Item 2. Management’s Discussion and Analysis
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 condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2021. 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 and should be read together with the “Risk Factors” section of this Quarterly Report on Form 10-Q for a discussion of important factors that could cause actual results to differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
We are a biopharmaceutical company focused on the formulation, development and commercialization of innovative therapies for diseases and conditions of the eye using our proprietary, bioresorbable hydrogel 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 focus our development efforts on incorporating 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 dry eye disease. 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 as well as ocular itching associated with allergic conjunctivitis, and ReSure ® Sealant, an ophthalmic device designed to prevent wound leaks in corneal incisions following cataract surgery.
Our core pipeline assets include four programs in clinical development:
● OTX-TKI, an intravitreal implant, administered by fine-gauge needle, of a hydrogel, anti-angiogenic formulation of axitinib, a tyrosine kinase inhibitor, or TKI, for the treatment of wet AMD;
● OTX-TIC, a travoprost intracameral implant for the reduction of intraocular pressure, or IOP, in patients with primary open-angle glaucoma or ocular hypertension;
● 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.
Additionally, in June 2021, we entered into an agreement with Mosaic Biosciences, Inc., or Mosaic, to identify new targets and discover novel therapeutic agents aimed at the treatment of dry age-related degeneration, or dAMD.
Retinal Disease Program
We are engaged in the development of formulations of our hydrogel administered via intravitreal injection to address large markets for diseases and conditions of the back of the eye which we believe have significant growth potential. Our initial development efforts for our retinal disease programs have focused on the use of our extended-delivery hydrogel in combination with anti-angiogenic drugs, such as TKIs or protein-based anti-VEGF drugs, for the treatment of retinal diseases such as wet AMD; diabetic macular edema, or DME; and retinal vein occlusion, or RVO. Our initial goal for these programs is to provide extended delivery for at least six months, thereby reducing the
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frequency of the current monthly or bi-monthly immediate release intravitreal anti-VEGF injection regimens for wet AMD and other retinal diseases.
OTX-TKI (axitinib intravitreal implant)
Our product candidate OTX-TKI is a preformed, bioresorbable hydrogel fiber implant incorporating a small molecule tyrosine kinase inhibitor, or TKI, axitinib, with anti-angiogenic properties delivered by intravitreal injection into the back of the eye and designed for a duration of six months or longer. TKIs have shown promise in the treatment of wet AMD. In the first quarter of 2019, we began dosing patients in a multi-center, open-label, dose-escalation Phase 1 clinical trial in Australia designed to evaluate the safety, durability and tolerability of OTX-TKI. We are evaluating biological activity by measuring retinal thickness using spectral domain optical coherence tomography, or OCT, and following visual acuity over time. We have enrolled three cohorts to date: a lower dose cohort of 200 µg with six subjects, a higher dose cohort of 400 µg with seven subjects, and a third cohort with two parallel arms, one arm of six subjects receiving a concomitant anti-VEGF injection with 400 µg of OTX-TKI and the other arm of six subjects receiving a 600 µg of OTX-TKI with no anti-VEGF injection. We have also begun to actively enroll a fourth cohort with two parallel arms, one arm of six subjects receiving 600 µg single implant of OTX-TKI and the other arm of six subjects receiving a 600 µg single implant of OTX-TKI with anti-VEGF injection.
On May 5, 2021 at the Association for Research in Vision and Ophthalmology (ARVO) annual meeting, Dr. James Wong presented interim data from the Phase 1 clinical trial. In the Phase 1 clinical trial, OTX-TKI was observed to have a generally favorable safety profile, with no reported ocular serious adverse events. Some subjects in the Phase 1 clinical trial have shown a decrease in intraretinal or subretinal fluid by two months, and interim data suggest that OTX-TKI might have an extended duration of action beyond that of the current standard of care. In addition, the implants in the first cohort consistently bio-resorbed by nine to ten and a half months. The observation of implant location suggests limited movement.
On July 29, 2021, we announced the initiation of a prospective, multi-center, randomized, controlled Phase 1 clinical trial in the United States under an exploratory investigational new drug, or eIND, application to evaluate a single implant 600 µg dose of OTX-TKI with an anti-VEGF injection in comparison with a 2 mg dose of aflibercept. The trial will consist of 20 patients in two arms: a fifteen-subject arm that will receive OTX-TKI in combination with an anti-VEGF injection and a five-subject arm that will receive aflibercept at eight week intervals. The trial is designed to assess the safety, durability and tolerability of OTX-TKI as well as to assess preliminary biological activity in subjects by measuring anatomical and functional changes. At a pre-investigational new drug, or pre-IND, application meeting in April 2021, we discussed with the FDA the possibility of transitioning from an eIND application to a traditional investigational new drug application.
As of July 2021, we no longer intend to initiate a Phase 2 clinical trial in Australia to compare tolerability, durability and efficacy of the administration of a single implant 600 µg dose of OTX-TKI with an anti-VEGF injection to a 2 mg dose of aflibercept dosed every 8 weeks as the comparator. Pending our receipt and review of the topline data from both the Phase 1 clinical trial in Australia and the Phase 1 clinical trial in the United States, we plan to initiate a Phase 2 clinical trial.
Glaucoma Program
Our development efforts for our glaucoma program have focused on the use of our extended-delivery hydrogel in combination with travoprost, an FDA-approved prostaglandin analog designed to lower elevated IOP. Our initial goal for this program is to provide extended delivery over at least four months with a single treatment.
OTX-TIC (travoprost intracameral implant)
Our product candidate OTX-TIC is a bioresorbable hydrogel implant incorporating travoprost that is designed to be administered by a physician as an intracameral injection with an initial target duration of drug release of four to six months. We have completed a multi-center, open-label, dose-escalation, proof-of-concept Phase 1 clinical trial to evaluate the safety, biological activity, durability and tolerability of OTX-TIC compared to current standard of care, topical travoprost (eye drops), in patients with primary open-angle glaucoma or ocular hypertension. The trial consisted of four patient cohorts: cohort 1 was 5 subjects who received a 15 µg dose, cohort 2 was 4 subjects who received a 26
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µg dose, cohort 3 was 5 subjects who received a 15 µg with a fast-degrading implant, and cohort 4 was 5 subjects who received a 5 µg with a fast-degrading implant.
We presented interim data on all four patient cohorts at the Glaucoma360 Virtual Conference in January 2021 and presented incremental data in May 2021 at the ARVO annual meeting. In this Phase 1 clinical trial, with a single implant, several subjects were able to achieve a decrease in IOP at least as large as that of the current standard of care. Many subjects exhibited an IOP-lowering effect of more than six months in cohorts 1 and 2 and between three and six months in cohorts 3 and 4, the cohorts in which the fast-degrading implant was used. In the clinical trial, OTX-TIC was observed to have a generally favorable safety profile, with no reported ocular serious adverse events. Corneal health, as measured by endothelial cell counts, pachymetry assessments and slit lamp examinations did not indicate a clinically meaningful change from baseline.
In the fourth quarter of 2021, we plan to initiate a randomized, double-masked, active-controlled Phase 2 clinical trial in which we plan to enroll approximately 105 subjects to evaluate two formulations for the treatment of glaucoma or ocular hypertension in patients compared to Durysta™. Certain subjects in the Phase 2 clinical trial will receive the same formulation used in cohort 1 of the Phase 1 clinical trial, containing a 26 µg dose of drug and utilizing a standard implant, and others will receive the same formulation used in cohort 4 of the Phase 1 clinical trial, containing a 5 µg dose of drug and utilizing a fast-degrading implant. The non-study eye of each patient will receive a topical prostaglandin daily.
Ocular Surface Disease Programs
We are engaged in the development of formulations of our hydrogel administered via intracanalicular inserts to address large markets for diseases and conditions of the surface of the eye. Our next development efforts for these programs are focused on the use of our extended-delivery hydrogel in combination with well-known and well-understood drugs (cyclosporine and corticosteroids) for the treatment of dry eye disease.
Dry Eye Disease
OTX-CSI (cyclosporine intracanalicular insert)
Our product candidate OTX-CSI (cyclosporine intracanalicular insert) incorporates the FDA-approved immunomodulator cyclosporine as a preservative-free active pharmaceutical ingredient into a hydrogel, drug-eluting intracanalicular insert. The product candidate is designed for a duration of three to four months for patients suffering from moderate to severe dry eye and to be administered by a physician as a bioresorbable intracanalicular insert.
In October 2020, we reported topline data from our five subject Phase 1 clinical trial evaluating OTX-CSI in the treatment of dry eye disease. All subjects completed the 16-week study period with no drop-outs. There were no serious adverse effects reported. The inserts were observed to be generally well-tolerated, and there were no adverse events of stinging, irritation, blurred vision or tearing reported or observed.
In October 2021, we announced topline results from our Phase 2 clinical trial of OTX-CSI for the treatment of dry eye disease. The Phase 2, U.S.-based, randomized, double-masked, multi-center, vehicle-controlled clinical trial of OTX-CSI was designed to evaluate safety, tolerability, durability, and efficacy of two different formulations of OTX-CSI by measuring signs and symptoms of dry eye disease in 140 subjects treated in both eyes over approximately 16 weeks (a 12-week study period, with an additional 4-week safety follow-up). In the Phase 2 clinical trial, OTX-CSI was administered to 147 subjects with dry eye disease at 15 sites in the United States. The four groups evaluated in this study were: OTX-CSI for a shorter duration (2-3 months formulation-F1, n=42), OTX-CSI for a longer duration (3-4 months formulation-F2a, n=40), vehicle insert for a longer duration (3-4 months formulation-F2b, n=43) and vehicle insert for a very short duration (1 week formulation-F3, n=22). The study did not show separation between the OTX-CSI treated subjects (both formulations) and the vehicle treated subjects (both formulations) for the primary endpoint of increased tear production at 12 weeks as measured by the Schirmer’s Test. Change from baseline (improvement) in mean Schirmer’s Test scores for the four groups were as follows: OTX-CSI F1: 1.98 mm, OTX-CSI F2a: 1.91 mm, Vehicle F2b: 2.24 mm and Vehicle F3: 3.08 mm.
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The clinical trial did show an improvement compared with baseline in signs of dry eye disease as measured by total corneal fluorescein staining (CFS) and symptoms of dry eye disease as measured by the visual analogue scale (VAS) eye dryness in subjects treated with the OTX-CSI insert (both formulations) starting as early as two weeks after insertion and continuing over the 12 weeks study period. These improvements were not statistically significant compared with vehicle insert (both formulations) for either CFS or VAS eye dryness (severity and frequency) at 12 weeks.
Overall, OTX-CSI (both formulations) was observed to have a generally favorable safety profile and was well tolerated. There were no ocular serious adverse events. No subjects dropped out of the trial due to an adverse event. The most common ocular adverse event was ocular pruritis which was seen in less than 16% of subjects. The adverse events of ocular discomfort or pain were seen in less than 3% of subjects. The most common non-ocular event was COVID-19 and was seen in 3% of subjects.
We intend to review the Phase 2 data for additional information that may inform future development of this program. This will include retention rates of the OTX-CSI inserts, or how long the inserts were observed to remain in the canaliculus, which were lower than anticipated across the active drug groups.
OTX-DED (dexamethasone intracanalicular insert)
Our product candidate OTX-DED incorporates the FDA-approved corticosteroid dexamethasone as a preservative-free active pharmaceutical ingredient in a hydrogel, drug-eluting intracanalicular insert. OTX-DED incorporates the same active drug as DEXTENZA, but it includes a lower dose of the drug, delivers it via a smaller insert, and is designed to release it over a period of two to three weeks, compared with up to 30 days in the case of DEXTENZA. We believe that OTX-DED will address several of the current limitations of existing dry eye disease steroid treatments, including the toxicity associated with preservatives and the potential for abuse of topical steroids.
In February 2021, we dosed the first patient in a U.S.-based prospective, randomized, double-masked, vehicle-controlled Phase 2 clinical trial evaluating the safety and efficacy of two different formulations of OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease compared to a hydrogel insert in approximately 150 subjects. Enrollment of this Phase 2 clinical trial is complete and we currently anticipate receiving topline data from this Phase 2 clinical trial in the first quarter of 2022.
Post-Surgical Ocular Inflammation and Pain
DEXTENZA (dexamethasone ophthalmic insert) 0.4 mg for intracanalicular use for the Treatment of Post-Surgical Ocular Inflammation and Pain
As described above, DEXTENZA incorporates the FDA-approved corticosteroid dexamethasone as a preservative-free active pharmaceutical ingredient into a hydrogel, drug-eluting intracanalicular insert for the treatment of post-surgical ocular inflammation and pain. We commercially launched DEXTENZA in the United States in July 2019. 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.
In September 2020, we announced that we had dosed the first patients in a Phase 3 clinical trial evaluating DEXTENZA for the treatment of post-surgical ocular inflammation and pain in children following cataract surgery. Enrollment is ongoing. This ongoing clinical trial is a post-approval requirement of the FDA in accordance with the Pediatric Research Equity Act of 2003, in connection with the FDA’s prior approval of DEXTENZA for the treatment of inflammation and pain following ophthalmic surgery in adults.
Additionally, we have received proposals for, and are supporting, many investigator-initiated trials evaluating DEXTENZA in different clinical situations. To date, third-party clinical investigators have initiated over 25 trials to study the use of DEXTENZA in cataract surgery, other ophthalmic surgeries and other potential indications. Over ten of the trials have completed enrollment, and the remaining trials are actively enrolling and treated patients are being followed.
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Allergic Conjunctivitis
DEXTENZA (dexamethasone ophthalmic insert) for the Treatment of Ocular Itching Associated with Allergic Conjunctivitis
DEXTENZA, incorporating the corticosteroid dexamethasone, is our FDA-approved intracanalicular insert for the treatment of post-surgical ocular inflammation and pain. We believe that allergic conjunctivitis represents a discrete potential market for DEXTENZA as a physician-administered, hands-free therapy administered in the office setting and designed to release preservative-free dexamethasone to the ocular surface for up to 30 days.
In April 2020, we reported topline results of a 96-subject, third pivotal Phase 3 clinical trial evaluating DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis. DEXTENZA-treated subjects demonstrated a statistically significant (p-value < 0.0001) difference in mean ocular itching scores, compared to vehicle-treated subjects, at all three pre-specified time points.
In October 2021, the FDA approved our supplemental new drug application, or sNDA, for DEXTENZA to include the treatment of ocular itching associated with allergic conjunctivitis as an additional indication. With the approval, DEXTENZA is the first, FDA-approved, physician-administered intracanalicular insert capable of delivering a preservative-free drug for the treatment of ocular itching associated with allergic conjunctivitis with a single administration for up to 30 days. DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis also represents our first indication approved to be administered in a physician’s office during a routine, non-surgical appointment.
The approval of DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis was based on three randomized, multicenter, double-masked, parallel group, vehicle-controlled studies in subjects with a positive history of ocular allergies and positive skin test reaction to perennial and seasonal allergens (n=255). In all three trials, DEXTENZA demonstrated lower mean ocular itching scores compared with the vehicle group at all time points throughout the study duration of up to 30 days. In two of the three studies, a higher proportion of patients had statistically significant reductions in ocular itching on Day 8, at 3 minutes, 5 minutes and 7 minutes post-challenge in the DEXTENZA group compared to the vehicle group. Data for the primary endpoint, ocular itching at Day 8, is shown below for all three studies (scale 0-4 ):
Reduction in Ocular Itching
Clinical Trial 1
Clinical Trial 2
Clinical Trial 3
Dextenza
(N=35)
Vehicle
(N=38)
Difference
(95% CI)
Dextenza
(N=44)
Vehicle
(N=42)
Difference
(95% CI)
Dextenza
(N=48)
Vehicle
(N=48)
Difference
(95% CI)
Visit
Time Point
Least Square Means
Least Square Means
Least Square Means
Day 8
3 min
1.9
2.7
-0.7 (-1.2, -0.3)
2.1
2.3
-0.2 (-0.7, 0.3)
1.8
2.7
-0.9 (-1.2, -0.4)
5 min
2.1
2.8
-0.7 (-1.2, -0.3)
2.1
2.3
-0.2 (-0.8, 0.3)
1.8
2.7
-1.0 (-1.4, -0.6)
7 min
1.9
2.7
-0.8 (-1.2, -0.4)
2.1
2.4
-0.3 (-0.8, 0.3)
1.7
2.7
-1.0 (-1.4, -0.6)
DEXTENZA was observed to have a favorable safety profile and be generally well-tolerated in the allergic conjunctivitis as well as the ocular inflammation and pain clinical populations. The most common ocular adverse events seen in the pooled analysis of the allergic conjunctivitis studies were: increased intraocular pressure (3%), increased lacrimation (1%), eye discharge (1%) and reduced visual acuity (1%). The most common non-ocular adverse reaction that occurred in patients treated with DEXTENZA for allergic conjunctivitis was headache (1%).
An estimated 10 million people in the U.S. annually seek medical attention for the inflammatory response associated with allergic conjunctivitis caused by both seasonal and perennial allergens, representing a discrete market opportunity for DEXTENZA beyond its current use in the surgical setting. We expect to launch DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis in the first half of 2022.
We currently expect to market and sell DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis through our existing sales force. We believe many of the specialists who treat patients for post-surgical pain and inflammation also treat patients suffering from allergic conjunctivitis.
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ReSure Sealant
In 2014, we commercially launched ReSure Sealant in the United States as a device approved to prevent wound leaks in corneal incisions following cataract surgery. In the pivotal clinical trials that formed the basis for FDA approval, ReSure Sealant provided superior wound closure and a better safety profile than sutured closure.
While ReSure Sealant remains commercially available in the United States, commercial and sales support for this product are modest at this time. We have received only limited revenues from ReSure Sealant to date and anticipate only limited sales for the remainder of 2021. We are not currently manufacturing ReSure Sealant in order that we may focus our manufacturing resources to support the further commercialization of DEXTENZA.
AffaMed License Agreement
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, Taiwan, Hong Kong, Macau, South Korea, and the countries of the Association of Southeast Asian Nations . Under the terms of the agreement, we received an upfront payment of $12 million and are eligible to receive development, regulatory and commercial milestone payments and clinical development support payments of up to $91 million in the aggregate, as well as royalties from future product sales. Royalties are tiered and will range from the low teens to low twenty percent range. In return, we agreed to grant AffaMed exclusive rights to develop and commercialize DEXTENZA for the treatment of post-surgical inflammation and pain following ophthalmic surgery and ocular itching in patients with allergic conjunctivitis, and OTX-TIC for the reduction of elevated intraocular pressure in patients with primary open-angle glaucoma or ocular hypertension in specified Asian markets. We retain the right to develop and commercialize DEXTENZA and OTX-TIC in all other global markets.
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 and the nine months ending September 30, 2021. 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 the remainder of 2021 and beyond will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. Management continues to actively monitor this situation and the possible effects on our financial condition, liquidity, operations, suppliers, industry, and workforce. For additional information on risks posed by the COVID-19 pandemic, please see “Part II, Item 1A—Risk Factors—Risks Related to the Coronavirus Pandemic,” included elsewhere in this Quarterly Report on Form 10-Q.
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 as well as ocular itching associated with allergic conjunctivitis, 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, the initiation of our commercialization of DEXTENZA for ocular itching associated with allergic conjunctivitis, and our obtaining marketing approval for and commercializing other products with significant market potential, including OTX-TKI for the treatment of wet AMD, 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. Our net income was $2.7 million for the three months ended September 30,
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2021, and our net loss was $11.9 million for the three months ended September 30, 2020 and $2.7 million and $70.0 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, we had an accumulated deficit of $542.0 million.
Our total costs and operating expenses were $31.7 million and $91.2 million for the three and nine months ended September 30, 2021 including $4.4 million and $13.0 million in non-cash stock-based compensation expense and depreciation and amortization expense, respectively. Our operating expenses have grown as we continue to support the commercial launch of DEXTENZA following its entry into the market in July 2019; pursue the clinical development of OTX-TKI, OTX-TIC, OTX-CSI, and OTX-DED; research and develop our other product candidates; and seek marketing approval for any product candidate for which we obtain favorable pivotal clinical trial results. We expect to incur substantial sales and marketing expenses in connection with the ongoing commercialization of DEXTENZA and that of any of our other product candidates . In addition, we will continue to incur additional costs associated with operating as a public company.
Although we expect to continue 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 September 30, 2021, 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 $641.4 million to us.
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 could 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 aggregate, under the 2019 Sales Agreement, we sold 10,321,840 shares of common stock, resulting in gross net proceeds of approximately $47.1 million after commissions and expenses.
On August 9, 2021, we and Jefferies mutually terminated the 2019 Sales Agreement and entered into another Open Market Sale Agreement SM , or the 2021 Sale Agreement, under which we may offer and sell shares of our common stock having an aggregate offering price of up to $100.0 million from time to time through Jefferies, acting as agent. As of November 7, 2021, we have not sold any shares of our common stock under the 2021 Sales Agreement.
All of our product candidates are designed to be medical-benefit “buy-and-bill” products with associated procedure codes. Products with these characteristics are optimized to be not only attractive to physicians and patients but also to the sites of care that participate in utilization. We primarily derive our product revenues from the sale of DEXTENZA in the United States to a network of specialty distributors, who then sell DEXTENZA to ambulatory surgical centers, or ASCs; hospital out-patient departments, or HOPDs; and physicians’ offices. In addition to distribution agreements with specialty distributors, we enter into arrangements with government payers that provide for government-mandated rebates and chargebacks with respect to the purchase of DEXTENZA. In-market unit sales figures—unit sales from specialty distributors to ASCs and HOPDs—for July, August and September 2021 were 6,924, 9,321 and 8,737 units, respectively. The third month of each quarter typically reflects an increase in in-market unit sales to ASCs under our rebate program, which typically reverts in the following month. In October 2021, our estimated in-market unit sales exceeded 9,600 billable inserts.
We believe that our existing cash and cash equivalents of $179.3 million as of September 30, 2021 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, expenses and reimbursement associated with the commercialization of DEXTENZA, the pace of our research and clinical development programs, and other aspects of our business. We have based our estimate on assumptions that 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 September 30, 2021, 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. In June 2019, we also began to recognize revenue from the sales of DEXTENZA. Following the FDA’s October 2021 approval of our sNDA, we expect to launch DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis, our first in-office indication, in the first half of 2022.
For the three months and nine months ended September 30, 2021, three specialty distributor customers accounted for 44%, 28%, and 16%, and 44%, 26% and 15%, respectively, of our total revenue, and no other customer accounted for more than 10% of our total revenue. At September 30, 2021, three specialty distributor customers accounted for 49%, 27% and 16% of our total accounts receivable and no other customer accounted for more than 10% of our total accounts receivable at September 30, 2021.
For the three and nine months ended September 30, 2020, three specialty distributor customers accounted for 39%, 38% and 10% and 40%, 30% and 12%, respectively, of our total revenue and no other customer accounted for more than 10% of total revenue. At December 31, 2020, three specialty distributor customers accounted for 45%, 33% and 15% of our total accounts receivable and no other customer accounted for more than 10% of our total accounts receivable at December 31, 2020.
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.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:
● employee-related expenses, including salaries, related benefits and payroll taxes, travel and stock-based compensation expense for employees engaged in research and development, clinical and regulatory and other related functions;
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● expenses incurred in connection with the clinical trials of our product candidates, including with the investigative sites that conduct our clinical trials and under agreements with contract research organizations, or CROs;
● expenses relating to regulatory activities, including filing fees paid to the FDA for our submissions for product approvals;
● expenses associated with developing our pre-commercial manufacturing capabilities and manufacturing clinical study materials;
● ongoing research and development activities relating to our core bioresorbable hydrogel technology and improvements to this technology;
● facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities, insurance and supplies;
● costs relating to the supply and manufacturing of product inventory, prior to approval by the FDA or other regulatory agencies of our products; and
● expenses associated with preclinical development activities.
We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites.
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, intellectual property, regulatory, compliance, director and officer insurance costs as well as investor and public relations expenses associated with being a public company.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of salaries and related costs for personnel in selling and marketing functions as well as consulting, advertising and promotion costs. Selling and marketing expenses for DEXTENZA increased in 2021 due to the product’s continued commercialization. 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 and beyond and incur additional marketing expenses in preparation for the planned commercial launch of DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis in the first half of 2022.
Other Income (Expense)
Interest Expense . Interest expense is incurred on our debt. In June 2021, we amended and restated 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, which we refer to as our Credit Facility, to $25.0 million, extend the interest-only payment period to May 1, 2024, and extend the maturity date to at least November 30, 2025.
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In March 2019, we issued $37.5 million of unsecured senior subordinated convertible notes, or the 2026 Convertible Notes. The 2026 Convertible Notes accrue interest at an annual rate of 6% of the outstanding principal amount, payable 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 condensed consolidated statement of operations and comprehensive income (loss) and are presented under the caption change in fair value of derivative liability.
Critical Accounting Policies and Significant Judgments and Estimates
Our condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. The preparation of our condensed consolidated financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
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 11, 2021 and the notes to the financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. There have been no significant changes to our critical accounting policies since the beginning of this fiscal year.
Results of Operations
Comparison of the Three Months Ended September 30, 2021 and 2020
The following table summarizes our results of operations for the three months ended September 30, 2021 and 2020:
Three Months Ended
September 30,
Increase
2021
2020
(Decrease)
(in thousands)
Revenue:
Product revenue, net
$
12,153
$
5,876
$
6,277
Total revenue, net
12,153
5,876
6,277
Costs and operating expenses:
Cost of product revenue
1,310
450
860
Research and development
12,719
6,951
5,768
Selling and marketing
9,576
6,520
3,056
General and administrative
8,077
5,961
2,116
Total costs and operating expenses
31,682
19,882
11,800
Loss from operations
(19,529)
(14,006)
(5,523)
Other income (expense):
Interest income
7
6
1
Interest expense
(1,658)
(1,715)
57
Change in fair value of derivative liability
23,837
3,771
20,066
Total other income (expense), net
22,186
2,062
20,124
Net income (loss)
$
2,657
$
(11,944)
$
14,601
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Gross-to-Net Deductions
We record DEXTENZA product sales net of estimated chargebacks, rebates, distribution fees and product returns. These deductions are generally referred to as gross-to-net deductions. Our total gross-to-net provisions for the three months ended September 30, 2021 and 2020 were 22.2% and 20.7%, respectively, of gross DEXTENZA product sales. In the first quarter of 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.
Net Revenue
We generated $12.2 million of revenue during the three months ended September 30, 2021 from sales of our products, of which $11.9 million was attributable to sales of DEXTENZA and $0.3 million was attributable to sales of ReSure Sealant. We generated $5.9 million of revenue during the three months ended September 30, 2020 from sales of our products, of which $5.4 million was attributable to sales of DEXTENZA and $0.5 million was attributable to sales of ReSure Sealant. We believe the growth in third quarter 2021 revenue over third quarter 2020 for DEXTENZA was primarily due to increased market acceptance and commercialization efforts as well as higher elective surgery volumes at ASCs and HOPDs.
Research and Development Expenses
Three Months Ended
September 30,
Increase
2021
2020
(Decrease)
(in thousands)
Direct research and development expenses by program:
ReSure Sealant
$
—
$
49
$
(49)
DEXTENZA for post-surgical ocular inflammation and pain
445
262
183
DEXTENZA for ocular itching associated with allergic conjunctivitis
2
195
(193)
OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease
1,037
61
976
OTX-TP for glaucoma and ocular hypertension
6
140
(134)
OTX-TIC for glaucoma or ocular hypertension
755
255
500
OTX-TKI for wet AMD
572
303
269
OTX-CSI for treatment of dry eye disease
832
364
468
OTX-AFS for wet AMD, DME and RVO
1
—
1
Preclinical programs
210
119
91
Unallocated expenses:
Personnel costs
5,373
2,777
2,596
All other costs
3,486
2,426
1,060
Total research and development expenses.
$
12,719
$
6,951
$
5,768
Research and development expenses were $12.7 million for the three months ended September 30, 2021, compared to $7.0 million for the three months ended September 30, 2020. The increase of $5.8 million was primarily due to an increase of $3.7 million in unallocated expenses, primarily associated with increased personnel costs of $2.6 million to support the number of clinical related programs, and $2.0 million in clinical related programs. For the three months ended September 30, 2021, we incurred $3.9 million in direct research and development expenses for our product candidates compared to $1.7 million for the three months ended September 30, 2020. The increase of $2.1 million is related to timing and start of our various clinical trials for our product candidates and development activities related to our preclinical programs. We expect that clinical trial expenses will increase for our product candidates including for OTX-TKI due to the recent initiation of our Phase 1 clinical trial in the United States, for OTX-TIC due to the planned initiation of a Phase 2 clinical trial in the fourth quarter of 2021, for OTX-DED due to our ongoing Phase 2 clinical trial initiated in February 2021, and for our ongoing Phase 3 clinical trial to evaluate DEXTENZA in pediatric subjects following cataract surgery in accordance with the FDA’s post-approval requirement. In addition, we are evaluating the further clinical development of OTX-CSI in light of the recently announced topline Phase 2 clinical trial results.
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Selling and Marketing Expenses
Three Months Ended
September 30,
Increase
2021
2020
(Decrease)
(in thousands)
Personnel related (including stock-based compensation)
$
6,173
$
4,487
$
1,686
Professional fees
2,114
1,768
346
Facility related and other
1,289
265
1,024
Total selling and marketing expenses
$
9,576
$
6,520
$
3,056
Selling and marketing expenses were $9.6 million for the three months ended September 30, 2021, compared to $6.5 million for the three months ended September 30, 2020. The increase of $3.0 million was primarily due to an increase of $1.7 million in personnel costs, including stock-based compensation and increase of $1.0 million in facility-related and other costs.
We expect our selling and marketing expenses to increase in the remainder of 2021 and beyond as we continue to support the commercialization of DEXTENZA, including the planned commercial launch of DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis in the first half of 2022.
General and Administrative Expenses
Three Months Ended
September 30,
Increase
2021
2020
(Decrease)
(in thousands)
Personnel related (including stock-based compensation)
$
4,315
$
2,675
$
1,640
Professional fees
3,005
2,116
889
Facility related and other
757
1,170
(413)
Total general and administrative expenses
$
8,077
$
5,961
$
2,116
General and administrative expenses were $8.1 million for the three months ended September 30, 2021, compared to $6.0 million for the three months ended September 30, 2020. The increase of $2.1 million was primarily due to an increase of $1.6 million in personnel costs, including stock-based compensation, and an increase of $0.9 million in professional fees, including legal fees offset by a decrease of $0.4 million in facility related and other costs.
Other Income (Expense), Net
Other expense, net gain was $22.2 million for the three months ended September 30, 2021, compared to other expense, net expense of $2.1 million for the three months ended September 30, 2020. The change of $20.1 million was due primarily to the change in fair value of the derivative liability associated with the 2026 Convertible Notes of $20.1 million due primarily to a decrease in our stock price from January 1, 2021 to September 30, 2021.
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Comparison of the Nine Months Ended September 30, 2021 and 2020
The following table summarizes our results of operations for the nine months ended September 30, 2021 and 2020:
Nine Months Ended
September 30,
Increase
2021
2020
(Decrease)
(in thousands)
Revenue:
Product revenue, net
$
31,214
$
10,054
$
21,160
Total revenue, net
31,214
10,054
21,160
Costs and operating expenses:
Cost of product revenue
3,298
1,403
1,895
Research and development
37,505
21,070
16,435
Selling and marketing
26,054
19,803
6,251
General and administrative
24,345
16,282
8,063
Total costs and operating expenses
91,202
58,558
32,644
Loss from operations
(59,988)
(48,504)
(11,484)
Other income (expense):
Interest income
27
162
(135)
Interest expense
(4,991)
(5,042)
51
Change in fair value of derivative liability
62,249
(16,640)
78,889
Total other income (expense), net
57,285
(21,520)
78,805
Net loss
$
(2,703)
$
(70,024)
$
67,321
Gross-to-Net Deductions
We record DEXTENZA product sales net of estimated chargebacks, rebates, distribution fees and product returns. These deductions are generally referred to as gross-to-net deductions. Our total gross-to-net provisions for the nine months ended September 30, 2021 and 2020 were 24.2% and 19.4%, respectively, of gross DEXTENZA product sales. In the first quarter of 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.
Net Revenue
We generated $31.2 million of revenue during the nine months ended September 30, 2021 from sales of our products, of which $29.7 million was attributable to sales of DEXTENZA and $1.5 million was attributable to sales of ReSure Sealant. We generated $10.1 million of revenue during the nine months ended September 30, 2020 from sales of our products, of which $8.8 million was attributable to sales of DEXTENZA and $1.3 million was attributable to sales of ReSure Sealant. We believe the growth in revenue for DEXTENZA was primarily due to increased market acceptance and commercialization efforts as well as an increase in elective surgeries during the first and second quarters of 2021 compared to the comparable periods in 2020 during the initial months of the COVID-19 pandemic.
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Research and Development Expenses
Nine Months Ended
September 30,
Increase
2021
2020
(Decrease)
(in thousands)
Direct research and development expenses by program:
ReSure Sealant
$
59
$
92
$
(33)
DEXTENZA for post-surgical ocular inflammation and pain
1,228
758
470
DEXTENZA for ocular itching associated with allergic conjunctivitis
78
2,291
(2,213)
OTX-DED for the short-term treatment of the signs and symptoms of dry eye disease
3,063
61
3,002
OTX-TP for glaucoma and ocular hypertension
—
507
(507)
OTX-TIC for glaucoma or ocular hypertension
2,259
676
1,583
OTX-TKI for wet AMD
3,655
829
2,826
OTX-CSI for treatment of dry eye disease
2,729
601
2,128
OTX-AFS for wet AMD, DME and RVO
104
—
104
Preclinical programs
584
198
386
Unallocated expenses:
Personnel costs
15,342
8,541
6,801
All other costs
8,404
6,516
1,888
Total research and development expenses
$
37,505
$
21,070
$
16,435
Research and development expenses were $37.5 million for the nine months ended September 30, 2021, compared to $21.1 million for the nine months ended September 30, 2020. The increase of $16.4 million was primarily due to an increase of $8.7 million in unallocated expenses, primarily associated with increased personnel costs of $6.8 million to support the number of clinical related programs, and $7.8 million in clinical related programs. For the nine months ended September 30, 2021, we incurred $13.8 million in direct research and development expenses for our product candidates compared to $6.0 million for the nine months ended September 30, 2020. The increase of $7.8 million is related to timing and start of our various clinical trials for our product candidates and development activities related to our preclinical programs. We expect that clinical trial expenses will increase for our product candidates for OTX-TKI due to the recent initiation of our Phase 1 clinical trial in the United States, for OTX-TIC due to the planned initiation of a Phase 2 clinical trial in late 2021, and for OTX-DED due to our ongoing Phase 2 clinical trial initiated in February 2021 and for our ongoing Phase 3 clinical trial to evaluate DEXTENZA in pediatric subjects following cataract surgery in accordance with the FDA’s post-approval requirement. In addition, we are evaluating the further clinical development of OTX-CSI in light of the recently announced topline Phase 2 clinical trial results.
Selling and Marketing Expenses
Nine Months Ended
September 30,
Increase
2021
2020
(Decrease)
(in thousands)
Personnel related (including stock-based compensation)
$
17,384
$
12,582
$
4,802
Professional fees
5,544
4,993
551
Facility related and other
3,126
2,228
898
Total selling and marketing expenses
$
26,054
$
19,803
$
6,251
Selling and marketing expenses were $26.1 million for the nine months ended September 30, 2021, compared to $19.8 million for the nine months ended September 30, 2020. The increase of $6.3 million was primarily due to increases of $4.8 million in personnel costs associated with the expansion of the commercial workforce to support DEXTENZA.
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General and Administrative Expenses
Nine Months Ended
September 30,
Increase
2021
2020
(Decrease)
(in thousands)
Personnel related (including stock-based compensation)
$
12,720
$
7,466
$
5,254
Professional fees
9,716
5,618
4,098
Facility related and other
1,909
3,198
(1,289)
Total general and administrative expenses
$
24,345
$
16,282
$
8,063
General and administrative expenses were $24.3 million for the nine months ended September 30, 2021, compared to $16.3 million for the nine months ended September 30, 2020. The increase of $8.1 million was primarily due to an increase of $5.3 million of personnel related costs, including stock-based compensation to support the infrastructure of the organization and an increase of $4.1 million in professional fees primarily related to legal fees and other professional service costs.
Other Income (Expense), Net
Other income, net was $57.3 million for the nine months ended September 30, 2021, compared to other expense, net of $21.5 million for the nine months ended September 30, 2020. The change of $78.8 million was due primarily to the change in fair value of the derivative liability associated with the 2026 Convertible Notes of $62.2 million due primarily to a decrease in our stock price from January 1, 2021 to September 30, 2021.
Liquidity and Capital Resources
We have had a history of incurring significant operating losses. Our net loss was $2.7 million for the nine months ended September 30, 2021 primarily due to a loss from operations of $60.0 million offset by a change of $62.2 million in the fair value of our derivative liability related to the Convertible Notes during the period. Our net loss was $70.0 million for the nine months ended September 30, 2020, and our net losses were $155.6 million and $86.4 million for the years ended December 31, 2020 and 2019, respectively. As of September 30, 2021, we had an accumulated deficit of $542.0 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 ocular itching associated with allergic conjunctivitis and our obtaining marketing approval for and commercializing other products with significant market potential, including 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 for the remainder of 2021 and potentially beyond.
On June 4, 2021, which we refer to as the Closing Date, we entered into a Fourth Amended and Restated Credit and Security Agreement, or the Fourth Amendment, with MidCap Financial Trust, as administrative agent, or the Administrative Agent, and the lenders party thereto, or the Lenders, which amends and restates our Credit Agreement to refinance our Credit Facility.
Under the Fourth Amendment, the term loans outstanding under the Credit Facility, in the aggregate principal amount of approximately $20.8 million were converted into a new term loan under the Credit Facility as of June 4, 2021, or the Converted Term Loan. The Fourth Amendment also established an additional term loan under the Credit Facility in the principal amount of approximately $4.2 million as of the Closing Date, or the 2021 Term Loan. We refer to the Converted Term Loan and the 2021 Term Loan together as the Term Loans. Under the Credit Facility, the aggregate principal amount of the Term Loans available under the Credit Facility, or the Total Credit Facility Amount, is $25.0 million, the entirety of which was drawn at closing. As of September 30, 2021, the interest rate was 7.75%. In addition, a final payment (exit fee) equal to 3.5% of amounts drawn under the Credit Facility is due upon maturity.
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The Fourth Amendment extends the term of the Credit Facility until November 30, 2025, provided that the term is automatically extended until April 1, 2026, if the Administrative Agent receives evidence reasonably satisfactory to it, by November 15, 2025, that the outstanding principal amount of the 2026 Convertible Notes has been converted into equity interests of us and that such indebtedness is otherwise indefeasibly satisfied in full. We refer to the maturity date, as applicable, as the Maturity Date. The Fourth Amendment requires us to make interest-only payments on the Term Loans on a monthly basis until May 1, 2024. The Fourth Amendment requires that thereafter, in addition to the monthly interest payments, we make principal payments on the Term Loans in accordance with the amortization schedules set forth in the Fourth Amendment. Remaining unpaid principal and accrued interest outstanding on the Maturity Date is due on the Maturity Date.
Through September 30, 2021, 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 $641.4 million to us.
As of September 30, 2021, we had cash and cash equivalents of $179.3 million; outstanding debt of $24.9 million, net of unamortized discount; and unsecured senior subordinated convertible notes of $37.5 million of aggregate principal amount, plus accrued interest of $5.3 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 September 30, 2021, will enable us to fund our planned operating expenses, debt service obligations and capital expenditure requirements through 2023. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.
The following table summarizes our sources and uses of cash for each of the periods presented:
Nine Months Ended
September 30,
2021
2020
Cash used in operating activities
$
(50,397)
$
(47,308)
Cash used in investing activities
(563)
(588)
Cash provided by financing activities
2,184
64,101
Net (decrease) increase in cash and cash equivalents
$
(48,776)
$
16,205
Operating activities . Net cash used in operating activities was $50.4 million for the nine months ended September 30, 2021, primarily resulting from our net loss of $2.7 million and changes in our operating assets and liabilities of $4.6 million, offset by the gain on the change in the fair value of $62.2 million and $15.9 million of non-cash items. Our net loss was primarily attributed to research and development activities, selling and marketing expenses, and our general and administrative expenses, which significantly offset any contributions from our revenues to date. Our net non-cash charges during the nine months ended September 30, 2021 consisted primarily of $11.1 million of stock-based compensation expense, $1.9 million in depreciation and amortization expense and other non-cash expenses and the gain in fair value of the derivative liability of $62.2 million. Net cash used by changes in our operating assets and liabilities during the nine months ended September 30, 2021 consisted primarily of increases in accrued expenses, accounts receivable, and inventories as we continue to commercialize DEXTENZA.
Net cash used in operating activities was $47.3 million for the nine months ended September 30, 2020, primarily resulting from our net loss of $70.0 million and changes in our operating assets and liabilities of $4.8 million, offset by $27.5 million of non-cash items. Our net loss was primarily attributed to research and development activities, selling and marketing expenses, and our general and administrative expenses, which were partially offset by contributions from our revenues during the applicable period. Our net non-cash charges during the nine months ended September 30, 2020 consisted primarily of $10.8 million of stock-based compensation expense, depreciation expense and other non-cash expenses and the change in fair value of the derivative liability of $16.6 million. Net cash used by changes in our operating assets and liabilities during the nine months ended September 30, 2020 consisted primarily of increases in accrued expenses, accounts receivable, and inventories as we continue to commercialize DEXTENZA.
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Investing activities . Net cash used in investing activities for the nine months ended September 30, 2021 and 2020 totaled $0.6 million and $0.6 million, respectively. For the nine months ended September 30, 2021, net cash used in investing activities is due to $0.6 million of purchases of property and equipment, which consisted primarily of laboratory equipment. For the nine months ended September 30, 2020, net cash used in investing activities is due to $0.6 million of purchases of property and equipment, which consisted primarily of laboratory equipment.
Financing activities . Net cash provided by financing activities for the nine months ended September 30, 2021 and 2020 was $2.2 million and $64.1 million, respectively. Net cash provided by financing activities for the nine months ended September 30, 2021 of $2.2 million consisted primarily of $2.4 million in proceeds from the exercise of stock options, $3.7 million (net) in borrowings under our amended credit facility, $0.5 million in proceeds from the issuance of common stock pursuant to the employee stock purchase plan offset by payments on notes payable of $4.2 million.
Net cash provided by financing activities for the nine months ended September 30, 2020 consisted primarily of $48.6 million in proceeds from our May 2020 follow-on offering of our common stock, net of underwriting discounts and commissions and other offering expenses, $14.4 million in proceeds from our 2019 Sales Agreement, net of underwriting discounts and commissions and other offering expenses, $1.0 million in proceeds from the exercise of stock options and $0.4 million in proceeds from the issuance of common stock pursuant to the employee stock purchase plan.
Funding Requirements
We expect to continue to incur losses in connection with our ongoing activities, particularly as we advance the clinical trials of our product candidates in development and increase our sales and marketing resources to support the commercialization of DEXTENZA and the potential launch of our product candidates, subject to receiving FDA approval.
We anticipate we will incur substantial expenses if and as we:
● continue to commercialize DEXTENZA in the United States, including the planned commercial launch of DEXTENZA for the treatment of ocular itching associated with allergic conjunctivitis in the first half of 2022;
● continue to develop and expand our sales, marketing and distribution capabilities for DEXTENZA and any of our products or product candidates;
● continue ongoing clinical trials of our product candidates OTX-TKI (in both Australia and the United States), OTX-TIC, and OTX-DED and our ongoing clinical trial to evaluate DEXTENZA in pediatric subjects following cataract surgery in accordance with the FDA’s post-approval requirement;
● initiate a planned Phase 2 clinical trial for our product candidate OTX-TIC in the fourth quarter of 2021 and a future clinical trial to evaluate DEXTENZA in pediatric subjects with ocular itching associated with allergic conjunctivitis in accordance with the FDA’s post-approval requirement;
● conduct research and development activities on, and seek regulatory approvals for, DEXTENZA and OTX-TIC in mainland China, Taiwan, Hong Kong, Macau, South Korea, and the countries of the Association of Southeast Asian Nations 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;
● seek marketing approvals for any of our product candidates that successfully complete clinical development;
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● 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, administrative 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;
● make investments to improve our defenses against cybersecurity;
● 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 September 30, 2021, 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 European Medicines Agency, or 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;
● the costs of expanding our facilities to accommodate our manufacturing needs and increased headcount;
● the progress, costs and outcome of our planned and ongoing clinical trials of our extended-delivery drug delivery product candidates, in particular 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;
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● the extent of our debt service obligations and our ability, if desired, to refinance any of our existing debt on terms that are more favorable to us;
● the amounts we are entitled to receive, if any, 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 of our funding of early-stage development programs;
● the extent to which we choose to establish additional collaboration, distribution or other marketing arrangements for our products and product candidates;
● the costs and outcomes of any legal actions and proceedings;
● the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; and
● the extent to which we acquire or invest in other businesses, products and technologies.
Until such time, if ever, as we can generate product revenues sufficient to achieve profitability, we expect to finance our cash needs through equity offerings, debt financings, 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 license agreement with AffaMed provides for AffaMed’s reimbursement of certain clinical expenses incurred by us in connection with our collaboration and for our potential receipt of development and sales milestone payments as well as royalty payments. To the extent that we raise additional capital through the sale of equity or convertible debt securities, each security holder’s ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect each security holder’s rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. The covenants under our existing Credit Agreement and the pledge of our assets as collateral limit our ability to obtain additional debt financing. If we raise additional funds through government or other third-party funding, collaborations, strategic alliances, licensing arrangements, royalty agreements, or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. In addition, the COVID-19 pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could adversely impact our ability to raise additional funds through equity or debt financings. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.
Contractual Obligations and Commitments
We enter into contracts in the normal course of business to assist in the performance of our research and development activities and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts which are not included contractual obligations and commitments.
Under the Fourth Amendment, we are permitted to make interest-only payments from July 2021 to April 2024. We are required to make 19 equal monthly installments of principal in the amount of $1.0 million, plus interest, beginning in May 2024 through November 2025. In the event we achieve certain milestones under the Fourth Amendment, we have the right to extend the maturity of the facility through April 1, 2026 and make 6 equal monthly installments of principal. We have not assumed the achievement of these milestones for purposes of disclosures herein.
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During the nine months ended September 30, 2021, there were no other significant changes to our contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020.
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 condensed consolidated financial statements.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.