News Column

OCULAR THERAPEUTIX, INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 29, 2014

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our final prospectus for our initial public offering filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on July 25, 2014. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the ''Risk Factors'' section of this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described, in or implied, by the forward-looking statements contained in the following discussion and analysis. We are a biopharmaceutical company focused on the development and commercialization of innovative therapies for diseases and conditions of the eye using our proprietary hydrogel platform technology. Our bioresorbable hydrogel based product candidates are designed to provide sustained delivery of therapeutic agents to the eye. Our lead product candidates are the drug eluting punctum plugs OTX-DP and OTX-TP that are inserted into a natural opening called the punctum located in the inner portion of the eyelid near the nose. Our punctum plug product candidates combine our hydrogel technology with U.S. Food and Drug Administration, or FDA, approved therapeutic agents with the goal of providing sustained delivery of drug to the eye. In addition to our ongoing product development, we have recently launched our first commercial product, ReSure Sealant, a hydrogel based ophthalmic wound sealant approved by the FDA in January 2014 to close corneal incisions following cataract surgery. ReSure Sealant is the first and only surgical sealant to be approved by the FDA for ophthalmic use. In the pivotal clinical trials that formed the basis for FDA approval, ReSure Sealant provided superior wound closure and a better safety profile than sutured closure. Our most advanced product candidate, OTX-DP, incorporates the FDA approved corticosteroid dexamethasone as an active pharmaceutical ingredient in a hydrogel based drug eluting punctum plug and is in Phase 3 clinical development for the treatment of ocular inflammation and pain following cataract surgery. We recently completed patient enrollment in our first Phase 3 clinical trial of OTX-DP for this indication and have enrolled approximately half of the patients in our second Phase 3 clinical trial for this indication. We expect to report results from our Phase 3 clinical program during the first quarter of 2015 and, if the results are favorable, to submit a new drug application, or NDA, to the FDA for OTX-DP in the second quarter of 2015. We initiated a Phase 2 clinical trial of OTX-DP for the treatment of allergic conjunctivitis in March 2014 and have recently completed patient enrollment in this trial. Our second product candidate, OTX-TP, incorporates the FDA approved prostaglandin analog travoprost as an active pharmaceutical ingredient in a hydrogel based drug eluting punctum plug and has completed a Phase 2a clinical trial for the treatment of glaucoma and ocular hypertension. We plan to initiate a Phase 2b clinical trial of OTX-TP for the treatment of glaucoma and ocular hypertension in the second half of 2014. In addition to OTX-DP and OTX-TP, we have a pipeline of earlier stage punctum plug product candidates, including OTX-MP, which has completed a Phase 1 clinical trial for the treatment of bacterial conjunctivitis, as well as a preclinical intravitreal hydrogel based drug delivery depot. Our intravitreal hydrogel depot is designed to release therapeutic agents, such as antibodies to vascular endothelial growth factor, or VEGF, over a sustained period following administration by an intravitreal injection for the treatment of diseases and conditions of the back of the eye, including wet age related macular degeneration, or wet AMD. We were incorporated and commenced operations in September 2006, and our operations to date have been primarily limited to organizing and staffing our company, acquiring rights to intellectual property, business planning, raising capital, developing our technology, identifying potential product candidates, undertaking preclinical studies and clinical trials, manufacturing initial quantities of our products and product candidates and, beginning in the first quarter of 2014, commercializing ReSure Sealant. From our inception through June 30, 2014, we have financed our operations primarily through private placements of our preferred stock with aggregate proceeds of $74.2 million and borrowings under credit facilities totaling $22.7 million, of which we had repaid $7.6 million through June 30, 2014. 20



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We have generated limited amounts of revenue to date. In the first quarter of 2014, we began recognizing revenue from sales of ReSure Sealant. All of our sustained drug delivery products are in various phases of clinical and preclinical development. We do not expect sales of ReSure Sealant to generate revenue that is sufficient for us to achieve profitability. Instead, our ability to generate product revenue sufficient to achieve profitability will depend heavily on our obtaining marketing approval for and commercializing products with greater market potential, including one or both of OTX-DP and OTX-TP. Since inception, we have incurred significant operating losses. Our net losses were $6.4 million and $13.4 million for the three and six months ended June 30, 2014. As of June 30, 2014, we had an accumulated deficit of $74.2 million. Our total operating expenses were $6.0 million and $12.9 million for the three and six months ended June 30, 2014, including $0.6 million and $3.4 million, respectively, in non-cash stock-based compensation expense and licensing and consulting fees paid in stock. We anticipate that our operating expenses will increase substantially as we pursue the clinical development of our most advanced product candidates, OTX-DP and OTX-TP, continue the research and development of our other product candidates and seek marketing approval for any such product candidate for which we obtain favorable pivotal clinical trial results. We expect to continue to incur additional expenses for product manufacturing, sales, marketing and distribution for ReSure Sealant and any of our product candidates for which we obtain marketing approval. In addition, we will incur additional costs associated with operating as a public company. We do not expect to generate revenue from sales of any product other than ReSure Sealant for several years, if at all. Accordingly, we may need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts or to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. In July 2014, we completed an initial public offering, or IPO, of our common stock, and in August 2014 the underwriters in our IPO exercised their over-allotment option in full. We received total net proceeds of approximately $66.7 million from the issuance and sale of 5,750,000 shares of common stock, including in connection with the exercise by the underwriters of their over-allotment option, after deducting underwriting discounts and offering costs. We believe that the net proceeds from the offering, together with our existing cash and cash equivalents, revenue from sales of ReSure Sealant and $5.0 million of additional borrowing capacity available to us under our credit facility, will enable us to fund our operating expenses, debt service obligations and capital expenditure requirements at least through the first half of 2016. See "-Liquidity and Capital Resources."



Financial Operations Overview

Revenue

From our inception through June 30, 2014, we have generated limited amounts of revenue from the sales of our products. Our ReSure Sealant product received premarket approval, or PMA, from the FDA in January 2014. We commenced sales of ReSure Sealant in the first quarter of 2014 and anticipate only limited sales during 2014. ReSure Sealant is currently our only source of revenue from product sales. We may generate revenue in the future if we successfully develop one or more of our product candidates and receive marketing approval for any such product candidate or if we enter into collaboration agreements with third parties. In September 2013, we entered into a feasibility agreement with a biopharmaceutical company. Under this agreement, the biopharmaceutical company agreed to pay us up to $0.5 million under this feasibility study. In the event that we terminate the agreement in advance of the achievement of certain milestones, we would be required to refund certain portions of the funding based on the actual milestones achieved as of the date of termination. At the present time, we do not have any intention of terminating the agreement. As of December 31, 2013 and June 30, 2014, none of the milestones had been achieved and all amounts received were reflected as deferred revenue on our balance sheet as of those dates. 21



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Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the development of our product candidates, which include:

employee-related expenses, including salaries, related benefits, travel

and stock-based compensation expense for employees engaged in research and

development, clinical and regulatory and other related functions; expenses incurred in connection with the clinical trials of our product



candidates, including with the investigative sites that conduct our

clinical trials and under agreements with contract research organizations,

or CROs;



expenses relating to regulatory activities, including filing fees paid to

the FDA for our submissions for product approvals;



expenses associated with developing our pre-commercial manufacturing

capabilities and manufacturing clinical study materials; ongoing research and development activities relating to our core



biosorbable 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;

expenses associated with preclinical development activities; and



payments made under our licensing agreement with Incept, LLC, or Incept.

We expense research and development costs as incurred. We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors and our clinical investigative sites. Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, such as fees paid to investigators, consultants, central laboratories and CROs in connection with our clinical trials and regulatory fees. We do not allocate employee and contractor-related costs, costs associated with our platform technology, costs related to manufacturing or purchasing clinical trial materials, and facility expenses, including depreciation or other indirect costs, to specific product development programs because these costs are deployed across multiple product development programs and, as such, are not separately classified. We use internal resources, including clinical monitors and clinical research associates, to manage our clinical trials, monitor patient enrollment and perform data analysis for many of our clinical trials, rather than utilizing third-party CROs. These employees work across multiple development programs and, therefore, we do not track their costs by program. The table below summarizes our research and development expenses incurred by product development program: Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (in thousands) ReSure Sealant $ 7$ 56$ 25$ 81 OTX-DP for post-surgical ocular inflammation and pain 577 132 774 343 OTX-DP for allergic conjunctivitis 567 254 1,126 263 OTX-TP for glaucoma 482 65 718 477 Unallocated expenses 2,659 1,897 6,607 3,727 Total research and development expenses $ 4,292$ 2,404$ 9,250$ 4,891 22



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We expect that our expenses will increase substantially in connection with our ongoing activities including costs related to clinical trials and other research and development activities for our OTX-DP and OTX-TP product candidates and other research and development activities. The successful development and commercialization of our product candidates is highly uncertain. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the uncertainty of: the scope, progress, outcome and costs of our clinical trials and other research and development activities; the efficacy and potential advantages of our product candidates compared

to alternative treatments, including any standard of care; the market acceptance of our product candidates;



obtaining, maintaining, defending and enforcing patent claims and other

intellectual property rights; significant and changing government regulation; and the timing, receipt and terms of any marketing approvals. Any changes in the outcome of any of these variables with respect to the development of our product candidates in clinical and preclinical development could mean a significant change in the costs and timing associated with the development of these product candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials or other testing beyond those that we currently expect or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development of that product candidate.



General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation, for personnel in executive, finance and administrative functions. General and administrative expenses also include facility-related costs and professional fees for legal, patent, consulting and accounting and audit services. We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued development and commercialization of our product candidates. We also anticipate to incur increased accounting, audit, legal, regulatory, compliance, director and officer insurance costs as well as investor and public relations expenses associated with being a public company.



Selling and Marketing Expenses

Selling and marketing expenses consist primarily of salaries and related costs for personnel in selling and marketing functions as well as advertising and promotion costs. Through December 31, 2013, we incurred selling and marketing expenses in connection with our first-generation surgical sealant product. In addition, we invested in sales and marketing resources in anticipation of an earlier approval of our surgical sealant product in the United States than we ultimately received from the FDA, as a result of a change in designation from a 510(k) to a PMA regulatory path. During the three and six months ended June 30, 2014, we incurred selling and marketing expense in connection with ReSure Sealant, which we commercialized for the first time during this period.



We expect that our selling and marketing expenses will increase in the future in connection with further commercialization of our ReSure Sealant product.

Other Income (Expense)

Interest Income. Interest income consists primarily of interest income earned on cash and cash equivalents. Our interest income has not been significant due to nominal cash and investment balances and low interest earned on invested balances. We anticipate that our interest income will increase in the future due to increased balances from cash proceeds from our IPO that we completed in July 2014 and from the exercise of the over-allotment option in August 2014. 23



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Interest Expense. Interest expense consists of interest expense on our debt. We expect interest expense to increase in the future as a result of our new credit facility, under which we borrowed $15.0 million in aggregate principal amount in April 2014 and could borrow an additional $5.0 million. Other Income (Expense), Net. Other income (expense), net consists primarily of the gain or loss associated with the change in the fair value of our preferred stock warrant liability. We have issued warrants for the purchase of our redeemable convertible preferred stock that we believe are financial instruments that could require a transfer of assets because of the redemption feature of the underlying stock. Therefore, we have classified these warrants as liabilities that we remeasure to fair value at each reporting period, and we record the changes in the fair value as a component of other income (expense), net. Upon the closing of our IPO in July 2014, the underlying redeemable convertible preferred stock was converted into common stock, the preferred stock warrants became exercisable for common stock instead of preferred stock, and the fair value of the warrant liability became fixed as of that date and was reclassified to additional paid-in capital. Other income (expense), net also consists of small amounts of miscellaneous income and expense items unrelated to our core operations.



Critical Accounting Policies and Significant Judgments and Estimates

We have prepared our financial statements in accordance with U.S. generally accepted accounting principles. Our preparation of these financial statements requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, expenses, and related disclosures at the date of the financial statements, as well as revenue and expenses recorded during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.



For a discussion of our critical accounting policies and recent accounting pronouncements see Note 2 in our financial statements included in this Quarterly Report on Form 10-Q.

Results of Operations



Comparison of the Three Months Ended June 30, 2014 and 2013

The following table summarizes our results of operations for the three months ended June 30, 2014 and 2013:

Three Months Ended June 30, Increase 2014 2013 (Decrease) (in thousands) Revenue $ 97 $ - $ 97 Operating expenses: Cost of revenue 20 - 20 Research and development 4,292 2,404 1,888 Selling and marketing 535 143 392 General and administrative 1,196 442 754 Total operating expenses 6,043 2,989 3,054 Loss from operations (5,946 ) (2,989 ) (2,957 ) Other income (expense): Interest income 1 3 (2 ) Interest expense (257 ) (107 ) (150 ) Other income (expense), net (190 ) 3 (193 ) Total other expense, net (446 ) (101 ) (345 ) Net loss $ (6,392 )$ (3,090 )$ (3,302 ) 24



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Revenue

We generated $0.1 million of revenue during the three months ended June 30, 2014 from initial sales of our ReSure Sealant product, for which we received FDA approval in January 2014. We did not sell any products and had no revenue during the three months ended June 30, 2013.



Research and Development Expenses

Three Months Ended June 30, Increase 2014 2013 (Decrease) (in thousands) Direct research and development expenses by program: ReSure Sealant $ 7$ 56$ (49 ) OTX-DP for post-surgical ocular inflammation and pain 577 132 445 OTX-DP for allergic conjunctivitis 567 254 313 OTX-TP for glaucoma 482 65 417 Unallocated expenses: Personnel costs 1,451 1,033 418 All other costs 1,208 864 344 Total research and development expenses $ 4,292 $



2,404 $ 1,888

Research and development expenses were $4.3 million for the three months ended June 30, 2014, compared to $2.4 million for the three months ended June 30, 2013. The increase of $1.9 million was primarily due to an increase of $1.2 million in costs incurred in connection with the clinical trials of our OTX-DP product candidate for the treatment of post-surgical inflammation and pain, our OTX-DP product candidate for the treatment of allergic conjunctivitis and our OTX-TP product candidate for the treatment of glaucoma. In addition, the increase in research and development expenses was due to an increase of $0.4 million in unallocated personnel costs and an increase of $0.3 million in other unallocated research and development costs. For the three months ended June 30, 2014, we incurred $1.6 million in direct research and development expenses for our punctum plug product candidates, including $0.6 million for our OTX-DP product candidate for the treatment of post-surgical ocular inflammation and pain which is in Phase 3 clinical trials, $0.6 million for our OTX-DP product candidate for the treatment of allergic conjunctivitis which is in Phase 2a clinical trials and $0.5 million for our OTX-TP product candidate for the treatment of glaucoma and ocular hypertension which is also in Phase 2a clinical trials. In comparison, for the three months ended June 30, 2013, we incurred $0.5 million in direct research and development expenses for our punctum plug product candidates, including $0.1 million for our OTX-DP for the treatment of ocular inflammation and pain following cataract surgery which was in Phase 2 clinical trials and $0.3 million for OTX-DP for the treatment of allergic conjunctivitis which was in a pilot study. Unallocated research and development expenses increased $0.8 million for the three months ended June 30, 2014, compared to the three months ended June 30, 2013, due to an increase of $0.4 million in personnel costs relating to new hires primarily in our clinical, regulatory and quality department and an increase in stock-based compensation expense and an increase of $0.3 million due to higher testing and laboratory supply costs.



Selling and Marketing Expenses

Selling and marketing expenses were $0.5 million for the three months ended June 30, 2014, compared to $0.1 million for the three months ended June 30, 2013. The increase of $0.4 million was primarily due to increased personnel costs relating to new hires, increased professional fees including consulting and recruiting and increased advertising and promotion costs relating to the ReSure Sealant. 25



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General and Administrative Expenses

Three Months Ended June 30, Increase 2014 2013 (Decrease) (in thousands) Personnel related (including stock-based compensation) $ 825$ 290$ 535 Professional and consultant fees 235 67 168 Facility related and other 136 85 51 Total general and administrative expenses $ 1,196 $



442 $ 754

General and administrative expenses were $1.2 million for the three months ended June 30, 2014, compared to $0.4 million for the three months ended June 30, 2013. The increase of $0.8 million was primarily due to a $0.5 million increase in personnel related costs, due primarily to an increase in stock-based compensation expense and an increase of $0.2 million in professional and consultant fees primarily due to increased activities in support of our operating as a public company.



Other Income (Expense), Net

Other expense, net was $0.4 million for the three months ended June 30, 2014, compared to $0.1 million for the three months ended June 30, 2013. During the three months ended June 30, 2014, there was an increase of $0.2 million in interest expense on our notes payable due to our new credit facility, under which we borrowed $15.0 million in aggregate principal amount in April 2014 and an increase of $0.2 million in our adjustment for the fair value of the liability for our preferred stock warrants due to the increase in the value of the underlying preferred stock, in each case as compared to the three months ended June 30, 2013.



Comparison of the Six Months Ended June 30, 2014 and 2013

The following table summarizes our results of operations for the six months ended June 30, 2014 and 2013:

Six Months Ended June 30, Increase 2014 2013 (Decrease) (in thousands) Revenue $ 124 $ - $ 124 Operating expenses: Cost of revenue 29 - 29 Research and development 9,250 4,891 4,359 Selling and marketing 845 280 565 General and administrative 2,771 878 1,893 Total operating expenses 12,895 6,049 6,846 Loss from operations (12,771 ) (6,049 ) (6,722 ) Other income (expense): Interest income 2 8 (6 ) Interest expense (300 ) (256 ) (44 ) Other income (expense), net (331 ) 7 (338 ) Total other expense, net (629 ) (241 ) (388 ) Net loss $ (13,400 )$ (6,290 )$ (7,110 ) Revenue We generated $0.1 million of revenue during the six months ended June 30, 2014 from initial sales of our ReSure Sealant product, for which we received FDA approval in January 2014. We did not sell any products and had no revenue during the six months ended June 30, 2013. 26



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Research and Development Expenses

Six Months Ended June 30, Increase 2014 2013 (Decrease) (in thousands) Direct research and development expenses by program: ReSure Sealant $ 25$ 81$ (56 ) OTX-DP for post-surgical ocular inflammation and pain 774 343 431 OTX-DP for allergic conjunctivitis 1,126 263 863 OTX-TP for glaucoma 718 477 241 Unallocated expenses: Personnel costs 2,785 2,068 717 All other costs 3,822 1,659 2,163 Total research and development expenses $ 9,250$ 4,891



$ 4,359

Research and development expenses were $9.3 million for the six months ended June 30, 2014, compared to $4.9 million for the six months ended June 30, 2013. The increase of $4.4 million was primarily due to an increase of $1.5 million in clinical trial and regulatory expenses and an increase of $2.9 million in personnel costs and other unallocated expenses. For the six months ended June 30, 2014, we incurred $2.6 million in direct research and development expenses for our punctum plug product candidates, including $0.8 million for our OTX-DP product candidate for the treatment of post-surgical ocular inflammation and pain which is in Phase 3 clinical trials, $1.1 million for our OTX-DP product candidate for the treatment of allergic conjunctivitis which is in Phase 2a clinical trials and $0.7 million for our OTX-TP product candidate for the treatment of glaucoma and ocular hypertension which is also in Phase 2a clinical trials. In comparison, for the six months ended June 30, 2013, we incurred $1.1 million in direct research and development expenses for our punctum plug product candidates, including $0.3 million for our OTX-DP for the treatment of ocular inflammation and pain following cataract surgery which was in Phase 2 clinical trials, $0.3 million for OTX-DP for the treatment of allergic conjunctivitis which was in a pilot study and $0.5 million for our OTX-TP product candidate for the treatment of glaucoma and ocular hypertension which was in a pilot study. Unallocated research and development expenses increased $2.9 million for the six months ended June 30, 2014, compared to the six months ended June 30, 2013, due to additional license fees paid to Incept in connection with the expansion of the scope of the license to include back of the eye technology, which we paid by the issuance to Incept of 189,393 fully vested shares of our common stock having a fair value of $1.7 million on the issuance date and due to a $0.3 million increase in testing and laboratory supply costs. In addition, unallocated personnel costs increased by $0.7 million, relating to new hires primarily in the clinical, regulatory and quality department.



Selling and Marketing Expenses

Selling and marketing expenses were $0.9 million for the six months ended June 30, 2014, compared to $0.3 million for the six months ended June 30, 2013. The increase of $0.6 million was primarily due to an increase in personnel costs and travel relating to new hires and consulting, advertising and promotion expenses relating to commercial activities in support of ReSure Sealant.



General and Administrative Expenses

Six Months Ended June 30, Increase 2014 2013 (Decrease) (in thousands)



Personnel related (including stock-based compensation) $ 1,466$ 568$ 898 Professional and consultant fees

1,039 138 901 Facility related and other 266 172 94 Total general and administrative expenses $ 2,771$ 878$ 1,893 27



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General and administrative expenses were $2.8 million for the six months ended June 30, 2014, compared to $0.9 million for the six months ended June 30, 2013. The increase of $1.9 million was primarily due to consultant fees of $0.7 million incurred in 2014 in connection with consulting services rendered by a former member of our board of directors and current stockholder of Incept, which we paid by the issuance of 79,545 fully vested shares of our common stock having a fair value of $0.7 million on the issuance date. In addition, the increase in general and administrative expenses was due to a $0.9 million increase in personnel related costs, due primarily to an increase in stock-based compensation expense.



Other Income (Expense), Net

Other expense, net was $0.6 million for the six months ended June 30, 2014, compared to $0.2 million for the six months ended June 30, 2013. During the six months ended June 30, 2014, there was an increase of $0.3 million in our adjustment for the fair value of the liability for our preferred stock warrants as compared to the six months ended June 30, 2013 due to the increase in fair value of the underlying preferred stock.



Liquidity and Capital Resources

Since inception, we have incurred significant operating losses. We have generated limited revenue to date and are in the early phases of commercial launch of our first FDA-approved product, ReSure Sealant. We have not yet commercialized any of our sustained drug delivery products, which are in various phases of clinical and preclinical development. We do not expect to generate revenue from sales of any product other than ReSure Sealant for several years, if at all. Through June 30, 2014, we have financed our operations primarily through private placements of our preferred stock and borrowings under credit facilities. In July 2014, we closed our IPO, and in August 2014 the underwriters in our IPO exercised their over-allotment option in full. We received total net proceeds of approximately $66.7 million from the issuance and sale of 5,750,000 shares of common stock, including in connection with the exercise by the underwriters of their over-allotment option, after deducting underwriting discounts and offering costs. As of June 30, 2014, we had cash and cash equivalents of $19.9 million. In April 2014, we borrowed $15.0 million in aggregate principal amount under a new credit facility and used $1.9 million of this amount to repay $1.7 million aggregate principal amount of indebtedness and pay $0.2 million of other amounts due in connection with our termination of a prior credit facility. Until December 31, 2014, we can borrow an additional $5.0 million in aggregate principal amount under this credit facility, contingent upon our satisfaction of general borrowing conditions. The outstanding borrowings under this facility bear interest at an annual rate equal to 8.25%. See "-Contractual Obligations and Commitments" for additional information.



Cash Flows

As of June 30, 2014, we had cash and cash equivalents of $19.9 million. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. The following table summarizes our sources and uses of cash for each of the periods presented: Six Months Ended June 30, 2014 2013 (in thousands) Cash used in operating activities $ (8,537 ) $



(6,338 )

Cash used in investing activities (545 )



(72 )

Cash provided by financing activities 11,521



7,586

Net increase in cash and cash equivalents $ 2,439$ 1,176

Operating activities. Net cash used in operating activities was $8.5 million for the six months ended June 30, 2014, primarily resulting from our net loss of $13.4 million, partially offset by non-cash charges of $4.0 million and net cash provided by changes in our operating assets and liabilities of $0.8 million. Our net loss was primarily attributed to research and development activities and our general and administrative expenses, as we had minimal product revenue in the period. Our net non-cash charges during the six months ended June 30, 2014 consisted primarily of $2.4 million of licensing and consultant fees paid in common stock and $1.0 million of stock-based compensation expense. Net cash provided by changes in our operating assets and liabilities during the six months ended June 30, 2014 consisted primarily of an increase in accounts payable and accrued expenses of $0.8 million and a decrease of $0.2 million in accounts receivable, partially offset by an increase in inventories of $0.1 million, representing the initial capitalization of inventories purchased following the approval of ReSure Sealant. The increase in accounts payable and accrued expenses was due to increased research and development activities and the timing of vendor invoicing and payments. 28



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Net cash used in operating activities was $6.3 million for the six months ended June 30, 2013, primarily resulting from our net loss of $6.3 million and cash used for changes in our operating assets and liabilities of $0.5 million, partially offset by non-cash charges of $0.4 million. Our net loss was primarily attributed to research and development activities and our general and administrative expenses, as we had no product revenue in the period. Our net non-cash charges during the six months ended June 30, 2013 consisted primarily of $0.2 million of stock-based compensation expense and $0.2 million of depreciation expense. Net cash used for changes in our operating assets and liabilities during the six months ended June 30, 2013 consisted primarily of a decrease of $0.6 million in accounts payable and accrued expenses, primarily due to the payment of accrued bonuses. The decrease in accounts payable was due to the timing of vendor invoicing and payments. Investing activities. Net cash used in investing activities for the six months ended June 30, 2014 totaled $0.5 million for purchases of property and equipment, primarily laboratory equipment and additional investment in a manufacturing clean room. Net cash used in investing activities for the six months ended June 30, 2013 totaled $0.1 million for purchases of property and equipment, primarily laboratory equipment and additional investment in a manufacturing clean room. Financing activities. Net cash provided by financing activities for the six months ended June 30, 2014 and 2013 was $11.5 million and $7.6 million, respectively. Net cash provided by financing activities in the six months ended June 30, 2014 consisted primarily of proceeds of $14.9 million from our new credit facility, under which we borrowed $15.0 million in aggregate principal amount in April 2014, partially offset by the repayment of $2.3 million of outstanding principal and other amounts due in connection with our termination of a prior credit facility and payments of $1.1 million of deferred offering costs in anticipation of our IPO that we completed in July 2014. Net cash provided by financing activities in the six months ended June 30, 2013 consisted primarily of net proceeds of $8.5 million from the issuance of our Series D-1 redeemable convertible preferred stock, partially offset by repayments of $0.9 million on our outstanding notes payable.



Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the clinical trials of our products in development and increase our sales and marketing resources focused on the launch of the ReSure Sealant, our first FDA-approved product. In addition, we will incur additional costs associated with operating as a public company.



Our expenses will also increase as we:

pursue the clinical development of our most advanced product candidates,

the punctum plug candidates OTX-DP and OTX-TP;



continue the research and development of our other product candidates;

seek to identify and develop additional product candidates; seek marketing approvals for any of our product candidates that successfully complete clinical development;



develop and expand our sales, marketing and distribution capabilities for

ReSure Sealant and any of our product candidates for which we obtain

marketing approval; scale up our manufacturing processes and capabilities to support sales of



ReSure Sealant, our ongoing clinical trials of our product candidates and

commercialization of any of our product candidates for which we obtain

marketing approval; maintain, expand and protect our intellectual property portfolio;



expand our operational, financial and management systems and personnel,

including personnel to support our clinical development, manufacturing and

commercialization efforts and our operations as a public company; and



increase our product liability and clinical trial insurance coverage as we

expand our clinical trials and commercialization efforts.

We believe that the net proceeds from the IPO completed in July 2014 and from the exercise of the over-allotment option in August 2014, together with our existing cash and cash equivalents, revenue from sales of ReSure Sealant and $5.0 29



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million of additional borrowing capacity available to us under our credit facility, will enable us to fund our operating expenses, debt service obligations and capital expenditure requirements at least through the first half of 2016. We have based this estimate on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect.



Our future capital requirements will depend on many factors, including:

the level of product sales from ReSure Sealant 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 ReSure Sealant and any

additional products for which we obtain marketing approval in the future;

the progress, costs and outcome of the clinical trials of our punctum plug

product candidates, in particular OTX-DP and OTX-TP;



the scope, progress, costs and outcome of preclinical development and

clinical trials of our other product candidates; the costs, timing and outcome of regulatory review of our product candidates by the FDA, the EMA or other regulatory authorities;



the extent to which we choose to establish collaboration, distribution or

other marketing arrangements for our products and product candidates;

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 a combination of revenue from sales of ReSure Sealant, equity offerings, debt financings, government or other third-party funding, collaborations, strategic alliances, licensing arrangements and marketing and distribution arrangements. We do not have any committed external source of funds other than remaining borrowing ability under our credit facility of $5.0 million. Our ability to borrow under our credit facility will be subject to our satisfaction of specified conditions. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your 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 facility, the pledge of our assets as collateral and the negative pledge of intellectual property 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 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. 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. Since our inception in 2006, we have not recorded any U.S. federal or state income tax benefits for the net losses we have incurred in each year or our earned research and development tax credits, due to our uncertainty of realizing a benefit from those items. As of December 31, 2013, we had federal net operating loss carryforwards of $23.7 million, which begin to expire in 2026, and state net operating loss carryforwards of $22.0 million, which began to expire in 2014. As of December 31, 2013, we also had federal research and development tax credit carryforwards of $1.4 million and state research and development tax credit carryforwards $1.0 million, which begin to expire in 2026 and 2023, respectively. We have not completed a study to assess whether an ownership change, generally defined as a greater than 50% change (by value) in the equity ownership of our corporate entity over a three-year period, has occurred or whether there have been multiple ownership changes since our inception, due to the significant costs and complexities associated with such studies. Accordingly, our ability to utilize our tax carryforwards may be limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be utilized against future taxes. As a result, we may not be able to take full advantage of these carryforwards for federal and state tax purposes. 30



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Contractual Obligations and Commitments

We lease office, laboratory and manufacturing space in Bedford, Massachusetts and certain office equipment under operating leases that expire in June 2017 and June 2018. In April 2014, we entered into a secured credit facility with Silicon Valley Bank and MidCap Financial SBIC, LP. The credit facility provides for borrowings of up to $20.0 million, of which we borrowed $15.0 million on the initial closing of the credit facility. Upon the completion of our IPO in July 2014, an additional $5.0 million became available to us under our credit facility. We can borrow this additional amount until December 31, 2014, contingent upon our satisfaction of other general borrowing conditions. The credit facility carries a fixed annual interest rate of 8.25% on outstanding borrowings. In addition, upon repayment of all outstanding amounts under the credit facility, we are required to make a payment in an amount equal to 3.75% of total borrowings during the term of the credit facility. In April 2014, we issued the lenders warrants to purchase 100,000 shares of our Series D-1 redeemable convertible preferred stock with an exercise price of $3.00 per share. Upon the closing of our IPO in July 2014, the preferred stock warrants became warrants to purchase an aggregate of 37,878 shares of our common stock with an exercise price of $7.92 per share. We will be required to issue an additional warrant or warrants to purchase shares of our common stock in connection with any additional borrowings we make under the credit facility. The value of such warrants will equal 2% of the amount of any additional borrowings. The credit facility provides for monthly, interest-only payments on outstanding borrowings until March 1, 2015. Thereafter, we are required to pay 36 consecutive, equal monthly installments of principal and interest through March 2018. As a result of closing our IPO in July 2014, the term of the monthly, interest-only payments can be extended until October 1, 2015. There are no financial covenants associated with the credit facility. There are negative covenants restricting our activities, including limitations on dispositions, mergers or acquisitions; encumbering our intellectual property; incurring indebtedness or liens; paying dividends; making investments; and engaging in certain other business transactions. The obligations under the credit facility are subject to acceleration upon the occurrence of specified events of default, including a material adverse change in our business, operations or financial or other condition. The credit facility is secured by substantially all of our assets except for our intellectual property, which is subject to a negative pledge. The following table summarizes our contractual obligations at June 30, 2014 and the effects such obligations are expected to have on our liquidity and cash flow in future periods: Less Than 1 to 3 3 to 5 More than Total 1 Year Years Years 5 Years (in thousands)



Operating lease commitments $ 2,950$ 787$ 1,639 $

524 $ - Debt obligations(1) 18,441 2,496 11,502 4,443 - Total $ 21,391$ 3,283$ 13,141$ 4,967 $ -



(1) As a result of closing our IPO in July 2014, the term of the monthly,

interest-only payments can be extended until October 1, 2015. In August 2014,

the Company elected to extend the term of interest-only payments until

October 1, 2015. As a result, payments relating to our debt obligations in

less than 1 year, 1 to 3 years and 3 to 5 years will be $1.3 million, $12.3

million and $5.2 million, respectively.

We enter into contracts in the normal course of business with CROs to assist in the performance of our research and development activities and other services and products for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments. We have in-licensed a significant portion of our intellectual property from Incept, an intellectual property holding company, under an amended and restated license agreement that we entered into with Incept in January 2012. We are obligated to pay Incept a royalty equal to a low single-digit percentage of net sales made by us or our affiliates of any products covered by the licensed technology. Any sublicensee of ours also will be obligated to pay Incept a royalty equal to a low single-digit percentage of net sales made by it and will be bound by the terms of the agreement to the same extent as we are. We are obligated to reimburse Incept for our share of the reasonable fees and costs incurred by Incept in connection with the prosecution of the patent applications licensed to us under the agreement. Our share of these fees and costs is equal to the total amount of such fees and costs divided by the total number of Incept's exclusive licensees of the patent application. We have not included in the table above any payments to Incept under this license agreement as the amount, timing and likelihood of such payment are not known. 31



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Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of 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

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016 and interim periods within those periods. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. We are currently assessing the impact that adopting this new accounting guidance will have on our financial statements and footnote disclosures.


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