Item 7. Management’s Discussion and Analysis
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties and should be read together with the “Risk Factors” section of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
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 in our product candidates.
We currently incorporate therapeutic agents that have previously received regulatory approval from the U.S. Food and Drug Administration, or FDA, including small molecules and proteins, into our hydrogel technology with the goal of providing local programmed-release of drug to the eye. We believe that our local programmed-release drug delivery technology has the potential to treat conditions and diseases of both the front and the back of the eye and can be administered through a range of different modalities including intravitreal implants, suprachoroidal implants, intracameral implants and intracanalicular inserts. We have product candidates in preclinical and clinical development designed to utilize this technology to treat retinal diseases including wet age-related macular degeneration, or wet AMD; glaucoma and ocular hypertension; and ocular surface diseases and conditions including chronic and acute dry eye disease and ocular itching associated with allergic conjunctivitis. We also have two FDA-approved products in commercialization in the United States: DEXTENZA ® , an intracanalicular insert for the treatment of post-surgical ocular inflammation and pain, and ReSure ® Sealant, an ophthalmic device designed to prevent wound leaks in corneal incisions following cataract surgery. Our core pipeline assets include four development programs. We are currently evaluating two of these programs in Phase 1 clinical trials: OTX-TKI, an intravitreal implant injected by fine-gauge needle of a hydrogel, anti-angiogenic formulation of axitinib, a tyrosine kinase inhibitor, or TKI, for the treatment of wet AMD, and OTX-TIC, a travoprost intracameral implant for the reduction of intraocular pressure, or IOP, in patients with primary open-angle glaucoma or ocular hypertension. We have commenced Phase 2 clinical trials of OTX-CSI, a cyclosporine intracanalicular insert for the chronic treatment of dry eye disease, and OTX-DED, a dexamethasone intracanalicular insert for the short-term treatment of the signs and symptoms of dry eye disease.
We also have a 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 large molecule vascular endothelial growth factor, or VEGF, inhibitor, aflibercept, currently marketed under the brand name Eylea. On May 8, 2020, we entered into an amendment to our existing collaboration agreement with Regeneron. Pursuant to this amendment, we and Regeneron have adopted a new workplan to transition joint efforts under the existing collaboration agreement to the research and development of an extended-delivery formulation of aflibercept to be delivered to the suprachoroidal space. Regeneron has agreed to pay for our personnel and material costs for specified preclinical development activities in connection with the revised workplan, as well as costs of certain specialty equipment.
DEXTENZA is the first FDA-approved intracanalicular insert delivering dexamethasone to treat post-surgical ocular inflammation and pain for up to 30 days with a single administration. We filed a supplemental New Drug Application, or sNDA, in the fourth quarter of 2020 for an additional indication of DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis. The FDA has accepted our sNDA for filing and has established a target action date under the Prescription Drug User Fee Act, commonly known as PDUFA, of October 18, 2021.
In October 2020, we entered into a license agreement and collaboration with AffaMed Therapeutics Limited, or AffaMed, for the development and commercialization of DEXTENZA and OTX-TIC in mainland China , Hong Kong , Macau , and Taiwan ; South Korea , and the ASEAN markets ( Brunei , Cambodia , Indonesia , Laos , Malaysia , Myanmar , the Philippines , Singapore , Thailand and Vietnam) .
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We continue to assess the potential use of our hydrogel platform technology in other areas of the body.
Business Update Regarding COVID-19
The pandemic caused by an outbreak of a new strain of coronavirus, or the COVID-19 pandemic, that is affecting the U.S. and global economy and financial markets and the related responses of government, businesses and individuals are also impacting our employees, patients, communities and business operations. The implementation of travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders and shutdowns, for example, affected our business in 2020. The full extent to which the COVID-19 pandemic will continue to directly or indirectly impact our business, results of operations and financial condition and those of our customers, vendors, suppliers, and collaboration partners in 2021 will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. Management continues to actively monitor this situation and the possible effects on our financial condition, liquidity, operations, suppliers, industry, and workforce. In the paragraphs that follow, we have described impacts of the COVID-19 pandemic on our clinical development programs. For additional information on risks posed by the COVID-19 pandemic, please see “Item 1A — Risk Factors — Risks Related to the Coronavirus Pandemic,” included elsewhere in this Annual Report on Form 10-K.
Financial Position
We have local programmed-release drug delivery product candidates in preclinical and clinical development, and we have two FDA-approved products—DEXTENZA, an intracanalicular insert for the treatment of post-surgical ocular inflammation and pain, and ReSure Sealant, an ophthalmic device designed to prevent wound leaks in corneal incisions following cataract surgery—in commercialization in the United States. Our ability to generate product revenues sufficient to achieve profitability will depend heavily on our continued commercialization of DEXTENZA for the treatment of ocular inflammation and pain following ophthalmic surgery and our obtaining marketing approval for and commercializing other products with significant market potential, including DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis, OTX-TKI for the treatment of wet AMD, OTX-TIC for the treatment of glaucoma and ocular hypertension, OTX-CSI for the chronic treatment of dry eye disease, and OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease. Since inception, we have incurred significant operating losses. Our net losses were $155.6 million and $86.4 million for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $539.3 million.
Our total cost and operating expenses were $80.3 million and $90.0 million for the years ended December 31, 2020 and 2019, respectively, including $7.5 million and $8.8 million, respectively, in non-cash stock-based compensation expense. Our operating expenses have grown as we continue to support the commercial launch of DEXTENZA following its entry into the market in July 2019; continue to pursue the clinical development of OTX-TKI, OTX-TIC, OTX-CSI, OTX-DED, OTX-AFS and DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis; continue the research and development of our other product candidates; and seek marketing approval for any such product candidate for which we obtain favorable pivotal clinical trial results. We expect to incur substantial sales and marketing expenses in connection with the ongoing DEXTENZA commercial launch and that of any of our other product candidates . In addition, we will continue to incur additional costs associated with operating as a public company, including legal costs associated with any pending legal proceedings.
Although we expect to generate revenue from sales of DEXTENZA and limited revenue from sales of ReSure Sealant, we will need to obtain substantial additional funding to support our continuing operations and the commercialization of DEXTENZA. If we are unable to raise capital or access our borrowing capacity 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.
Through December 31, 2018, we raised $337.7 million through the sale of common stock in various offerings and $25.0 million through a credit facility.
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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 could offer and sell our common stock having aggregate proceeds of up to $40.0 million from time to time. During 2019, we sold 1,318,481 shares of common stock pursuant to the 2016 Sales Agreement, resulting in net proceeds of approximately $5.0 million after underwriting discounts and commissions and expenses. As of February 25, 2019, we had no amounts remaining available for future sale under the 2016 Sales Agreement. On February 28, 2019, pursuant to the 2016 Sales Agreement, we delivered a termination notice to Cantor, terminating the 2016 Sales Agreement. Through March 31, 2019, we sold an aggregate of 6,330,222 shares of common stock under the 2016 Sales Agreement, resulting in net proceeds of approximately $38.4 million after underwriting discounts and commissions and other offering expenses.
On March 1, 2019, we issued $37.5 million of unsecured senior subordinated convertible notes, or the 2026 Convertible Notes. The 2026 Convertible Notes accrue interest at an annual rate of 6% of their outstanding principal amount, payable at maturity, on March 1, 2026, unless earlier converted, repurchased or redeemed. The holders of the 2026 Convertible Notes may convert all or part of the outstanding principal amount of their 2026 Convertible Notes into shares of our common stock, par value $0.0001 per share, prior to maturity and provided that no conversion results in a holder beneficially owning more than 19.99% of our issued and outstanding common stock. The conversion rate is initially 153.8462 shares of our common stock per $1,000 principal amount of the 2026 Convertible Notes, which is equivalent to an initial conversion price is $6.50 per share. The conversion rate is subject to adjustment in customary circumstances such as stock splits or similar changes to our capitalization, none of which have occurred to date.
On April 5, 2019, we entered into an Open Market Sale Agreement SM , or the 2019 Sales Agreement, with Jefferies LLC, or Jefferies, under which we may offer and sell shares of our common stock having an aggregate offering price of up to $50.0 million from time to time through Jefferies, acting as agent. In the twelve months ended December 31, 2019, the Company sold 7,337,459 shares of common stock under the 2019 Sales Agreement, resulting in net proceeds of approximately $32.7 million, respectively, after commissions and expenses. In the twelve months ended December 31, 2020, the Company sold 2,984,381 shares of common stock under the 2019 Sales Agreement, resulting in net proceeds of approximately $14.4 million, respectively, after commissions and expenses. From inception to December 31, 2020 , we have sold 10,321,840 shares of common stock under the 2019 Sales Agreement, resulting in net proceeds of approximately $47.0 million after commissions and expenses.
In May 2020, we entered into an underwriting agreement with Jefferies and Piper Sandler & Co., or the Underwriters, pursuant to which we issued and sold an aggregate of 9,409,091 shares of our common stock in an underwritten public offering at a public offering price of $5.50 per share. We refer to this offering as the May 2020 Offering. After deducting underwriting discounts and commissions and offering expenses, we received net proceeds from the May 2020 Offering of approximately $48.3 million.
In October 2020, we entered into an underwriting agreement with the Underwriters pursuant to which we issued and sold an aggregate of 8,257,000 shares of our common stock in an underwritten public offering at a public offering price of $9.75 per share. We refer to this offering as the October 2020 Offering. After deducting underwriting discounts and commissions and offering expenses, we received net proceeds from the October 2020 Offering of approximately $75.4 million.
In December 2020, we entered into an underwriting agreement with the Underwriters pursuant to which we issued and sold an aggregate of 4,283,750 shares of our common stock in an underwritten public offering at a public offering price of $21.50 per share. We refer to this offering as the December 2020 Offering. After deducting underwriting discounts and commissions and offering expenses, we received net proceeds from the December 2020 Offering of approximately $86.4 million.
We believe that our existing cash and cash equivalents of $228.1 million as of December 31, 2020, will enable us to fund our planned operating expenses, debt service obligations and capital expenditure requirements through 2023. This estimate is based on our current operating plan which includes estimates of anticipated cash inflows from DEXTENZA and ReSure Sealant product sales and cash outflows from operating expenses. T hese estimates are subject to various assumptions including those related to the severity and duration of the COVID-19 pandemic, the revenues and expenses associated with the commercialization of DEXTENZA, the pace of our research and clinical development programs, and other aspects of our business. These and other assumptions upon which w e have based our estimate may prove to be wrong, and we could use our capital resources sooner than we currently expect and would therefore need to
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raise additional capital to support our ongoing operations or adjust our plans accordingly. See “—Liquidity and Capital Resources.”
Financial Operations Overview
Revenue
From our inception through December 31, 2020, we have generated limited amounts of revenue from the sales of our products. We commenced sales of ReSure Sealant in the first quarter of 2014, but we have received only limited revenues from ReSure Sealant to date and anticipate only limited sales for 2021. Until June 2019, ReSure Sealant was our only source of revenue from product sales.
We began to recognize limited product revenue from DEXTENZA during the second quarter of 2019 with the first commercial shipments to customers in June 2019. As further explained under “—Revenue Recognition—Product Revenue, Net” below, we recognize revenue when we sell DEXTENZA in the United States to a network of specialty distributors, who then resell the product to ambulatory surgical centers, or ASCs, and hospital outpatient departments, or HOPDs. We refer to these resales from the specialty distributors to the ASCs and HOPDs as in-market unit sales. For the first two months of 2021, in-market units sales neared 9,500, representing an increase of greater than 10% over the first two months of the fourth quarter of 2020. We may generate revenue in the future if we continue to commercialize DEXTENZA and develop and commercialize 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.
For the year ended December 31, 2020, three specialty distributor customers accounted for 42%, 29% and 12% of our total revenue and three specialty distributor customers accounted for 45%, 33% and 15% of our total accounts receivable. No other customer accounted for more than 10% of total revenue or accounts receivable for the year ended December 31, 2020.
For the year ended December 31, 2019, two specialty distributor customers accounted for 27% and 11% of our total revenue and three specialty distributor customers accounted for 39%, 18% and 11% of our total accounts receivable. No other customer accounted for more than 10% of total revenue or accounts receivable for the year ended December 31, 2019.
Operating Expenses
Cost of Product Revenue
Cost of product revenue consists primarily of costs of DEXTENZA and ReSure product revenue, which include:
● Direct materials costs;
● Royalties;
● Direct labor, which includes employee-related expenses, including salaries, related benefits and payroll taxes, travel and stock-based compensation expense for employees engaged in the production process;
● Manufacturing overhead costs, which includes rent, depreciation, and indirect labor costs associated with the production process;
● Transportation costs; and
● Cost of scrap material.
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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 study materials;
● ongoing research and development activities relating to our core bioresorbable hydrogel technology and improvements to this technology;
● facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and supplies;
● costs relating to the supply and manufacturing of product inventory, prior to approval by the FDA or other regulatory agencies of our products; and
● expenses associated with preclinical development activities.
We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites.
Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical trials and regulatory fees. We do not allocate employee and contractor-related costs, costs associated with our platform technology, costs related to manufacturing or purchasing clinical trial materials, and facility expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple product development programs and, as such, are not separately classified. We use internal resources in combination with third-party CROs, including clinical monitors and clinical research associates, to manage our clinical trials, monitor 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 successful development and commercialization of our products or product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of:
● the scope, progress, outcome and costs of our clinical trials and other research and development activities;
● the timing, receipt and terms of any marketing approvals;
● the efficacy and potential advantages of our products or product candidates compared to alternative treatments, including any standard of care;
● the market acceptance of our products or product candidates; and
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● significant and changing government regulation.
Any changes in the outcome of any of these variables with respect to the development of our product candidates in clinical and preclinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate. We anticipate that our research and development expenses will increase in the future as we support our continued development of our product candidates.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance, information technology, human resources and administrative functions. General and administrative expenses also include insurance, facility-related costs and professional fees for legal, patent, consulting and accounting and audit services.
We anticipate that our general and administrative expenses will increase in the future as we support our continued development and commercialization of our product candidates. We also anticipate that we will continue to incur increased accounting, audit, legal, 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 years ended December 31, 2020 and 2019, we incurred limited marketing expenses in connection with ReSure Sealant, which we began commercializing in 2014. Selling and marketing expenses for DEXTENZA increased in 2019 due to the product’s July 2019 commercial launch and further increased in 2020 with the continued commercialization of DEXTENZA. We anticipate that our selling and marketing expenses associated with DEXTENZA will continue to increase, particularly as we plan to grow our salesforce supporting DEXTENZA in 2021.
Other Income (Expense)
Interest Income . Interest income consists primarily of interest income earned on cash and cash equivalents. In each of 2020 and 2019, our interest income has not been significant due to the low rates of interest being earned on our invested balances.
Interest Expense . Interest expense consists of interest expense on our debt. We borrowed $15.0 million in aggregate principal amount in April 2014. We refer to the credit facility under which we drew down this indebtedness, as amended over time, as our Credit Facility. In December 2015, we amended our credit and security agreement, which we refer to, as amended, as our Credit Agreement, to increase the aggregate principal amount borrowed under our Credit Facility to $15.6 million, extend the interest-only payment period through December 2016, and extend the maturity date to December 1, 2019. In March 2017, we amended our Credit Agreement to increase the aggregate principal amount borrowed under our Credit Facility to $18.0 million, extend the interest-only payment period through February 2018, and extend the maturity date to December 1, 2020. In December 2018, we amended the Credit Agreement to increase the aggregate principal amount borrowed under our Credit Facility to $25.0 million, extend the interest-only payment period through December 2020, and extend the maturity date to December 2023.
On March 1, 2019, we issued $37.5 million of the 2026 Convertible Notes. The 2026 Convertible Notes accrue interest at an annual rate of 6% of their outstanding principal amount, payable in cash at maturity, on March 1, 2026, unless earlier converted, repurchased or redeemed.
Change in Fair Value of Derivative Liability. In 2019, in connection with the issuance of our 2026 Convertible Notes, we identified an embedded derivative liability, which we are required to measure at fair value at inception and then at the end of each reporting period until the embedded derivative is settled. The changes in fair value are recorded through the statement of operations and comprehensive loss and are presented under the caption change in fair value of
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derivative liability. Our derivative liability calculations are further described under the heading “—Critical Accounting Policies and Significant Judgments and Estimates—Derivative Liability” below.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, accrued research and development expenses and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this annual report, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize product revenue from DEXTENZA for the treatment of post-surgical ocular inflammation and pain, which we began selling to customers in June 2019, and ReSure Sealant. We have generated limited revenues from ReSure Sealant to date and do not expect significant future sales.
In November 2018, the FDA approved DEXTENZA for the treatment of ocular pain following ophthalmic surgery. We entered into a limited number of arrangements with specialty distributors in the United States to distribute DEXTENZA. Accounting Standards Codification 606 – Revenue from Contracts with Customers , or Topic 606, applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance arrangements and financial instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to be entitled to in exchange for those goods or services.
To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to arrangements that meet the definition of a contract with a customer under Topic 606, including when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services we transfer to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we assess the goods or services promised within each contract, determines those that are performance obligations, and assesses whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. For a complete discussion of accounting for product revenue, see Product Revenue, Net (below).
Product Revenue, Net — We derive our product revenues from the sale of DEXTENZA in the United States to customers, which includes a limited number of specialty distributors, who then subsequently resell DEXTENZA to physicians, clinics and certain medical centers or hospitals. In addition to distribution agreements with customers, we enter into arrangements with government payers that provide for government mandated rebates and chargebacks with respect to the purchase of DEXTENZA.
We recognize revenue on product sales when the customer obtains control of our product, which occurs at a point in time (upon delivery to the customer). We have determined that the delivery of DEXTENZA to our customers constitutes a single performance obligation. There are no other promises to deliver goods or services beyond what is specified in each accepted customer order. We have assessed the existence of a significant financing component in the agreements with our customers. The trade payment terms with our customers do not exceed one year and therefore we have elected to apply the practical expedient and no amount of consideration has been allocated as a financing
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component. Product revenues are recorded net of applicable reserves for variable consideration, including discounts and allowances.
Transaction Price, including Variable Consideration — Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. Components of variable consideration include trade discounts and allowances, product returns, government chargebacks, discounts and rebates, and other incentives, such as voluntary patient assistance, and other fee-for-service amounts that are detailed within contracts between us and our customers relating to our sale of DEXTENZA. These reserves, as detailed below, are based on the amounts earned, or to be claimed on the related sales, and are classified as reductions of accounts receivable or a current liability. These estimates take into consideration a range of possible outcomes which are probability-weighted in accordance with the expected value method in Topic 606 for relevant factors such as current contractual and statutory requirements, specific known market events and trends, industry data, and forecasted customer buying and payment patterns. Overall, these reserves reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the respective underlying contracts.
The amount of variable consideration which is included in the transaction price may be constrained, and is included in the net sales price, only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized under the contract will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our original estimates, we will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Trade Discounts and Allowances —We compensate (through trade discounts and allowances) our customers for sales order management, data, and distribution services. However, we have determined such services received to date are not distinct from our sale of products to the customer and, therefore, these payments have been recorded as a reduction of revenue within the statement of operations and comprehensive loss, as well as a reduction to trade receivables, net on the consolidated balance sheets.
Product Returns — Consistent with industry practice, we generally offers customers a limited right of return for product that has been purchased from us in certain circumstances as further discussed below. We estimate the amount of our product sales that may be returned by our customers and record this estimate as a reduction of revenue in the period the related product revenue is recognized, as well as within accrued expenses and other current liabilities, in the accompanying consolidated balance sheets. We currently estimate product return reserves using available industry data and our own sales information, including its visibility into the inventory remaining in the distribution channel. We have received no returns to date and believe the returns of DEXTENZA will be minimal.
Government Chargebacks — Chargebacks for fees and discounts to qualified government healthcare providers represent the estimated obligations resulting from contractual commitments to sell products to qualified U.S. Department of Veterans Affairs hospitals and 340B entities at prices lower than the list prices charged to customers who directly purchase the product from us. The 340B Drug Discount Program is a U.S. federal government program created in 1992 that requires drug manufacturers to provide outpatient drugs to eligible health care organizations and covered entities at significantly reduced prices. Customers charge us for the difference between what they pay for the product and the statutory selling price to the qualified government entity. These allowances are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and trade receivables, net. Chargeback amounts are generally determined at the time of resale to the qualified government healthcare provider by customers, and we generally issue credits for such amounts within a few weeks of the customer’s notification to us of the resale. Allowances for chargebacks consist of credits that we expect to issue for units that remain in the distribution channel inventories at each reporting period-end that we expect will be sold to qualified healthcare providers, and chargebacks that customers have claimed, but for which we have not yet issued a credit.
Government Rebates — We are subject to discount obligations under state Medicaid programs and Medicare. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses and other current liabilities on the consolidated balance sheets. For Medicare, we also estimate the number of patients in the prescription drug coverage gap for whom we will owe an additional liability under the Medicare Part D program. For Medicaid programs, we estimate the portion of sales attributed to Medicaid patients and record a liability for the rebates to be paid to the respective state Medicaid programs. Our liability for these rebates consists of invoices received for claims from prior quarters that have not been paid or for which an invoice has not yet been received, estimates of claims for the current
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quarter, and estimated future claims that will be made for product that has been recognized as revenue, but which remains in the distribution channel inventories at the end of each reporting period.
Rebates — We offer rebate payments for which ASCs, HOPDs and other prescribers qualify by meeting purchase volumes of DEXTENZA under our rebate program. We calculate rebate payment amounts due under this program based on actual qualifying purchase and apply a contractual discount rate. The calculation of the accrual for rebates is based on an estimate of claims that we expect to receive associated with product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as an accrued expenses and other current liabilities on the consolidated balance sheets.
Other Incentives — Other incentives which we offer include voluntary patient assistance programs, such as the co-pay assistance program, which are intended to provide financial assistance to qualified commercially-insured patients with prescription drug co-payments required by payers. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue, but remains in the distribution channel inventories at the end of each reporting period. The adjustments are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included as an accrued expenses and other current liabilities on the consolidated balance sheets.
Derivative Liability
The 2026 Convertible Notes allow the holders to convert all or part of the outstanding principal of their 2026 Convertible Notes into shares our common stock provided that no conversion results in a holder beneficially owning more than 19.99% of our issued and outstanding common stock. The entire embedded conversion option is required to be separated from the 2026 Convertible Notes and accounted for as a freestanding derivative instrument subject to derivative accounting. Therefore, the entire conversion option is bifurcated from the underlying debt instrument and accounted for and valued separately from the host instrument. We measure the value of the embedded conversion option at its estimated fair value and recognize changes in the estimated fair value in other income (expense), net in the consolidated statements of operations and comprehensive loss during the period of change. The embedded conversion is recognized as a derivative liability in our consolidated balance sheet.
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Results of Operations
Comparison of the Years Ended December 31, 2020 and December 31, 2019
The following table summarizes our results of operations for the years ended December 31, 2020 and 2019:
Year Ended
December 31,
Increase
2020
2019
(Decrease)
(in thousands)
Revenue:
Product revenue, net
$
17,403
$
4,227
$
13,176
Total revenue, net
17,403
4,227
13,176
Costs and operating expenses:
Cost of product revenue
2,083
2,325
(242)
Research and development
28,694
41,091
(12,397)
Selling and marketing
26,614
24,491
2,123
General and administrative
22,859
22,122
737
Total costs and operating expenses
80,250
90,029
(9,779)
Loss from operations
(62,847)
(85,802)
22,955
Other income (expense):
Interest income
168
1,229
(1,061)
Interest expense
(6,768)
(6,101)
(667)
Change in fair value of derivative liability
(86,189)
4,310
(90,499)
Other income (expense), net
—
(8)
8
Total other income (expense), net
(92,789)
(570)
(92,219)
Net loss
$
(155,636)
$
(86,372)
$
(69,264)
Gross-to-Net Deductions
We record DEXTENZA product sales net of estimated chargebacks, rebates, distribution fees and product returns. These deductions are generally referred to as gross-to-net deductions. Our total gross-to-net provisions for the years ended December 31, 2020 and 2019 were 22.2% and 16.3%, respectively, of gross DEXTENZA product sales. In 2020, we introduced a rebate program under a purchase volume-discount program that primarily relates to the change over the prior year in the gross-to-net provisions.
Chargebacks and Rebates
We record a provision for estimated chargebacks and rebates at the time we recognize DEXTENZA product sales revenue and reduce the accrual when payments are made or credits are granted. Our chargebacks are related to a pharmaceutical pricing agreement, a federal supply schedule agreement, a 340B prime vendor agreement, a Medicaid drug rebate agreement and beginning in 2020, rebates under our purchase volume-discount programs.
Distribution Fees and Product Return Allowances
We pay our wholesalers a distribution fee for services they perform for us based on the dollar value of their purchases of DEXTENZA. We record a provision for these charges as a reduction to revenue at the time of sale to the wholesaler and we issue a credit memo to the wholesaler against its outstanding receivable to us.
We record a provision for returns upon sale of DEXTENZA to our wholesaler. When a return or claim is received, we issue a credit memo to the wholesaler and reduce the corresponding liability.
Net Revenue
We generated $17.4 million of revenue during the year ended December 31, 2020 from sales of our products, of which $15.7 million was attributable to sales of DEXTENZA and $1.7 million was attributable to sales of ReSure
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Sealant. We generated $4.2 million of product revenue during the year ended December 31, 2019, of which $2.2 million was attributable to DEXTENZA and $2.0 million was attributable to sales of ReSure Sealant during the year ended December 31, 2019. We began to recognize product revenue from DEXTENZA during the second quarter of 2019 with the first commercial shipments to customers in June 2019. The growth in revenue for DEXTENZA was due to increased market acceptance and commercialization efforts during 2020.
Research and Development Expenses
Year Ended
December 31,
Increase
2020
2019
(Decrease)
(in thousands)
Direct research and development expenses by program:
OTX-TKI for wet AMD
$
1,534
$
1,013
$
521
OTX-TIC for glaucoma or ocular hypertension
924
726
198
OTX-CSI for treatment of dry eye disease
1,389
—
1,389
OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease
111
—
111
DEXTENZA for post-surgical ocular inflammation and pain
1,077
1,039
38
DEXTENZA for ocular itching associated with allergic conjunctivitis
2,296
2,060
236
ReSure Sealant
117
153
(36)
OTX-TP for glaucoma and ocular hypertension
584
1,558
(974)
Preclinical activities
403
1,645
(1,242)
Unallocated expenses:
Personnel costs
11,458
20,068
(8,610)
All other costs
8,801
12,829
(4,028)
Total research and development expenses
$
28,694
$
41,091
$
(12,397)
Research and development expenses were $28.7 million for the year ended December 31, 2020, compared to $41.1 million for the year ended December 31, 2019. The decrease of $12.4 million was primarily due to a decrease of $12.6 million in unallocated expenses. Unallocated research and development costs decreased $12.6 million for the year ended December 31, 2020, compared to the year ended December 31, 2019 primarily due to a decrease in unallocated personnel costs of $8.6 million and $4.0 million in all other costs as a result of the organizational restructuring that took place in November 2019 which reduced personnel and deferred program costs. For the year ended December 31, 2020, we incurred $8.0 million in direct research and development expenses for our product candidates compared to $6.5 million for the year ended December 31, 2019. The increase of $1.5 million is related to timing and start of our various clinical trials for our product candidates. We expect that clinical trial expenses will increase for our product candidates including for OTX-TKI due to the planned initiation of Phase 1 and Phase 2 clinical trials in mid-2021, for OTX-TIC due to the planned initiation of a Phase 2 clinical trial in mid-2021, for OTX-CSI due to the continuation of our Phase 2 clinical trial initiated in 2020, and for OTX-DED due to the initiation of our Phase 2 clinical trial in February 2021.
Selling and Marketing Expenses
Year Ended
December 31,
Increase
2020
2019
(Decrease)
(in thousands)
Personnel related (including stock-based compensation)
$
17331
$
12,382
$
4,949
Professional fees
5,996
9,087
(3,091)
Facility related and other
3,287
3,022
265
Total selling and marketing expenses
$
26,614
$
24,491
$
2,123
Selling and marketing expenses were $26.6 million for the year ended December 31, 2020, compared to $24.5 million for the year ended December 31, 2019. The increase of $2.1 million was primarily due to an increase of $4.9 million in personnel costs, including stock-based compensation as the Company increased the field-based team to
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support the commercial launch of DEXTENZA, partially offset by a decrease of $3.1 million in professional fees including consulting, trade shows, and conferences.
We expect our selling and marketing expenses to increase in 2021 and beyond, as we continue to support the commercial launch of DEXTENZA and, if our sNDA is approved, support the planned commercial launch of DEXTENZA for ocular itching associated with allergic conjunctivitis in the first half of 2022.
General and Administrative Expenses
Year Ended
December 31,
Increase
2020
2019
(Decrease)
(in thousands)
Personnel related (including stock-based compensation)
$
11,688
$
11,352
$
336
Professional fees
8,886
8,257
629
Facility related and other
2,285
2,513
(228)
Total general and administrative expenses
$
22,859
$
22,122
$
737
General and administrative expenses were $22.9 million for the year ended December 31, 2020, compared to $22.1 million for the year ended December 31, 2019. The increase of $0.7 million was primarily due to an increase of $0.6 million in professional fees.
Other Income (Expense), Net
Other expense, net was $92.8 million for the year ended December 31, 2020, compared to $0.6 million for the year ended December 31, 2019. The change of $92.2 million, was due to an unrealized loss of $86.2 million on the change in fair value of the derivative liability associated with the 2026 Convertible Notes and lower interest income of $1.1 million. The change in fair value of the derivative liability was a loss in the amount of $86.2 million in 2020 as compared to a gain of $4.3 million during the year ended December 31, 2019 due changes in the underlying assumptions of the derivative liability, primarily related to an increase in our common stock price between December 31, 2020 and 2019. We expect the change in fair value of the derivative liability will continue to fluctuate until it is settled based on the extent changes occur in the underlying assumptions.
Liquidity and Capital Resources
Since inception, we have incurred significant operating losses. Our net losses were $155.6 million and $86.4 million, for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had an accumulated deficit of $539.3 million.
We have generated limited revenue to date. In 2014, we began recognizing revenue from sales of ReSure Sealant. We commercially launched DEXTENZA for post-surgical ocular inflammation and pain in July 2019. All of our other sustained drug delivery products are in various phases of clinical and preclinical development. Our ability to generate product revenues sufficient to achieve profitability will depend heavily on our continued commercialization of DEXTENZA for the treatment of ocular inflammation and pain following ophthalmic surgery and our obtaining marketing approval for and commercializing other products with significant market potential, including DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis, OTX-TKI for wet AMD, OTX-TIC for glaucoma or ocular hypertension, and OTX-CSI and OTX-DED for dry eye disease. While it is difficult to predict the extent or duration of the impact of the global COVID-19 pandemic on future financial results, we anticipate current guidelines and recommendations from the global health authorities, including the delay of elective surgeries, will impact revenue in 2021.
Through December 31, 2020, we have financed our operations primarily through private placements of our preferred stock, public offerings of our common stock, private placements of our convertible notes and borrowings under credit facilities, which has resulted in net proceeds of $637.2 million to us. As described above, we issued and sold an aggregate of 21,949,841 shares of our common stock in the May 2020 Offering, the October 2020 Offering, and the December 2020 Offering. We received net proceeds from these offerings of approximately $210.0 million, after deducting underwriting discounts and commissions and offering expenses .
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In April 2019, we entered into the 2019 Sales Agreement with Jefferies, acting as agent, for the issuance of up to $50.0 million of our common stock. Through March 1, 2021, we have sold 10,321,840 shares of common stock under the 2019 Sales Agreement, resulting in net proceeds of approximately $47.0 million after commissions and expenses. We have $1.3 million available for issuance as of March 1, 2021.
On March 2019, we issued $37.5 million of the 2026 Convertible Notes. The 2026 Convertible Notes accrue interest at an annual rate of 6% of its outstanding principal amount, payable in cash at maturity on March 1, 2026, unless earlier converted, repurchased or redeemed. The holders of the 2026 Convertible Notes may convert all or part of the outstanding principal amount of their 2026 Convertible Notes into shares of our common stock, par value $0.0001 per share, prior to maturity and provided that no conversion results in a holder beneficially owning more than 19.99% of our issued and outstanding common stock. The conversion rate is initially 153.8462 shares of our common stock per $1,000 principal amount of the 2026 Convertible Notes, which is equivalent to an initial conversion price is $6.50 per share. The conversion rate is subject to adjustment in customary circumstances such as stock splits or similar changes to our capitalization, none of which have occurred to date.
In April 2014, we borrowed $15.0 million in aggregate principal amount under our Credit Facility and used $1.9 million of this amount to repay $1.7 million aggregate principal amount of indebtedness and pay $0.2 million of other amounts due in connection with our termination of a prior credit facility. In December 2015, we amended the Credit Agreement to increase the aggregate principal amount borrowed under our Credit Facility to $15.6 million, extend the interest-only payment period through December 2016, and extend the maturity date to December 1, 2019. In March 2017, we amended the Credit Agreement to increase the aggregate principal amount borrowed under our Credit Facility to $18.0 million and extend the interest only period through February 1, 2018 and extend the maturity date to February 1, 2020. In December 2018, we amended the Credit Agreement to increase the aggregate principal amount borrowed under our Credit Facility to $25.0 million, extend the interest-only payment period through December 2020 and extend the to maturity to date to December 2023. Amounts borrowed under the Credit Agreement are at a LIBOR base rate, subject to a 2.00% floor, plus 7.25%. As of December 31, 2020, the interest rate was 9.25%. In addition, a final payment (exit fee) equal to 3.5% of amounts drawn under the Credit Facility is due upon maturity. If we elect to prepay amounts borrowed under the Credit Agreement, we would also owe a prepayment fee of 2.00% of amounts prepaid until December 2021 or 1.00% of amounts prepaid thereafter. See “—Contractual Obligations and Commitments” for additional information.
As of December 31, 2020, we had cash and cash equivalents of $228.1 million, notes payable of $25.0 million face value and senior subordinated convertible notes of $37.5 million par value, plus accrued interest of $4.2 million.
Cash Flows
Based on our current plans and forecasted expenses, which includes estimates related to anticipated cash inflows from DEXTENZA and ReSure Sealant product sales and cash outflows from operating expenses, we believe that our existing cash and cash equivalents, as of December 31, 2020, will enable us to fund our planned operating expenses, debt service obligations and capital expenditure requirements through 2023. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.
The following table summarizes our sources and uses of cash for each of the periods presented:
Year Ended December 31,
2020
2019
(in thousands)
Cash used in operating activities
$
(53,554)
$
(77,578)
Cash used in investing activities
(841)
(2,238)
Cash provided by financing activities
228,014
75,341
Net increase in cash and cash equivalents
$
173,620
$
(4,475)
Operating activities. Net cash used in operating activities was $53.6 million for the year ended December 31, 2020, primarily resulting from our net loss of $155.6 million, partially offset by non-cash charges of $100.9 million and cash provided by changes in our operating assets and liabilities of $1.1 million. Our net loss was primarily attributed to research and development activities, selling and marketing costs and our general and administrative expenses partially
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offset by $17.4 million of revenue in the period. Our net non-cash charges during the year ended December 31, 2020 primarily consisted of the change in fair value of the derivative liability of $86.2 million, $7.5 million of stock-based compensation expense, $4.4 million of non-cash interest expense and $2.8 million of depreciation expense. Net cash provided by changes in our operating assets and liabilities during the year ended December 31, 2020 consisted primarily of a $12.0 million in deferred revenue partially offset by the change in the working capital accounts and a $9.7 million increase in accounts receivable.
Net cash used in operating activities was $77.6 million for the year ended December 31, 2019, primarily resulting from our net loss of $86.4 million, partially offset by non-cash charges of $10.7 million and cash provided by changes in our operating assets and liabilities of $1.9 million. Our net loss was primarily attributed to research and development activities, selling and marketing costs and our general and administrative expenses partially offset by $4.2 million of revenue in the period. Our net non-cash charges during the year ended December 31, 2019 primarily consisted of $8.8 million of stock-based compensation expense, $2.5 million of depreciation expense and non-cash interest expense partially offset by the change in fair value of the derivative liability of $4.3 million. Net cash provided by changes in our operating assets and liabilities during the year ended December 31, 2019 consisted primarily of a $1.7 million increase in accrued expenses and deferred rent and a $2.3 million increase in accounts receivable.
Investing activities. Net cash used in investing activities was $0.8 million for the year ended December 31, 2020, consisting of cash used to purchase property and equipment. Net cash used in investing activities was $2.2 million for the year ended December 31, 2019, consisting of cash used to purchase property and equipment.
Financing activities. Net cash provided by financing activities for 2020 was $228.0 million and consisted primarily of proceeds from the May 2020 Offering, the October 2020 Offering and the December 2020 Offering of an aggregate of $210.0 million, net of underwriting discounts and commissions and offering expenses; proceeds from sales under the 2019 Sales Agreement of $14.4 million, net of commissions and other offering expenses; proceeds from the exercise of stock options of $2.6 million; and proceeds from issuance of common stock pursuant to our employee stock purchase plan of $0.8 million.
Net cash provided by financing activities for 2019 was $75.3 million and consisted primarily of proceeds from the 2026 Convertible Notes of $37.3 million and the 2016 Sales Agreement of $4.9 million, net of commissions and other offering expenses and the 2019 Sales Agreement of $32.6 million, net of commissions and other offering expenses.
Funding Requirements
We expect to continue to incur losses in connection with our ongoing activities, particularly as we advance the clinical trials of our products in development and increase our sales and marketing resources to support the DEXTENZA launch and the potential launch of our product candidates, subject to receiving FDA approval.
We anticipate we will incur substantial expenses if and as we:
● continue to commercialize DEXTENZA in the United States;
● continue to develop and expand our sales, marketing and distribution capabilities for DEXTENZA and any of our products or product candidates;
● continue to pursue the clinical development of DEXTENZA for additional indications;
● continue ongoing clinical trials of our product candidates OTX-TKI, OTX-TIC, OTX-CSI and OTX-DED;
● initiate planned Phase 2 clinical trials for our product candidates OTX-TKI and OTX-TIC;
● conduct joint research and development under our strategic collaboration with Regeneron , for the development and potential commercialization of products containing our extended-delivery hydrogel formulation in combination with Regeneron’s large molecule , VEGF-targeting compounds to treat retinal diseases;
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● conduct research and development activities on, and seek regulatory approvals for, DEXTENZA and OTX-TIC in certain Asian countries pursuant to our license agreement and collaboration with AffaMed Therapeutics Limited, or AffaMed;
● continue the research and development of our other product candidates;
● seek to identify and develop additional product candidates, including through additional preclinical development activities associated with our front-of-the-eye and back-of-the-eye programs and potential opportunities outside the field of ophthalmology;
● seek marketing approvals for any of our product candidates that successfully complete clinical development;
● scale up our manufacturing processes and capabilities to support sales of commercial products, our ongoing clinical trials of our product candidates and commercialization of any of our product candidates for which we obtain marketing approval, and expand our facilities to accommodate this scale up and any corresponding growth in personnel;
● renovate our existing facilities including research and development laboratories, manufacturing space and office space;
● maintain, expand and protect our intellectual property portfolio;
● expand our operational, financial and management systems and personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company;
● defend ourselves against legal proceedings;
● increase our product liability and clinical trial insurance coverage as we expand our clinical trials and commercialization efforts; and
● continue to operate as a public company.
Based on our current plans and forecasted expenses, which includes estimates related to anticipated cash inflows from DEXTENZA and ReSure Sealant product sales and cash outflows from operating expenses, we believe that our existing cash and cash equivalents, as of December 31, 2020, will enable us to fund our planned operating expenses, debt service obligations and capital expenditure requirements through 2023. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.
Our future capital requirements will depend on many factors, including:
● our ability to continue to commercialize and sell DEXTENZA in the United States;
● the costs, timing and outcome of regulatory review of our product candidates by the FDA, the EMA or other regulatory authorities;
● the level of product sales from DEXTENZA and any additional products for which we obtain marketing approval in the future;
● the costs of manufacturing, sales, marketing, distribution and other commercialization efforts with respect to DEXTENZA and any additional products for which we obtain marketing approval in the future;
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● the costs of expanding our facilities to accommodate our manufacturing needs and headcount;
● the progress, costs and outcome of our planned and ongoing clinical trials of our extended-delivery drug delivery product candidates, in particular DEXTENZA for additional indications, OTX-TIC for the treatment of glaucoma or ocular hypertension, OTX-TKI for the treatment of wet AMD, OTX-CSI for the chronic treatment of dry eye disease, and OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease;
● the scope, progress, costs and outcome of preclinical development and clinical trials of our other product candidates;
● the extent of our debt service obligations and our ability, if desired, to refinance any of our existing debt on terms that are more favorable to us;
● the amounts we are entitled to receive, if any, from Regeneron as potential option exercise fees, development, regulatory and sales milestone payments and royalty payments and the amounts we are obligated to pay to Regeneron as reimbursement if it chooses to exercise its option to advance a product candidate under our collaboration agreement;
● the amounts we are entitled to receive, if any, from AffaMed as reimbursements for clinical trial expenditures, development, regulatory, and sales milestone payments, and royalty payments under our license agreement with AffaMed;
● the extent to which we choose to establish additional collaboration, distribution or other marketing arrangements for our products and product candidates;
● the costs and outcomes of legal actions and proceedings;
● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and
● the extent to which we acquire or invest in other businesses, products and technologies.
Until such time, if ever, as we can generate product revenues sufficient to achieve profitability, we expect to finance our cash needs through equity offerings, debt financings, government or other third-party funding, collaborations, strategic alliances, licensing arrangements, royalty agreements, and marketing and distribution arrangements. We do not have any committed external source of funds, although our collaboration agreement with Regeneron provides for Regeneron’s reimbursement of certain preclinical expenses incurred by us under our collaboration agreement and for our potential receipt of option exercise, development, regulatory and sales milestone payments and royalty payments and our license agreement with AffaMed provides for AffaMed’s reimbursement of certain clinical expenses incurred by us in connection with our collaboration and for our potential receipt of development and sales milestone payments as well as royalty payments. To the extent that we raise additional capital through the sale of equity or convertible debt securities, each security holder’s ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect each security holder’s rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. The covenants under our existing Credit Agreement, the pledge of our assets as collateral limit our ability to obtain additional debt financing. If we raise additional funds through government or other third-party funding, collaborations, strategic alliances, licensing arrangements, royalty agreements, or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. In addition, the COVID-19 pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could adversely impact our ability to raise additional funds through equity or debt financings. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate
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our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.
Since our inception in 2006, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2020, we had net operating loss, or NOL, carryforwards for federal and state income tax purposes of $354.7 million and $274.9 million, respectively. The federal and state NOLs generated for annual periods prior to January 1, 2018 begin to expire in 2026. Our federal NOLs generated for the years ended after December 31, 2018, which amounted to a total of $229.1 million, can be carried forward indefinitely. As of December 31, 2020, we also had available research and development tax credit carryforwards for federal and state income tax purposes of $9.2 million and $5.0 million , respectively, which begin to expire in 2026 and 2025, respectively. We have not completed a study to assess whether an ownership change, generally defined as a greater than 50% change (by value) in the equity ownership of our corporate entity over a three-year period, has occurred or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated with such studies. Accordingly, our ability to utilize our tax carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be utilized against future taxes. As a result, we may not be able to take full advantage of these carryforwards for federal and state tax purposes.
Contractual Obligations and Commitments
Less Than
1 to 3
3 to 5
More than
Total
1 Year
Years
Years
5 Years
(in thousands)
Operating lease commitments
$
12,770
$
2,483
4,905
4,498
884
Credit Agreement
29,683
10,427
19,256
—
—
2026 Convertible Notes
53,475
—
—
53,475
—
Total
$
95,928
$
12,910
$
24,161
$
57,973
$
884
The table above includes our enforceable and legally binding obligations and future commitments at December 31, 2020, as well as obligations related to contracts that we are likely to continue, regardless of the fact that they may be cancelable at December 31, 2020. Some of the figures that we include in this table are based on management’s estimates and assumptions about these obligations, including their duration, and other factors. Because these estimates and assumptions are necessarily subjective, the amounts we will actually pay in future periods may vary from those reflected in the table.
We enter into contracts in the normal course of business to assist in the performance of our research and development activities and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included contractual obligations and commitments.
Operating lease commitments represent payments due under our leases of office, laboratory and manufacturing space in Bedford, Massachusetts and certain office equipment under operating leases that expire in July 2023, March 2024 and July 2027. We expect lease costs under these commitments to total $2.5 million in 2021 and increase annually. We expect total costs of approximately $12.8 million over the terms of our current leases.
Under our Credit Agreement, we have been permitted to make interest-only payments since December 2018. Commencing in January 2021, we are required to make 36 equal monthly installments of principal in the amount of $0.7 million, plus interest, through December 2023.
On March 2019, we issued the 2026 Convertible Notes pursuant to a note purchase agreement, or the Purchase Agreement, with Cap 1 LLC, an affiliate of Summer Road LLC . The 2026 Convertible Notes accrue interest at an annual rate of 6% of its outstanding principal amount, payable at maturity, on March 1, 2026, unless earlier converted, repurchased or redeemed. The holders of the 2026 Convertible Notes may convert all or part of the outstanding principal amount of their 2026 Convertible Notes into shares of our common stock, par value $0.0001 per share, prior to maturity and provided that no conversion results in a holder beneficially owning more than 19.99% of our issued and outstanding common stock. The conversion rate is initially 153.8462 shares of our common stock per $1,000 principal amount of the 2026 Convertible Notes, which is equivalent to an initial conversion price is $6.50 per share. The conversion rate is
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subject to adjustment in customary circumstances such as stock splits or similar changes to our capitalization. At our election, we may choose to make such conversion payment in cash, in shares of common stock, or in a combination thereof. Upon any conversion of any 2026 Convertible Note, we are obligated to make a cash payment to the holder of such 2026 Convertible Note for any interest accrued but unpaid on the principal amount converted. Upon the occurrence of a Corporate Transaction (as defined in the 2026 Convertible Notes), the holder of a 2026 Convertible Note is entitled, at such holder’s option, to convert all of the outstanding principal amount of the 2026 Convertible Note in accordance with the foregoing and receive an additional, “make-whole” cash payment in accordance with a table set forth in each 2026 Convertible Note.
Upon the occurrence of a Corporate Transaction, each holder of a 2026 Convertible Note has the option to require us to repurchase all or part of the outstanding principal amount of such 2026 Convertible Note at a repurchase price equal to 100% of the outstanding principal amount of the 2026 Convertible Note to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date.
On or after March 1, 2022, if the last reported sale price of the common stock has been at least 130% of the conversion rate then in effect for twenty of the preceding thirty trading days (including the last trading day of such period), we are entitled, at our option, to redeem all or part of the outstanding principal amount of the 2026 Convertible Notes, on a pro rata basis, at an optional redemption price equal to 100% of the outstanding principal amount of the 2026 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the optional redemption date.
The Purchase Agreement contains customary representations and warranties by us and the noteholder. The Purchase Agreement does not include any financial covenants. Our obligations under the Purchase Agreement and the 2026 Convertible Notes are subject to acceleration upon the occurrence of specified events of default, including a default or breach of certain contracts material to us and the delisting and deregistration of our common stock.
We have in-licensed a significant portion of our intellectual property from Incept, an intellectual property holding company, under an amended and restated license agreement, or the License Agreement, that we entered into with Incept in January 2012, which was most recently amended in September 2018. We are obligated to pay Incept a royalty equal to a low-single-digit percentage of net sales made by us or our affiliates of any products , devices, materials, or components thereof, or the Licensed Products, including or covered by Original IP (as defined in the License Agreement), excluding the Shape-Changing IP (as defined in the License Agreement), in the Ophthalmic Field of Use (as defined in the License Agreement). We are obligated to pay Incept a royalty equal to a mid-single-digit percentage of net sales made by us or our affiliates of any Licensed Products including or covered by Original IP, excluding the Shape-Changing IP, in the Additional Field of Use (as defined in the License Agreement). We are obligated to pay Incept a royalty equal to a low-single-digit percentage of net sales made by us or our affiliates of any Licensed Products including or covered by Incept IP (as defined in the License Agreement) or Joint IP (as defined in the License Agreement) in the field of drug delivery. Any sublicensee of ours also will be obligated to pay Incept a royalty on net sales of Licensed Products made by it and will be bound by the terms of the agreement to the same extent as we are. We are obligated to reimburse Incept for our share of the reasonable fees and costs incurred by Incept in connection with the prosecution of the patent applications licensed to us under the agreement. Our share of these fees and costs is equal to the total amount of such fees and costs divided by the total number of Incept’s exclusive licensees of the patent application. We have not included in the table above any payments to Incept under this license agreement as the amount, timing and likelihood of such payments are not known.
In October 2016, we entered into the Collaboration Agreement with Regeneron. If the Option is exercised, Regeneron will be obligated to 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 $25.0 million, which cap may be increased by up to $5.0 million under certain circumstances. We have not included in the table above any payments to Regeneron under this Collaboration Agreement as the timing of such payments are not known. Regeneron will be responsible for funding an initial preclinical tolerability study, which Regeneron initiated in early 2018. We do not expect our funding requirements under our collaboration with Regeneron 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. On May 8, 2020, we entered into an amendment (the “Regeneron Amendment”) to the Collaboration Agreement. Pursuant to the Regeneron Amendment, we and Regeneron have adopted a new workplan to transition joint efforts under the Collaboration Agreement to the research and development of an extended-delivery formulation of aflibercept to be delivered to the suprachoroidal space. Regeneron has agreed to pay
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our personnel and material costs for specified preclinical development activities in connection with the revised workplan, as well as certain other costs. In addition, the Regeneron Amendment provides for the modification of the terms of the Option previously granted to Regeneron under the Collaboration Agreement.
On October 29, 2020, we entered into the License Agreement with AffaMed. Pursuant to the terms of the License Agreement, we are generally responsible for expenses related to the development and commercialization of DEXTENZA regarding ocular inflammation and pain following cataract surgery and allergic conjunctivitis, or collectively, the DEXTENZA Field, and for OTX-TIC, or collectively with DEXTENZA, the AffaMed Licensed Products, regarding open-angle glaucoma and ocular hypertension, or collectively, the TIC Field and, with the DEXTENZA Field, each a Field, in each case in mainland China, Taiwan, Hong Kong, Macau, South Korea, and the countries of the Association of Southeast Asian Nations, or collectively, the Territories, provided that AffaMed (i) reimburse us a low-teen percentage of expenses incurred in connection with certain clinical trials conducted by us and designed to support marketing approval of the AffaMed Licensed Product by FDA or the European Medicines Agency, or the Global Studies; (ii) is solely responsible for expenses incurred in connection with territory-specific clinical trials that it conducts in furtherance of the development plan agreed between the parties in the applicable Fields in the Territories, or the Local Studies; and (iii) reimburse us in full for expenses incurred in connection with obtaining and maintaining regulatory approvals of the AffaMed Licensed Products in the applicable Fields in the Territories. In the event AffaMed declines to participate in a Global Study or to conduct a Local Study in any jurisdiction in which we determine to conduct such a study, we are relieved of our obligation to provide AffaMed clinical data from such study, other than safety data, unless AffaMed subsequently reimburses us in the amounts described above plus a prespecified premium.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission, such relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that are not required to be reflected on our balance sheets.
Recently Issued Accounting Pronouncements
Information regarding new accounting pronouncements is included in Note 2 – Summary of Significant Accounting Policies to the current period’s consolidated financial statements.
Smaller Reporting Company Status
We are a “smaller reporting company,” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. We would cease to be a smaller reporting company if we have a non-affiliate public float in excess of $250 million and annual revenues in excess of $100 million, or a non-affiliate public float in excess of $700 million, determined on an annual basis. As a smaller reporting company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not smaller reporting companies. These exemptions include:
● being permitted to provide only two years of audited consolidated financial statements in this Annual Report on Form 10-K, with correspondingly reduced “Management's Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
● reduced disclosure obligations regarding executive compensation; and
● not being required to furnish a contractual obligations table in “Management's Discussion and Analysis of Financial Condition and Results of Operations”; and
● not being required to furnish a stock performance graph in our annual report.
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We expect to continue to take advantage of some or all of the available exemptions as long as we continue to qualify as a smaller reporting company. We may cease to qualify as a smaller reporting company as early as June 30, 2021, which would require us to comply with disclosure requirements that are applicable to other public companies that are not smaller reporting companies following the filing of our Annual Report on Form 10-K for the year ending December 31, 2021, and any portions of our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders incorporated by reference therein.