ocul_Current_Folio_June 30, 2018

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

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

 

For the quarterly period ended June 30, 2018

 

OR

 

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

 

For the transition period from                      to                     

 

Commission file number: 001-36554

 


 

Ocular Therapeutix, Inc.

(Exact name of registrant as specified in its charter)

 


 

 

 

Delaware

20-5560161

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

 

 

15 Crosby Drive

 

Bedford, MA

01730

(Address of principal executive offices)

(Zip Code)

 

(781) 357-4000

(Registrant’s telephone number, including area code)

 


 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No   

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”  and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No   

 

As of August 1, 2018, there were 38,592,182 shares of Common Stock, $0.0001 par value per share, outstanding.

 

 


 

Table of Contents

Ocular Therapeutix, Inc.

 

INDEX 

 

 

 

    

Page

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1. 

Financial Statements (unaudited)

 

3

 

 

 

 

 

Balance Sheets as of June 30, 2018 and December 31, 2017

 

3

 

 

 

 

 

Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2018 and 2017

 

4

 

 

 

 

 

Statements of Cash Flows for the six months ended June 30, 2018 and 2017

 

5

 

 

 

 

 

Notes to Financial Statements

 

6

 

 

 

 

Item 2. 

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

 

19

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

 

 

 

Item 4. 

Controls and Procedures

 

35

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

36

 

 

 

 

Item 1A. 

Risk Factors

 

38

 

 

 

 

Item 5. 

Other Information

 

82

 

 

 

 

Item 6. 

Exhibits

 

82

 

 

 

 


 

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FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties.  All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements.  The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “target,” “potential,” “goals,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. 

 

The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

 

·

our plans to develop and commercialize our product candidates based on our proprietary bioresorbable hydrogel technology platform;

 

·

the timing of and our ability to submit applications and obtain regulatory approval for DEXTENZA® and our other product candidates, including our New Drug Application, or NDA ,we resubmitted to the U.S. Food and Drug Administration, or FDA, for  DEXTENZA for the treatment of post-surgical ocular pain;

 

·

our ability to manufacture DEXTENZA in compliance with current Good Manufacturing Practices, or cGMP;

 

·

our plans to raise additional capital, including through equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, royalty agreements and marketing and distribution arrangements, generally, and to fund the regulatory submission and commercialization of DEXTENZA, specifically;

 

·

our ongoing and planned clinical trials, including our Phase 3 clinical trials of OTX-TP for the treatment of glaucoma and ocular hypertension, our Phase 1 clinical trial of OTX-TIC for the reduction of intraocular pressure in patients with glaucoma and ocular hypertension and our Phase 1 clinical trial of OTX-TKI for the treatment of VEGF induced retinal leakage for an extended duration;

 

·

the timing of and our ability to submit applications and obtain and maintain regulatory approvals for DEXTENZA, OTX-TP and our other product candidates;

 

·

our plans to raise additional capital, including through equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, royalty agreements and marketing and distribution arrangements;

 

·

our commercialization of ReSure Sealant;

 

·

the potential advantages of ReSure Sealant and our product candidates;

 

·

the rate and degree of market acceptance and clinical utility of our products and our ability to secure reimbursement for our products;

 

·

the preclinical development of our intravitreal depot with protein-based or small molecule drugs, including tyrosine kinase inhibitors, or TKIs, for the treatment of wet age-related macular degeneration, or wet AMD, and other retinal diseases;

 

·

our strategic collaboration, option and license agreement with Regeneron Pharmaceuticals, Inc.  under which we are collaborating on the development of an extended-delivery formulation of the vascular endothelial growth factor, trap aflibercept, currently marketed under the brand name Eylea, for the treatment of wet AMD, and other serious retinal diseases;

 

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·

our estimates regarding the potential market opportunity for DEXTENZA, OTX-TP, ReSure Sealant and our other product candidates;

 

·

our commercialization, marketing and manufacturing plans, capabilities and strategy;

 

·

the costs and timing of manufacturing, sales, marketing, distribution and other commercialization efforts with respect to ReSure Sealant and any additional products, including DEXTENZA, for which we may obtain marketing approval in the future;

 

·

our intellectual property position;

 

·

our ability to identify additional products, product candidates or technologies with significant commercial potential that are consistent with our commercial objectives;

 

·

our estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

 

·

the impact of government laws and regulations;

 

·

the outcome of certain legal actions and proceedings, including the current lawsuits described under “Part II, Item 1 — Legal Proceedings”;   

 

·

our ability to continue as a going concern; and

 

·

our competitive position. 

 

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements.  Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make.  We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make.  Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. 

 

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to the Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect.  We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. 

 

 

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PART I—FINANCIAL INFORMATION

 

Item 1.Financial Statements.

 

Ocular Therapeutix, Inc.

 

Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2018

    

2017

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

56,834

 

$

41,538

Accounts receivable

 

 

285

 

 

226

Inventory

 

 

131

 

 

122

Prepaid expenses and other current assets

 

 

1,222

 

 

1,453

Total current assets

 

 

58,472

 

 

43,339

Property and equipment, net

 

 

10,373

 

 

10,478

Restricted cash

 

 

1,614

 

 

1,614

Total assets

 

$

70,459

 

$

55,431

Liabilities and Stockholders’ Equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

2,137

 

$

3,571

Accrued expenses and deferred rent

 

 

3,680

 

 

4,310

Notes payable, net of discount, current

 

 

6,082

 

 

5,545

Total current liabilities

 

 

11,899

 

 

13,426

Deferred rent, long-term

 

 

3,283

 

 

3,387

Notes payable, net of discount, long-term

 

 

9,548

 

 

12,471

Total liabilities

 

 

24,730

 

 

29,284

Commitments and contingencies (Note 10)

 

 

  

 

 

  

Stockholders’ equity:

 

 

  

 

 

  

Preferred stock, $0.0001 par value; 5,000,000 shares authorized and no shares issued or outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

 —

 

 

 —

Common stock, $0.0001 par value; 100,000,000 shares authorized and 38,476,937 and 29,658,202 shares issued and outstanding at June 30, 2018 and December 31, 2017

 

 

 4

 

 

 3

Additional paid-in capital

 

 

310,559

 

 

263,409

Accumulated deficit

 

 

(264,834)

 

 

(237,265)

Total stockholders’ equity

 

 

45,729

 

 

26,147

Total liabilities and stockholders’ equity

 

$

70,459

 

$

55,431

 

The accompanying notes are an integral part of these financial statements. 

 

 

 

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Ocular Therapeutix, Inc.

 

Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

  

2018

    

2017

    

2018

    

2017

Revenue:

 

 

  

 

 

  

 

 

  

 

 

  

Product revenue

 

$

648

 

$

438

 

$

988

 

$

913

Total revenue

 

 

648

 

 

438

 

 

988

 

 

913

Costs and operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

Cost of product revenue

 

 

153

 

 

104

 

 

233

 

 

219

Research and development

 

 

8,745

 

 

8,117

 

 

16,972

 

 

14,846

Selling and marketing

 

 

867

 

 

6,832

 

 

1,584

 

 

12,859

General and administrative

 

 

4,447

 

 

3,724

 

 

9,218

 

 

7,000

Total costs and operating expenses

 

 

14,212

 

 

18,777

 

 

28,007

 

 

34,924

Loss from operations

 

 

(13,564)

 

 

(18,339)

 

 

(27,019)

 

 

(34,011)

Other income (expense):

 

 

  

 

 

  

 

 

  

 

 

  

Interest income

 

 

215

 

 

113

 

 

391

 

 

205

Interest expense

 

 

(455)

 

 

(468)

 

 

(941)

 

 

(911)

Total other expense, net

 

 

(240)

 

 

(355)

 

 

(550)

 

 

(706)

Net loss

 

 

(13,804)

 

 

(18,694)

 

$

(27,569)

 

$

(34,717)

Net loss per share, basic and diluted

 

$

(0.37)

 

$

(0.64)

 

$

(0.76)

 

$

(1.22)

Weighted average common shares outstanding, basic and diluted

 

 

37,524,512

 

 

29,026,259

 

 

36,160,251

 

 

28,352,348

Comprehensive loss:

 

 

  

 

 

  

 

 

  

 

 

  

Net loss

 

$

(13,804)

 

$

(18,694)

 

$

(27,569)

 

$

(34,717)

Other comprehensive loss:

 

 

  

 

 

  

 

 

  

 

 

  

Unrealized gain on marketable securities

 

 

 —

 

 

 9

 

 

 —

 

 

 5

Total other comprehensive income

 

 

 —

 

 

 9

 

 

 —

 

 

 5

Total comprehensive loss

 

$

(13,804)

 

$

(18,685)

 

$

(27,569)

 

$

(34,712)

 

The accompanying notes are an integral part of these financial statements. 

 

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Ocular Therapeutix, Inc.

 

Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30, 

 

  

2018

    

2017

Cash flows from operating activities:

 

 

  

 

 

  

Net loss

 

$

(27,569)

 

$

(34,717)

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

 

 

  

 

 

  

Stock-based compensation expense

 

 

3,661

 

 

3,462

Non-cash interest expense

 

 

185

 

 

210

Depreciation and amortization expense

 

 

1,131

 

 

615

Purchase of premium on marketable securities

 

 

 —

 

 

(3)

Amortization of premium on marketable securities

 

 

 —

 

 

17

Changes in operating assets and liabilities:

 

 

  

 

 

  

Accounts receivable

 

 

(59)

 

 

39

Prepaid expenses and other current assets

 

 

231

 

 

(588)

Inventory

 

 

(9)

 

 

23

Accounts payable

 

 

(1,539)

 

 

2,922

Accrued expenses and deferred rent

 

 

(738)

 

 

2,312

Net cash used in operating activities

 

 

(24,706)

 

 

(25,708)

Cash flows from investing activities:

 

 

  

 

 

  

Purchases of property and equipment

 

 

(937)

 

 

(5,652)

Purchases of marketable securities

 

 

 —

 

 

(3,000)

Proceeds from maturities of marketable securities

 

 

 —

 

 

35,200

Net cash (used in) provided by investing activities

 

 

(937)

 

 

26,548

Cash flows from financing activities:

 

 

  

 

 

  

Proceeds from issuance of notes payable

 

 

 —

 

 

3,700

Proceeds from exercise of stock options

 

 

273

 

 

38

Proceeds from issuance of common stock pursuant to employee stock purchase plan

 

 

119

 

 

157

Proceeds from issuance of common stock offering, net

 

 

43,118

 

 

27,072

Payments of insurance costs financed by a third party

 

 

 —

 

 

(394)

Repayment of notes payable

 

 

(2,571)

 

 

(1,300)

Net cash provided by financing activities

 

 

40,939

 

 

29,273

Net increase in cash, cash equivalents and restricted cash

 

 

15,296

 

 

30,113

Cash, cash equivalents and restricted cash at beginning of period

 

 

43,152

 

 

34,664

Cash, cash equivalents and restricted cash at end of period

 

$

58,448

 

$

64,777

Supplemental disclosure of non-cash investing and financing activities:

 

 

  

 

 

  

Additions to property and equipment included in accounts payable and accrued expenses at balance sheet dates

 

$

89

 

$

1,269

Public offering costs included in accounts payable and accrued expenses at balance sheet dates

 

$

20

 

$

 —

 

The accompanying notes are an integral part of these financial statements. 

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Ocular Therapeutix, Inc.

 

Notes to the Financial Statements

(Amounts in thousands, except share and per share data)

(Unaudited)

 

1. Nature of the Business and Basis of Presentation

 

Ocular Therapeutix, Inc.  (the “Company”) was incorporated on September 12, 2006 under the laws of the State of Delaware.  The Company is a biopharmaceutical company focused on the formulation, development and commercialization of innovative therapies for diseases and conditions of the eye using its proprietary bioresorbable hydrogel platform technology.  The Company’s bioresorbable hydrogel product candidates are designed to tailor amount and duration of delivery of a range of therapeutic agents of varying duration in its product candidates.  Since inception, the Company’s operations have been primarily focused on organizing and staffing the Company, acquiring rights to intellectual property, business planning, raising capital, developing its technology, identifying potential product candidates, undertaking preclinical studies and clinical trials, manufacturing initial quantities of its products and product candidates and building the initial sales and marketing infrastructure for the commercialization of the Company’s approved product and product candidates. 

 

The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, new technological innovations, protection of proprietary technology, dependence on key personnel, compliance with government regulations, regulatory approval, uncertainty of market acceptance of products, securing reimbursement and the need to obtain additional financing.  Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval, prior to commercialization. 

 

As of June 30, 2018, the Company’s lead product candidates were in clinical stage development. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary government regulatory approval and adequate reimbursement or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees and consultants. The Company may not be able to generate significant revenue from sales of any product for several years, if at all. Accordingly, the Company will need to obtain additional capital to finance its operations, including to support the planned commercial launch of DEXTENZA®, subject to receiving FDA approval for its new drug application, or NDA, for post-surgical ocular pain filed on June 28, 2018 with a target action date under the Prescription Drug User Fee Act (commonly known as “PDUFA”) of December 28, 2018.  

 

The Company believes that its existing cash and cash equivalents as of June 30, 2018, will enable it to fund its operating expenses, debt service obligations and capital expenditure requirements into the second quarter of calendar year 2019. Management has determined that the Company’s accumulated deficit, history of losses, negative cash flows from operations and future expected losses raise substantial doubt about the Company’s ability to continue as a going concern within one year of the issuance date of these financial statements. The Company has incurred losses and negative cash flows from operations since its inception, and the Company expects to continue to generate operating losses and negative cash flows from operations in the foreseeable future. As of June 30, 2018, the Company had an accumulated deficit of $264,834. 

 

If the Company is unable to obtain other financing, the Company would be forced to delay, reduce or eliminate its research and development programs or any future commercialization efforts or to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to the Company.  The actions necessary to reduce spending to a level that mitigates the factors described above are not considered probable, as defined in the accounting standards.   

 

The accompanying unaudited interim financial statements of the Company have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The accompanying unaudited interim financial statements do not include any adjustments to reflect the possible future effects

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on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to the ability to continue as a going concern.

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). 

 

Unaudited Interim Financial Information

 

The balance sheet at December 31, 2017 was derived from audited financial statements, but does not include all disclosures required by GAAP.  The accompanying unaudited financial statements as of June 30, 2018 and for the three and six months ended June 30, 2018 and 2017 have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  However, the Company believes that the disclosures are adequate to make the information presented not misleading.  These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K on file with the SEC.  In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of June 30, 2018 and results of operations and cash flows for the six months ended June 30, 2018 and 2017 have been made.  The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2018. 

 

2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods.  Significant estimates and assumptions reflected in these financial statements include, but are not limited to, revenue recognition, the accrual of research and development expenses, including clinical trials, and the valuation of common stock and stock-based awards.  Estimates are periodically reviewed in light of changes in circumstances, facts and experience.  Actual results could differ from the Company’s estimates. 

 

Fair Value Measurements

 

Certain assets and liabilities are carried at fair value under GAAP.  Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.  Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

 

·

Level 1—Quoted prices in active markets for identical assets or liabilities. 

 

·

Level 2—Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. 

 

·

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. 

 

The Company’s cash equivalents at June 30, 2018 and December 31, 2017, were carried at fair value determined according to the fair value hierarchy described above (see Note 3).  The carrying value of accounts receivable, accounts payable and accrued expenses approximate their fair value due to the short-term nature of these assets and liabilities. 

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The carrying value of the Company’s outstanding notes payable (see Note 6) approximates fair value reflecting interest rates currently available to the Company. 

 

Restricted Cash

 

The Company held certificates of deposit totaling $1,614 at June 30, 2018 and December 31, 2017, as security deposits for the lease of the Company’s manufacturing space and current corporate headquarters.  The Company has classified these certificates of deposit as long-term restricted cash on its balance sheet. 

 

Comprehensive Loss

 

Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. 

 

Net Loss Per Share

 

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding for the period.  Diluted net loss per share is computed by dividing the diluted net loss by the weighted average number of common shares, including potential dilutive common shares assuming the dilutive effect of outstanding stock options, unvested restricted common shares and common stock warrants, as determined using the treasury stock method.  For periods in which the Company has reported net losses, diluted net loss per share is the same as basic net loss per share, since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. 

 

Recently Issued and Adopted Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).  ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.  This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized.  The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services.  In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date which delays the effective date of ASU 2014-09 such that the standard is effective for public entities for annual periods beginning after December 15, 2017 and for interim periods within those fiscal years.  The FASB subsequently issued amendments to ASU No. 2014-09 that have the same effective date and transition date, all of which collectively are herein referred to as “the New Revenue Standard.” 

 

The Company adopted the New Revenue Standard on January 1, 2018 using the modified retrospective method.  The adoption of the New Revenue Standard did not have a material impact on its financial statements and footnote disclosures. Under the New Revenue Standard, the Company recognizes revenue when the customer obtains control of the good in an amount that reflects the consideration which the Company expects to receive in exchange for those goods.  The Company only applies the New Revenue Standard to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods transferred to the customer.

 

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”).  ASU 2016-15 is intended to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications.  The Company adopted ASU 2016-15 effective January 1, 2018 and its adoption did not have a material impact on its financial statements. 

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash” (“ASU 2016-18”).  ASU 2016-18 requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.  Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents

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when reconciling the beginning-of-period and end-of- period total amounts shown on the statement of cash flows.  The Company adopted ASU 2016-18 effective January 1, 2018 and has reflected the adoption retrospectively to all periods presented. The Company’s statements of cash flows include restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on such statements. A reconciliation of the cash, cash equivalents, and restricted cash reported within the balance sheet that sum to the total of the same amounts shown in the statement of cash flows is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

June 30, 

 

December 31, 

 

December 31, 

 

    

2018

    

2017

    

2017

    

2016

Cash and cash equivalents

 

$

56,834

 

$

63,049

 

$

41,538

 

$

32,936

Restricted cash

 

 

1,614

 

 

1,728

 

 

1,614

 

 

1,728

Total cash, cash equivalents and restricted cash as shown on the statement of cash flow

 

$

58,448

 

$

64,777

 

$

43,152

 

$

34,664

 

In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. The new standard does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if the fair value, vesting conditions, or classification of the award changes as a result of the change in terms or conditions. A reporting entity must apply the amendments in the ASU prospectively to an award modified on or after the adoption date. The Company adopted ASU 2017-09 effective January 1, 2018, as required, and its adoption did not have a material impact on the Company’s financial statements. The adoption of ASU 2017-09, however, will have an impact on the accounting for the modification of stock-based awards, if any, to the extent stock-based awards are modified.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842) (“ASU 2016-02”).  ASU 2016-02 requires lessees to recognize most leases on the balance sheet.  This is expected to increase both reported assets and liabilities.  The new lease standard does not substantially change lessor accounting.  For public companies, the standard will be effective for the first interim reporting period within annual periods beginning after December 15, 2018, although early adoption is permitted.  Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method.  The requirements of this standard include a significant increase in required disclosures.  The Company is currently assessing the impact that adopting this new accounting guidance will have on its financial statements and footnote disclosures. 

 

3. Fair Value of Financial Assets and Liabilities

 

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 and indicate the level of the fair value hierarchy utilized to determine such fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of

 

 

June 30, 2018 Using:

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

 —

 

$

52,440

 

$

 —

 

$

 52,440

Total

 

$

 —

 

$

52,440

 

$

 —

 

$

52,440

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements as of

 

 

December 31, 2017 Using:

 

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

 —

 

$

40,386

 

$

 —

 

$

40,386

Total

 

$

 —

 

$

40,386

 

$

 —

 

$

40,386

 

During the six months ended June 30, 2018 there were no transfers between Level 1, Level 2 and Level 3.

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4. Income Taxes

 

The Company did not provide for any income taxes in its statement of operations for the six-month periods ended June 30, 2018 or 2017.  The Company has provided a valuation allowance for the full amount of its net deferred tax assets because, at June 30, 2018 and December 31, 2017, it was more likely than not that any future benefit from deductible temporary differences and net operating loss and tax credit carryforwards would not be realized. 

 

As provided for in SEC Staff Accounting Bulletin No. 118, which addresses the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cut and Jobs Act, or TCJA, the Company is still in the process of analyzing the impact to the Company of the TCJA. Where the Company has been able to make reasonable estimates of the effects, the Company has recorded provisional amounts during the year ended December 31, 2017. The ultimate impact to the Company’s financial statements of the TCJA may differ from the provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA. The accounting is expected to be complete when the Company’s 2017 U.S. corporate income tax return is filed in 2018.

 

The Company has not recorded any amounts for unrecognized tax benefits as of June 30, 2018 or December 31, 2017.  As of June 30, 2018 and December 31, 2017, the Company had no accrued interest or tax penalties recorded related to income taxes.  The Company’s income tax return reporting periods since December 31, 2014 are open to income tax audit examination by the federal and state tax authorities.  In addition, because the Company has net operating loss carryforwards, the Internal Revenue Service is permitted to audit earlier years and propose adjustments up to the amount of net operating losses generated in those years. 

 

5. Collaboration and Feasibility Agreements

 

In October 2016, the Company entered into a Collaboration, Option and License Agreement (the “Collaboration Agreement”) with Regeneron Pharmaceuticals, Inc.  (“Regeneron”) for the development and potential commercialization of products containing the Company’s extended-delivery hydrogel formulation in combination with Regeneron’s large molecule VEGF-targeting compounds for the treatment of retinal diseases.  The Collaboration Agreement does not cover the development of any products that deliver small molecule drugs, including tyrosine kinase inhibitors, or TKIs, or deliver large molecule drugs other than those that target VEGF proteins. 

 

Under the terms of the Collaboration Agreement, the Company and Regeneron have agreed to conduct a joint research program with the aim of developing an extended-delivery formulation of aflibercept, currently marketed under the tradename Eylea, that is suitable for advancement into clinical development.  The Company has granted Regeneron an option (the “Option”) to enter into an exclusive, worldwide license to develop and commercialize products containing the Company’s hydrogel in combination with Regeneron’s large molecule VEGF-targeting compounds (“Licensed Products”).  Under the term of the Collaboration Agreement, Regeneron is responsible for funding an initial preclinical tolerability study, which it initiated in early 2018.

 

If the Option is exercised, Regeneron will conduct further preclinical development and an initial clinical trial under a collaboration plan.  The Company is obligated to reimburse Regeneron for certain development costs incurred by Regeneron under the collaboration plan during the period through the completion of the initial clinical trial, subject to a cap of $25,000, which cap may be increased by up to $5,000 under certain circumstances.  If Regeneron elects to proceed with further development following the completion of the collaboration plan, it will be solely responsible for conducting and funding further development and commercialization of product candidates.  If the Option is exercised, Regeneron is required to use commercially reasonable efforts to research, develop and commercialize at least one Licensed Product.  Such efforts shall include initiating the dosing phase of a subsequent clinical trial within specified time periods following the completion of the first-in-human clinical trial or the initiation of preclinical toxicology studies, subject to certain extensions.  Through June 30, 2018, the Option has not been exercised, and no payments have been made to Regeneron.

 

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Under the terms of the Collaboration Agreement, Regeneron has agreed to pay the Company $10,000 upon the exercise of the Option.  The Company is also eligible to receive up to $145,000 per Licensed Product upon the achievement of specified development and regulatory milestones, $100,000 per Licensed Product upon first commercial sale of such Licensed Product and up to $50,000 based on the achievement of specified sales milestones for all Licensed Products.  In addition, the Company is entitled to tiered, escalating royalties, in a range from a high-single digit to a low-to-mid teen percentage of net sales of Licensed Products.   

 

6. Notes Payable

 

The Company has outstanding borrowings under a credit and security agreement entered into in 2014 and as most recently amended in March 2017 (the “Amended Credit Facility”) totaling $18,000, which is collateralized by substantially all of the Company’s personal property, other than its intellectual property.  The $18,000 of borrowings were drawn at the closing of the March 2017 amendment, which was used primarily to pay-off outstanding balances on the facility as of the amendment date of $14,300, resulting in net proceeds to the Company of $3,700. 

 

The Company was obligated to make interest-only payments under the Amended Credit Facility until February 1, 2018, at which time the Company became obligated to make monthly principal and interest payments through December 1, 2020.  Amounts borrowed under the Amended Credit Facility are at LIBOR base rate, subject to 1.00% floor, plus 7.25% with an indicative interest rate of 8.25% as of the amendment date.  In addition, a final payment equal to 3.5% of amounts drawn under the Amended Credit Facility is due upon the maturity date of December 1, 2020, which the Company has accrued for using the effective interest rate method.  At June 30, 2018 and December 31, 2017, the outstanding balance amounted to $15,630 and $18,016, respectively, net of unamortized discount.

 

There are no financial covenants associated with the Amended Credit Facility; however, there are certain negative covenants restricting the Company’s activities, including limitations on dispositions, mergers or acquisitions; encumbering its intellectual property; incurring indebtedness or liens; paying dividends; making certain investments; and engaging in certain other business transactions.  The obligations under the Amended Credit Facility are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in the Company’s business, operations or financial or other condition. 

 

The Company accounted for the amendment of the Amended Credit Facility in March 2017 as a modification in accordance with the guidance in ASC 470-50, Debt.  Amounts paid to the lenders were recorded as debt discount and a new effective interest rate was established.  The effective annual interest rate of the outstanding debt under the Amended Credit Facility is 10.5%.    

 

As of June 30, 2018, the annual repayment requirements for the Amended Credit Facility, inclusive of the final payment of $630 due at expiration, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and

 

 

 

 

 

 

 

 

Final

 

 

 

Year Ending December 31,

    

Principal

    

Payment

    

Total

Remainder of 2018

 

$

3,087

 

$

593

 

$

3,680

2019

 

 

6,171

 

 

796

 

 

6,967

2020

 

 

6,171

 

 

911

 

 

7,082

 

 

$

15,429

 

$

2,300

 

$

17,729

 

Interest paid amounted to $757 and $688 for the six months ended June 30, 2018 and 2017, respectively. 

 

 

7. Common Stock

 

In January 2018, the Company completed a follow-on offering of its common stock at a public offering price of $5.00 per share. The offering consisted of 7,475,000 shares of common stock sold by the Company, including those shares sold in connection with the exercise by the underwriter of its option to purchase additional shares. The Company received net proceeds from the follow-on offering of $34,704 after deducting underwriting discounts, commissions and expenses.

 

In January 2017, the Company completed a follow-on offering of its common stock at a public offering price of $7.00 per share.  The offering consisted of 3,571,429 shares of common stock sold by the Company.  The Company

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received net proceeds from the follow-on offering of $23,261 after deducting underwriting discounts, commissions and expenses.

 

In November 2016, the Company entered into a controlled equity offering sales agreement (the “2016 Sales Agreement”) with Cantor Fitzgerald & Co., under which the Company may offer and sell its common stock having aggregate proceeds of up to $40,000 from time to time.  In the three and six months ended June 30, 2017, the Company sold 93,730 and 432,139 shares of common stock at-the-market under the 2016 Sales Agreement, resulting in net proceeds of approximately $855 and $3,811 after underwriting discounts, commission and expenses, respectively.  In the three and six months ended June 30, 2018, the Company sold 1,166,535 shares of common stock at-the-market under the 2016 Sales Agreement, resulting in net proceeds of approximately $8,394 after underwriting discounts, commissions and expenses. Through June 30, 2018, the Company has sold 2,057,103 shares of common stock at-the-market under the 2016 Sales Agreement, resulting in net proceeds of approximately $14,992 after underwriting discounts, commissions and expenses.  As of June 30, 2018, the Company had approximately $24,113 available for future sale under the 2016 Sales Agreement.

 

8. Net Loss Per Share

 

Basic and diluted net loss per share was calculated as follows for the three and six months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2018

 

    

2017

 

2018

    

2017

Numerator:

 

 

 

 

 

 

 

 

  

 

 

  

Net loss attributable to common stockholders

 

$

(13,804)

 

$

(18,694)

 

$

(27,569)

 

$

(34,717)

Denominator:

 

 

  

 

 

 

 

 

  

 

 

  

Weighted average common shares outstanding, basic and diluted

 

 

37,524,512

 

 

29,026,259

 

 

36,160,251

 

 

28,352,348

Net loss per share attributable to common stockholders, basic and diluted

 

$

(0.37)

 

$

(0.64)

 

$

(0.76)

 

$

(1.22)

 

The Company excluded the following common stock equivalents, outstanding as of June 30, 2018 and 2017, from the computation of diluted net loss per share for the three and six months ended June 30, 2018 and 2017 because they had an anti-dilutive impact due to the net loss incurred for the periods.

 

 

 

 

 

 

 

 

As of June 30, 

 

    

2018

 

2017

Options to purchase common stock

 

5,190,096

    

4,657,912

Warrants for the purchase of common stock

 

18,939

 

18,939

 

 

5,209,035

 

4,676,851

 

 

9. Stock-Based Awards

 

2014 Stock Incentive Plan

 

The 2014 Stock Incentive Plan (the “2014 Plan”) provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards.  The number of shares of common stock that may be issued under the 2014 Plan is subject to increase on the first day of each fiscal year, beginning on January 1, 2015 and ending on December 31, 2024 in an amount equal to the lesser of a pre-determined formula or as determined by the Company’s board of directors.  On January 1, 2018, the number of shares

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available for issuance under the 2014 Plan was increased by 1,186,328.  As of June 30, 2018, 1,656,180 shares remained available for issuance under the 2014 Plan. 

 

2014 Employee Stock Purchase Plan

 

The Company has a 2014 Employee Stock Purchase Plan (the “ESPP”).  The number of shares of common stock that may be issued under the ESPP will automatically increase on the first day of each fiscal year, commencing on January 1, 2015 and ending on December 31, 2024 in an amount equal to the lesser of a pre-determined formula or as determined by the Company’s board of directors.  On January 1, 2018, the number of shares available for issuance under the 2014 Plan was increased by 148,291.  During the six months ended June 30, 2018,  29,141 shares of common stock were issued.  As of June 30, 2018,  453,824 shares remained available for issuance under the ESPP. 

 

Inducement Stock Option Awards

 

On June 20, 2017, the Company issued to Antony Mattessich, who became a director of the Company on June 20, 2017 and the Company’s President and Chief Executive Officer on July 26, 2017, a non-statutory stock option to purchase an aggregate of 590,000 shares of the Company’s common stock at an exercise price of $10.94 per share. Subject to Mr. Mattessich’s continued service to the Company, the stock option will vest over a four-year period, with 25% of the shares underlying the option award vesting on the one-year anniversary of the grant date and the remaining 75% of the shares underlying the award vesting monthly thereafter.  The stock option was issued outside of the Company’s 2014 Plan as an inducement material to Mr. Mattessich’s acceptance of entering into employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4). 

 

Stock-based Compensation

 

The Company recorded stock-based compensation expense related to stock options and restricted common stock in the following expense categories of its statements of operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

  

2018

    

2017

    

2018

    

2017

Research and development

 

$

619

 

$

579

 

$

1,226

 

$

1,111

Selling and marketing

 

 

115

 

 

262

 

 

227

 

 

468

General and administrative

 

 

1,096

 

 

916

 

 

2,208

 

 

1,883

 

 

$

1,830

 

$

1,757

 

$

3,661

 

$

3,462

 

 

As of June 30, 2018, the Company had an aggregate of $14,485 of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted average period of 2.8 years. 

 

As of June 30, 2018, there were outstanding unvested service-based stock options held by nonemployees for the purchase of 18,334 shares of common stock. 

 

10. Commitments and Contingencies

 

Intellectual Property Licenses

 

The Company has a license agreement with Incept, LLC (“Incept”) to use and develop certain patent rights (the “Incept License”).  Under the Incept License, as amended and restated, the Company was granted a worldwide, perpetual, exclusive license to develop and commercialize products that are delivered to or around the human eye for diagnostic, therapeutic or prophylactic purposes relating to ophthalmic diseases or conditions.  The Company is obligated to pay low single-digit royalties on net sales of commercial products developed using the licensed technology, commencing with the date of the first commercial sale of such products and until the expiration of the last to expire of the patents covered by the license.  Any of the Company’s sublicensees also will be obligated to pay Incept a royalty equal to a low single-digit percentage of net sales made by it and will be bound by the terms of the agreement to the same extent as the Company.  The Company is obligated to reimburse Incept for its share of the reasonable fees and costs incurred by Incept in connection with the prosecution of the patent applications licensed to the Company under the

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Incept License.  Through June 30, 2018, royalties paid under this agreement related to product sales were $180 and have been charged to cost of product revenue. 

 

Collaboration Agreement

 

In October 2016, the Company entered into the Collaboration Agreement with Regeneron as described in Note 5.  Under the terms of the Collaboration Agreement, the Company has granted Regeneron an Option to enter into an exclusive, worldwide license to develop and commercialize products containing the Company’s hydrogel in combination with Regeneron’s large molecule VEGF-targeting compounds.  If the Option is exercised, the Company are obligated to reimburse Regeneron for certain development costs incurred under the collaboration plan during the period through the completion of the initial clinical trial, subject to a cap of $25,000, which cap may be increased by up to $5,000 under certain circumstances. 

 

Legal Proceedings

 

Securities Class Actions

 

On July 7, 2017, a putative class action lawsuit was filed against the Company and certain of the Company’s  current and former executive officers in the United States District Court for the District of New Jersey, captioned Thomas Gallagher v. Ocular Therapeutix, Inc, et al., Case No. 2:17-cv-05011. The complaint purports to be brought on behalf of shareholders who purchased the Company’s common stock between May 5, 2017 and July 6, 2017. The complaint generally alleges that the Company and certain of the Company’s current and former officers violated Sections 10(b) and/or 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder by making allegedly false and/or misleading statements concerning the Form 483 issued by the FDA related to DEXTENZA and the Company’s manufacturing operations for DEXTENZA. The complaint seeks unspecified damages, attorneys’ fees, and other costs.  On July 14, 2017, an amended complaint was filed; the amended complaint purports to be brought on behalf of shareholders who purchased the Company’s common stock between May 5, 2017 and July 11, 2017, and otherwise includes allegations similar to those made in the original complaint.

 

On July 12, 2017, a second putative class action lawsuit was filed against the Company and certain of the Company’s current and former executive officers in the United States District Court for the District of New Jersey, captioned Dylan Caraker v. Ocular Therapeutix, Inc., et al., Case No. 2:17-cv-05095. The complaint purports to be brought on behalf of shareholders who purchased the Company’s common stock between May 5, 2017 and July 6, 2017. The complaint includes allegations similar to those made in the Gallagher complaint, and seeks similar relief. 

 

On August 3, 2017, a third putative class action lawsuit was filed against the Company and certain of the Company’s current and former executive officers in the United States District Court for the District of New Jersey, captioned Shawna Kim v. Ocular Therapeutix, Inc., et al., Case No. 2:17-cv-05704. The complaint purports to be brought on behalf of shareholders who purchased the Company’s common stock between March 10, 2016 and July 11, 2017. The complaint includes allegations similar to those made in the Gallagher complaint, and seeks similar relief. 

 

On October 27, 2017, a magistrate judge for the United States District Court for the District of New Jersey granted the defendants’ motion to transfer the above-referenced Gallagher, Caraker, and Kim litigations to the United States District Court for the District of Massachusetts.  These matters were assigned the following docket numbers in the District of Massachusetts: 1:17-cv-12288 (Gallagher), 1:17-cv-12146 (Caraker), and 1:17-cv-12286 (Kim).

 

On March 9, 2018, the court consolidated the three actions and appointed co-lead plaintiffs and co-lead counsel for the consolidated action.  On May 7, 2018, co-lead plaintiffs filed a consolidated amended class action complaint.  The amended complaint makes allegations similar to those in the original complaints, against the same defendants, and seeks similar relief on behalf of shareholders who purchased the Company’s common stock between March 10, 2016 and July 11, 2017.  The amended complaint generally alleges that defendants violated Sections 10(b) and/or 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder.  On July 6, 2018, defendants filed a motion to dismiss the consolidated amended complaint.  Plaintiffs’ deadline to file an opposition to the motion to dismiss is September 4, 2018, and defendants will file a reply within thirty days thereafter.

 

The Company denies any allegations of wrongdoing and intends to vigorously defend against these lawsuits.

 

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Shareholder Derivative Litigation

 

On July 11, 2017, a purported shareholder derivative lawsuit was filed against certain of the Company’s current and former executive officers, certain current and former board members, and the Company as a nominal defendant, in the United States District Court for the District of Massachusetts, captioned Robert Corwin v. Sawhney et al., Case No. 1:17-cv-11270.  The complaint generally alleged that the individual defendants breached fiduciary duties owed to the Company by making allegedly false and/or misleading statements concerning the Form 483 related to DEXTENZA and our manufacturing operations for DEXTENZA.  The complaint purported to assert claims against the individual defendants for breach of fiduciary duty, and sought to recover on behalf of the Company for any liability the Company incurs as a result of the individual defendants’ alleged misconduct.  The complaint also sought contribution on behalf of the Company from all individual defendants for their alleged violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder.  The complaint sought declaratory, equitable, and monetary relief, an unspecified amount of damages, with interest, and attorneys’ fees and costs.  On September 20, 2017, counsel for the plaintiff filed a notice of voluntary dismissal, stating that the plaintiff wished to coordinate his efforts and proceed in a consolidated fashion with the plaintiff in a similar derivative suit that was pending in the Superior Court of Suffolk County of the Commonwealth of Massachusetts captioned Angel Madera v. Sawhney et al., Case. No. 17-2273 (which is discussed in the paragraph immediately below) by filing an action in that court subsequent to the dismissal of this lawsuit.  The Corwin lawsuit was dismissed without prejudice on September 21, 2017.  On October 24, 2017, the plaintiff filed a new derivative complaint in Massachusetts Superior Court (Suffolk County), captioned Robert Corwin v. Sawhney et al., Case No. 17-3425 (BLS2).  The new Corwin complaint includes allegations similar to those made in the federal court complaint and asserts a derivative claim for breach of fiduciary duty against certain of our current and former officers and directors. The complaint also asserts an unjust enrichment claim against two additional defendants, SV Life Sciences Fund IV, LP and SV Life Sciences Fund IV Strategic Partners, LP.  The complaint also names the Company as a nominal defendant.

 

On July 19, 2017, a second purported shareholder derivative lawsuit was filed against certain of the Company’s current and former executive officers, all current board members, one former board member, and the Company as a nominal defendant, in the Superior Court of Suffolk County of the Commonwealth of Massachusetts, captioned Angel Madera v. Sawhney et al., Case. No. 17-2273.  The complaint included allegations similar to those made in the Corwin complaint.  The complaint purported to assert derivative claims against the individual defendants for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets, and sought to recover on behalf of the Company for any liability the Company incurs as a result of the individual defendants’ alleged misconduct. The complaint sought declaratory, equitable, and monetary relief, an unspecified amount of damages, with interest, and attorneys’ fees and costs. On November 6, 2017, the court dismissed this action without prejudice due to plaintiff’s failure to complete service of process within the time permitted under applicable court rules.  On December 21, 2017, the same plaintiff filed a new derivative complaint in the same court, captioned Angel Madera v. Sawhney et al., Case. No. 17-4126 (BLS2).  The new Madera complaint is premised on substantially similar allegations as the previous complaint and purports to assert derivative claims against certain current and former executive officers and board members for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and names the Company as a nominal defendant.  Like the new Corwin complaint, the new Madera complaint also asserts an unjust enrichment claim against two additional defendants, SV Life Sciences Fund IV, LP and SV Life Sciences Fund IV Strategic Partners, LP.  

 

By order dated January 29, 2018, the court consolidated the state court Corwin and Madera complaints under the Corwin docket and appointed lead counsel for plaintiffs. On February 28, 2018, plaintiffs filed a consolidated amended complaint.  The consolidated complaint names substantially the same defendants and is premised on substantially similar allegations as the previous Corwin and Madera complaints, asserting claims for breach of fiduciary duty against the individual defendants and unjust enrichment against the two SV entity defendants.  On April 17, 2018, all defendants served a motion to dismiss the consolidated amended complaint.  On June 22, 2018, plaintiffs served their opposition to the motion to dismiss and a cross-motion to stay the proceedings pending a decision on the motion to dismiss in the above-referenced securities class action in the District of Massachusetts. The briefing on the motion to dismiss remains ongoing.  On July 30, 2018, the parties filed a joint motion to stay the proceedings pending a decision on the motion to dismiss in the above-referenced securities class action in the District of Massachusetts.

 

On January 31, 2018, a third purported shareholder derivative suit was filed against certain of the Company’s current and former executive officers, certain current and former board members, and the Company as a nominal defendant, in the United States District Court for the District of Massachusetts, captioned Brian Robinson v. Sawhney et al., Case. No. 1:18-cv-10199.  The complaint includes allegations similar to those made in the Corwin and Madera

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complaints.  The complaint does not name either SV Life Sciences Fund, IV, LP or SV Life Sciences Fund IV Strategic Partners, LP as defendants, and adds two former officers as defendants.  The complaint purports to assert derivative claims against the individual defendants for breach of fiduciary duty, waste of corporate assets, and unjust enrichment, and seeks to recover on behalf of the Company for any liability the Company incurs as a result of the individual defendants’ alleged misconduct. The complaint seeks declaratory, equitable, and monetary relief, an unspecified amount of damages, with interest, and attorneys’ fees and costs.  On April 30, 2018, all defendants filed a motion to dismiss or stay the complaint. Plaintiff filed his opposition on June 22, 2018. On July 26, 2018, the parties filed a joint motion to extend the deadline for defendants to file their reply brief pending the potential substitution of the named shareholder plaintiff.

 

On February 16, 2018, a fourth purported shareholder derivative suit was filed against certain of the Company’s current and former executive officers, certain current and former board members, and the Company as a nominal defendant, in the United States District Court for the District of Delaware, captioned Terry Kelly v. Sawhney et al., Case. No. 1:18-cv-00277.  The complaint includes allegations similar to those made in the Corwin and Madera complaints.  The complaint purports to assert derivative claims against the individual defendants for breach of fiduciary duty, unjust enrichment and waste of corporate assets, and seeks to recover on behalf of the Company for any liability the Company incurs as a result of the individual defendants’ alleged misconduct. The complaint also asserts an unjust enrichment claim against SV Life Sciences Fund IV, LP and SV Life Sciences Fund IV Strategic Partners, LP.  The complaint seeks declaratory, equitable, and monetary relief, an unspecified amount of damages, with interest, and attorneys’ fees and costs. On June 11, 2018, the parties filed a stipulation staying the lawsuit pending final judgment in the consolidated derivative action pending in Massachusetts state court under the Corwin docket, described above.  The court entered an order staying the case on June 12, 2018.

 

The Company denies any allegations of wrongdoing and intend to vigorously defend against these lawsuits.

 

In addition, the Company has received a subpoena from the SEC, dated December 15, 2017, requesting documents and information concerning DEXTENZA (dexamethasone insert) 0.4mg, including related communications with the FDA, investors and others.  The Company intends to fully cooperate with the SEC regarding this non-public, fact-finding inquiry.  The SEC has informed the Company that this inquiry should not be construed as an indication that any violations of law have occurred or that the SEC has any negative opinion of any person, entity or security.

 

The Company is unable to predict the outcome of these lawsuits or proceedings at this time. Moreover, any conclusion of these matters in a manner adverse to the Company and for which it incurs substantial costs or damages not covered by our directors’ and officers’ liability insurance would have a material adverse effect on the Company’s financial condition and business. In addition, the proceedings could adversely impact the Company’s reputation and divert management’s attention and resources from other priorities, including the execution of business plans and strategies that are important to the Company’s ability to grow the Company’s business, any of which could have a material adverse effect on the Company’s business.

 

11. Related Party Transactions

 

The Company has a license agreement with Incept to use and develop certain patent rights that it entered into in 2007 (see Note 10).  Incept and certain owners of Incept are shareholders of the Company.  In addition, certain employees of the Company are shareholders of Incept.  The Company’s Executive Chairman of the Board of Directors and former President and Chief Executive Officer (“CEO”) is a general partner of Incept. 

 

In July 2017, the Company terminated a service arrangement with Axtria, Inc. (“Axtria”), a company that provided data warehouse implementation, operations and maintenance support services to the Company.  Jaswinder Chadha, co-founder and CEO of Axtria, is also a member of the Company’s Board of Directors and a cousin to the Company’s Executive Chairman of the Board of Directors and former President and CEO.  During the six months ended June 30, 2017, the Company incurred expenses of $946.  As of June 30, 2018 and December 31, 2017, there were no amounts due to Axtria. 

 

Since 2014, the Company has engaged Wilmer Cutler Pickering Hale and Dorr LLP (“WilmerHale”) to provide legal services to the Company, including with respect to general corporate, finance, securities law, regulatory and licensing matters.  The Company’s former Chief Medical Officer, Jonathan H. Talamo, M.D., who served as Chief Medical Officer from July 2016 until his resignation in June 2017, is married to a partner at WilmerHale, who has not

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participated in providing legal services to the Company.  The Company incurred fees for legal services rendered by WilmerHale of $489 for the six months ended June 30, 2017.  As of December 31, 2017, there was $194 recorded in accounts payable to WilmerHale. As of December 31, 2017, there was $80 recorded in accrued expenses for WilmerHale.

 

Since October 2017, the Company has engaged McCarter English LLP (“McCarter”) to provide legal services to the Company, including with respect to intellectual property matters.  The Company’s Senior Vice President, Technical Operations, Kevin Hanley, who joined the Company in January 2018, is married to a partner at McCarter, who has not participated in providing legal services to the Company.  The Company incurred fees for legal services rendered by McCarter of $120 and $210 for the three and six months ended June 30, 2018, respectively.  As of June 30, 2018, there was $35, recorded in accrued expenses for McCarter.

 

12. Restructuring and Other Costs

 

On July 31, 2017, the Board of Directors approved a strategic restructuring to eliminate a portion of the Company’s workforce as part of an initiative to enhance operations and reduce expenses.  As part of this strategic restructuring, the Company eliminated 30 positions across the organization.  During the third quarter of 2017, the Company recorded $1,703 of restructuring-related costs in operating expenses in research and development and selling and marking, including employee severance, benefits and related costs. 

 

On July 31, 2017, the Company entered into a transition, separation and release of claims agreement (the “Ankerud Transition Agreement”), pursuant to which Eric Ankerud resigned from his role as Executive Vice President, Regulatory, Quality and Compliance of the Company, effective immediately.  Mr. Ankerud continued to serve as an at-will employee of the Company in the capacity of Senior Advisor until October 31, 2017.  He currently serves as a consultant to the Company.  Under the Ankerud Transition Agreement, Mr. Ankerud is entitled to separation benefits until October 31, 2018,  in the form of continuation of his base salary in the same amount in effect as of October 31, 2018; the payment of monthly premiums for healthcare and/or dental coverage; and provided he continues to provide services to the Company as a consultant, the continued vesting of his outstanding stock options awards in accordance with the applicable equity plans and stock option agreements.  During the third quarter of 2017, the Company recorded $386 of severance expense which are included in operating expenses in research and development.

 

On October 13, 2017, the Company entered into a transition, separation and release of claims agreement (the “Fortune Transition Agreement”) with James Fortune, pursuant to which Mr. Fortune resigned from his role as Chief Operating Officer and any and all other positions he holds as an officer or employee of the Company, effective December 31, 2017 (the “Separation Date”).  Pursuant to the Fortune Transition Agreement, effective as of October 13, 2017, the Employment Agreement, by and between the Company and Mr. Fortune, dated June 19, 2014, was terminated.  Under the Fortune Transition Agreement, Mr. Fortune will be entitled to separation benefits in the form of (i) the continuation of his base salary for twelve months after the Separation Date in the same amount in effect as of the October 13, 2017 and (ii) the payment of monthly premiums for healthcare and/or dental coverage at the same rate that is in effect on the Separation Date until the earlier of twelve months from the Separation Date or the date Mr. Fortune becomes eligible to receive such benefits under another employer’s benefit plan.  For the calendar year 2017, Mr. Fortune was eligible to receive a bonus payment in such amount, if any, as he would have received had he remained employed with the Company through the date of such bonus payments.  On January 31, 2018, the Company’s Compensation Committee determined to grant Mr. Fortune a bonus of $62 for his performance in 2017 and this amount was included in accrued expenses as of December 31, 2017.  During the fourth quarter of 2017, the Company recorded $417 of severance expense which was included in operating expenses in general and administration.

 

The following table summarizes the restructuring and other costs reserve for the period indicated, which is included in accrued expenses in the accompany balance sheets for the period indicated:

 

 

 

 

 

 

 

Six Months Ended

 

    

June 30, 2018

Restructuring and other costs at December 31, 2017

 

$

960

Amounts paid during the period

 

 

(592)

Restructuring and other costs at June 30, 2018

 

$

368

 

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13.  Subsequent Event

 

The Company sold an additional 115,245 shares of common stock between July 1, 2018 and August 3, 2018, at-the-market under the 2016 Sales Agreement discussed in Note 7, resulting in net proceeds of approximately $724 after underwriting discounts, commissions and expenses.  As of August 3, 2018, the Company had approximately $23,367 available for future sale under the 2016 Sales Agreement.

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Item 2. 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 in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2018.  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, includes forward-looking statements that involve risks and uncertainties.  As a result of many factors, including those factors set forth in the “Risk Factors” section of this Quarterly Report on Form 10-Q, our actual results could 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 platform technology.  We use this technology to tailor duration and amount of delivery of a range of therapeutic agents of varying duration in our product candidates. 

 

We currently incorporate U.S. Food and Drug Administration, or FDA, approved therapeutic agents, including small molecules and proteins, into our hydrogel technology with the goal of providing extended delivery of drug to the eye.  We believe that our extended delivery technology allows us 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 intracanalicular inserts, intracameral implants and intravitreal implants. We have product candidates in clinical and preclinical development applying this technology to treat post-surgical ocular pain and inflammation, allergic conjunctivitis, dry eye disease, glaucoma and ocular hypertension, and wet age-related macular degeneration, or wet AMD, among other conditions. 

 

Our lead product candidates are DEXTENZA ® (dexamethasone insert), for the treatment of post-surgical ocular pain and inflammation, allergic conjunctivitis and dry eye disease, and OTX-TP (travoprost insert), for the reduction of intraocular pressure, or IOP, in patients with glaucoma and ocular hypertension. Both product candidates are extended-delivery, drug-eluting, preservative-free intracanalicular inserts that are placed into the canaliculus through a natural opening called the punctum located in the inner portion of the lower eyelid near the nose. 

 

Our early stage assets include two development programs that have initiated human clinical trials: OTX-TIC, an intracameral travoprost implant for the reduction of IOP in patients with glaucoma and ocular hypertension where greater IOP reduction is needed; and OTX-TKI, a tyrosine kinase inhibitor-containing intravitreal injection by fine gauge needle, delivering a hydrogel, anti-angiogenic formulation for the treatment of wet AMD. We are also continuing our collaboration with Regeneron Pharmaceuticals, Inc., or Regeneron, for the development and potential commercialization of products containing our extended-delivery hydrogel in combination with Regeneron’s VEGF inhibitor, aflibercept, currently marketed under the brand name Eylea.

 

In addition to our ongoing drug product development, we currently market our sole commercial product ReSure Sealant, a hydrogel ophthalmic wound sealant approved by the FDA to seal corneal incisions following cataract surgery.  ReSure Sealant is the first and only surgical sealant to be approved by the FDA for ophthalmic use. 

 

DEXTENZA  (dexamethasone insert)

 

Our most advanced product candidate, DEXTENZA, incorporates the FDA-approved corticosteroid dexamethasone as an active pharmaceutical ingredient into a hydrogel, drug-eluting intracanalicular insert.  In September 2015, we submitted to the FDA a New Drug Application, or NDA, for DEXTENZA for the treatment of post-surgical ocular pain.  In July 2016, we received a Complete Response Letter, or CRL, from the FDA regarding our NDA for DEXTENZA.  This CRL pertained to deficiencies in manufacturing process and controls identified during a pre-NDA approval inspection of our manufacturing facility.  In January 2017, we resubmitted our NDA.  Following a re-inspection of manufacturing operations by the FDA which was completed in May 2017, we received an FDA Form 483 containing new inspectional observations focused on manufacturing processes and analytical testing related to the manufacture of drug product for commercial production.  In July 2017, we received a second CRL from the FDA regarding our NDA for DEXTENZA for the treatment of post-surgical ocular pain.  FDA concerns included deficiencies in manufacturing processes and analytical testing related to manufacturing of drug product identified during the May

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2017 pre-NDA approval inspection. In May 2017, we submitted our initial response to the Form 483 and, in November 2017, we submitted our responses to the FDA’s remaining inspectional observations in an effort to close out the items identified in the Form 483. 

 

In June 2018, we resubmitted the NDA for DEXTENZA for the treatment of post-surgical ocular pain.  In July 2018, the FDA designated the DEXTENZA resubmission as a class 2, or major, review with a target action date under the Prescription Drug User Fee Act, commonly known as PDUFA, of December 28, 2018.  Adequate resolution of the outstanding Form 483 inspectional observations and the final decision as to the adequacy of our manufacturing processes are determined by the FDA with input from the Office of Process and Facilities within its Center for Drug Evaluation and Research, or CDER, as part of the NDA review process, and are necessary prior to NDA approval.

 

If DEXTENZA is approved for marketing, we are considering potential commercialization options available for DEXTENZA in the United States, including building our own highly targeted, key account sales force that would focus on the ambulatory surgical centers responsible for the largest volumes of cataract surgery. 

 

We have completed three Phase 3 clinical trials of DEXTENZA for the treatment of post-surgical ocular pain and inflammation.  The data from two of these three completed Phase 3 clinical trials and a prior Phase 2 clinical trial are being used to support our NDA for post-surgical ocular pain.  Subject to receiving approval for the pain indication, we plan to submit an NDA supplement, or sNDA, for DEXTENZA for the treatment of post-surgical ocular inflammation.  We have also completed two Phase 3 clinical trials of DEXTENZA for the treatment of allergic conjunctivitis and a Phase 2 clinical trial of DEXTENZA for the treatment of dry eye disease. 

 

OTX-TP (intracanalicular travoprost insert)

 

Our second product candidate, OTX-TP, incorporates travoprost, an FDA-approved prostaglandin analog, or PGA, that reduces elevated IOP as its active pharmaceutical ingredient, into a hydrogel, drug-eluting intracanalicular insert.  This preservative-free insert is designed to elute drug for up to 90 days.  OTX-TP is being developed as a treatment to lower IOP in patients with primary open angle glaucoma and ocular hypertension.  We reported topline results from a Phase 2b clinical trial for this indication in October 2015.  We completed an End-of-Phase 2 review with the FDA in April 2016 and initiated the first of two Phase 3 clinical trials of OTX-TP in September 2016. We expect our first Phase 3 trial to enroll approximately 550 patients at 50 sites in the United States. Based on discussions with the FDA, the first Phase 3 clinical trial design includes an OTX-TP treatment arm and a placebo-controlled comparator arm that uses a non-drug eluting hydrogel-based intracanalicular insert. There is not a requirement for either a timolol comparator or a validation arm. No eye drops, placebo or active, are administered in either the OTX-TP treatment arm or the placebo-controlled arm. The primary efficacy endpoint is superiority in the reduction of IOP from baseline in the OTX-TP treatment arm compared to the placebo arm at three diurnal time points at each of three measurement dates, 2, 6 and 12 weeks. We expect that the FDA will require that OTX-TP show both a statistically superior reduction of IOP, compared to the placebo and a clinically meaningful reduction of IOP prior to granting marketing approval.  While enrollment in this first Phase 3 clinical trial has continued steadily, it has been slightly slower than projected.  To address this issue, we are working closely with clinical sites to identify appropriate patients, and have added additional clinical sites to help complete enrollment.  We expect topline efficacy data from the first Phase 3 clinical trial in the first half of 2019.  We do not intend to initiate the second Phase 3 clinical trial until we receive data from the first Phase 3 clinical trial and may determine to discuss the results of this first Phase 3 clinical trial with the FDA prior to initiating a second Phase 3 clinical trial.  Given the anticipated use of OTX-TP as a chronic therapy, we intend to generate six-month (300 patients) and one-year (100 patients) safety data beginning during the first Phase 3 clinical trial to support our product registration.  In order to meet these targets, we began enrollment in the open-label one-year safety extension study in July 2018.

 

OTX-TIC (intracameral travoprost implant)  

 

OTX-TIC is our product candidate for glaucoma patients in need of a more significant reduction in IOP and ocular hypertension. 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. Preclinical studies to date have demonstrated reduction of IOP and pharmacokinetics in the aqueous humor that suggest a pharmacodynamic response of IOP lowering in humans.  We initiated a Phase 1 clinical trial outside the United States in third quarter of 2017 to assess safety and obtain initial efficacy data, but we did not enroll any patients in this trial and subsequently closed this trial in the second quarter of 2018. Our investigational new drug application, or IND, for our

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U.S. trial became effective in the first quarter of 2018, and we dosed the first patient in May 2018. We anticipate data from two dose groups from this clinical trial in the first half of 2019.  This trial is a multi-center, open-label, proof-of-concept clinical trial designed to evaluate the safety, durability, tolerability, and efficacy in patients with primary open-angle glaucoma or ocular hypertension. 

 

Back-of-the-Eye Programs

 

We are engaged in the development of formulations of our hydrogel administered via intravitreal injection to address the large and growing markets for diseases and conditions of the back of the eye.  Our initial development efforts are focused on the use of our extended-delivery hydrogel in combination with anti-angiogenic drugs, such as protein-based anti-VEGF drugs or small molecule drugs, such as TKIs, for the treatment of retinal diseases such as wet AMD, retinal vein occlusion and diabetic macular edema.  Our initial goal for these programs is to provide extended delivery over a four to six month period thereby reducing the frequency of the current monthly or bi-monthly intravitreal injection regimen for wet AMD and other retinal diseases and providing a more consistent uniform release of drug over the treatment period.

 

OTX-TKI (intravitreal tyrosine kinase inhibitor implant)

 

OTX-TKI is a preformed, bioresorbable hydrogel fiber incorporating a small molecule TKI with anti-angiogenic properties delivered by intravitreal injection. TKIs have shown promise in the treatment of wet AMD. In May 2017, we reported data from preclinical studies evaluating the efficacy, tolerability and pharmacokinetics of OTX-TKI.  In this study, OTX-TKI was well-tolerated, and high levels of drug were maintained in the tissue for up to twelve months in Dutch belted rabbits. We expect to dose the first patient in a Phase 1 clinical trial outside the United States in the third quarter of 2018.  This clinical trial will be a multi-center, open-label, dose escalation study to test the safety, durability and tolerability of OTX-TKI.  We also plan to evaluate biological activity by following visual acuity over time and measuring retinal thickness using standard optical coherence tomography.  

 

OTX-IVT (intravitreal afibercept implant) in Collaboration with Regeneron

 

In October 2016, we entered into a strategic collaboration, option and license agreement, or Collaboration Agreement, with Regeneron for the development and potential commercialization of products using our hydrogel in combination with Regeneron’s large molecule VEGF-targeting compounds for the treatment of retinal diseases, with the initial focus on the VEGF trap aflibercept, currently marketed under the brand name Eylea. Under the terms of the agreement, we granted Regeneron an option, or the Option, to enter into an exclusive, worldwide license under our intellectual property to develop and commercialize products using our hydrogel in combination with Regeneron’s large molecule VEGF-targeting compounds, or Licensed Products. The Collaboration Agreement does not cover the development of any products that deliver small molecule drugs, including TKIs, for any target including VEGF, or any products that deliver large molecule drugs other than those that target VEGF proteins. Under the terms of the Collaboration Agreement, we and Regeneron have agreed to conduct a joint research program with the aim of developing an extended-delivery formulation of aflibercept that is suitable for advancement into clinical development.   We refer to the formulation we are developing with Regeneron as OTX-IVT.

 

Regeneron is responsible for funding an initial preclinical tolerability study, which it initiated in early 2018.  If the Option is exercised, Regeneron will conduct further preclinical development and an initial clinical trial under a collaboration plan. We are obligated to reimburse Regeneron for certain development costs during the period through the completion of the initial clinical trial, subject to a cap of $25 million, which cap may be increased by up to $5 million under certain circumstances. We do not expect our funding requirements under the collaboration to be material over the next twelve months. If Regeneron elects to proceed with further development beyond the initial clinical trial, it will be solely responsible for conducting and funding further development and commercialization of product candidates. If the Option is exercised, Regeneron is required to use commercially reasonable efforts to research, develop and commercialize at least one Licensed Product. Such efforts shall include initiating the dosing phase of a subsequent clinical trial within specified time periods following the completion of the first-in-human clinical trial or the initiation of preclinical toxicology studies, subject to certain extensions.

 

Under the terms of the Collaboration Agreement, Regeneron has agreed to pay us $10 million upon exercise of the Option.  We are also eligible to receive up to $145 million per Licensed Product upon the achievement of specified development and regulatory milestones, including successful results from the first-in-human clinical trial, $100 million

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per Licensed Product upon first commercial sale of such Licensed Product and up to $50 million based on the achievement of specified sales milestones for all Licensed Products.  In addition, we are entitled to tiered, escalating royalties, in a range from a high-single digit to a low-to-mid teen percentage of net sales of Licensed Products.  

 

ReSure

 

Following our receipt of FDA approval for ReSure Sealant, we commercially launched this product in the United States in 2014. ReSure Sealant is approved to seal corneal incisions following cataract surgery and is the first and only surgical sealant to be approved by the FDA for ophthalmic use.  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. While ReSure Sealant remains commercially available in the United States, there is no sales support provided to the product at this time.     

 

Additional Potential Areas for Growth

 

In addition to our focus on formulating, developing and commercializing innovative therapies for diseases and conditions of the eye, we are also assessing the potential use of our hydrogel platform technology in new areas of the body.  If we are to utilize our intellectual property, all of which we currently license from Incept, LLC, or Incept, for applications outside the field of ophthalmology, we will need to negotiate and enter into an amendment to our existing license agreement with Incept or a new license agreement with Incept covering one or more additional such fields of use. 

 

Financial Position

 

We have generated limited revenue to date.  All of our extended-delivery drug delivery products are in various phases of clinical and preclinical development.  We do not expect sales of ReSure Sealant to generate revenue that is sufficient for us to achieve profitability.  Instead, our ability to generate product revenue sufficient to achieve profitability will depend heavily on our obtaining marketing approval for and commercializing products with greater market potential, including one or both of DEXTENZA and OTX-TP.  Since inception, we have incurred significant operating losses.  Our net loss was $27.6 million and $34.7 million for the six months ended June 30, 2018 and 2017, respectively.  As of June 30, 2018, we had an accumulated deficit of $264.8  million. 

 

Our total cost and operating expenses were $28.0 million for the six months ended June 30, 2018, including $4.8 million in non-cash stock-based compensation expense and depreciation expense.  Our operating expenses have grown as we continue to pursue the clinical development of our most advanced product candidates, DEXTENZA and OTX-TP; continue the research and development of our other product candidates; continue the internal development of our intravitreal hydrogel formulation for the sustained delivery of protein-based or small molecule anti-angiogenic drugs, such as anti-VEGF drugs and TKIs for the treatment of wet AMD and other back-of-the-eye diseases; and seek marketing approval for any such product candidate for which we obtain favorable pivotal clinical trial results.  In August 2017, we updated our DEXTENZA commercial plans in light of the delayed regulatory process of DEXTENZA and realized savings in operating expenses, including reduced personnel costs, as a result of streamlining headcount, as part of an initiative to reduce expenses.  As a result, we also expect to incur lower sales and marketing expenses for our product candidates until we obtain marketing approval of DEXTENZA or any of our other product candidates.  In addition, we will continue to incur additional costs associated with operating as a public company.

 

We do not expect to generate significant revenue from sales of any product for several years, if at all. Accordingly, we may need to obtain substantial additional funding in connection with our continuing operations. If we are unable to access our borrowing capacity or raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future 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.

 

In November 2016, we entered into a controlled equity offering sales agreement, or the 2016 Sales Agreement, with Cantor Fitzgerald & Co., or Cantor, under which we may offer and sell our common stock having aggregate proceeds of up to $40.0 million from time to time. During the six months ended June 30, 2018, we have sold an aggregate of 1,166,535 shares of common stock under the 2016 Sales Agreement, resulting in net proceeds of approximately $8.4 million after underwriting discounts, commission and other offering expenses.  Through August 3,

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2018, we have sold an aggregate of 2,172,348 shares of common stock under the 2016 Sales Agreement, resulting in net proceeds of approximately $15.7 million after underwriting discounts, commission and other offering expenses. 

 

In January 2017, we completed a follow-on offering of our common stock at a public offering price of $7.00 per share.  The offering consisted of 3,571,429 shares of common stock sold by us.  We received net proceeds from the follow-on offering of approximately $23.3 million after deducting underwriting discounts and offering expenses.  In January 2018, we completed a follow-on offering of our common stock at a public offering price of $5.00 per share. The offering consisted of 7,475,000 shares of common stock sold by us, including those shares sold in connection with the exercise by the underwriter of its option to purchase additional shares. We received net proceeds from the follow-on offering of approximately $34.7 million after deducting underwriting discounts and offering expenses.

 

Based on our current plans and forecasted expenses, we believe that our existing cash and cash equivalents, as of June 30, 2018, without giving effect to any potential payment under our Collaboration Agreement with Regeneron, will enable us to fund our operating expenses, debt service obligations and capital expenditure requirements into the second quarter of 2019.  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.  We have not reflected the full costs of building a sales force that we would build if DEXTENZA is approved for marketing in our current operating plan and will need to raise additional capital to support such an effort.  See “—Liquidity and Capital Resources.”

 

Financial Operations Overview

 

Revenue

 

From our inception through June 30, 2018, we have generated limited amounts of revenue from the sales of our products.  Our ReSure Sealant product received premarket approval, or PMA, from the FDA in 2014.  We commenced sales of ReSure Sealant in the first quarter of 2014, have received only limited revenues from ReSure Sealant to date and anticipate only limited sales for 2018. ReSure Sealant is currently our only source of revenue from product sales. We may generate revenue in the future if we successfully develop one or more of our product candidates and receive marketing approval for any such product candidate or if we enter into longer-term collaboration agreements with third parties.

 

Operating Expenses

 

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;

 

·

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 trial 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;

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·

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 patient 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 table below summarizes our research and development expenses incurred by product development program:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

  

2018

    

2017

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ReSure Sealant

 

$

23

 

$

45

 

$

38

 

$

65

 

DEXTENZA for post-surgical ocular pain and inflammation

 

 

261

 

 

516

 

 

367

 

 

871

 

DEXTENZA for allergic conjunctivitis

 

 

 6

 

 

140

 

 

20

 

 

286

 

DEXTENZA for  dry eye disease

 

 

 —

 

 

 —

 

 

 —

 

 

 6

 

OTX-TP for glaucoma and ocular hypertension

 

 

1,427

 

 

1,471

 

 

2,736

 

 

2,498

 

Unallocated expenses

 

 

7,028

 

 

5,945

 

 

13,811

 

 

11,120

 

Total research and development expenses

 

$

8,745

 

$

8,117

 

$

16,972

 

$

14,846

 

 

We expect that our expenses will increase in connection with our ongoing activities including costs related to clinical trials and other research and development activities for our DEXTENZA and OTX-TP product candidates and other research and development activities. 

 

The successful development and commercialization of our 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 product candidates compared to alternative treatments, including any standard of care;

 

·

the market acceptance of our 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

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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. 

 

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 and administrative functions.  General and administrative expenses also include facility-related costs and professional fees for legal, patent, consulting and accounting and audit services. 

 

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued development and commercialization of our product candidates.  We also anticipate that we will continue to incur increased accounting, audit, legal, 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 and advertising and promotion costs.  During the three and six months ended June 30, 2018 and 2017, we incurred selling and marketing expenses in connection with ReSure Sealant, which we began commercializing in 2014, and marketing expenses in preparation for a potential commercial launch of our product candidates. 

 

In August 2017, we reorganized our DEXTENZA commercial plans and expect to realize savings in operating expenses, including personnel costs, as a result of streamlining headcount, as part of an initiative to enhance operations and reduce expenses.  As a result, we expect our selling and marketing expenses to decrease until we begin to incur expenses in support of potential marketing approval of our product candidates.    

 

Other Income (Expense)

 

Interest Income.  In 2018, interest income consists primarily of interest income earned on cash and cash equivalents and to a lesser extent, marketable securities in 2017.  In the three and six months ended June 30, 2018 and 2017, our interest income has not been significant due to the low rates of interest being earned on our invested balances. 

 

Interest Expense.  Interest expense is incurred on our debt.  In March 2017, we amended our credit facility to increase the aggregate principal amount to $18.0 million and extend the maturity date to December 1, 2020. 

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles.  The preparation of our 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 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.  During the three and six months ended June 30, 2018, there were no material changes to our critical accounting policies.  Our critical accounting policies 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 filed with the Securities and Exchange Commission, or SEC, on March 8, 2018 and the notes to the financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.  We believe that of our critical accounting policies, the following accounting policies involve the most judgment and complexity:

 

·

revenue recognition;

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·

accrued research and development expenses; and

 

·

stock-based compensation.

 

Accordingly, we believe the policies set forth in our Annual Report on Form 10-K filed with the SEC on March 8, 2018 are critical to fully understanding and evaluating our financial condition and results of operations.  If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected. 

 

Results of Operations

 

Comparison of the Three Months Ended June 30, 2018 and 2017

 

The following table summarizes our results of operations for the three months ended June 30, 2018 and 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

June 30, 

 

Increase

 

    

2018

    

2017

    

(Decrease)

 

 

(in thousands)

Revenue:

 

 

  

 

 

  

 

 

  

Product revenue

 

$

648

 

$

438

 

$

210

Total revenue

 

 

648

 

 

438

 

 

210

Costs and operating expenses:

 

 

  

 

 

  

 

 

  

Cost of product revenue

 

 

153

 

 

104

 

 

49

Research and development

 

 

8,745

 

 

8,117

 

 

628

Selling and marketing

 

 

867

 

 

6,832

 

 

(5,965)

General and administrative

 

 

4,447

 

 

3,724

 

 

723

Total costs and operating expenses

 

 

14,212

 

 

18,777

 

 

(4,565)

Loss from operations

 

 

(13,564)

 

 

(18,339)

 

 

4,775

Other income (expense):

 

 

  

 

 

  

 

 

  

Interest income

 

 

215

 

 

113

 

 

102

Interest expense

 

 

(455)

 

 

(468)

 

 

13

Total other expense, net

 

 

(240)

 

 

(355)

 

 

115

Net loss

 

$

(13,804)

 

$

(18,694)

 

$

4,890

 

Revenue

 

We generated $0.6 million and $0.4 million of revenue during the three months ended June 30, 2018 and 2017, respectively, from sales of our ReSure Sealant product due to increase in number of units shipped in 2018 as compared to 2017. 

 

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Research and Development Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

June 30, 

 

Increase

 

    

2018

    

2017

    

(Decrease)

 

 

 

(in thousands)

Direct research and development expenses by program:

 

 

  

 

 

  

 

 

  

ReSure Sealant

 

$

23

 

$

45

 

$

(22)

DEXTENZA for post-surgical ocular pain and inflammation

 

 

261

 

 

516

 

 

(255)

DEXTENZA for allergic conjunctivitis

 

 

 6

 

 

140

 

 

(134)

DEXTENZA for dry eye disease

 

 

 —

 

 

 —

 

 

 —

OTX-TP for glaucoma and ocular hypertension

 

 

1,427

 

 

1,471

 

 

(44)

Unallocated expenses:

 

 

  

 

 

  

 

 

 

Personnel costs

 

 

4,262

 

 

3,829

 

 

433

All other costs

 

 

2,766

 

 

2,116

 

 

650

Total research and development expenses.

 

$

8,745

 

$

8,117

 

$

628

 

Research and development expenses were $8.7 million for the three months ended June 30, 2018, compared to $8.1 million for the three months ended June 30, 2017.  Research and development costs increased by $0.6 million primarily due to an increase of $0.4 million in unallocated personnel costs and $0.6 million in unallocated all other costs, which was partially offset by a net decrease of $0.4 million in costs incurred in connection with the clinical trials of our DEXTENZA product candidate for the treatment of post-surgical ocular pain and inflammation, our DEXTENZA product candidate for the treatment of allergic conjunctivitis, our DEXTENZA product candidate for the treatment of dry eye disease and our OTX-TP product candidate for the treatment of glaucoma and ocular hypertension.    

 

For the three months ended June 30, 2018, we incurred $1.7 million in direct research and development expenses for our intracanalicular insert product candidates, including $0.3 million for our DEXTENZA product candidate for the treatment of post-surgical ocular pain and inflammation which was in Phase 3 clinical trials, and $1.4 million for our OTX-TP product candidate for the treatment of glaucoma and ocular hypertension which was in a Phase 3 clinical trial.  In comparison, for the three months ended June 30, 2017, we incurred $2.1 million in direct research and development expenses for our intracanalicular insert drug delivery product candidates for the front of the eye, including $0.5 million for our DEXTENZA product candidate for the treatment of post-surgical ocular pain and inflammation which was in Phase 3 clinical trials, $0.1 million for our DEXTENZA product candidate for the treatment of allergic conjunctivitis which was in a Phase 3 clinical trial, and $1.5 million for our OTX-TP product candidate for the treatment of glaucoma and ocular hypertension which was in a Phase 3 clinical trial. Unallocated research and development expense increased $1.1 million for the three months ended June 30, 2018, compared to the three months ended June 30, 2017, due primarily to an increase in personnel costs of $0.4 million due to additional hiring primarily in our clinical, regulatory and quality departments,  $0.4 million in facility related costs and $0.2 million in depreciation expense.    

 

Selling and Marketing Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

June 30, 

 

Increase

 

    

2018

    

2017

    

(Decrease)

 

 

(in thousands)

Personnel related (including stock-based compensation)

 

$

407

 

$

1,894

 

$

(1,487)

Professional fees

 

 

280

 

 

4,645

 

 

(4,365)

Facility related and other

 

 

180

 

 

293

 

 

(113)

Total selling and marketing expenses

 

$

867

 

$

6,832

 

$

(5,965)

 

Selling and marketing expenses were $0.9 million for the three months ended June 30, 2018, compared to $6.8 million for the three months ended June 30,  2017.  The decrease of $6.0 million was primarily due to a decrease of $1.5 million reduction in personnel costs, $4.4 million in professional fees including consulting, trade shows and conferences and $0.1 million in facility related and other costs.  In August 2017, we reorganized our DEXTENZA commercial plans streamlining headcount, as part of an initiative to enhance operations and reduce expenses in pre-commercialization activities.    

 

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General and Administrative Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended