What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-05 compared with 2020-11-05 · 167 added, 214 removed, 145 unchanged (72% of the section changed)

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We are a biopharmaceutical company focused on the discovery, development and commercialization of innovative therapies for diseases of the eye.

Our innovative mucus-penetrating particle, or MPP, drug delivery technology, which we refer to as our AMPPLIFY ® technology, uses selectively-sized nanoparticles that each have a proprietary coating.

We have worldwide rights to a portfolio of innovative products and product candidates that include two marketed therapies utilizing our proprietary mucus-penetrating particle, or MPP, drug delivery technology, which we refer to as our AMPPLIFY ® technology, to address medical needs for the front of the eye, and a pipeline of proprietary new chemical entities, or NCEs, targeted to address front and back of the eye diseases.

Our two marketed products are EYSUVIS ® (loteprednol etabonate ophthalmic suspension) 0.25%, for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease, and INVELTYS ® (loteprednol etabonate ophthalmic suspension) 1%, a topical twice-a-day ocular steroid for the treatment of post-operative inflammation and pain following ocular surgery.

Both products apply our AMPPLIFY technology to loteprednol etabonate, or LE, a corticosteroid designed for ocular applications.

The AMPPLIFY technology, uses selectively-sized nanoparticles that each have a proprietary coating.

We believe that these two key attributes enable even distribution of drug particles on mucosal surfaces and significantly increase drug delivery to target tissues by enhancing mobility of drug particles through mucus and preventing drug particles from becoming trapped and eliminated by mucus.

We have applied the AMPPLIFY technology to loteprednol etabonate, or LE, a corticosteroid designed for ocular applications, resulting in the October 2020 approval of EYSUVIS TM (loteprednol etabonate ophthalmic suspension) 0.25%, for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease and the August 2018 approval of INVELTYS ® (loteprednol etabonate ophthalmic suspension) 1%, our topical twice-a-day ocular steroid for the treatment of inflammation and pain following ocular surgery, by the U.S.

Food and Drug Administration, or the FDA.

We commercially launched INVELTYS in January 2019 and expect to begin shipping EYSUVIS to wholesalers in the U.S.

by the end of 2020 and for the full promotional launch to begin in January of 2021.

EYSUVIS is the first and only FDA-approved prescription product with an indication for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease.

The FDA approved EYSUVIS based on results from four clinical trials, including three Phase 3 clinical trials and one Phase 2 clinical trial, which demonstrated significant improvements in both the signs and symptoms of dry eye disease.

Specifically, statistical significance was achieved after two weeks of dosing for the sign endpoint of conjunctival hyperemia in all three Phase 3 clinical trials.

Statistical significance was observed in two of the three Phase 3 clinical trials for the symptom endpoints of ocular discomfort severity in both the overall intent-to-treat, or ITT, population and in a predefined subgroup of ITT patients with more severe ocular discomfort at baseline.

EYSUVIS was well-tolerated across the four trials, with adverse events and intraocular pressure, or IOP, increases comparable to that observed with vehicle.

We believe EYSUVIS could become the preferred first-line prescription therapy for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease, including the treatment of dry eye flares that affect the vast majority of dry eye patients.

INVELTYS is the first and only FDA-approved ocular corticosteroid product with a twice-a-day dosing regimen for the treatment of post-operative inflammation and pain.

Other approved topical ocular corticosteroid products for this indication are dosed three or four times a day.

In clinical trials, INVELTYS showed statistical significance in the primary efficacy endpoints of complete resolution of inflammation at day eight maintained through day 15 with no need for rescue medication compared to placebo and complete resolution of pain at day eight maintained through day 15 with no need for rescue medications compared to placebo.

We are also evaluating other opportunities for MPP compounds in our receptor Tyrosine Kinase Inhibitor program, or rTKI program, that inhibit the vascular endothelial growth factor pathway, for the potential treatment of a number of retinal diseases and novel next-generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action with the goal of eliminating the risk of interocular pressure, or IOP, increase and cataract formation.

We have retained worldwide commercial rights for EYSUVIS, INVELTYS and our current product candidates.

Since FDA approval of INVELTYS, we have built a commercial infrastructure with our own focused, specialty sales force which includes 56 territory sales managers, seven regional sales leaders, and three directors of national accounts.

As a result of the recent FDA approval of EYSUVIS, during the fourth quarter of 2020 we plan to increase our sales force from 56 sales representatives to approximately 90 sales representatives and from seven regional sales leaders to 14 sales leaders, and in 2021, we plan to further increase our sales force to approximately 125 sales representatives, in each case pending the status of the COVID-19 pandemic.

Our sales representatives will promote both EYSUVIS and INVELTYS.

We commercially launched INVELTYS in January 2019 and began shipping EYSUVIS to wholesalers in the U.S.

in late December 2020.

Full promotional launch of EYSUVIS began in January 2021.

We are also progressing our pipeline of proprietary preclinical development programs targeted to address front and back of the eye diseases.

These preclinical development programs, all of which are new chemical entities, include our receptor Tyrosine Kinase Inhibitor program, that is designed to inhibit the vascular endothelial growth factor pathway, for the treatment of retinal diseases, including wet age-related macular degeneration;

our selective glucocorticoid receptor modulators, which are a novel class of therapies designed to modify the downstream activity of the receptors to exhibit the anti-inflammatory and immunomodulatory properties of the corticosteroid class of therapies without their associated side effects;

and our novel surface targeting steroid designed to target the ocular surface and thus have the potential to have fewer side effects compared to traditional topical steroids.

We own all intellectual property and worldwide rights to these pipeline preclinical development programs.

We have retained worldwide commercial rights for EYSUVIS, INVELTYS and our preclinical development programs.

Starting with FDA approval of INVELTYS, we have built a commercial infrastructure with our own focused, specialty sales force which now includes 91 territory sales managers, or TSMs, 14 regional sales leaders, two area sales leaders and four directors of national accounts.

In 2021, we plan to expand our sales force to approximately 105 TSMs by the start of the third quarter, with a subsequent expansion to 125 TSMs expected by year-end, pending continued growth in payer coverage and the status of the COVID-19 pandemic.

Our sales representatives promote both EYSUVIS

and INVELTYS.

We expect to commercialize in the United States any of our product candidates that receive marketing approval as well.

We also expect to explore commercialization of EYSUVIS for the treatment of dry eye disease in certain markets outside the United States, including the European Union, or EU, utilizing a variety of collaboration, distribution and other marketing arrangements with one or more third parties.

Since the initial public offering of our common stock, or IPO, we have financed our operations primarily through common stock offerings pursuant to a shelf registration statement on Form S-3 that was declared effective by the SEC on August 27, 2018, or the 2018 Shelf Registration, and sales of our common stock pursuant to a sales agreement, or the 2018 Sales Agreement, with Jefferies, LLC, or Jefferies, under which we were able to issue and sell, from time to time, common stock in at-the-market offerings, or the ATM Offering, through Jefferies, as a sales agent.

On March 10, 2020 , we notified Jefferies that we were suspending and terminating the prospectus related to the 2018 Sales Agreement.

Through September 30, 2020, we have issued an aggregate of 30,549,976 shares of common stock under our 2018 Shelf Registration, including the ATM Offering , resulting in aggregate gross proceeds to us of $231.7 million.

On May 7, 2020, we filed a shelf registration statement on Form S-3 with the SEC, which was declared effective on May 19, 2020, or the 2020 Shelf Registration.

Under the 2020 Shelf Registration, we may offer and sell up to $350.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities or units during the three-year period the commenced upon the 2020 Shelf Registration becoming effective.

In connection with the filing of the 2020 Shelf Registration, we entered into an amended and restated sales agreement with Jefferies pursuant to which we may issue and sell, from time to time, up to an aggregate of $75.0 million of our common stock under our ATM Offering through Jefferies, as a sales agent.

Through September 30, 2020, we have not issued any shares of common stock under our 2020 Shelf Registration.

We also have an aggregate amount of $75.0 million of indebtedness outstanding under our credit facility, or the Athyrium Credit Facility, with Athyrium Opportunities III Acquisition LP, or Athyrium.

Since the initial public offering of our common stock, or IPO, we have financed our operations primarily through common stock offerings pursuant to a shelf registration statement on Form S-3 that was declared effective by the SEC on August 27, 2018, or the 2018 Shelf Registration, including sales of our common stock pursuant to a sales agreement with Jefferies, LLC, or Jefferies, under which we were able to issue and sell, from time to time, common stock in at-the-market offerings, or the ATM Offering, through Jefferies, as a sales agent;

and common stock offerings pursuant to a shelf registration statement on Form S-3 that was declared effective by the SEC on May 7, 2020, or the 2020 Shelf Registration, under which we are able to issue and sell, from time to time, common stock in the ATM Offering, through Jefferies, as a sales agent, under an amended and restated sales agreement.

Since inception, we have incurred significant losses from operations and negative cash flows from operations.

Our net losses were $73.2 million for the nine months ended September 30, 2020 and $94.3 million for the year ended December 31, 2019.

As of September 30, 2020, we had an accumulated deficit of $368.7 million.

As we commercially launched our first product, INVELTYS, in January 2019, and are planning full promotional launch of our second product, EYSUVIS, to begin in January of 2021, we have had only limited revenues to date from product sales and have financed our operations primarily through proceeds from our IPO, public common stock offerings and sales of our common stock under our ATM Offering, private placements of preferred stock, convertible debt financings, borrowings under credit facilities and warrants.

We have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and clinical trials and engaging in activities to launch and commercialize EYSUVIS and INVELTYS.

Although we expect to continue to generate revenue from sales of INVELTYS and to begin to generate revenue from EYSUVIS following its commercial launch, there can be no assurance as to the amount or timing of any such revenue, and we expect to continue to incur significant expenses and operating losses.

Our net losses were $30.4 million for the three months ended March 31, 2021 and $104.3 million for the year ended December 31, 2020.

As of March 31, 2021, we had an accumulated deficit of $430.2 million.

As we commenced a full promotional launch of EYSUVIS in early January 2021 and commercially launched our first product, INVELTYS, in January 2019, we have had only limited revenues to date from product sales and have financed our operations primarily through proceeds from our IPO, follow-on public common stock offerings and sales of our common stock under our ATM Offerings, private placements of preferred stock, borrowings under credit facilities, convertible promissory notes and warrants.

Although we expect to continue to generate revenue from sales of EYSUVIS and INVELTYS, there can be no assurance as to the amount or timing of any such revenue, and we expect to continue to incur significant expenses and operating losses.

Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year.

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As a result, all office-based personnel have been instructed to work from home, and our laboratory facilities that support our early-stage research activities are being utilized as necessary.

In addition, we previously suspended our sales force from substantially all in-person interactions with physicians and customers and were limited to conducting educational and promotional activities virtually.

If we suspend all or some in-person interactions with physicians and customers in the future, we will again be limited to conducting educational and promotional activities virtually, which has hampered, and may continue to hamper, our ability to market INVELTYS.

The effects of COVID-19 may also disrupt the launch and commercialization of EYSUVIS.

In addition, we previously suspended our sales force from substantially all in-person interactions with physicians and were limited to conducting educational and promotional activities virtually.

Our sales force has since resumed substantially all in-person interactions in the field, but to the extent we restrict, or are restricted from, in-person interactions with physicians in the future, we may be limited to conducting educational and promotional activities virtually, may continue to hamper our ability to market INVELTYS.

The effects of the COVID-19 pandemic may also disrupt the full promotional launch and commercialization of EYSUVIS.

In addition, government restrictions have at times led to moratoria on elective ocular surgeries in many jurisdictions, which has significantly reduced, and may in the future continue to significantly reduce, the demand for INVELTYS, which is indicated for the treatment of inflammation and pain following ocular surgery.

The extent of the impact of COVID-19 on our commercialization efforts and our operational and financial performance will depend on certain developments, including the length and severity of this pandemic and the impact on our customers, employees, vendors, and government agencies, all of which are uncertain and cannot be predicted.

Management is actively monitoring the COVID-19 pandemic and its possible effects on our financial condition, liquidity, operations, customers, sales force, contractors, and workforce.

For additional information on risks posed by the COVID-19 pandemic, please see Part II, Item 1A – “Risk Factors” of this Quarterly Report, including the risk factor entitled “The ongoing novel coronavirus pandemic and the efforts to prevent its spread have adversely impacted our operations and the market for INVELTYS, could impact the launch of EYSUVIS and may continue to adversely affect our business, results of operations and financial condition.”

The extent of the impact of the COVID-19 pandemic on our commercialization efforts of EYSUVIS and INVELTYS and our operational and financial performance will depend on certain developments, including the length and severity of this pandemic and the full extent of the impact on our customers, employees and vendors and government agencies, all of which are uncertain and cannot be predicted.

Management is actively monitoring the COVID-19 pandemic and its effects on our financial condition, liquidity, operations, customers, sales force, contractors, and workforce.

For additional information on risks posed by the COVID-19 pandemic, please see Part II, Item 1A – “Risk Factors” of this Quarterly Report on Form 10-Q, including the risk factor entitled “The ongoing novel coronavirus pandemic and the efforts to prevent its spread have adversely impacted our operations and the market for INVELTYS, could impact the launch and commercialization of EYSUVIS and may continue to adversely affect our business, results of operations and financial condition.”

Recent Developments

On May 4, 2021, we entered into a Loan and Security Agreement, or the Loan Agreement, with Oxford Finance LLC, in its capacity as lender (in such capacity, the “Lender”), and in its capacity as collateral agent (in such capacity, the “Agent”), pursuant to which a term loan of up to an aggregate principal amount of $125.0 million is available to us, consisting of (i) a tranche A term loan that was disbursed on the closing date of the Loan Agreement in the aggregate principal amount of $80.0 million;

(ii) a contingent tranche B term loan in the aggregate principal amount of $20.0 million available to us through June 30, 2023 and within 90 days of our achieving trailing 6-month product revenue equal to or greater than $75.0 million, subject to certain other terms and conditions;

and (iii) a contingent tranche C term loan in the aggregate principal amount of $25.0 million available to us through December 31, 2023 and within 90 days of our achieving trailing 6-month product revenue equal to or greater than $100 million, subject to certain other terms and conditions.

The term loans bear interest at a floating rate equal to the greater of 30-day LIBOR and 0.11%, plus 7.89%.

The Loan Agreement provides for interest-only payments until December 1, 2024 if neither the tranche B term loan nor the tranche C term loan are made, and until June 1, 2025 if either the tranche B term loan or the tranche C term loan is made, or the Amortization Date.

The aggregate outstanding principal balance of the term loans are required to be repaid in monthly installments starting on the Amortization Date based on a repayment schedule equal to (i) 18 months if neither the tranche B term loan nor the tranche C term loan is made and (ii) 12 months if either the tranche B term loan or the tranche C term loan is made.

All unpaid principal and accrued and unpaid interest with respect to each term loan is due and payable in full on May 1, 2026, or the Maturity Date.

We paid a facility fee of $400,000 on the closing date of the Loan Agreement and have agreed to pay a facility fee of $100,000 upon closing of the tranche B term loan and a $125,000 facility fee upon the closing of the tranche C term loan.

We will be required to make a final payment fee of 7.00% of the original principal amount of any funded term loan payable on the earlier of (i) the prepayment of the term loan in full or (ii) the Maturity Date.

At our option, the we may elect to prepay all, but not less than all, of the outstanding loans, subject to a prepayment fee equal to the following percentage of the principal amount being prepaid:

3.00% if an advance is prepaid during the first 12 months following the applicable advance date, 2.00% if an advance is prepaid after 12 months but prior to 24 months following the applicable advance date, and 1.00% if an advance is prepaid any time after 24 months following the applicable advance date but prior to the Maturity Date.

In connection with our entry into the Loan Agreement, we granted the Agent a security interest in substantially all of our personal property owned or later acquired, including intellectual property.

The Loan Agreement also contains customary representations and warranties and affirmative and negative covenants, as well as customary events of default.

Certain of the customary negative covenants limit our and certain of our subsidiaries’ ability, among other things, to incur future debt, grant liens, make investments, make acquisitions, distribute dividends, make certain restricted payments and sell assets, subject in each case to certain exceptions.

Concurrently with the closing of the Loan Agreement and the initial borrowing of the tranche A loan, we utilized substantially all of the proceeds from the tranche A loan to repay in full all outstanding amounts owed under our credit facility, or the Athyrium Credit Facility, with Athyrium Opportunities III Acquisition LP, or Athyrium, under which we had an aggregate principal amount of $75.0 million of indebtedness outstanding.

We terminated all commitments by Athyrium to extend further credit thereunder and all guarantees and security interests granted by us thereunder.

In connection with the termination of the Athyrium Credit Facility, we paid to the lenders a prepayment premium of $2.25 million and an exit fee of $750,000.

Financial Operations Overview

Product Revenues, Net

As a result of the commercial launch of INVELTYS in the United States in early January 2019, we commenced generating product revenues from sales of INVELTYS.

Our product revenues are recorded net of provisions relating to estimates for (i) trade discounts and allowances, such as discounts for prompt payment and distributor fees, (ii) estimated rebates, chargebacks and co-pay assistance program, and (iii) reserves for expected product returns.

We commenced generating product revenues from sales of INVELTYS in January 2019 and commenced generating revenue from EYSUVIS upon the shipment to wholesalers in the United States in late December 2020.

Full promotional launch of EYSUVIS began in early January 2021.

Our product revenues are recorded net of provisions relating to estimates for (i) trade discounts and allowances, such as discounts for prompt payment and other discounts and distributor fees, (ii) estimated rebates, chargebacks and co-pay assistance program, and (iii) reserves for expected product returns.

These estimates reflect current contractual and statutory requirements, known market events and trends, industry data and forecasted customer buying and payment patterns.

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If actual results vary, estimates may be adjusted in the period such change in estimate becomes known, which could have an impact on earnings in the period of adjustment.

Beginning in March 2020 and continuing through most of the second quarter of 2020, prescriptions of INVELTYS and revenue had been adversely affected by the ongoing COVID-19 pandemic as federal, state and local governments implemented restrictions on elective procedures, which include most ocular surgeries during the second quarter.

While many deferred ocular surgeries have been rescheduled as individual states have released restrictions on elective procedures, and INVELTYS prescriptions have returned to growth, we are unable to project the specific timing or potential impact on future revenues given the continued uncertainty around the impact and duration of the restrictions related to COVID-19 .

While many deferred ocular surgeries have been rescheduled as individual states have released restrictions on elective procedures, and INVELTYS prescriptions have returned to quarterly growth, we are unable to project the specific timing or potential impact on future revenues given the continued uncertainty around the impact and duration of the restrictions related to the COVID-19 pandemic.

We also cannot project the full extent of the impact that the COVID-19 pandemic may have on the full promotional launch and commercialization of EYSUVIS.

Cost of Product Revenues

Cost of product revenues consists primarily of materials, third-party manufacturing costs, freight and distribution costs, royalty expense, allocation of labor, quality control and assurance, reserves for defective inventory, reserves for excess and obsolete inventory and other manufacturing overhead costs.

We expensed cost of product

revenues related to INVELTYS as research and development expenses prior to regulatory approval which we received on August 22, 2018.

We expensed cost of product revenues related to INVELTYS as research and development expenses prior to U.S.

regulatory approval, which we received on August 22, 2018.

We expensed cost of product revenues related to EYSUVIS as research and development expenses prior to the determination that FDA approval was probable and before the future economic benefit was expected to be realized.

With respect to the ongoing COVID-19 pandemic, we expect that the cost of product revenues will be impacted consistent with the negative impact to product revenues, net.

However, we are unable to predict the specific timing or specific impact on cost of product revenues given the continued uncertainty around the impact and duration of the restrictions related to COVID-19.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries, benefits, commissions, stock-based compensation and travel expenses related to our commercial infrastructure and our executive, finance, human resources, legal, information technology and business development functions.

Selling, general and administrative expenses also includes external costs related to marketing, samples and professional fees for auditing, tax, information technology, consultants, legal services and allocated facility-related costs not otherwise included in research and development expenses.

We anticipate that our selling, general and administrative expenses will increase in the future as we continue to build our commercial infrastructure to support the commercialization of EYSUVIS, which was approved by the FDA on October 26, 2020, INVELTYS or of any product candidates for which we obtain marketing approval, and if and as we increase our administrative headcount to support our continued research activities and development of our product candidates.

With respect to the ongoing COVID-19 pandemic, certain selling, general and administrative expenses were favorably impacted during the three and nine months ended September 30, 2020 by the restriction in the activities of our sales force, which had previously suspended substantially all in-person interactions with physicians and customers.

Our sales force has resumed in-person interactions in the field.

If we are forced to suspend all or some in-person sales force interactions again in the future as a result of the COVID-19 pandemic, selling, general and administrative expenses could again be favorably impacted by a reduction in certain expenses associated with the restriction in activities for our sales force.

Selling, general and administrative expenses also include external selling and marketing costs, costs to manufacture sample units and professional fees for auditing, tax, information technology, consultants, legal services and allocated facility-related costs not otherwise included in research and development expenses.

We anticipate that our selling, general and administrative expenses will increase in the future as we continue to build our commercial infrastructure to support the full promotional launch and commercialization of EYSUVIS and the commercialization of INVELTYS or of any product candidates for which we obtain marketing approval.

We also anticipate that our selling, general and administrative expenses will increase if and as we increase our administrative headcount to support our continued research activities and development of our product candidates.

Our sales force has resumed substantially all in-person interactions in the field with physicians, which were previously suspended due to the restrictions with respect to the ongoing COVID-19 pandemic.

If we are forced to suspend all or some in-person sales force interactions again in the future as a result of the COVID-19 pandemic, selling, general and administrative expenses could be favorably impacted by a reduction in certain expenses associated with the restriction in activities for our sales force and other employees.

We are unable to predict the specific amount of this impact if we are forced to resume such restrictions.

Research and Development Expenses

Research and development expenses consist of costs associated with our research activities, including compensation and benefits for full-time research and development employees, an allocation of facilities expenses, overhead expenses, payments to universities under our license agreements and other outside expenses.

Our research and development expenses include:

● employee-related expenses, including salaries, related benefits, travel and stock-based compensation;

● expenses incurred for the preclinical and clinical development of our product candidates and under agreements with contract research organizations, or CROs, including costs of manufacturing product candidates prior to the determination that FDA approval of a drug candidate is probable and before the future economic benefit from the sale of the drug is expected to be realized;

● facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and supplies.

● payments made under our third-party licensing agreements, including the annual minimum royalty and reimbursable expenses for defense of agreed upon patents under a license agreement with Johns Hopkins University, or JHU.

We expense research and development costs as they are incurred.

Prior to regulatory approval, we expense costs relating to the production of inventory for our product candidates, as research and development expenses within our condensed consolidated statements of operations and comprehensive loss in the period incurred, unless we believe regulatory approval and subsequent commercialization of the product candidate is probable and we expect the future economic benefit from sales of the drug to be realized.

Research and development costs that are paid in advance of

performance are capitalized as a prepaid expense until incurred.

We expense costs relating to the production of inventory for our product candidates, as research and development expenses within our condensed consolidated statements of operations and comprehensive loss in the period incurred, unless we believe regulatory approval and subsequent commercialization of the product candidate is probable and we expect the future economic benefit from sales of the drug to be realized.

Research and development costs that are paid in advance of performance are capitalized as a prepaid expense until incurred.

We track outsourced development costs by development program but do not allocate personnel costs, payments made under our license agreements or other costs to specific product candidates or development programs.

These costs are included in Employee-related costs and Other research and development costs in the line items in the tables under “Results of Operations”.

We expect that our total research and development costs in 2020 will decrease as compared to the year ended December 31, 2019 as a result of the completion of our Phase 3 clinical trial of EYSUVIS, which we refer to as STRIDE 3 (STRIDE- S hort T erm R elief I n D ry E ye), and as a result of the capitalization of EYSUVIS manufacturing costs to inventory beginning in the third quarter of 2020.

We expect that research and development costs will increase if and as we continue to advance our product candidates and conduct preclinical studies and clinical trials.

We expect that our total research and development costs will decrease in 2021 as compared to the year ended December 31, 2020 as a result of the completion of our Phase 3 clinical trial of EYSUVIS, which we refer to as STRIDE 3 (STRIDE- S hort T erm R elief I n D ry E ye), and as a result of the capitalization of EYSUVIS manufacturing costs as inventory beginning in the third quarter of 2020.

We expect that research and development costs will increase if and as we continue to advance our preclinical development programs, identify product candidates and conduct preclinical studies and clinical trials.

The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming.

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Interest Income

Interest income consists of interest earned on our cash balance held in a deposit account.

Interest income consists of interest earned on our cash, cash equivalents and short-term investments.

Interest Expense

Interest expense primarily consists of contractual coupon interest expense, amortization of debt discounts and debt issuance costs recognized on our debt facility.

Interest expense primarily consists of contractual coupon interest, amortization of debt discounts and debt issuance costs recognized on our debt facility.

Critical Accounting Policies and Significant Judgments and Estimates

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Results of Operations

Comparison of the Three Months Ended September 30, 2020 and 2019

The following table summarizes the results of our operations for the three months ended September 30, 2020 and 2019:

Comparison of the Three Months Ended March 31, 2021 and 2020

The following table summarizes the results of our operations for the three months ended March 31, 2021 and 2020:

Three Months Ended

September 30,

(in thousands)

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Product revenues, net

Product revenues, net was $2.2 million for the three months ended September 30, 2020 compared to $1.5 million for the three months ended September 30, 2019.

The increase in product revenues, net of $0.7 million was driven primarily by an increase in total units of INVELTYS sold in the three months ended September 30, 2020 compared to the three months ended September 30, 2019.

Also contributing to this increase was a $0.6 million reduction in revenue included in product revenues, net for the three months ended September 30, 2019 relating to the first two quarters of 2019 as a result of an adjustment to the estimated number of prescriptions reported by our third-party data provider, which resulted in a change in the estimated payor mix for INVELTYS.

INVELTYS was our first product to receive regulatory approval, which we launched in the United States in January 2019.

We expect product revenues to increase if and as we increase our market share, and obtain and maintain coverage and adequate reimbursement for INVELTYS from third-party payors;

however, we expect full-year product revenues to be negatively impacted for 2020 and revenues could continue to be negatively impacted into 2021 as a result of the COVID-19 pandemic.

In addition, we expect to begin shipping EYSUVIS to wholesalers in the U.S.

by the end of 2020 and for the full promotional launch to begin in January of 2021, which we expect to result in an increase in product revenues.

Product revenues, net was $3.3 million for the three months ended March 31, 2021, consisting of $1.63 million from INVELTYS sales and $1.64 million from EYSUVIS sales, compared to $1.1 million from INVELTYS sales for the three months ended March 31, 2020.

The increase in product revenues, net of $2.2 million was driven primarily by sales of EYSUVIS, which we began shipping to wholesalers in the United States in late December 2020, as well as a higher per unit gross selling price of INVELTYS and an increase in the total units of INVELTYS sold in the three months ended March 31, 2021 as compared to those sold during the three months ended March 31, 2020.

These increases in INVELTYS sales were partially offset by higher estimated reserves per unit during the three months ended March 31, 2021 as compared to those estimated during the three months ended March 31, 2020.

We expect product revenues to

increase if and as we increase our market share and obtain and maintain coverage and adequate reimbursement for EYSUVIS and INVELTYS from third-party payors;

however, revenues could continue to be negatively impacted in 2021 as a result of the COVID-19 pandemic.

Cost of product revenues

Cost of product revenues was $0.7 million for the three months ended September 30, 2020 consistent with the three months ended September 30, 2019.

The three months ended September 30, 2019 included an additional $0.1 million in write offs of damaged inventory compared to the same period in 2020.

Offsetting this amount are higher overall cost of product revenues due to an increase in the total units of INVELTYS sold in the three months ended September 30, 2020 compared to the same period in 2019.

We expect cost of product revenues to increase as we continue to commercialize INVELTYS and as a result of the planned launch of EYSUVIS, which we expect to begin shipping to wholesalers in the U.S.

by the end of 2020 and for the full promotional launch to begin in January of 2021.

Cost of product revenues was $0.8 million for the three months ended March 31, 2021, compared to $0.4 million in the three months ended March 31, 2020, an increase of $0.4 million.

The cost of product revenues attributable to EYSUVIS was $0.1 million for the three months ended March 31, 2021.

There were no sales of EYSUVIS in the three months ended March 31, 2020.

The remaining $0.3 million increase in cost of product revenues was due to an increase in total INVELTYS units sold during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 as well as a higher INVELTYS cost per unit as a result of the units sold during the three months ended March 31, 2020 being partially manufactured prior to FDA approval and for which costs were expensed as research and development expenses in the period prior to FDA approval as compared to those units sold during the three months ended March 31, 2021.

We expect aggregate cost of product revenues to increase as we continue to commercialize INVELTYS and as a result of the launch of EYSUVIS, which we began shipping to wholesalers in the United States in late December 2020 and for which we commenced a full promotional launch in early January 2021.

Selling, general and administrative expenses

Selling, general and administrative expenses were $23.9 million for the three months ended September 30, 2020 compared to $15.3 million for the three months ended September 30, 2019, which was an increase of $8.6 million.

The increase was driven by a $5.3 million increase in external sales and marketing costs related to preparation for the launch

of EYSUVIS, a $1.5 million increase in stock-based compensation expense, of which $1.4 million was a result of the issuance of restricted stock units, or RSUs, and performance-based restricted stock units, or PSUs, in June 2020, a $1.0 million increase in costs for administrative and professional service fees and a $0.8 million increase in other selling, general and administrative costs, which include facility related costs and certain medical affairs costs.

We anticipate that our selling, general and administrative expenses will increase in the future as we begin to commercialize EYSUVIS and if and as we increase our administrative headcount to support our continued research activities and seek marketing approval for our product candidates.

Selling, general and administrative expenses were $27.7 million for the three months ended March 31, 2021 compared to $15.4 million for the three months ended March 31, 2020, which was an increase of $12.3 million.

Selling, general and administrative expenses for the three months ended March 31, 2021 included a $5.5 million increase in external sales and marketing costs as compared to the three months ended March 31, 2020, as a result of the launch of EYSUVIS.

External sales and marketing costs incurred during the three months ended March 31, 2020 primarily related to commercial activities for INVELTYS.

Also contributing to the increase in selling, general and administrative expenses for the three months ended March 31, 2021 was a $4.2 million increase in employee-related expenses primarily due to an increase in employee headcount related to the launch of EYSUVIS and merit-based pay, a $1.8 million increase in stock-based compensation costs, a $0.3 million increase in costs for administrative and professional service fees and a $0.5 million increase in other selling, general and administrative costs, which includes facility related costs and certain medical affairs costs.

We anticipate that our selling, general and administrative expenses will increase in the future as we continue to commercialize EYSUVIS and INVELTYS and if and as we increase our administrative headcount to support our continued research and development activities and seek marketing approval for our product candidates.

Research and development expenses

The following table summarizes the research and development expenses incurred during the three months ended September 30, 2020 and 2019:

The following table summarizes the research and development expenses incurred during the three months ended March 31, 2021 and 2020:

Three Months Ended

September 30,

(in thousands)

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Total research and development

Research and development expenses were $3.5 million for the three months ended September 30, 2020 compared to $7.1 million for the three months ended September 30, 2019, a $3.6 million decrease.

The decrease was primarily the result of a $2.1 million decrease in EYSUVIS development costs, $1.8 million of which related to a decrease in external spend on STRIDE 3, our Phase 3 clinical trial of EYSUVIS, a $1.2 million decrease in employee-related costs largely due to the capitalization of manufacturing employees’ time dedicated to EYSUVIS production to inventory in the third quarter of 2020 and a $0.3 million decrease in o ther research and development costs, which include other facility related costs, preclinical studies, certain medical affairs and associated regulatory costs.

We expect research and development costs to increase if and as we conduct any necessary preclinical studies and clinical trials and other development activities for our product candidates.

Interest income

Interest income decreased by $0.5 million to $0.1 million for the three months ended September 30, 2020 compared to $0.6 million for the three months ended September 30, 2019.

Interest income consists of interest earned on our cash balance held in an interest-bearing deposit account.

The decrease was attributable to a lower interest rate during the three months ended September 30, 2020 as well as having less cash in interest bearing deposit accounts during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 as a result of purchases of cash equivalents and short-term investments in 2020.

Interest expense

We incurred interest expense of $2.2 million for the three months ended September 30, 2020, which remained consistent with interest expense of $2.2 million for the three months ended September 30, 2019.

Interest expense was comprised of the contractual coupon interest expense and the amortization of the debt discount associated with our Athyrium Credit Facility during the three months ended September 30, 2020 and 2019.

During the three months ended September 30, 2019, $75.0 million of indebtedness was outstanding under the Athyrium Credit Facility and remained outstanding during the three months ended September 30, 2020.

Comparison of the Nine Months Ended September 30, 2020 and 2019

The following table summarizes the results of our operations for the nine months ended September 30, 2020 and 2019:

Nine Months Ended

September 30,

(in thousands)

Product revenues, net

Costs and expenses:

Cost of product revenues

Selling, general and administrative

Research and development

Total costs and expenses

Loss from operations

Other income (expense)

Interest income

Interest expense

Product revenues, net

Product revenues, net was $4.1 million for the nine months ended September 30, 2020 compared to $4.9 million for the nine months ended September 30, 2019.

The decrease in product revenues, net of $0.8 million was driven by a decrease in the total units of INVELTYS sold in the nine months ended September 30, 2020 as compared to those sold during the nine months ended September, 30 2019, which we attribute to the reductions in elective surgeries as a result of the restrictions related to COVID-19.

INVELTYS was our first product to receive regulatory approval, which we launched in the United States in January 2019.

We expect product revenues to increase if and as we increase our market share, and obtain and maintain coverage and adequate reimbursement for INVELTYS from third-party payors;

however, we expect full-year product revenues to be negatively impacted for 2020 and revenues could continue to be negatively impacted into 2021 as a result of the COVID-19 pandemic.

In addition, we expect to begin shipping EYSUVIS to wholesalers in the U.S.

by the end of 2020 and for the full promotional launch to begin in January of 2021, which we expect to result in an increase in product revenues.

Cost of product revenues

Cost of product revenues was $1.8 million for the nine months ended September 30, 2020, a $0.5 million increase compared to $1.3 million for the nine months ended September 30, 2019.

The primary driver of this increase was a reserve for excess inventory of $0.5 million during the nine months ended September 30, 2020.

Also contributing to the increase in cost of product revenues was an increase in the product cost per unit as a result of a portion of units sold during the nine months ended September 30, 2019 partially manufactured prior to FDA approval and previously expensed as research and development expenses, partially offset by a decrease in total units sold compared to the nine months ended September 30, 2019 for a net increase of $0.1 million.

We expect cost of product revenues to increase as we continue to commercialize INVELTYS and as a result of the planned launch of EYSUVIS, which we expect to begin shipping to wholesalers in the U.S.

by the end of 2020 and for the full promotional launch to begin in January of 2021.

Selling, general and administrative expenses

Selling, general and administrative expenses were $54.6 million for the nine months ended September 30, 2020 compared to $50.5 million for the nine months ended September 30, 2019, an increase of $4.1 million.

Selling, general and administrative expenses for the nine months ended September 30, 2020 include a $2.7 million increase in external sales and marketing costs related to preparation for the launch of EYSUVIS.

External sales and marketing costs incurred during the nine-months ended September 30, 2019 primarily related to the commercial launch of INVELTYS.

contributing to the increase in selling, general and administrative expenses for the nine months ended September 30, 2020 was a $2.0 million increase in costs for administrative and professional service fees, a $1.6 million increase in stock-based compensation costs, of which $1.4 million was a result of the issuance of RSUs and PSUs in June 2020, and a $0.4 million increase in other selling, general and administrative costs, which includes facility related costs and certain medical affairs.

These costs were offset by lower employee-related expenses of $2.6 million for the nine months ended September 30, 2020 primarily attributable to reduced travel due to COVID-19, lower overall headcount throughout the period and reduced variable compensation associated with lower unit sales of INVELTYS due to COVID-19, partially offset by increased recruiting costs related to hiring efforts as we prepare for the launch of EYSUVIS.

We anticipate that our selling, general and administrative expenses will increase in the future as we prepare for the launch of EYSUVIS and if and as we increase our administrative headcount to support our continued research activities and seek marketing approval for our product candidates.

Research and development expenses

The following table summarizes the research and development expenses incurred during the nine months ended September 30, 2020 and 2019:

Nine Months Ended

September 30,

(in thousands)

KPI-121 development costs

Employee‑related costs

Other research and development costs

Total research and development

Research and development expenses were $15.0 million for the nine months ended September 30, 2020 compared to $21.1 million for the nine months ended September 30, 2019, a $6.1 million decrease.

The decrease was primarily the result of a $5.0 million decrease in EYSUVIS development costs related to a decrease in external spend on STRIDE 3, our Phase 3 clinical trial of EYSUVIS, a $0.7 million decrease in employee-related costs largely due to reduced travel due to COVID-19 and the capitalization of manufacturing employees’ time dedicated to EYSUVIS production to inventory in the third quarter of 2020 and a $0.4 million decrease in other research and development costs, which include other facility related costs, preclinical studies, certain medical affairs and associated regulatory costs.

We expect research and development costs to increase if and as we conduct any necessary preclinical studies and clinical trials and other development activities for our product candidates.

Research and development expenses were $3.1 million for the three months ended March 31, 2021 compared to $5.4 million for the three months ended March 31, 2020, a $2.3 million decrease.

The decrease was primarily the result of a $1.6 million decrease in EYSUVIS development costs related to a decrease in external spend on STRIDE 3, our Phase 3 clinical trial of EYSUVIS, and a $0.7 million decrease in employee-related costs largely due to the decrease in the allocation of employee time dedicated to research and development.

We expect research and development costs to

increase if and as we advance our development programs and conduct any necessary preclinical studies and clinical trials and other development activities for product candidates.

Interest income

Interest income decreased by $1.5 million to $0.5 million for the nine months ended September 30, 2020 compared to $2.0 million for the nine months ended September 30, 2019.

Interest income consists of interest earned on our cash balance held in an interest-bearing deposit account.

The decrease was attributable to a lower interest rate during the nine months ended September 30, 2020 as well as having less cash in interest bearing deposit accounts during the third quarter of 2020 compared to the third quarter of 2019 as a result of purchases of short-term investments in 2020.

Interest income was less than $0.1 million for the three months ended March 31, 2021, compared to $0.3 million for the three months ended March 31, 2020, a decrease of $0.2 million.

Interest income consists of interest earned on our cash, cash equivalents and short-term investments.

The decrease was attributable to lower interest rates during the three months ended March 31, 2021.

Interest expense

We incurred interest expense of $6.4 million for the nine months ended September 30, 2020, compared to $6.3 million for the nine months ended September 30, 2019.

Interest expense was comprised of the contractual coupon interest expense and the amortization of the debt discount associated with our Athyrium Credit Facility during the nine months ended September 30, 2020 and 2019.

During the nine months ended September 30, 2019, $75.0 million of indebtedness was outstanding under the Athyrium Credit Facility and remained outstanding during the nine months ended September 30, 2020.

We incurred interest expense of $2.1 million for the three months ended March 31, 2021, which remained consistent with interest expense of $2.1 million for the three months ended March 31, 2020.

During each of the three months ended March 31, 2021 and 2020, $75.0 million of indebtedness was outstanding under the Athyrium Credit Facility.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses.

As we commercially launched our first product, INVELTYS, in January 2019, we have had limited revenues to date from product sales and have financed our operations primarily through proceeds from our IPO, public common stock offerings and sales of our common stock under our ATM Offering, private placements of preferred stock, borrowings under credit facilities, convertible promissory notes and warrants.

As we commercially launched our first product, INVELTYS, in January 2019, and commenced a full promotional launch of our second product, EYSUVIS, in early January 2021, we have had limited revenues to date from product sales and have financed our operations primarily through proceeds from our IPO, follow-on public common stock offerings and sales of our common stock under our ATM Offerings, private placements of preferred stock, borrowings under credit facilities, convertible promissory notes and warrants.

In July 2017, we completed an IPO pursuant to which we issued and sold 6,900,000 shares of our common stock, which included 900,000 shares sold pursuant to the exercise of the underwriters’ option to purchase additional shares, at a price of $15.00 per share.

We received net proceeds of $94.0 million after deducting underwriting discounts and commission of $7.3 million and offering costs incurred in 2017 of $2.2 million.

On August 9, 2018, we filed our 2018 Shelf Registration, under which we may offer and sell up to $250.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities, purchase contracts, purchase units or any combination of such securities during the three-year period that commenced upon the 2018 Shelf Registration becoming effective.

We received net proceeds of $94.0 million after deducting underwriting discounts and commission of $7.3 million and offering costs of $2.2 million.

On August 9, 2018, we filed our 2018 Shelf Registration, under which we could initially offer and sell up to $250.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities, purchase contracts, purchase units or any combination of such securities during the three-year period that commenced upon the 2018 Shelf Registration becoming effective.

Under the 2018 Shelf Registration, we may periodically offer one or more types of securities in amounts, at prices and on terms announced, if and when the securities are ever offered.

We initially designated $50.0 million of our 2018 Shelf Registration to be offered under our ATM Offering.

There was $18.3 million of securities available to be issued under the 2018 Shelf Registration as of September 30, 2020.

On October 1, 2018, we entered into the Athyrium Credit Facility with Athyrium for up to $110.0 million.

The Athyrium Credit Facility provided for a Term Loan A in the aggregate principal amount of $75.0 million, and a Term Loan B in the aggregate principal amount of $35.0 million.

On October 1, 2018, we borrowed the entire principal amount of the Term Loan A.

We did not satisfy the conditions to draw down any of the Athyrium Term Loan B funds, and as a result, the Term Loan B funds are no longer available.

The maturity date of the Athyrium Credit Facility is October 1, 2024, the six-year anniversary of the close.

The Term Loan A bears interest at a rate of 9.875% per annum, with quarterly, interest-only payments until the fourth anniversary of the Term Loan A.

The unpaid principal amount of the Term Loan A is due and payable in quarterly installments starting at the end of the fourth anniversary of the loan.

The Athyrium Credit Facility provided for a Term Loan A in the aggregate principal amount of $75.0 million, and a Term Loan B in the aggregate principal amount of $35.0 million which we did not draw down on.

The term loans bear interest at a floating rate equal to the greater of 30-day LIBOR and 0.11%, plus 7.89%.

Concurrently with the closing of the Loan Agreement and the initial borrowing of the tranche A loan, we utilized substantially all of the proceeds from the tranche A loan to repay in full all outstanding amounts owed under our Athyrium Credit Facility, under which we had an aggregate principal amount of $75.0 million of indebtedness outstanding.

We terminated all commitments by Athyrium to extend further credit under the Athyrium Credit Facility and all guarantees and security interests granted by us thereunder.

In connection with the termination of the Athyrium Credit Facility, we paid to the lenders a prepayment premium of $2.25 million and an exit fee of $750,000.

On October 5, 2018, we sold 7,500,000 shares of common stock in an underwritten offering pursuant to the 2018 Shelf Registration at a public offering price of $8.25 per share, before underwriting discounts and commissions.

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The total number of shares sold by us in the offering was 8,625,000 shares, resulting in net proceeds to us, after underwriting discounts and offering expenses, of $66.1 million.

On March 11, 2020, we sold 16,000,000 shares of our common stock in an underwritten offering pursuant to the 2018 Shelf Registration at a public offering price of $7.89 per share, before underwriting discounts, commissions, and offering expenses, resulting in net proceeds of $118.2 million.

In addition, the underwriters of the offering were granted the option for a period of 30 days to purchase up to an additional 2,400,000 shares of common stock offered in the public offering at the public offering price, less underwriting discounts and commissions.

On April 3, 2020, the underwriters exercised their option and purchased an additional 979,371 shares of common stock at $7.89 per share, before underwriting discounts, commissions, and offering expenses, resulting in net proceeds to us of $7.2 million.

The total number of shares sold by us in the offering was 16,979,371, resulting in total net proceeds to us, after underwriting discounts and offering expenses, of $125.4 million.

In connection with the filing of the 2018 Shelf Registration, we entered into a sales agreement with Jefferies, pursuant to which we could issue and sell, from time to time, up to an aggregate of $50.0 million of our common stock in an ATM Offering, through Jefferies, as sales agent.

As of December 31, 2019, we had issued an aggregate of 2,592,934 shares of our common stock under the ATM Offering, resulting in net proceeds to us of $13.1 million.

During the first quarter of 2020, we issued an aggregate of 2,352,671 shares of our common stock under the ATM Offering,

resulting in net proceeds to us of $12.5 million.

Through the first quarter of 2020, we issued an aggregate of 4,945,605 shares of our common stock under the ATM Offering, resulting in net proceeds to us of $25.6 million.

On March 10, 2020, we suspended and terminated the prospectus related to the ATM Offering.

On March 11, 2020, we sold 16,000,000 shares of our common stock in an underwritten offering pursuant to the 2018 Shelf Registration at a public offering price of $7.89 per share, resulting in net proceeds of $118.2 million, after underwriting discounts, commissions, and offering expenses.

On April 3, 2020, the underwriters exercised their option and purchased an additional 979,371 shares of common stock at $7.89 per share, resulting in net proceeds to us of $7.2 million, after underwriting discounts, commissions, and offering expenses.

The total number of shares sold by us in the offering was 16,979,371, resulting in total net proceeds to us, after underwriting discounts, commissions and offering expenses, of $125.4 million.

Under the 2018 Shelf Registration, we have issued an aggregate of 30,549,976 shares of common stock, including under the ATM Offering, resulting in aggregate gross proceeds to us of $231.7 million.

There was $18.3 million of securities available to be issued under the 2018 Shelf Registration as of March 31, 2021.

On May 7, 2020, we filed our 2020 Shelf Registration, under which we may offer and sell up to $350.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities or units during the three-year period that commenced upon the 2020 Shelf Registration becoming effective.

In connection with the filing of the 2020 Shelf Registration, we entered into an amended and restated sales agreement with Jefferies, pursuant to which we may issue and sell, from time to time, up to an aggregate of $75.0 million of our common stock under our ATM Offering.

As of September 30, 2020, we had $159.1 million in cash, cash equivalents and short-term investments and $75.0 million in indebtedness.

The following table summarizes our sources and uses of cash for the nine months ended September 30, 2020 and 2019:

Nine Months Ended

September 30,

During the fourth quarter of 2020, we issued an aggregate of 2,821,059 shares of our common stock under the ATM Offering, resulting in net proceeds to us of $20.6 million.

In the three months ended March 31, 2021, we issued and sold an additional 4,746,072 shares of our common stock under our ATM Offering, resulting in net proceeds to us of $34.7 million.

As of March 31, 2021, there was $18.1 million of shares of common stock remaining under the ATM Offering that we may issue and sell in the future and, excluding the shares of common stock that may be offered under our ATM Offering, there was $275.0 million of securities available to be issued under the 2020 Shelf Registration.

In the period beginning April 1, 2021 through the date of this Quarterly Report on Form 10-Q, we issued and sold an additional 837,257 shares of our common stock under our ATM Offering, resulting in our receipt of $6.0 million in net proceeds.

As of March 31, 2021 and 2020, we had $156.0 million and $196.5 million, respectively, in cash, cash equivalents and short-term investments, and $75.0 million in indebtedness.

The indebtedness in 2021 and 2020 represented the aggregate principal amount that was outstanding under the Athyrium Credit Facility.

The following table summarizes our sources and uses of cash for the three months ended March 31, 2021 and 2020:

Three Months Ended

(in thousands)

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Decrease in cash and restricted cash

Net Cash Used in Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2020 was $64.8 million compared to $74.5 million for the nine months ended September 30, 2019, a decrease of $9.7 million, primarily due to the timing of working capital fluctuations which accounted for $8.7 million of the decrease and a $1.0 million increase in the net loss adjusted for non-cash charges.

Notable working capital fluctuations include a decrease to accounts receivable in the nine months ended September 30, 2020 by $4.1 million driven by a decrease in sales of INVELTYS as a result of COVID-19, whereas accounts receivable had increased by $7.2 million in the nine months ended September 30, 2019 driven by the launch of INVELTYS.

Inventory increased by a greater amount during the nine months ended September 30, 2019 due to an increase in manufacturing activity for INVELTYS.

Offsetting these increases was a decrease in accrued expenses and other current liabilities during the nine months ended September 30, 2020 by $4.9 million mainly driven by a decrease in accrued revenue reserves and a decrease in external spend on STRIDE 3, our clinical trial for EYSUVIS, as compared to an increase in accrued expenses and other current liabilities in the nine months ended September 30, 2019 of $3.5 million.

Net Cash Used in Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2020 was $115.0 million compared to $1.1 million for the same period in 2019, an increase of $113.9 million, largely due to purchases of short-term investments in 2020 of $113.6 million.

Additionally, we used an additional $0.3 million in cash for capital expenditures in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

Net cash provided by (used in) investing activities

Net cash provided by financing activities

Net cash provided by financing activities for the nine months ended September 30, 2020 was $139.9 million, an increase of $137.2 million compared to $2.7 million in the nine months ended September 30, 2019, due to $125.4 million of net proceeds from the sale of shares of our common stock in an underwritten offering under the 2018 Shelf

Registration, $12.5 million of net proceeds from the sale of shares of our common stock under the ATM Offering, and $2.0 million of proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan in 2020.

Net cash provided by financing activities for the nine-months ended September 30, 2019 consisted of $2.1 million of net proceeds from the sale of shares of our common stock under the ATM Offering and $0.6 million of proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan.

Increase in cash and restricted cash

Operating Activities

Net cash used in operating activities for the three months ended March 31, 2021 was $32.6 million compared to $19.9 million for the three months ended March 31, 2020, an increase of $12.7 million, primarily due to the timing of working capital fluctuations which accounted for $6.6 million of the increase and a $6.1 million increase in the net loss adjusted for non-cash charges.

Notable working capital fluctuations include an increase to accounts receivable in the three months ended March 31, 2021 of $2.6 million driven by an increase in sales largely due to the launch of EYSUVIS, whereas accounts receivable had decreased by $6.8 million in the three months ended March 31, 2020 driven by a decrease in sales of INVELTYS primarily as a result of the COVID-19 pandemic.

Inventory increased by a greater amount during the three months ended March 31, 2021 due to an increase in manufacturing activity for EYSUVIS and INVELTYS.

Offsetting these increases was a decrease in accrued expenses and other current liabilities during the three months ended March 31, 2021 of $3.8 million, as compared to a decrease in accrued expenses and other current liabilities in the three months ended March 31, 2020 of $6.0 million.

Investing Activities

Net cash provided by investing activities for the three months ended March 31, 2021 was $48.0 million compared to net cash used of $0.3 million for the same period in 2020, an increase of $48.3 million, primarily due to sales or maturities of short-term investments of $48.3 million during the three months ended March 31, 2021.

Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2021 was $35.3 million, a decrease of $95.9 million compared to $131.2 million in the three months ended March 31, 2020.

Net cash provided by financing activities for the three months ended March 31, 2021 included $34.7 million of net proceeds from the sale of shares of our common stock under the ATM Offering and $0.6 million of proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan.

Net cash provided by financing activities for the three months ended March 31, 2020 consisted of $118.2 million of net proceeds from the sale of shares of our underwritten offering pursuant to the 2018 Shelf Registration, $12.5 million of net proceeds from the sale of shares of our common stock under the ATM Offering and $0.4 million of proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan.

Funding Requirements

We anticipate that our expenses will increase substantially as compared to prior periods as we continue to commercialize INVELTYS in the United States and engage in activities to prepare for the launch and commercialization of our lead product, EYSUVIS, which was approved by the FDA on October 26, 2020, as a result of increased headcount, including management personnel to support our clinical, manufacturing and commercialization activities, expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated with being a public company and increased insurance premiums, among other factors.

The anticipated increase in expenses from an increase in headcount includes our plan to increase, pending the status of the COVID-19 pandemic, our sales force from 56 sales representatives to approximately 90 sales representatives and from seven regional sales leaders to 14 regional sales leaders during the fourth quarter of 2020 and then to approximately 125 sales representatives in 2021.

We anticipate that our expenses will increase substantially as compared to prior periods as we continue to commercialize INVELTYS in the United States and execute our commercial launch plans for EYSUVIS, as a result of increased headcount, including management personnel to support our clinical, manufacturing and commercialization activities, expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated with being a public company and increased insurance premiums, among other factors.

The increase in headcount includes the expansion of our sales force from 56 TSMs to 91 TSMs, which occurred in the fourth quarter of 2020, and our plan to further increase our sales force in 2021 from 91 TSMs to approximately 105 TSMs by the start of the third quarter, with a subsequent expansion to 125 TSMs expected by year-end, pending continued growth in payer coverage and the status of the COVID-19 pandemic.

Our expenses will also increase if and as we:

● continue to grow our sales, marketing and distribution capabilities in connection with the commercialization of EYSUVIS, INVELTYS and any product candidates;

● conduct any necessary clinical trials and other development activities and/or seek marketing approvals for any product candidates;

● continue to grow our sales, marketing and distribution capabilities in connection with the commercialization of EYSUVIS, INVELTYS and any product candidates for which we may submit for and obtain marketing approval;

● continue to scale up our manufacturing processes and capabilities to support commercialization of EYSUVIS and INVELTYS;

● seek regulatory approval for EYSUVIS and INVELTYS outside of the United States;

● progress our current and any future preclinical development programs;

● in license or acquire the rights to other products, product candidates or technologies;

● pursue the clinical development of KPI-121 for the treatment of other additional indications or for use in other patient populations;

● pursue the preclinical and clinical development of product candidates, including our rTKI program, for use in the treatment of retinal diseases, and novel next-generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action with the goal of eliminating the risk of IOP increase and cataract formation;

● seek regulatory approval for EYSUVIS, INVELTYS or any other product candidate outside of the United States;

● continue to scale up our manufacturing processes and capabilities to support commercialization of EYSUVIS, INVELTYS, and any of our product candidates for which we seek and/or obtain marketing approval ;

● leverage our proprietary AMPPLIFY technology to advance additional potential high-value therapeutics into preclinical and clinical development ;

● conduct clinical trials and other development activities and/or seek marketing approval for future product candidates;

● leverage our proprietary AMPPLIFY technology to seek to advance additional therapeutics into preclinical and clinical development;

● maintain, expand and protect our intellectual property portfolio;

● hire additional clinical, quality control, scientific, manufacturing, commercial and management personnel;

● expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company ;

● expand our operational, financial and management systems;

● increase our product liability insurance coverage as we expand our commercialization efforts for EYSUVIS and INVELTYS.

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Net losses may fluctuate significantly from quarter-to-quarter and year-to-year.

We anticipate that our existing cash, cash equivalents, and short-term investments as of September 30, 2020, along with anticipated revenue from INVELTYS, will enable us to fund our operations, lease and debt service obligations, and capital expenditure requirements into at least the third quarter of 2022.

We expect revenue anticipated to be generated from sales of EYSUVIS to provide additional cash runway.

We anticipate that our cash, cash equivalents and short-term investments as of March 31, 2021, along with anticipated revenue from EYSUVIS and INVELTYS, will enable us to fund our operations, lease and debt service obligations, and capital expenditure requirements for at least two years.

We have based this estimate on assumptions that may prove to be wrong, and our operating plan may change as a result of many factors currently unknown to us.

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● there are any delays in enrollment of patients in or completing our clinical trials or the development of our product candidates;

● we in-license or acquire rights to other products, product candidates or technologies;

● there are any third-party challenges to our intellectual property portfolio, or the need arises to defend against intellectual property-related claims or enforce our intellectual property rights.

Our ability to become and remain profitable depends on our ability to generate revenue.

While we began to generate revenue from the sales of INVELTYS in January 2019 and expect to begin shipping EYSUVIS to wholesalers in the U.S.

by the end of 2020 and for the full promotional launch to begin in January of 2021, there can be no assurance as to the amount or timing of any such revenue from INVELTYS and EYSUVIS, and we may not achieve profitability.

While we began to generate revenue from the sales of EYSUVIS and INVELTYS in late December 2020 and January 2019, respectively, there can be no assurance as to the amount or timing of any future revenue from these products, and we may not achieve profitability.

Achieving and maintaining profitability will require us to be successful in a range of challenging activities, including:

● successfully launching EYSUVIS and growing EYSUVIS revenues;

● successfully growing INVELTYS revenues ;

● successfully launching EYSUVIS;

● obtaining marketing approval for any product candidates;

● achieving an adequate level of market acceptance, and obtaining and maintaining coverage and adequate reimbursement from third-party payors for EYSUVIS, INVELTYS and any other products we commercialize ;

● manufacturing at commercial scale, marketing, selling and distributing EYSUVIS and INVELTYS or any product candidates for which we obtain marketing approval;

● maintaining regulatory and marketing approvals for EYSUVIS and INVELTYS and for any product candidates for which we obtain marketing approval;

● manufacturing at commercial scale, marketing, selling and distributing EYSUVIS and INVELTYS;

● maintaining regulatory and marketing approvals for EYSUVIS and INVELTYS;

● discovering, developing and successfully seeking marketing approval and commercialization of additional product candidates;

● hiring and building a full commercial organization required for marketing, selling and distributing those products for which we obtain marketing approval;

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EYSUVIS and INVELTYS are our only products that have been approved for sale, and they have only been approved in the United States.

Our ability to generate revenue from operations will depend, in part, on the success of commercial sales of INVELTYS, which we commercially launched in the United States in January 2019, and the success of commercial sales of EYSUVIS, which we expect to begin shipping to wholesalers in the U.S.

by the end of 2020 and for the full promotional launch to begin in January of 2021.

However, the successful commercialization of EYSUVIS and INVELTYS in the United States is subject to many risks.

We plan to seek approval in other jurisdictions, but may not do so successfully, or at all.

Further, the successful commercialization of EYSUVIS and INVELTYS in the United States is subject to many risks.

As a company, we have limited experience commercializing products, and we may not be able to do so successfully.

There are numerous examples of unsuccessful product launches and failures to meet expectations of market potential, including by pharmaceutical companies with more experience and resources than us.

We do not anticipate our revenue from sales of EYSUVIS and INVELTYS alone will be sufficient for us to become profitable in the near future, if at all.

In addition, our recent commercialization efforts have been hampered by the operational restrictions on our sales force from quarantines, travel restrictions and bans and other governmental restrictions related to COVID-19.

As a result of these restrictions, we previously suspended our sales force from substantially all in-person interactions with physicians and customers and were limited to conducting educational and promotional activities virtually, and we may be forced to suspend all or some in-person interactions again in the future.

To the extent we restrict in-person interactions with physicians and customers, we will again be limited to conducting educational and promotional activities virtually, which has hampered, and may continue to hamper, our ability to market INVELTYS and could adversely affect our ability to launch and market EYSUVIS.

The extent of the impact of COVID-19 on our commercialization efforts will depend on the length and severity of this pandemic and the impact on our customers, employees, vendors, and government agencies, which is uncertain and cannot be predicted.

Our revenue from sales of EYSUVIS and INVELTYS alone may not be sufficient for us to become profitable in the near future, if at all.

As a result of these restrictions, we previously suspended our sales force from substantially all in-person interactions with physicians and were limited to conducting educational and promotional activities virtually.

Our sales force has since resumed substantially all in-person interactions in the field, but to the extent we restrict, or are restricted from, in-person interactions with physicians, we may be limited to conducting educational and promotional activities virtually, which may continue to hamper our ability to market INVELTYS and could adversely affect our ability to launch and market EYSUVIS.

The extent of the impact of COVID-19 on our commercialization efforts will depend on the length and severity of this pandemic, including the extent there is any resurgence of the COVID-19 virus or any variant strains of the virus, the availability and effectiveness of vaccines, and the impact of the foregoing on our customers, employees and vendors and government agencies, which is uncertain and cannot be predicted.

We may never succeed in these activities and may never generate revenue that is sufficient to achieve profitability.

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Debt financing and preferred equity financing, if available, may involve agreements that include pledging of assets as collateral, covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

Our pledge of our assets as collateral to secure our obligations under our Athyrium Credit Facility may limit our ability to obtain additional debt financing.

Under our Athyrium Credit Facility, we are also restricted from paying dividends on our common stock and limited with respect to certain other uses of our cash without the lenders’ consent.

Our pledge of our assets as collateral to secure our obligations under our Loan Agreement may limit our ability to obtain additional debt financing.

Under our Loan Agreement, we are also restricted from incurring future debt, granting liens, making investments, making acquisitions, distributing dividends on our common stock, making certain restricted payments and selling assets and making certain other uses of our cash, without the lenders’ consent, subject in each case to certain exceptions.

We may need to raise additional capital in the future to advance our business.

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The COVID-19 pandemic has also impacted, and may continue to impact, the volatility of our stock price and trading in our stock.

Even after the COVID-19 pandemic has subsided, we may continue

to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future.

Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future.

Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis