10-Q 1 ocul-20220630x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2022

OR

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

For the transition period from                      to                     

Commission file number: 001-36554

Ocular Therapeutix, Inc.

(Exact name of registrant as specified in its charter)

Delaware

20-5560161

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification Number)

24 Crosby Drive

Bedford, MA

01730

(Address of principal executive offices)

(Zip Code)

(781) 357-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

OCUL

The Nasdaq Global Market

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

As of August 5, 2022, there were 76,966,889 shares of Common Stock, $0.0001 par value per share, outstanding.

Ocular Therapeutix, Inc.

INDEX

    

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements (unaudited)

3

Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021

3

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2022 and 2021

4

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021

5

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2022 and 2021

6

Notes to Condensed Consolidated Financial Statements

8

Item 2.

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

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

Item 4.

Controls and Procedures

39

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

40

Item 1A.

Risk Factors

40

Item 6.

Exhibits

40

SIGNATURES

42

FORWARD-LOOKING STATEMENTS

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

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

our ongoing and planned clinical trials, including our Phase 1 clinical trials of OTX-TKI for the treatment of wet age-related macular degeneration, or wet AMD, our Phase 2 clinical trial of OTX-TIC for the reduction of intraocular pressure in patients with primary open-angle glaucoma or ocular hypertension, and our clinical trial to evaluate DEXTENZA® in pediatric subjects following cataract surgery in accordance with the U.S. Food and Drug Administration’s post-approval requirement;
our commercialization efforts for our product DEXTENZA;
our plans to develop, seek regulatory approval for and commercialize OTX-TKI, OTX-TIC, OTX-DED, OTX-CSI and other product candidates based on our proprietary bioresorbable hydrogel technology platform;
our ability to manufacture DEXTENZA and our product candidates in compliance with Current Good Manufacturing Practices and in sufficient quantities for our clinical trials and commercial use;
the timing of and our ability to submit applications and obtain and maintain regulatory approvals for DEXTENZA and our product candidates;
our estimates regarding future revenue; expenses; the sufficiency of our cash resources; our ability to fund our operating expenses, debt service obligations and capital expenditure requirements; and our needs for additional financing;
our plans to raise additional capital, including through equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, royalty agreements and marketing and distribution arrangements;
the potential advantages of DEXTENZA, ReSure Sealant, and our product candidates;
the rate and degree of market acceptance and clinical utility of our products;
our ability to secure and maintain reimbursement for our products as well as the associated procedures to insert, implant or inject our products;
our estimates regarding the market opportunity for DEXTENZA and our product candidates;
our license agreement and collaboration with AffaMed Therapeutics Limited under which we are collaborating on the commercialization of DEXTENZA and our product candidate OTX-TIC in mainland China, Taiwan, Hong Kong, Macau, South Korea, and the countries of the Association of Southeast Asian Nations;
our capabilities and strategy, and the costs and timing of manufacturing, sales, marketing, distribution and other commercialization efforts with respect to DEXTENZA, ReSure Sealant and any additional products for which we may obtain marketing approval in the future;
our intellectual property position;

1

our ability to identify additional products, product candidates or technologies with significant commercial potential that are consistent with our commercial objectives;
the impact of government laws and regulations;
the costs and outcomes of legal actions and proceedings;
uncertainty regarding the extent to which the COVID-19 pandemic and related response measures will adversely affect our business, results of operations and financial condition; and
our competitive position.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A — Risk Factors section, and in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission, or the SEC, on February 28, 2022, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, licensing agreements, collaborations, or investments we may make.

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

This Quarterly Report on Form 10-Q includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties. All of the market data used in this Quarterly Report on Form 10-Q involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such data. While we believe that the information from these industry publications, surveys and studies is reliable, we have not independently verified such data. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of important factors, including those described in the section titled “Risk Factors.”

This Quarterly Report on Form 10-Q contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report and the documents incorporated by reference herein may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

2

 

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

Ocular Therapeutix, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

June 30, 

December 31, 

    

2022

    

2021

Assets

 

  

 

  

Current assets:

 

 

  

Cash and cash equivalents

$

134,539

$

164,164

Accounts receivable, net

 

20,482

 

21,135

Inventory

 

1,500

 

1,250

Prepaid expenses and other current assets

 

3,801

 

4,751

Total current assets

 

160,322

 

191,300

Property and equipment, net

 

6,680

 

6,956

Restricted cash

 

1,764

 

1,764

Operating lease assets

4,305

4,867

Total assets

$

173,071

$

204,887

Liabilities and Stockholders’ Equity

 

 

  

Current liabilities:

 

 

  

Accounts payable

$

3,703

$

4,592

Accrued expenses and other current liabilities

 

19,450

 

20,121

Deferred revenue

 

1,189

 

Operating lease liabilities

1,771

1,624

Total current liabilities

 

26,113

 

26,337

Other liabilities:

 

 

Operating lease liabilities, net of current portion

4,999

5,924

Derivative liability

10,461

20,192

Deferred revenue, net of current portion

13,000

13,000

Notes payable, net of discount

 

25,128

 

25,000

2026 convertible notes, net

 

27,567

 

26,435

Total liabilities

 

107,268

 

116,888

Commitments and contingencies

 

 

Stockholders’ equity:

 

 

  

Preferred stock, $0.0001 par value; 5,000,000 shares authorized and no shares issued or outstanding at June 30, 2022 and December 31, 2021, respectively

 

 

Common stock, $0.0001 par value; 200,000,000 shares authorized and 76,910,026 and 76,731,940 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively

 

8

 

8

Additional paid-in capital

 

642,907

 

633,795

Accumulated deficit

 

(577,112)

 

(545,804)

Total stockholders’ equity

 

65,803

 

87,999

Total liabilities and stockholders’ equity

$

173,071

$

204,887

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

 

3

Ocular Therapeutix, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands, except share and per share data)

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

  

2022

    

2021

    

2022

    

2021

Revenue:

 

  

 

  

 

  

 

  

Product revenue, net

$

12,144

$

11,718

$

24,642

$

19,061

Collaboration revenue

 

122

 

 

811

 

Total revenue, net

 

12,266

 

11,718

 

25,453

19,061

Costs and operating expenses:

 

  

 

  

 

  

  

Cost of product revenue

 

1,155

 

1,096

 

2,454

1,988

Research and development

 

13,100

 

13,859

 

26,200

24,786

Selling and marketing

 

10,140

 

8,391

 

19,203

16,477

General and administrative

 

7,787

 

8,603

 

15,344

16,268

Total costs and operating expenses

 

32,182

 

31,949

 

63,201

59,519

Loss from operations

 

(19,916)

 

(20,231)

 

(37,748)

(40,458)

Other income:

 

  

 

  

 

  

  

Interest income

 

73

 

8

 

89

20

Interest expense

 

(1,696)

 

(1,655)

 

(3,378)

(3,335)

Change in fair value of derivative liability

2,773

13,396

9,731

38,412

Other income (expense), net

 

 

1

 

(2)

1

Total other income, net

 

1,150

 

11,750

 

6,440

35,098

Net loss

$

(18,766)

$

(8,481)

$

(31,308)

$

(5,360)

Net loss per share, basic

$

(0.24)

$

(0.11)

$

(0.41)

$

(0.07)

Weighted average common shares outstanding, basic

 

76,764,296

 

76,324,367

 

76,755,028

 

76,198,384

Net loss per share, diluted

$

(0.25)

$

(0.25)

$

(0.47)

$

(0.51)

Weighted average common shares outstanding, diluted

 

82,533,528

 

82,093,599

 

82,524,260

 

81,967,616

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

 

4

Ocular Therapeutix, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Six Months Ended

June 30, 

  

2022

    

2021

Cash flows from operating activities:

 

 

  

Net loss

$

(31,308)

$

(5,360)

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

 

 

Stock-based compensation expense

 

8,490

 

7,378

Non-cash interest expense

 

2,391

 

2,282

Change in fair value of derivative liability

(9,731)

(38,412)

Depreciation and amortization expense

 

1,109

 

1,257

Loss on disposal of property and equipment

 

2

 

Changes in operating assets and liabilities:

 

 

Accounts receivable

 

653

 

(6,482)

Prepaid expenses and other current assets

 

950

 

(167)

Inventory

 

(250)

 

89

Operating lease assets

562

466

Accounts payable

 

(809)

 

1,255

Accrued expenses

 

(1,946)

 

928

Deferred revenue

1,189

Operating lease liabilities

 

(778)

 

(649)

Net cash used in operating activities

 

(29,476)

 

(37,415)

Cash flows from investing activities:

 

  

 

Purchases of property and equipment

 

(771)

 

(287)

Net cash used in investing activities

 

(771)

 

(287)

Cash flows from financing activities:

 

  

 

Proceeds from issuance of notes payable, net

 

 

3,722

Proceeds from exercise of stock options

 

140

 

1,735

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

 

482

 

490

Issuance costs from the issuance of common stock upon public offering

 

 

(275)

Repayment of notes payable

 

(4,167)

Net cash provided by financing activities

 

622

 

1,505

Net decrease in cash, cash equivalents and restricted cash

 

(29,625)

 

(36,197)

Cash, cash equivalents and restricted cash at beginning of period

 

165,928

 

229,821

Cash, cash equivalents and restricted cash at end of period

$

136,303

$

193,624

Supplemental disclosure of cash flow information:

 

  

 

Cash paid for interest

$

990

$

1,065

Supplemental disclosure of non-cash investing and financing activities:

 

  

 

Additions to property and equipment included in accounts payable and accrued expenses

$

245

$

8

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

5

 

Ocular Therapeutix, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

(Unaudited)

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

    

Shares

    

Par Value

    

Capital

    

Deficit

    

Equity

Balances at December 31, 2021

76,731,940

$

8

$

633,795

$

(545,804)

$

87,999

Issuance of common stock upon exercise of stock options

 

27,674

 

 

129

 

 

129

Stock-based compensation expense

 

 

 

4,209

 

 

4,209

Net loss

 

 

 

 

(12,542)

 

(12,542)

Balances at March 31, 2022

 

76,759,614

$

8

$

638,133

$

(558,346)

$

79,795

Issuance of common stock upon exercise of stock options

 

9,469

11

 

11

Issuance of common stock in connection with employee stock purchase plan

 

140,943

482

 

482

Stock-based compensation expense

 

4,281

 

4,281

Net loss

 

(18,766)

 

(18,766)

Balances at June 30, 2022

 

76,910,026

$

8

$

642,907

$

(577,112)

$

65,803

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

6

Ocular Therapeutix, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

(Unaudited)

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders’

    

Shares

    

Par Value

    

Capital

    

Deficit

    

Equity

Balances at December 31, 2020

 

75,996,732

$

8

$

615,338

$

(539,251)

$

76,095

Issuance of common stock upon exercise of stock options

 

228,241

 

 

1,197

 

 

1,197

Issuance of common stock upon cashless exercise of warrant

11,737

 

 

 

 

Issuance costs associated with common stock public offering

 

 

 

(91)

 

 

(91)

Stock-based compensation expense

 

 

 

3,086

 

 

3,086

Net income

 

 

 

 

3,121

 

3,121

Balances at March 31, 2021

 

76,236,710

$

8

$

619,530

$

(536,130)

$

83,408

Issuance of common stock upon exercise of stock options

 

177,256

 

 

538

 

 

538

Issuance of common stock in connection with employee stock purchase plan

 

40,631

 

 

490

 

 

490

Stock-based compensation expense

 

 

 

4,292

 

 

4,292

Net loss

 

 

 

 

(8,481)

 

(8,481)

Balances at June 30, 2021

 

76,454,597

$

8

$

624,850

$

(544,611)

$

80,247

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

7

Ocular Therapeutix, Inc.

Notes to the Condensed Consolidated Financial Statements

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

(Unaudited)

1. Nature of the Business and Basis of Presentation

Ocular Therapeutix, Inc. (the “Company”) was incorporated on September 12, 2006 under the laws of the State of Delaware. The Company is a biopharmaceutical company focused on the formulation, development and commercialization of innovative therapies for diseases and conditions of the eye using its proprietary, bioresorbable hydrogel platform technology. The Company’s product candidates are designed to provide differentiated drug delivery solutions that reduce the complexity and burden of the current standard of care by creating local programmed-release alternatives. Since inception, the Company’s operations have been primarily focused on organizing and staffing the Company, acquiring rights to intellectual property, business planning, raising capital, developing its technology, identifying product candidates, undertaking preclinical studies and clinical trials, manufacturing its products and product candidates, building its sales and marketing infrastructure for the commercialization of the Company’s approved products and product candidates, and commercializing its approved products.

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

As of June 30, 2022, the Company had two U.S. Food and Drug Administration (“FDA”)-approved products in commercialization in the United States: DEXTENZA® (dexamethasone insert) 0.4mg, an intracanalicular insert for the treatment of post-surgical ocular inflammation and pain and ocular itching associated with allergic conjunctivitis, and ReSure® Sealant, an ophthalmic device designed to prevent wound leaks in corneal incisions following cataract surgery. While ReSure Sealant is commercially available in the United States, it does not receive sales support, is not currently being manufactured by the Company, and has not in the past generated, nor is it anticipated to in the future to generate, material revenues. The Company’s most advanced product candidates are in either Phase 1 or Phase 2 of clinical stage development. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary government regulatory approval and adequate reimbursement or that any approved products will be commercially viable. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates in an environment of rapidly changing technology and substantial competition from pharmaceutical and biotechnology companies. In addition, the Company is dependent upon the services of its employees and consultants. The Company may not be able to generate significant revenue from sales of any product for several years, if at all. Accordingly, the Company will need to obtain additional capital to finance its operations.

The Company has incurred losses and negative cash flows from operations since its inception, and the Company expects to continue to generate operating losses and negative cash flows from operations in the foreseeable future. As of June 30, 2022, the Company had an accumulated deficit of $577,112.  Based on its current plans and forecasted expenses, which include estimates related to anticipated cash inflows from DEXTENZA product sales and cash outflows from operating expenses, the Company believes that its existing cash and cash equivalents of $134,539, as of June 30, 2022, will enable it to fund its planned operating expenses, debt service obligations and capital expenditure requirements through at least the next 12 months from the date of these condensed consolidated financial statements. The future viability of the Company beyond that point is dependent on its ability to generate cash flows from the sale of DEXTENZA and raise additional capital to finance its operations.  The Company will need to finance its operations through public or private securities offerings, debt financings, royalty financings or other sources, which may include licensing, collaborations or other strategic transactions or arrangements.  Although the Company has been successful in raising capital in the past, there is no assurance that it will be successful in obtaining such additional financing on terms acceptable to the Company, if at all. If the Company is unable to obtain funding, the Company could be forced to delay,

8

reduce or eliminate some or all of its research and development programs for product candidates, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects, or the Company may be unable to continue operations.

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The significant accounting policies used in preparation of these financial statements are consistent with those described in Note 2 - Summary of Significant Accounting Policies in our 2021 Annual Report on Form 10-K.

Unaudited Interim Financial Information

The balance sheet at December 31, 2021 was derived from audited financial statements but does not include all disclosures required by GAAP. The accompanying unaudited financial statements as of June 30, 2022 and for the three and six months ended June 30, 2022 and 2021 have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the Company’s financial position as of June 30, 2022 and results of operations and cash flows for the three and six months ended June 30, 2022 and 2021 have been made. The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2022.

Effects of COVID-19

The pandemic caused by an outbreak of a new strain of coronavirus, ( 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 impacting our employees, patients, customers, communities and business operations. The implementation of travel bans and restrictions, quarantines, shelter-in-place/stay-at-home and social distancing orders and shutdowns, for example, affected our business in 2020 and 2021. During the first half of 2022, the COVID-19 pandemic and related employee recruitment and retention challenges for ambulatory surgical centers (“ASCs”), and hospital out-patient departments (“HOPDs”) slowed the overall pace of cataract procedures performed in the United States, thereby reducing the number of opportunities for ophthalmologists to use DEXTENZA as a treatment for post-surgical ocular inflammation and pain. In addition, recruitment and retention challenges with regards to the Company’s own sales force have adversely affected its ability to market DEXTENZA to ophthalmologists and in the office setting. The full extent to which the COVID-19 pandemic will continue to directly or indirectly impact the Company’s business, results of operations and financial condition and those of the Company’s customers, vendors, suppliers, and collaboration partners will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. Management continues to actively monitor this situation and the possible effects on the Company’s financial condition, liquidity, operations, suppliers, industry, and workforce. For additional information on risks posed by the COVID-19 pandemic, please see “Item 1A — Risk Factors — Risks Related to the Coronavirus Pandemic,” included our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 28, 2022.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates and assumptions reflected in these financial statements include, but are not

9

limited to, revenue recognition, clinical trial accruals and the fair value of derivatives.  Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results may differ from these estimates.  

Concentration of Credit Risk and of Significant Suppliers and Customers

The Company is dependent on a small number of third-party manufacturers to supply products for research and development activities in its preclinical and clinical programs and for sales of its products. The Company’s development programs as well as revenue from future product sales could be adversely affected by a significant interruption in the supply of any of the components of these products.

For the three and six months ended June 30, 2022, four specialty distributor customers accounted for 41%, 26%, 17%, and 10%, and three specialty distributor customers accounted for 41%, 25% and 20%, respectively, of the Company’s total product revenue, and no other customer accounted for more than 10% of the Company’s total product revenue. At June 30, 2022, four specialty distributor customers accounted for 46%, 25%, 16% and 10% of the Company’s total accounts receivable and no other customer accounted for more than 10% of the Company’s total accounts receivable at June 30, 2022.

For the three and six months ended June 30, 2021, three specialty distributor customers accounted for 45%, 28%, and 15%, and 45%, 25% and 14%, respectively, of the Company’s total product revenue, and no other customer accounted for more than 10% of the Company’s total product revenue.

At December 31, 2021, three specialty distributor customers accounted for 42%, 26% and 21% of the Company’s total accounts receivable. No other customer accounted for more than 10% of total accounts receivable for the year ended December 31, 2021.

Recently Adopted Accounting Pronouncements

Effective January 1, 2022, the Company adopted ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40), which amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share guidance for both Subtopics. The adoption of this standard did not have any impact on the Company’s condensed consolidated financial statements.

10

3. Fair Value of Financial Assets and Liabilities

The following tables present information about the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 and indicate the level of the fair value hierarchy utilized to determine such fair value:

Fair Value Measurements as of

June 30, 2022 Using:

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

  

 

  

 

  

 

  

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

32,424

$

$

$

32,424

Liability:

Derivative liability (Note 7)

$

$

$

10,461

$

10,461

Fair Value Measurements as of

December 31, 2021 Using:

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets:

 

  

 

  

 

  

 

  

Cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

62,392

$

$

$

62,392

Liability:

 

  

 

  

 

  

 

  

Derivative liability (Note 7)

$

$

$

20,192

$

20,192

4. Restricted Cash

The Company held restricted cash of $1,764 at June 30, 2022 and December 31, 2021, on its condensed consolidated balance sheet. The Company held restricted cash as security deposits for the lease of its research and development space, manufacturing space and corporate headquarters.

The Company’s condensed consolidated statements of cash flows include restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on such statements. A reconciliation of the cash, cash equivalents, and restricted cash reported within the balance sheet that sum to the total of the same amounts shown in the condensed consolidated statement of cash flows is as follows:

June 30, 

June 30, 

    

2022

    

2021

Cash and cash equivalents

$

134,539

$

191,860

Restricted cash

1,764

1,764

Total cash, cash equivalents and restricted cash

$

136,303

$

193,624

5. Inventory

The Company values its inventories at the lower of cost or estimated net realizable value.

11

Inventory consisted of the following:

June 30, 

December 31, 

    

2022

    

2021

 

Raw materials

$

325

$

388

Work-in-process

662

605

Finished goods

 

513

 

257

$

1,500

$

1,250

6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of June 30, 2022 and December 31, 2021 consisted of the following:

June 30, 

December 31, 

    

2022

    

2021

Accrued payroll and related expenses

$

4,747

$

6,597

Accrued rebates and programs

3,260

3,615

Accrued professional fees

 

1,081

 

1,227

Accrued research and development expenses

 

1,683

 

1,102

Accrued interest payable on 2026 convertible notes

 

7,606

 

6,475

Accrued other

 

1,073

 

1,105

$

19,450

$

20,121

7. Derivative Liability

The unsecured senior subordinated convertible notes (the “2026 Convertible Notes”) (Note 8) contains an embedded conversion option that meets the criteria to be bifurcated and accounted for separately (the “Derivative Liability”) from the 2026 Convertible Notes. The Derivative Liability was recorded at fair value upon the issuance of the 2026 Convertible Notes and is subsequently remeasured to fair value at each reporting period.  The Derivative Liability was initially valued and remeasured using a “with-and-without” method. The “with-and-without” methodology involves valuing the whole instrument on an as-is basis and then valuing the instrument without the embedded conversion option. The difference between the entire instrument with the embedded conversion option compared to the instrument without the embedded conversion option is the fair value of the derivative, recorded as the Derivative Liability in the Company’s condensed consolidated balance sheet.

The estimated fair value of the 2026 Convertible Notes was $41,092 at June 30, 2022. The fair value of the 2026 Convertible Notes was estimated utilizing a binomial lattice model which requires the use of Level 3 unobservable inputs. The main inputs when determining the fair value for disclosure purposes are the common stock price and bond yield which are updated each period to reflect the yield of a comparable instrument issued as of the valuation date. The estimated fair value presented is not necessarily indicative of an amount that could be realized in a current market exchange. The use of alternative inputs and estimation methodologies could have a material effect on these estimates of fair value. The main inputs to valuing the 2026 Convertible Notes with the conversion option are as follows:

As of

June 30, 

December 31, 

2022

2021

Company's stock price

$

4.02

$

6.97

Expected annual volatility

80.7

%

82.6

%

Bond yield

16.4

%

12.6

%

12

A roll-forward of the derivative liability is as follows:

As of

    

June 30, 2022

Balance at December 31, 2021

$

20,192

Change in fair value

(9,731)

Balance at June 30, 2022

$

10,461

8. Convertible Notes

On March 1, 2019, the Company issued $37,500 of 2026 Convertible Notes. Each 2026 Convertible Note accrues interest at an annual rate of 6% of its outstanding principal amount, which is payable, along with the principal amount at maturity, on March 1, 2026, unless earlier converted, repurchased or redeemed. The Company presents accrued interest in accrued current liabilities because the 2026 Convertible Notes are currently convertible and the interest is payable in cash. The effective annual interest rate for the 2026 Convertible Notes was 14.8% through June 30, 2022.

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 the Company’s 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 the issued and outstanding common stock of the Company. The conversion rate is 153.8462 shares of the Company’s common stock per $1,000 principal amount of the 2026 Convertible Notes, which is equivalent to an initial conversion price of $6.50 per share. The conversion rate is subject to adjustment in customary circumstances such as stock splits or similar changes to the Company’s capitalization.

At its election, the Company may choose to make such conversion payment in cash, in shares of common stock, or a combination thereof. Upon any conversion of any 2026 Convertible Note, the Company is 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 below), each holder has the option to require the Company to repurchase all or part of the outstanding principal amount of such 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. In addition, each holder is entitled to receive an additional make-whole cash payment in accordance with a table set forth in each 2026 Convertible Note.

Upon conversion by the holder, the Company has the right to select the settlement of the conversion in shares of common stock, cash, or in a combination thereof. In addition, the Company is 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.

If the Company elects to satisfy such conversion by shares of common stock, the Company shall deliver to the converting holder in respect of each $1,000 principal amount of 2026 Convertible Notes being converted a number of common shares equal to the conversion rate in effect on the conversion date;
If the Company elects to satisfy such conversion by cash settlement, the Company shall pay to the converting holder in respect of each $1,000 principal amount of 2026 Convertible Notes being converted cash in an amount equal to the sum of the Daily Conversion Values (as defined below) for each of the twenty (20) consecutive trading days during a specified period. The “Daily Conversion Values” is defined as each of the 20 consecutive trading days during the specified period, 5.0% of the product of (a) the conversion rate on such trading day and (b) the Daily VWAP on such trading day. The Daily VWAP is defined as each of the 20 consecutive trading days during the applicable observation period, the per share volume-weighted average price as displayed under the heading “Bloomberg VWAP” on the Bloomberg page for the Company.
If the Company elects to satisfy such conversion by combination, the Company shall pay or deliver, as the case may be, in respect of each $1,000 principal amount of 2026 Convertible Notes being converted, a settlement amount equal to the sum of the Daily Settlement Amounts (as defined below) for each of the twenty (20) consecutive trading days during the specified period. The “Daily Settlement Amount” is defined as, for each of the 20 consecutive trading days during the specified period: (a) cash

13

in an amount equal to the lesser of (i) the Daily Measurement Value (as defined below) and (ii) the Daily Conversion Value on such Trading Day; and (b) if the Daily Conversion Value on such trading day exceeds the Daily Measurement Value, a number of shares equal to (i) the difference between the Daily Conversion Value and the Daily Measurement Value, divided by (ii) the Daily VWAP for such Trading Day. The “Daily Measurement Value” is defined as the Specified Dollar Amount (as defined below), if any, divided by 20. The “Specified Dollar Amount” is defined as the maximum cash amount per $1,000 principal amount of Notes to be received upon conversion as specified in the notice specifying the Company’s chosen settlement method.

In the event of a Corporate Transaction, the noteholder shall have the right to either (a) convert all of the unpaid principal at the conversion rate and receive a cash payment equal to (i) the outstanding accrued but unpaid interest under the 2026 Convertible Note to, but excluding, the corporate transaction conversion date (to the extent such date occurs prior to March 1, 2026, the maturity date of the 2026 Convertible Notes) plus (ii) an additional amount of consideration based on a sliding scale depending on the date of such as Corporate transaction or (b) require the Company 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.

A corporate transaction includes (i) a merger or consolidation executed through a tender offer or change of control (other than one in which stockholders of the Company own a majority by voting power of the outstanding shares of the surviving or acquiring corporation); (ii) a sale, lease, transfer, of all or substantially all of the assets of the Company; or (iii) if the Company’s common stock ceases to be listed or quoted on any of the New York Stock Exchange, the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market (the “Corporate Transaction”).

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 20 of the preceding 30 trading days (including the last trading day of such period), the Company is entitled, at its 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 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 the Company and the delisting and deregistration of the Company’s common stock.

As discussed in Note 7, the Company determined that the 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. The allocation of proceeds to the conversion option results in a discount on the 2026 Convertible Notes. The Company is amortizing the discount to interest expense over the term of the 2026 Convertible Notes using the effective interest method.

The terms and conditions of the 2026 Convertible Notes are described in the Company’s periodic reports including its Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 28, 2022.

A summary of the 2026 Convertible Notes at June 30, 2022 and December 31, 2021 is as follows:

   

June 30, 

December 31, 

    

2022

    

2021

2026 Convertible Notes

$

37,500

$

37,500

Less: unamortized discount

(9,933)

(11,065)

Total

$

27,567

$

26,435

Accrued interest related to the 2026 Convertible Notes amounted to $7,606 and $6,475 at June 30, 2022 and December 31, 2021, respectively.

14

9. Income Taxes

The Company did not provide for any income taxes in its condensed consolidated statement of operations and comprehensive income (loss) for the three and six month periods ended June 30, 2022 or 2021. The Company has provided a valuation allowance for the full amount of its net deferred tax assets because, at June 30, 2022 and December 31, 2021, it was more likely than not that any future benefit from deductible temporary differences and net operating loss and tax credit carryforwards would not be realized.

10. Collaboration Agreements

AffaMed License Agreement

In October 2020, the Company entered into a license agreement with AffaMed Therapeutics Limited (“AffaMed”) for the development and commercialization of the Company’s DEXTENZA product regarding ocular inflammation and pain following cataract surgery and ocular itching associated with allergic conjunctivitis and for the Company’s OTX-TIC product candidate (collectively with DEXTENZA, the “AffaMed Licensed Products”) regarding open-angle glaucoma or ocular hypertension, in each case in mainland China, Taiwan, Hong Kong, Macau, South Korea, and the countries of the Association of Southeast Asian Nations. The Company and AffaMed subsequently amended the license agreement in October 2021 (as amended, the “License Agreement”). The Company retains development and commercialization rights for the AffaMed Licensed Products in the rest of the world.

The terms and conditions of the License Agreement are described in the Company’s periodic reports including its Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022.

The Company recognized $122 and $811 of collaboration revenue related to the performance obligation to conduct a Phase 2 clinical trial of OTX-TIC under the License Agreement for the three and six months ended June 30, 2022. During the three months ended March 31, 2022, the Company invoiced AffaMed $2,000 for a clinical trial support payment, under the License Agreement, in connection with the initiation of the OTX-TIC Phase 2 clinical trial. The Company concluded this clinical support payment was no longer constrained and has allocated the amount to the performance obligation to conduct a Phase 2 clinical trial of OTX-TIC. As of June 30, 2022, the aggregate amount of the transaction price allocated to performance obligations that are partially unsatisfied was $1,189. This amount is expected to be recognized as performance obligations are satisfied through June 2023. 

For the Phase 2 clinical trial of OTX-TIC, performance obligation revenue is recognized under an input method using the ratio of effort incurred to date compared to the total estimated effort required to complete the performance obligation. The calculation of the total estimated effort includes the total amount of forecasted costs associated with the completion of the Phase 2 clinical trial, as well as the assumed timing of this activity. Such cost estimates include forecasted direct labor and material costs, subcontractor costs, and external contract research organization, or CRO, costs.

Deferred revenue activity for the six months ended June 30, 2022 was as follows:

    

Deferred Revenue

Deferred revenue at December 31, 2021

$

13,000

Additions

2,000

Amounts recognized into revenue

(811)

Deferred revenue at June 30, 2022

$

14,189

As of June 30, 2022, the aggregate amount of the transaction price allocated to DEXTENZA product and OTX-TIC product performance obligations that are partially unsatisfied was $13,000. This amount is expected to be recognized as performance obligations are satisfied. The Company recognizes revenue related to the amounts allocated to the combined performance obligations for the development and commercialization of the Company’s DEXTENZA product regarding ocular inflammation and pain following cataract surgery and allergic conjunctivitis and the Company’s OTX-TIC product candidate based on the point in time upon which control of supply is transferred to

15

AffaMed for each delivery of the associated supply. The Company currently expects to recognize the revenue over a period of approximately seven to eight years commencing on the date the Company begins delivering product to AffaMed. This estimate of this period considers the timing of development and commercial activities under the License Agreement and may be reduced or increased based on the various activities as directed by the joint committees, decisions made by AffaMed, regulatory feedback or other factors not currently known.

11. Notes Payable

The Company entered into a credit and security agreement in 2014 (as amended to date, the “Credit Agreement”) establishing the Company’s credit facility (the “Credit Facility”). Under the Credit Facility, the Company has a total borrowing capacity of $25,000, which was fully drawn down as of June 30, 2022. The carrying value of the Company’s variable interest rate notes payable are recorded at amortized cost, which approximates fair value due to their short-term nature.

The terms and conditions of the Credit Agreement and the Credit Facility are described in the Company’s periodic reports including its Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022.

Borrowings outstanding are as follows:

   

June 30, 

   

December 31, 

    

2022

    

2021

Borrowings outstanding

$

25,000

$

25,000

Accrued exit fee

222

110

Unamortized discount

(94)

(110)

Long-term notes payable

$

25,128

$

25,000

As of June 30, 2022, the annual requirement for the repayment of principal for the Credit Facility, inclusive of the final payment of $875 due at expiration, was as follows:

Year Ending December 31,

    

Principal

    

Final Payment

    

Total

2022 (July 1 to December 31)

2023

2024

8,333

8,333

2025

16,667

875

17,542

$

25,000

$

875

$

25,875

12. Net Loss Per Share

Basic net loss per share was calculated as follows for the three and six months ended June 30, 2022 and 2021.

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

    

2021

2022

    

2021

Numerator:

 

Net loss attributable to common stockholders

$

(18,766)

$

(8,481)

$

(31,308)

$

(5,360)

Denominator:

 

  

 

 

  

 

Weighted average common shares outstanding, basic

 

76,764,296

 

76,324,367

 

76,755,028

 

76,198,384

Net loss per share - basic

$

(0.24)

$

(0.11)

$

(0.41)

$

(0.07)

16

Diluted net loss per share was calculated as follows for the three and six months ended June 30, 2022 and 2021:

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2022

    

2021

2022

    

2021

Net loss attributable to common stockholders, basic

$

(18,766)

$

(8,481)

$

(31,308)

$

(5,360)

Interest expense on 2026 Convertible Notes

 

1,141

 

1,095

 

2,264

 

2,173

Change in fair value of derivative liability

(2,773)

(13,396)

(9,731)

(38,412)

Net loss attributable to common stockholders, diluted

$

(20,398)

$

(20,782)

$

(38,775)

$

(41,599)

Weighted average common shares outstanding, basic

76,764,296

76,324,367

76,755,028

76,198,384

Shares issuable upon conversion of 2026 Convertible Notes, as if converted

5,769,232

5,769,232

5,769,232

5,769,232

Weighted average common shares outstanding, diluted

 

82,533,528

 

82,093,599

 

82,524,260

 

81,967,616

Net loss per share attributable to common stockholders, diluted

$

(0.25)

$

(0.25)

$

(0.47)

$

(0.51)

The Company excluded the following common stock equivalents and restricted stock units, outstanding as of June 30, 2022 and 2021, from the computation of diluted net loss per share for the six months ended June 30, 2022 and 2021 because they had an anti-dilutive impact.

Six Months Ended June 30, 

    

2022

    

2021

Options to purchase common stock

13,892,884

11,049,287

Restricted stock units

1,017,111

14,909,995

11,049,287

17

13. Stock-Based Awards

2021 Stock Incentive Plan

The 2021 Stock Incentive Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units, stock appreciation rights and other stock-based awards. Upon its adoption, the number of shares of common stock authorized for issuance under the 2021 Stock Incentive Plan equaled the total of 6,000,000 shares of common stock plus up to the sum of 456,334 shares remaining available for grant under the 2014 Stock Incentive Plan (the “2014 Plan”) as of immediately prior to the effective date of the 2021 Plan and 9,766,336 shares subject to awards granted under the 2014 Plan or the Company’s 2006 Stock Incentive Plan, which awards expire, terminate or are otherwise surrendered, canceled, forfeited or repurchased by the Company at their original issuance price pursuant to a contractual repurchase right (subject to certain limitations).

At the Company’s 2022 Annual Meeting of Stockholders held on June 16, 2022, the Company’s stockholders approved an amendment to the 2021 Stock Incentive Plan (as amended, the “2021 Plan”) to increase the number of shares of common stock authorized for issuance under the 2021 Plan by 3,600,000 shares. As of June 30, 2022, 5,837,806 shares of common stock remained available for issuance under the 2021 Plan.

Stock Option Awards for the Three and Six months Ended June 30, 2022

During the three and six months ended June 30, 2022, the Company granted options to purchase 557,050 and 3,419,253 shares of common stock, at a weighted exercise price of $3.69 and $5.02, respectively, per share under the 2021 Plan.

Restricted Stock Units (RSU) Awards for the Three and Six months Ended June 30, 2022

During the three and six months ended June 30, 2022, the Company granted 120,404 and 1,054,883 restricted stock units (“RSUs”), respectively, under the 2021 Plan. Each RSU is equivalent to one share of common stock upon vesting. Each RSU award vests on an annual basis over a three-year period. Holders of RSUs are not entitled to vote on any matters and are not entitled to dividends. The Company has determined the fair value of each RSU based on the closing price of the Company’s common stock on the date of grant and recognizes the compensation expense using the straight-line method over the service period, which coincides with the vesting period.

Stock-based Compensation Expense

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

Three Months Ended

Six Months Ended

 

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

 

Research and development

$

1,036

$

1,206

$

2,098

$

1,883

Selling and marketing

 

1,191

 

1,129

 

2,329

 

1,883

General and administrative

 

2,054

 

1,957

 

4,063

 

3,612

$

4,281

$

4,292

$

8,490

$

7,378

 

As of June 30, 2022, the Company had an aggregate of $25,612 of unrecognized stock-based compensation cost, which is expected to be recognized over a weighted average period of 2.7 years.

14. Related Party Trans