What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-05 compared with 2021-05-05 · 155 added, 94 removed, 218 unchanged (53% of the section changed)

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Starting with FDA approval of INVELTYS, we have built a commercial infrastructure with our own focused, specialty sales force which now includes 105 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 plan to further expand our sales force up to 125 TSMs by year-end, subject to continued growth in payor 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, 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 $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.

Our net losses were $36.5 million and $66.9 million for the three and six months ended June 30, 2021, respectively, and $104.3 million for the year ended December 31, 2020.

As of June 30, 2021, we had an accumulated deficit of $466.7 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 initial public offering, or IPO, follow-on public common stock offerings and sales of our common stock under our sales agreement with Jefferies, LLC, or Jefferies, in at-the-market offerings, or ATM Offerings, private placements of preferred stock, borrowings under credit facilities and the Loan and Security Agreement, or Loan Agreement, with Oxford Finance LLC, or Oxford Finance, convertible promissory notes 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 commercialize EYSUVIS and INVELTYS.

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Business Impact of COVID-19 Pandemic

The ongoing COVID-19 pandemic, which began in December 2019, has spread worldwide, causing federal, state and local governments to implement measures to slow the spread of the pandemic through quarantines, strict travel restrictions and bans, heightened border scrutiny and other measures.

In order to safeguard the health of our employees, we follow, and will continue to follow, recommendations from the U.S.

In order to safeguard the health of our employees from the COVID-19 pandemic, we follow, and will continue to follow, recommendations from the U.S.

Centers for Disease Control and Prevention, as well as federal, state, and local governments, regarding working-from-home practices for non-essential employees.

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.

As a result, all office-based personnel are permitted 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 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 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.

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, which may continue to hamper our ability to market and commercialize EYSUVIS and INVELTYS.

In addition, government restrictions have at times led to moratoria on elective ocular surgeries in many jurisdictions, which had 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 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, the timing and extent of any resurgence of the COVID-19 virus or any variant strains of the virus, the availability and effectiveness of vaccines, 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

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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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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 U.S.

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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 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 continued 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.

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Interest Expense

Interest expense primarily consists of contractual coupon interest, 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 and accretion of the final payment fee recognized on our debt facility.

Loss on Extinguishment of Debt

Loss on extinguishment of debt primarily consists of unamortized debt discount and issuance costs, a prepayment premium and unaccreted exit fees on the Athyrium Credit Facility .

Critical Accounting Policies and Significant Judgments and Estimates

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Results of Operations

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:

Comparison of the Three Months Ended June 30, 2021 and 2020

The following table summarizes the results of our operations for the three months ended June 30, 2021 and 2020:

Three Months Ended

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Interest expense

Loss on extinguishment of debt

Product revenues, net

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;

Product revenues, net was $3.1 million for the three months ended June 30, 2021, consisting of $1.7 million from EYSUVIS sales and $1.4 million from INVELTYS sales, compared to $0.8 million from INVELTYS sales for the three months ended June 30, 2020.

There were no sales of EYSUVIS in the three months ended June 30, 2020.

The increase in product revenues, net of $2.3 million was driven primarily by sales of EYSUVIS, which we began shipping to wholesalers in the United States in late December 2020, an increase in the total units of INVELTYS sold in the three months ended June 30, 2021 as well as a higher per unit gross selling price of INVELTYS as compared to those sold during the three months ended June 30, 2020.

These increases in INVELTYS sales were partially offset by higher estimated reserves per unit during the three months ended June 30, 2021 as compared to those estimated during the three months ended June 30, 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 $0.8 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.

Cost of product revenues was $1.0 million for the three months ended June 30, 2021, compared to $0.8 million for the three months ended June 30, 2020, an increase of $0.2 million.

Cost of product revenues increased $0.5 million due to an increase in total INVELTYS units sold during the three months ended June 30, 2021, compared to the three months ended June 30, 2020 as well as a higher INVELTYS cost per unit as a result of the units sold during the three months ended June 30, 2020 being partially manufactured prior to FDA approval and for which costs were expensed as research and development prior to FDA approval as compared to those units sold during the three months ended June 30, 2021.

Offsetting these increases was a reserve for excess inventory of $0.5 million recorded during the three months ended June 30, 2020, which did not occur in the three months ended June 30, 2021.

The cost of product revenues attributable to EYSUVIS was $0.2 million for the three months ended June 30, 2021.

There were no sales of EYSUVIS in the three months ended June 30, 2020.

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 $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.

Selling, general and administrative expenses were $28.0 million for the three months ended June 30, 2021, compared to $15.3 million for the three months ended June 30, 2020, which was an increase of $12.7 million.

Selling, general and administrative expenses for the three months ended June 30, 2021 included a $4.8 million increase in external sales and marketing costs as compared to the three months ended June 30, 2020, primarily as a result of the launch of EYSUVIS.

External sales and marketing costs incurred during the three months ended June 30, 2020 primarily related to commercial activities for INVELTYS.

Also contributing to the increase in selling, general and administrative expenses for the three months ended June 30, 2021 was a $5.7 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 $1.6 million increase in stock-based compensation costs and a $0.9 million increase in other selling, general and administrative expenses, which included facility related costs and certain medical affairs costs attributable to our commercial products.

These increases were partially offset by a $0.3 million decrease in costs for administrative and professional service fees.

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 March 31, 2021 and 2020:

The following table summarizes the research and development expenses incurred during the three months ended June 30, 2021 and 2020:

Three Months Ended

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Total research and development

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.

Research and development expenses were $3.1 million for the three months ended June 30, 2021, compared to $6.1 million for the three months ended June 30, 2020, a $3.0 million decrease.

The decrease was primarily the result of a $2.0 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 $1.3 million decrease in employee-related costs largely due to the decrease in the allocation of employee time dedicated to research and development, partially offset by a $0.3 million increase in other research and development costs, which included preclinical studies and other facility related costs.

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 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 was less than $0.1 million for the three months ended June 30, 2021, compared to $0.1 million for the three months ended June 30, 2020, a decrease of less than $0.1 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.

The decrease was attributable to lower interest rates during the three months ended June 30, 2021.

Interest expense

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.

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 March 31, 2021 and 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.

We incurred interest expense of $2.1 million for the three months ended June 30, 2021, which remained consistent with interest expense of $2.1 million for the three months ended June 30, 2020.

Interest expense was comprised of the contractual coupon interest expense, the amortization of the debt discount and the accretion of the final payment fee associated with our Loan Agreement with Oxford Finance LLC and our Athyrium Credit Facility.

During the three months ended June 30, 2021, $75.0 million of indebtedness was outstanding under the Athyrium Credit Facility until we repaid such indebtedness in full on May 4, 2021.

During the three months ended June 30, 2021, $80.0 million of indebtedness was outstanding under our Loan Agreement after we drew down the tranche A term loan on May 4, 2021.

During the three months ended June 30, 2020, $75.0 million of indebtedness was outstanding under the Athyrium Credit Facility.

Loss on extinguishment of debt

The loss of extinguishment of debt was $5.4 million for the three months ended June 30, 2021.

Upon the repayment in full of all amounts owed under the Athyrium Credit Facility, the unamortized debt discount and issuance costs, prepayment premium and unaccreted exit fee were recorded as loss on extinguishment of debt for the three months ended June 30, 2021.

There was no loss on extinguishment of debt for the three months ended June 30, 2020.

Comparison of the Six Months Ended June 30, 2021 and 2020

The following table summarizes the results of our operations for the six months ended June 30, 2021 and 2020:

Six Months Ended

(in thousands)

Product revenues, net

Costs and expenses:

Cost of product revenues

Selling, general and administrative

Research and development

Total operating expenses

Loss from operations

Other income (expense)

Interest income

Interest expense

Loss on extinguishment of debt

Product revenues, net

Product revenues, net was $6.3 million for the six months ended June 30, 2021, consisting of $3.3 million from EYSUVIS sales and $3.0 million from INVELTYS sales, compared to $1.9 million from INVELTYS sales for the six months ended June 30, 2020.

There were no sales of EYSUVIS in the six months ended June 30, 2020.

The increase in product revenues, net of $4.4 million was driven primarily by sales of EYSUVIS, which we began shipping to wholesalers in the United States in late December 2020, an increase in the total units of INVELTYS sold in the six months ended June 30, 2021 as well as a higher per unit gross selling price of INVELTYS as compared to those sold during the six months ended June 30, 2020.

These increases in INVELTYS sales were partially offset by higher estimated reserves per unit during the six months ended June 30, 2021 as compared to those estimated during the six months ended June 30, 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 $1.8 million for the six months ended June 30, 2021, compared to $1.1 million in the six months ended June 30, 2020, an increase of $0.7 million.

Cost of product revenues increased $0.8 million due to an increase in total INVELTYS units sold during the six months ended June 30, 2021, compared to the six months ended June 30, 2020 as well as a higher INVELTYS cost per unit as a result of the units sold during the six months ended June 30, 2020 being partially manufactured prior to FDA approval and for which costs were expensed as research and development prior to FDA approval as compared to those units sold during the six months ended June 30, 2021.

Partially offsetting these increases was a reserve for excess inventory of $0.5 million recorded during the six months ended June 30, 2020, which did not occur in the six months ended June 30, 2021.

The cost of product revenues attributable to EYSUVIS was $0.4 million for the six months ended June 30, 2021.

There were no sales of EYSUVIS in the six months ended June 30, 2020.

Selling, general and administrative expenses

Selling, general and administrative expenses were $55.7 million for the six months ended June 30, 2021, compared to $30.7 million for the six months ended June 30, 2020, which was an increase of $25.0 million.

Selling, general and administrative expenses for the six months ended June 30, 2021 included a $10.3 million increase in external

sales and marketing costs as compared to the six months ended June 30, 2020, primarily as a result of the launch of EYSUVIS.

External sales and marketing costs incurred during the six months ended June 30, 2020 primarily related to commercial activities for INVELTYS.

Also contributing to the increase in selling, general and administrative expenses for the six months ended June 30, 2021 was a $9.8 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 $3.4 million increase in stock-based compensation costs and a $1.5 million increase in other selling, general and administrative expenses, which included facility related costs and certain medical affairs costs attributable to our commercial products .

Research and development expenses

The following table summarizes the research and development expenses incurred during the six months ended June 30, 2021 and 2020:

Six Months Ended

(in thousands)

KPI-121 development costs

Employee‑related costs

Other research and development costs

Total research and development

Research and development expenses were $6.2 million for the six months ended June 30, 2021, compared to $11.5 million for the six months ended June 30, 2020, a $5.3 million decrease.

The decrease was primarily the result of a $3.6 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 $1.9 million decrease in employee-related costs largely due to the decrease in the allocation of employee time dedicated to research and development, partially offset by a $0.2 million increase in other research and development costs, which included preclinical studies and other facility related costs.

Interest income

Interest income was $0.1 million for the six months ended June 30, 2021, compared to $0.4 million for the six months ended June 30, 2020, a decrease of $0.3 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 six months ended June 30, 2021.

Interest expense

We incurred interest expense of $4.2 million for the six months ended June 30, 2021, compared to $4.3 million for the six months ended June 30, 2020, a $0.1 million decrease.

During the six months ended June 30, 2021, $75.0 million of indebtedness was outstanding under the Athyrium Credit Facility until we repaid such indebtedness in full on May 4, 2021.

During the six months ended June 30, 2021, $80.0 million of indebtedness was outstanding under our Loan Agreement after we drew down the tranche A term loan on May 4, 2021.

During the six months ended June 30, 2020, $75.0 million of indebtedness was outstanding under the Athyrium Credit Facility.

Loss on extinguishment of debt

The loss of extinguishment of debt was $5.4 million for the six months ended June 30, 2021.

There was no loss on extinguishment of debt for the six months ended June 30, 2020.

Liquidity and Capital Resources

Since our inception , we have incurred significant operating losses.

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 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.

On August 9, 2018, we filed our shelf registration statement on Form S-3 that was declared effective by the SEC on August 27, 2018, or the 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.

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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.

On May 4, 2021, concurrently with the closing of the Loan Agreement with Oxford Finance LLC and the initial borrowing of the tranche A loan, we utilized substantially all of the proceeds from the tranche A term 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.

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 $0.8 million.

The transaction resulted in a loss on extinguishment of debt of $5.4 million, consisting of the prepayment premium, the unamortized debt discount and the unaccreted exit fee.

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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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.

There was $18.3 million of securities available to be issued under the 2018 Shelf Registration as of June 30, 2021.

On May 7, 2020, we filed our 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 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.

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 the three and six months ended June 30, 2021, we issued and sold an additional 837,257 and 5,583,329 shares of our common stock under our ATM Offering, respectively, resulting in net proceeds to us of $6.0 million and $40.7 million, respectively.

As of June 30, 2021, there was $11.9 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.

On May 4, 2021, we entered into the Loan Agreement with Oxford Finance, in its capacity as lender, or 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;

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

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.

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.

As of June 30, 2021 and 2020, we had $149.6 million and $184.6 million, respectively, in cash, cash equivalents and short-term investments.

As of June 30, 2021, we had $80.0 million in indebtedness, which represented the aggregate principal amount that was outstanding under the Loan Agreement with Oxford Finance LLC.

As of June 30, 2020, we had $75.0 million in indebtedness, which 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 six months ended June 30, 2021 and 2020:

Six Months Ended

(in thousands)

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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.

Net cash used in operating activities for the six months ended June 30, 2021 was $54.2 million compared to $39.1 million for the six months ended June 30, 2020, an increase of $15.1 million, primarily due to an $11.7 million increase in the net loss adjusted for non-cash charges and the timing of working capital fluctuations which accounted for $3.4 million of the increase.

Notable working capital fluctuations include an increase to accounts receivable in the six months ended June 30, 2021 of $2.3 million driven by an increase in sales largely due to the launch of EYSUVIS, whereas accounts receivable had decreased by $7.3 million in the six months ended June 30, 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 six months ended June 30, 2021 due to an increase in manufacturing activity for EYSUVIS and INVELTYS.

Offsetting these increases was an increase in accrued expenses and other current liabilities during the six months ended June 30, 2021 of $2.0 million, as compared to a decrease in accrued expenses and other current liabilities in the six months ended June 30, 2020 of $6.8 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.

Net cash provided by investing activities for the six months ended June 30, 2021 was $70.7 million compared to net cash used of $57.5 million for the same period in 2020, an increase of $128.2 million.

Net cash provided by investing activities for the six months ended June 30, 2021 primarily related to the sales or maturities of short-term investments $71.3 million.

Net cash used in investing activities for the six months ended June 30, 2020 primarily related to the purchases of short-term investments of $56.5 million.

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.

Net cash provided by financing activities for the six months ended June 30, 2021 was $41.2 million, a decrease of $98.0 million compared to $139.2 million in the six months ended June 30, 2020.

Net cash provided by financing activities for the six months ended June 30, 2021 included $77.8 million of net proceeds from the tranche A term loan under our Loan Agreement, $40.7 million of net proceeds from the sale of shares of our common stock under the ATM Offering and $0.7 million of proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan, partially offset by the repayment of indebtedness under our Athyrium Credit Facility of $78.0 million.

Net cash provided by financing activities for the six months ended June 30, 2020 consisted of $125.4 million of net proceeds from the sale of shares of our underwritten offering pursuant to the 2018 Shelf Registration,

$12.6 million of net proceeds from the sale of shares of our common stock under the ATM Offering and $1.2 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 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.

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 from 91 TSMs to 105 TSMs, which occurred around the start of the third quarter 2021, with a subsequent expansion up to 125 TSMs expected by year-end, subject to continued growth in payor coverage and the status of the COVID-19 pandemic.

Our expenses will also increase if and as we:

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

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 anticipate that our cash, cash equivalents and short-term investments as of June 30, 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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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.

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Additional private or public financings may not be available to us on acceptable terms, or at all.

Additionally, the COVID-19 pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact our ability to raise additional funds.

Additionally, the COVID-19 pandemic has already caused significant disruptions in the financial markets, and may again cause such disruptions, which could impact our ability to raise additional funds.

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

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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