertible Notes with$37.5 million of aggregate principal amount, plus accrued interest of$8.1 million .
Cash Flows
Based on our current plans and forecasted expenses, which includes estimates related to anticipated cash inflows from DEXTENZA product sales and cash outflows from operating expenses, we believe that our existing cash and cash equivalents, as ofSeptember 30, 2022 , will enable us to fund our planned operating expenses, debt service obligations and capital expenditure requirements through 2023. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. The following table summarizes our sources and uses of cash for each of the periods presented: Nine Months Ended September 30, 2022 2021 Cash used in operating activities$ (42,645) $ (50,397) Cash used in investing activities (1,565) (563) Cash provided by financing activities 996 2,184
Net decrease in cash and cash equivalents
Operating activities. Net cash used in operating activities was$42.6 million for the nine months endedSeptember 30, 2022 , primarily resulting from our net loss of$55.5 million , the change in the fair value of our derivative liability of$8.6 million more than offset by$18.0 million of other non-cash items and net favorable changes in our operating assets and liabilities of$3.5 million ,. Our net loss was primarily attributed to research and development activities, selling and marketing expenses, and our general and administrative expenses, which significantly offset any contributions from our revenues to date. Our net non-cash charges during the nine months endedSeptember 30, 2022 consisted primarily of$12.7 million of stock-based compensation expense,$3.6 million in non-cash interest expense and$1.6 million in depreciation and amortization expense and the change in fair value of the derivative liability of$8.6 million . Net cash generated by favorable changes in our operating assets and liabilities during the nine months endedSeptember 30, 2022 consisted primarily of net decreases in accounts receivable, prepaid expenses and other current assets of$2.8 million . Net cash used in operating activities was$50.4 million for the nine months endedSeptember 30, 2021 , primarily resulting from our net loss of$2.7 million and the gain on the change in the fair value of our derivative liability of$62.2 million and partially offset by$16.4 million of other non-cash items and changes in our operating assets and liabilities of$1.9 million . Our net loss was primarily attributed to research and development activities, selling and marketing expenses, and our general and administrative expenses, which significantly offset any contributions from our revenues to 36
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date. Our net non-cash charges during the nine months endedSeptember 30, 2021 consisted primarily of$11.1 million of stock-based compensation expense,$1.9 million in depreciation and amortization expense and non-cash interest expense of$3.4 million and the gain in fair value of the derivative liability of$62.2 million . Net cash used by changes in our operating assets and liabilities during the nine months endedSeptember 30, 2021 consisted primarily of increases in accrued expenses, and accounts receivable as we continue to commercialize DEXTENZA.
Investing activities. Net cash used in investing activities for the nine months
ended
Financing activities. Net cash provided by financing activities was$1.0 million for the nine months endedSeptember 30, 2022 and$2.2 million for the nine months endedSeptember 30, 2021 . Net cash provided by financing activities for the nine months endedSeptember 30, 2022 of$1.0 million consisted of$0.5 million from the exercise of stock options and$0.5 million in proceeds from the issuance of common stock pursuant to the employee stock purchase plan. Net cash provided by financing activities for the nine months endedSeptember 30, 2021 of$2.2 million consisted primarily of$2.4 million in proceeds from the exercise of stock options,$3.7 million (net) in borrowings under our Credit Facility and$0.5 million in proceeds from the issuance of common stock pursuant to the employee stock purchase plan partially offset by payments on notes payable of$4.2 million .
Funding Requirements
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 and increase our sales and marketing resources to support the ongoing 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 to commercialize DEXTENZA in
? in the office setting for the treatment of ocular itching associated with
allergic conjunctivitis;
continue to develop and expand our sales, marketing and distribution
? capabilities for DEXTENZA and any of our products or product candidates we
intend to commercialize;
continue ongoing clinical trials for our product candidates OTX-TKI (in both
? the treatment of open-angle glaucoma or ocular hypertension, and our ongoing
clinical trial to evaluate DEXTENZA in pediatric subjects following cataract
surgery in accordance with the
determine to initiate new clinical trials to evaluate OTX-TKI for the treatment
of wet AMD, diabetic retinopathy and other retinal diseases, OTX-DED for the
short-term treatment of the signs and symptoms of dry eye disease, and OTX-CSI
for the chronic treatment of dry eye disease, conduct planned clinical trials
? to evaluate OTX-TKI for the treatment of diabetic retinopathy and OTX-TKI for
the treatment of wet AMD, conduct a collaborative trial in connection with our
efforts to develop an appropriate placebo comparator that may be used in both
OTX-DED and OTX-CSI programs, and conduct development activities regarding our
programs;
conduct research and development activities on, and seek regulatory approvals
? for, DEXTENZA and OTX-TIC in specified Asian markets pursuant to our license
agreement and collaboration with AffaMed;
advance our preclinical development programs, including our program to develop
? a gene therapy product candidate for the treatment of inherited and acquired
ocular diseases and our program to develop a product candidate for the
treatment of dry AMD through complement inhibition;
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? seek marketing approvals for any of our product candidates that successfully
complete clinical development;
scale up our manufacturing processes and capabilities to support sales of
commercial products, clinical trials of our product candidates 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;
? renovate our existing facilities including research and development
laboratories, manufacturing space and office space;
? maintain, expand and protect our intellectual property portfolio;
expand our operational, financial, administrative and management systems and
? personnel, including personnel to support our clinical development,
manufacturing and commercialization efforts;
? make investments to improve our cybersecurity defenses and establish and
maintain cybersecurity insurance; and
? continue to operate as a public company.
Based on our current plans and forecasted expenses, which includes estimates related to anticipated cash inflows from DEXTENZA product sales and cash outflows from operating expenses, we believe that our existing cash and cash equivalents, as ofSeptember 30, 2022 , will enable us to fund our planned operating expenses, debt service obligations and capital expenditure requirements through 2023. We have based this estimate 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 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 additional products for which we obtain
marketing approval in the future, including cost increases due to inflation;
the progress, costs and outcome of our ongoing and planned clinical trials of
and ongoing clinical development activities for our product candidates, in
? particular OTX-TKI for the treatment of wet AMD, diabetic retinopathy and other
retinal diseases and OTX-TIC for the treatment of open-angle glaucoma or ocular
hypertension;
? the scope, progress, costs and outcome of preclinical development and clinical
trials of any other product candidates;
? the costs, timing and outcome of regulatory review of our product candidates by
the FDA, the EMA or other regulatory authorities;
the costs of scaling up our manufacturing processes and capabilities to support
sales of commercial products, clinical trials of our product candidates and
? commercialization of any of our product candidates for which we obtain
marketing approval and of expanding our facilities to accommodate this scale up
and any corresponding growth in personnel;
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? 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;
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 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, government or other third-party funding, collaborations, strategic alliances, licensing arrangements, royalty agreements, and marketing and distribution arrangements. We do not have any committed external source of funds, development, regulatory and sales milestone payments, or royalty payments 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 as well as royalty payments. To the extent that we raise additional capital through the sale of equity or convertible debt securities, each security holder's ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect each security holder's rights as a common stockholder. 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 our existing Credit Agreement and the pledge of our assets as collateral limit our ability to obtain additional debt financing. If we raise additional funds through government or other third-party funding, 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 or product candidates or grant licenses on terms that may not be favorable to us. In addition, the COVID-19 pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could adversely impact our ability to raise additional funds through equity or debt financings. If we are unable to raise additional funds through equity or debt financings 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.
Contractual Obligations and Commitments
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 considered contractual obligations and commitments.
During the three and nine months endedSeptember 30, 2022 , there were no significant changes to our contractual obligations and commitments described under Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . OnOctober 18, 2022 , the Company exercised its option to extend the existing operating lease for its manufacturing space located at36 Crosby Drive inBedford, Massachusetts (19,786 square feet), which would otherwise have expired onJuly 31, 2023 , by an additional five-year term, resulting in a new expiration date ofJuly 31, 2028 . Because rent has not yet been determined, the Company cannot make a reliable estimate of the financial effect of this event at this point. Refer to Note 16 - Subsequent Events to the current period's condensed consolidated financial statements. 39
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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 theSecurities 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.
Recently Issued Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 2 - Summary of Significant Accounting Policies to the current period's condensed consolidated financial statements.
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