0001720725us-gaap:AdditionalPaidInCapitalMember2021-01-012021-03-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September 30, 2021~~March 31, 2022


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

For the transition period from _____________ to ____________

Commission File Number: 001-39112

OYSTER POINT PHARMA, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware			81-1030955
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
202 Carnegie Center, Suite 109 Princeton, New Jersey			08540
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (609) 382-9032

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.001

OYST

The Nasdaq Global Select Market

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

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

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

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☒

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

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

As of ~~October~~April 29, ~~2021,~~2022, the registrant had ~~26,163,861~~26,669,342 shares of common stock, $0.001 par value per share, outstanding.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Any statements contained in this Form 10-Q that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, such forward-looking statements ~~are identified~~ by ~~terminology~~terms such as ~~“aim,~~“may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” ~~“assume,~~“could,” “intend,” “target,” “project,” “contemplate,” “believe,” ~~“contemplate,” “continue,” “could,” “due,”~~ “estimate,~~” “expect,” “goal,” “intend,” “may,” “objective,” “plan,~~” “predict,” ~~“potential,” “positioned,” “seek,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of~~“potential” or ~~indicate future events and future trends,~~“continue” or the negative of these terms or other ~~comparable terminology.~~ similar expressions. These forward-looking statements include, but are not limited to, statements about:

•plans relating to commercializing TYRVAYA® Nasal Spray and the Company's other product candidates, if approved, including the geographic areas of focus and sales strategy;

•the likelihood of the Company's clinical trials demonstrating safety and efficacy of its product candidates, and other positive results;

•the timing of initiation of the Company's future clinical trials, and the reporting of data from completed, current and future clinical trials and preclinical studies;

•plans relating to the clinical development of the Company's product candidates, including the size, number and disease areas to be evaluated;

•the size of the market opportunity and prevalence of dry eye disease for the Company's product candidates;

•~~plans relating to commercializing the Company's product candidates, if approved by regulatory agencies, including the geographic areas of focus and sales strategy;~~

•the success of competing therapies that are or may become available;

•the Company's estimates of the number of patients in the ~~United States~~U.S. who suffer from dry eye ~~disease,~~and other ophthalmic diseases, and the number of patients that will enroll in its clinical trials;

•the beneficial characteristics, safety, efficacy and therapeutic effects of the TYRVAYA Nasal Spray and the Company's other product candidates;

•the timing, likelihood or scope of regulatory filings and approval for its product candidates;

•the Company's ability to obtain and maintain regulatory approval of its product candidates;

•the Company's plans relating to the further development and manufacturing of its product candidates, including additional indications for which it may pursue;

•the expected potential benefits of strategic collaborations with third parties and the Company's ability to attract collaborators with development, regulatory and commercialization expertise;

•existing regulations and regulatory developments in the ~~United States~~U.S. and other jurisdictions;

•the Company's plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available;

•continued reliance on third parties to conduct additional clinical trials of the Company's product candidates, and for the manufacture and supply of product candidates, components for preclinical studies and clinical trials and ~~potentially~~products and components for ~~commercial supply;~~commercialization of TYRVAYA Nasal Spray and any additional approved products;

•the ~~Company’s~~need to hire additional personnel, and the Company's ability to ~~recruit~~attract and retain ~~key personnel needed to develop and commercialize the Company’s product candidates, if approved, and to grow the Company;~~such personnel;

•the potential effects of the novel strain coronavirus, or SARS-CoV-2 virus pandemic, ~~including the resurgence of cases relating to the spread of the Delta variant,~~ on business, operations and clinical development timelines and plans;

•the accuracy of estimates regarding expenses, future revenue, capital requirements and needs for additional financing;

•the Company's financial performance;

•the sufficiency of existing capital resources to fund future operating expenses and capital expenditure ~~requirements;~~requirements, and the Company's ability to raise additional capital;

•expectations regarding the period during which the Company will qualify as an emerging growth company under the JOBS Act; and

•the Company's anticipated use of its existing ~~resources and proceeds from the initial and follow-on public offerings.~~resources.

The Company has based these forward-looking statements largely on its current expectations and projections about its business, the industry in which it operates and financial trends that it believes may affect business, financial condition, results of operations and growth prospects, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Qand are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, as well as Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020 and the Company's Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30,~~ 2021. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, ~~they~~these forward-looking statements should not be relied on as predictions of future events. The events and circumstances reflected in ~~these~~the Company's forward-looking statements may not be achieved or occur and actual results could differ materially from those

projected in the forward-looking statements. Except as required by applicable law, the Company does not plan to publicly update or revise any forward-looking statements after the date of this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.

In addition, statements that “the Company believes” and similar statements reflect ~~the Company's~~its beliefs and opinions on the relevant subject. These statements are based upon information available to the Company as of the date of this Quarterly Report on Form 10-Q, and while the Company believes such information forms a reasonable basis for such statements, such information may be limited or incomplete, and ~~the Company's~~its statements should not be read to indicate that it has conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and ~~should~~investors are cautioned not beto unduly ~~relied upon.~~

rely upon these statements.

TABLE OF CONTENTS


		Page
	PART I – FINANCIAL INFORMATION
ITEM 1	Financial Statements (unaudited)	1
	Condensed Balance Sheets as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021	1
	Condensed Statements of Operations and Comprehensive Loss for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	2
	Condensed Statements of Stockholders’ Equity for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	3
	Condensed Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~	4
	Notes to Unaudited Interim Condensed Financial Statements	5
ITEM 2	Management's Discussion and Analysis of Financial Conditions and Results of Operations	2119
ITEM 3	Quantitative and Qualitative Disclosure About Market Risk	3428
ITEM 4	Controls and Procedures	342 9

	PART II – OTHER INFORMATION
ITEM 1	Legal Proceedings	3530
ITEM 1A	Risk Factors	3530
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	4131
ITEM 3	Defaults Upon Senior Securities	4131
ITEM 4	Mine Safety Disclosures	4131
ITEM 5	Other Information	4131
ITEM 6	Exhibits	4132
SIGNATURES		4433

iii

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

OYSTER POINT PHARMA, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
ASSETS	ASSETS					ASSETS
Current Assets	Current Assets					Current Assets
Cash and cash equivalents	Cash and cash equivalents	$	184,166	$	192,585	Cash and cash equivalents	$	143,364	$	193,372
Other receivable - related party		2,500		—
Restricted cash						Restricted cash	61		61
Accounts receivable, net						Accounts receivable, net	5,736		6,656
Inventory, net						Inventory, net	4,094		6,086
Prepaid expenses and other current assets	Prepaid expenses and other current assets	3,020		3,782		Prepaid expenses and other current assets	14,099		9,075
Total current assets	Total current assets	189,686		196,367		Total current assets	167,354		215,250
Property and equipment, net	Property and equipment, net	1,976		804		Property and equipment, net	2,557		2,497
Restricted cash		61		61
Investment - related party						Investment - related party	886		886
Other assets	Other assets	2,635		—		Other assets	3,223		1,082
Right-of-use assets, net	Right-of-use assets, net	651		678		Right-of-use assets, net	2,700		2,902
Total Assets	Total Assets	$	195,009	$	197,910	Total Assets	$	176,720	$	222,617
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities	Current Liabilities					Current Liabilities
Accounts payable	Accounts payable	$	3,506	$	2,279	Accounts payable	$	2,596	$	6,496
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	11,174		8,285		Accrued expenses and other current liabilities	19,715		21,511
Lease liabilities	Lease liabilities	481		418		Lease liabilities	715		795
Total current liabilities	Total current liabilities	15,161		10,982		Total current liabilities	23,026		28,802
Lease liabilities, non-current	Lease liabilities, non-current	179		269		Lease liabilities, non-current	2,004		2,118
Long-term debt, net	Long-term debt, net	41,919		—		Long-term debt, net	90,636		89,815
Other long-term liabilities		238		—
Total long-term liabilities		42,336		269
Other liabilities						Other liabilities	5,061		2,345
Total Liabilities	Total Liabilities	57,497		11,251		Total Liabilities	120,727		123,080
Commitments and Contingencies		0		0
Commitments and Contingencies (Note 11)						Commitments and Contingencies (Note 11)	0		0
Stockholders’ Equity	Stockholders’ Equity					Stockholders’ Equity
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; none outstanding		—		—
Common stock, $0.001 par value per share; 1,000,000,000 shares authorized, 26,094,253 and 25,890,490 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		26		26
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; 0 outstanding						Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; 0 outstanding	—		—
Common stock, $0.001 par value per share; 1,000,000,000 shares authorized, 26,662,697 and 26,579,585 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively						Common stock, $0.001 par value per share; 1,000,000,000 shares authorized, 26,662,697 and 26,579,585 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively	27		27
Additional paid-in capital	Additional paid-in capital	350,832		341,384		Additional paid-in capital	359,268		354,920
Accumulated deficit	Accumulated deficit	(213,346)		(154,751)		Accumulated deficit	(303,302)		(255,410)
Total Stockholders’ Equity	Total Stockholders’ Equity	137,512		186,659		Total Stockholders’ Equity	55,993		99,537
Total Liabilities and Stockholders’ Equity	Total Liabilities and Stockholders’ Equity	$	195,009	$	197,910	Total Liabilities and Stockholders’ Equity	$	176,720	$	222,617

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

OYSTER POINT PHARMA, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share amounts)

(unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020			2022		2021
Revenue:	Revenue:									Revenue:
License revenue - related party		$	17,943	$	—	$	17,943	$	—
Product revenue, net										Product revenue, net	$	2,704	$	—

Total revenue	Total revenue	17,943		—		17,943		—		Total revenue	2,704		—
Cost of product revenue										Cost of product revenue	336		—
Operating expenses:	Operating expenses:									Operating expenses:
Sales and marketing										Sales and marketing	26,966		4,567
General and administrative										General and administrative	12,932		8,525
Research and development	Research and development	$	6,214	$	8,210	$	18,772	$	28,104	Research and development	4,681		5,828
Selling, general and administrative		28,497		8,112		56,885		20,641
Total operating expenses	Total operating expenses	34,711		16,322		75,657		48,745		Total operating expenses	44,579		18,920
Loss from operations	Loss from operations	(16,768)		(16,322)		(57,714)		(48,745)		Loss from operations	(42,211)		(18,920)
Other income (expense):
Other income, net		222		17		243		457
Other (expense) income, net										Other (expense) income, net
Interest expense	Interest expense	(1,124)		—		(1,124)		—		Interest expense	(3,066)		—
Total other income (expense), net		(902)		17		(881)		457
Other (expense) income, net										Other (expense) income, net	(2,615)		11
Total other (expense) income, net										Total other (expense) income, net	(5,681)		11
Net loss and comprehensive loss	Net loss and comprehensive loss	$	(17,670)	$	(16,305)	$	(58,595)	$	(48,288)	Net loss and comprehensive loss	$	(47,892)	$	(18,909)
Net loss per share, basic and diluted	Net loss per share, basic and diluted	$	(0.68)	$	(0.63)	$	(2.25)	$	(2.05)	Net loss per share, basic and diluted	$	(1.80)	$	(0.73)
Weighted average shares outstanding, basic and diluted	Weighted average shares outstanding, basic and diluted	26,037,975		25,797,282		25,984,412		23,544,035		Weighted average shares outstanding, basic and diluted	26,631,577		25,924,096

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

OYSTER POINT PHARMA, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands, except share amounts)

(unaudited)
Common Stock Additional Paid-In Capital Accumulated Deficit Total Stockholders’ Equity
Shares Amount
Balance at January 1, 2021 25,890,490 $ 26 $ 341,384 $ (154,751) $ 186,659
Net loss — — — (18,909) (18,909)
Issuance of common stock upon exercise of stock options 55,046 — 218 — 218
Issuance of common stock upon vesting of restricted stock units 15,252 — — — —
Stock-based compensation expense — — 2,680 — 2,680
Balance at March 31, 2021 25,960,788 $ 26 $ 344,282 $ (173,660) $ 170,648
Net loss — — — (22,016) (22,016)
Issuance of common stock upon exercise of stock options 28,748 — 104 — 104
Issuance of common stock upon vesting of restricted stock units 16,901 — — — —
Stock-based compensation expense — — 3,048 — 3,048
Balance at June 30, 2021 26,006,437 $ 26 $ 347,434 $ (195,676) $ 151,784
Net loss — — (17,670) (17,670)
Issuance of common stock upon exercise of stock options 87,816 — 283 — 283
Stock-based compensation expense — — 3,115 — 3,115
Balance at September 30, 2021 26,094,253 $ 26 $ 350,832 $ (213,346) $ 137,512


	Common Stock		Additional Paid-In Capital			Accumulated Deficit		Total Stockholders’ Equity
		Shares			Amount
Balance at January 1, 2022		26,579,585	$	27		$	354,920	$	(255,410)	$	99,537
Net loss		—	—			—		(47,892)		(47,892)
Issuance of common stock upon exercise of stock options		69,930	—			76		—		76
Issuance of common stock upon vesting of restricted stock units		20,618	—			—		—		—

Shares withheld for taxes		(7,436)	—			(87)		—		(87)
Stock-based compensation expense		—	—			4,359		—		4,359
Balance at March 31, 2022		26,662,697	$	27		$	359,268	$	(303,302)	$	55,993


		Common Stock		Additional Paid-In Capital			Accumulated Deficit		Total Stockholders’ Equity								Common Stock	Additional Paid-In Capital		Accumulated Deficit		Total Stockholders’ Equity
			Shares			Amount													Amount					Total Stockholders’ Equity
Balance at January 1, 2020			21,366,950	$	21		$	221,508			$	(84,231)			$	137,298
Net loss			—	—			—		(16,519)				(16,519)
Issuance of common stock upon exercise of stock options			3,530	—			4		—				4
Stock-based compensation expense			—	—			1,180		—				1,180
Balance at March 31, 2020			21,370,480	$	21		$	222,692	$	(100,750)			$	121,963
Net loss			—	—			—		(15,464)				(15,464)
Issuance of common stock upon secondary equity offering, net of issuance costs of 8,125			4,312,500	5			112,620		—				112,625
Issuance of common stock upon exercise of stock options			60,425	—			82		—				82
Stock-based compensation expense			—	—			1,609		—				1,609
Balance at June 30, 2020			25,743,405	$	26		$	337,003	$	(116,214)			$	220,815
Balance at January 1, 2021															Balance at January 1, 2021			25,890,490		$	26	$	341,384				$	(154,751)			$	186,659
Net loss	Net loss		—	—			—		(16,305)				(16,305)		Net loss			—		—		—			(18,909)				(18,909)
Issuance of common stock upon exercise of stock options	Issuance of common stock upon exercise of stock options		87,755	—			173		—				173		Issuance of common stock upon exercise of stock options			55,046		—		218			—				218
Issuance of common stock upon vesting of restricted stock units	Issuance of common stock upon vesting of restricted stock units		13,601	—			—		—				—		Issuance of common stock upon vesting of restricted stock units			15,252		—		—			—				—
Stock-based compensation expense	Stock-based compensation expense		—	—			1,990		—				1,990		Stock-based compensation expense			—		—		2,680			—				2,680
Balance at September 30, 2020			25,844,761	$	26		$	339,166	$	(132,519)			$	206,673
Balance at March 31, 2021															Balance at March 31, 2021			25,960,788		$	26	$	344,282		$	(173,660)			$	170,648

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

OYSTER POINT PHARMA, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


		Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020			2022		2021
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net loss	Net loss	$	(58,595)	$	(48,288)	Net loss	$	(47,892)	$	(18,909)
Adjustments to reconcile net loss to net cash used in operating activities:	Adjustments to reconcile net loss to net cash used in operating activities:					Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense	Stock-based compensation expense	8,843		4,779		Stock-based compensation expense	4,359		2,680
Depreciation	Depreciation	91		57		Depreciation	74		23
Amortization and accretion of long-term debt related costs	Amortization and accretion of long-term debt related costs	508		—		Amortization and accretion of long-term debt related costs	998		—
Reduction in the carrying amount of the right-of-use assets	Reduction in the carrying amount of the right-of-use assets	371		285		Reduction in the carrying amount of the right-of-use assets	253		110
Non-cash consideration for license revenue - related party		(443)		—
Provision for inventory obsolescence						Provision for inventory obsolescence	175		—
Change in fair value of net embedded derivative liability	Change in fair value of net embedded derivative liability	(212)		—		Change in fair value of net embedded derivative liability	2,690		—
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Other receivable - related party		(2,500)		—
Accounts receivable, net						Accounts receivable, net	920		—
Inventory						Inventory	(412)		—
Prepaid expenses and other current assets	Prepaid expenses and other current assets	395		2,172		Prepaid expenses and other current assets	(5,024)		(2,949)
Other assets						Other assets	(9)		(30)
Accounts payable	Accounts payable	1,215		1,784		Accounts payable	(3,949)		4,812
Lease liabilities	Lease liabilities	(371)		(283)		Lease liabilities	(245)		(109)
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	2,921		2,146		Accrued expenses and other current liabilities	(1,669)		(2,158)
Other assets		(118)		—
Other liabilities						Other liabilities	26		—
Net cash used in operating activities	Net cash used in operating activities	(47,895)		(37,348)		Net cash used in operating activities	(49,705)		(16,530)
Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Purchases of property and equipment	Purchases of property and equipment	(1,250)		(342)		Purchases of property and equipment	(85)		(340)
Net cash used in investing activities	Net cash used in investing activities	(1,250)		(342)		Net cash used in investing activities	(85)		(340)
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Payment of deferred equity offering costs		(30)		—
Proceeds from follow-on equity offering, net of issuance costs		—		112,625
Payment of deferred offering costs						Payment of deferred offering costs	—		(23)

Net proceeds from long-term debt		40,151		—

Repayment of long-term debt						Repayment of long-term debt	(207)		—
Payment of withholding taxes related to stock-based compensation to employees						Payment of withholding taxes related to stock-based compensation to employees	(87)		—
Proceeds from the exercise of stock options	Proceeds from the exercise of stock options	605		259		Proceeds from the exercise of stock options	76		218
Net cash provided by financing activities		40,726		112,884
Net (decrease) increase in cash, cash equivalents and restricted cash		(8,419)		75,194
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(218)		195
Net decrease in cash, cash equivalents and restricted cash						Net decrease in cash, cash equivalents and restricted cash	(50,008)		(16,675)
Cash, cash equivalents and restricted cash at the beginning of the period	Cash, cash equivalents and restricted cash at the beginning of the period	192,646		139,198		Cash, cash equivalents and restricted cash at the beginning of the period	193,433		192,646
Cash, cash equivalents and restricted cash at the end of the period	Cash, cash equivalents and restricted cash at the end of the period	$	184,227	$	214,392	Cash, cash equivalents and restricted cash at the end of the period	$	143,425	$	175,971

Reconciliation of cash, cash equivalents and restricted cash	Reconciliation of cash, cash equivalents and restricted cash					Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents	Cash and cash equivalents	$	184,166	$	214,331	Cash and cash equivalents	$	143,364	$	175,910
Restricted cash	Restricted cash	61		61		Restricted cash	61		61
Cash, cash equivalents and restricted cash	Cash, cash equivalents and restricted cash	$	184,227	$	214,392	Cash, cash equivalents and restricted cash	$	143,425	$	175,971
Supplemental Cash Flow Information	Supplemental Cash Flow Information					Supplemental Cash Flow Information
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest	Interest	$	617	$	—	Interest	$	2,067	$	—
Non-cash investing and financing activities:	Non-cash investing and financing activities:					Non-cash investing and financing activities:
Accrued property and equipment						Accrued property and equipment	$	49	$	—
Right-of-use assets acquired through leases	Right-of-use assets acquired through leases	344		$	320	Right-of-use assets acquired through leases	$	50	$	344

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

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements

1. Nature of Business, Basis of Presentation and Significant Accounting Policies

Description of the Business

Oyster Point Pharma, Inc. (the Company) is a commercial-stage biopharmaceutical company focused on the discovery, development and commercialization of first-in-class pharmaceutical therapies to treat ophthalmic diseases. On October 15, 2021, TYRVAYA™® (varenicline solution) Nasal Spray (TYRVAYA Nasal Spray), formerly referred to as OC-01 (varenicline solution) nasal spray, a highly selective nicotinic acetylcholine receptor (nAChR) agonist, was approved by the U.S. Food and Drug Administration (FDA) for the treatment of the signs and symptoms of dry eye disease. TYRVAYA Nasal Spray’s highly differentiated mechanism of action is designed to increase basal tear production with a goal to re-establish tear film homeostasis.

Liquidity

~~On August 5,~~Since inception, the Company has incurred recurring losses and negative cash flows from operations. The Company generated net losses of $47.9 million for the three months ended March 31, 2022, and had an accumulated deficit of $303.3 million as of March 31, 2022. The Company had cash and cash equivalents of $143.4 million as of March 31, 2022. The Company has historically financed its operations primarily through the sale and issuance of its securities. In the second half of 2021, the Company ~~entered into~~secured debt capital in the form of a ~~$125~~$125.0 million ~~term loan~~long-term credit facility (the Credit Agreement) ~~with OrbiMed Royalty & Credit Opportunities III, LP,~~, to finance its operations, as ~~administrative agent and initial lender (OrbiMed). The Credit Agreement provides for loans to be funded in~~ three separate tranches: the first $45 million tranche was funded on August 10, 2021, the second $50 million tranche to be funded, at the option of the Company, upon FDA approval of TYRVAYA Nasal Spray for the signs and symptoms of dry eye disease, with an approved label that includes eye dryness score data from clinical trials, among other conditions, and the third $30 million tranche to be funded on or prior to June 30, 2023, at the option of the Company, upon the Company having received at least $40 million in net recurring revenue from the sale and/or licensing of TYRVAYA ~~Nasal Spray in any twelve month period~~ ~~prior to March 31, 2023, among other conditions, including having already drawn on the second tranche~~.

On October 19, 2021, the Company entered into a waiver and amendment (the Amendment) to the Credit Agreement to waive certain labeling requirements required for, and to permit the availability of, the second $50 million tranche of funding under the Credit Agreement (among other customary funding provisions) and make certain other amendments thereto, subject to the terms and conditions contained therein. Because the label approving ~~TYRVAYA Nasal Spray~~ for the signs and symptoms of dry eye disease did not include eye dryness score data from clinical trials, the Amendment was required in order for the Company to draw the second tranche and to be eligible to draw the third tranche under the Credit Agreement. The Amendment also increased the amount of principal that is required to be repaid if the Company does not meet certain minimum recurring revenue thresholds from the sale and/or licensing of ~~TYRVAYA Nasal Spray~~ on a quarterly basis for the most recently ended four fiscal quarter period, from $5 million to $10 million if (i) the Company does not meet such minimum recurring revenue thresholds from the sale and/or licensing of TYRVAYA Nasal Spray in the last four quarters and (ii) an improper promotional event has occurred. The Company would also be barred from drawing the second tranche in the event an improper promotional event occurs prior to the funding of the second tranche. The Company delivered notice to OrbiMed on October 19, 2021 that it intended to borrow the second tranche and the Company received the second tranche funding on November 4, 2021. ~~Additional information on the terms of the Amendment and the Credit Agreement are~~ further described in Note 7, 8, Long-term ~~Debt~~ ~~and Note 10,~~ ~~Subsequent Events.~~

~~On August 5, 2021,~~ ~~the~~Debt. The Company ~~entered into~~is also a party to a license ~~and collaboration~~ agreement ~~(the License Agreement)~~ with Ji Xing Pharmaceuticals Limited (Ji Xing), according to which it is an entity affiliated with RTW Investments, LP. RTW Investments, LP is one of the Company's beneficial owners, which owns more than 5% of the Company's outstanding shares as of September 30, 2021, and, as a result, the License Agreement is considered to be a related party transaction. Pursuant to the License Agreement, the Company was entitled to receive upfront payments of $17.5 million from the licensee, as well as up to 795,123 of the licensee's senior common shares. As described in Note 8, ~~License and Collaboration Agreements,~~ during the third quarter, the Company received $15.0 million in cash consideration, 397,562 of the senior common shares of Ji Xing as partial consideration upon signing of the License Agreement, and included $2.5 million in other receivable-related party on the condensed balance sheet as of September 30, 2021. Following FDA approval of TYRVAYA Nasal Spray on October 15, 2021, the Company received an additional $5 million development milestone payment and an additional 397,561 of the senior common shares of Ji Xing. The Company is also eligible to receive ~~up to $204.8 million in aggregate~~additional development and sales-based milestone payments and ~~royalty payments that are tiered on~~royalties in future periods. In addition, the Company began selling TYRVAYA Nasal Spray in November 2021 and generated net ~~sales~~product revenues of ~~OC-01 and OC-02 and are based on royalty rates between 10% and 20%.~~$2.7 million for the three months ended March 31, 2022.

~~OYSTER POINT PHARMA, INC.~~

~~Notes~~Based on the Company’s current business plan, management believes that the Company’s available cash and cash equivalents may not be sufficient to ~~Unaudited Interim Condensed Financial Statements (continued)~~

~~The Company incurred net losses of $58.6 million and $48.3 million~~fund its operations for the ~~nine~~next twelve months ~~ended September 30, 2021~~from the date these condensed financial statements are issued, and ~~2020, respectively,~~that the future viability of the Company is dependent on its ability to fund its operations through the sales and ~~had an accumulated deficit of $213.3 million as of September 30, 2021. The Company has been incurring higher expenses due to the Company's preparation for the commercialization~~licensing of TYRVAYA Nasal Spray and raising additional capital. Management believes that it may be able to raise such additional capital, including by drawing up to ~~establish commercial scale manufacturing arrangements and to provide for~~$30.0 million on the ~~marketing, commercial operations and distribution~~third tranche of the ~~product.~~Credit Agreement, raising up to $100.0 million of equity capital through its at-the-market sales agreement with Cowen and Company, LLC, and potentially receiving upfront and milestone payments through collaborative or strategic arrangements to license its OC-01 intellectual property in additional non-U.S. regions and/or intellectual property related to its pipeline assets worldwide. The Company’s ability to draw on the third tranche of the Credit Agreement is contingent upon achieving at least $40.0 million in TYRVAYA Nasal Spray net recurring revenue, as defined in the Credit Agreement, in any twelve-month period on or before March 31, 2023, and without an improper promotional event having occurred, among other conditions. The Credit Agreement also requires the Company ~~expended~~to maintain a minimum level of cash and ~~will continue~~permitted cash equivalent investments of at least $5.0 million at all times in a deposit account subject to ~~expend funds~~control by the lender. If the Company is in violation of this covenant and an event of default resulting from such violation is continuing, the lender could exercise remedies, including but not limited to, ~~complete~~ the ~~research, development and clinical testing~~acceleration of ~~its product candidates. The~~all outstanding debt under the Credit Agreement. In addition, the Company ~~will require additional funds as it commercializes~~has generated limited revenue from initial sales of TYRVAYA Nasal Spray, and given its limited commercial history, cannot guarantee that its commercialization efforts will result in product revenues that meet its sales expectations or those of analysts and investors. Finally, although the Company believes that it will continue to ~~commercialize any future products. The Company is unable~~raise capital to ~~entirely~~ fund ~~these efforts with~~ its ~~current financial resources~~operations as it has in the past, the Company’s ability to raise equity capital may depend on the stability of U.S. capital markets and ~~there~~demand from investors, among other factors. There can be no assurance that itthe Company will be ~~able to secure~~successful in commercializing TYRVAYA Nasal Spray or raising this additional capital or that such ~~additional financing on a timely basis,~~capital, if ~~at all, that~~available, will be on terms that are acceptable to the Company. If the Company is unable to successfully commercialize TYRVAYA Nasal Spray and raise sufficient additional capital, the Company may be compelled to ~~meet these needs.~~ reduce the scope of its operations and planned capital expenditures.

If adequate funds are unavailable on a timely basis from operations or additional sources of financing, the Company may have to delay or reduce the scope of its marketing and commercialization efforts or ~~eliminate~~make other changes to its operating plan, which could materially and adversely affect the Company's business, financial condition and operations. Successfully commercializing TYRVAYA Nasal Spray requires significant sales and marketing efforts, and the Company’s pipeline programs may require significant additional research and development efforts, including extensive preclinical and clinical testing. These activities will in turn require significant amounts of capital, qualified personnel and adequate infrastructure. There can be no assurance when, if ever, the Company will realize significant revenue from the sales of TYRVAYA Nasal Spray or if the development efforts supporting the Company’s pipeline of product candidates, including future clinical trials, will be successful.

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

Additionally, if the Company decides to enter into additional license agreements or other collaborative or strategic arrangements to supplement its funds, it may have to give up certain ~~commercial related expenses, included in selling, general~~rights, thereby limiting its ability to develop and ~~administrative expenses,~~commercialize TYRVAYA Nasal Spray, as well as ~~delay, reduce~~other product candidates in the pipeline, or ~~eliminate~~may have other terms that are not favorable to the ~~scope of one or more of its research or development programs,~~Company, which ~~would~~could materially and adversely affect its business, results of operation and financial ~~condition~~condition.

The accompanying unaudited condensed financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and ~~operations.~~satisfaction of liabilities in the ordinary course of business. No adjustments have been made relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company not continue as a going concern. The propriety of assuming that the Company will continue as a going concern is dependent upon, among other things, the ability to generate sufficient cash from operations, and potential other funding sources, including cash on hand, to meet the Company’s obligations as they become due. The factors described above raise substantial doubt about the Company’s ability to continue as a going concern within the next twelve months from the date these condensed financial statements are issued.

Risks and Uncertainties

The Company ~~had cash~~is subject to risks and ~~cash equivalents of $184.2 million as of September 30, 2021. Management believes that~~uncertainties common to companies in the ~~Company’s current cash and cash equivalents will be~~biopharmaceutical industry, including, but not limited to, the ability to secure sufficient capital to fund ~~its planned~~ operations, ~~for at least 12 months~~competition from other companies’ products, the ~~date~~availability and sufficiency of ~~issuance~~third-party payor coverage and reimbursement, compliance with laws and government regulations, the ability to develop and bring to market new products, protection of ~~these financial statements.~~proprietary technology, and dependence on third parties and key personnel.

~~SARS-CoV-2 Update~~The current global macro-economic environment is volatile, which may result in supply chain constraints and elevated rates of inflation. In addition, the Company operates in a dynamic and highly competitive industry and believes that changes in any of the following areas could have a material adverse effect on the Company’s future financial position, results of operations, or cash flows: ability to obtain future financing; advances and trends in new technologies and industry standards; results of clinical trials; regulatory approval and market acceptance of the Company’s products; development of sales channels; certain strategic relationships; litigation or claims against the Company related to intellectual property, product, regulatory, or other matters; and the Company’s ability to attract and retain employees necessary to support its growth.

Product candidates developed by the Company require approval from the FDA and/or other international regulatory agencies prior to commercial sales. There can be no assurance that the Company's product candidates will receive the necessary approvals. If the Company is denied approval, approval is delayed or the Company is unable to maintain approval, it could have a material adverse impact on the Company.

The Company relies on single source manufacturers and suppliers for the supply of its product candidates. This adds to the manufacturing risks faced by the Company, which could be left without backup facilities in the event of any failure by a supplier. In addition, if the Company decides to move to a different or add additional manufacturers and suppliers in the future, any such transition or addition could result in delays or other issues, which could have an adverse effect on the supply of TYRVAYA Nasal Spray or other product candidates. Any disruption from these manufacturers or suppliers could have a negative impact on the Company’s business, financial position and results of operations. In addition, the Company is dependent upon the services of its employees, consultants and other third parties.

For the three months ended March 31, 2022, a majority of the Company's sales of TYRVAYA Nasal Spray were to four large wholesale drug distributors, and the Company may continue to rely on a limited number of wholesale drug distributors for the distribution of TYRVAYA Nasal Spray. If the Company is unable to maintain its business relationships with wholesale drug distributors on commercially acceptable terms, it could have a material adverse impact on the Company’s business, financial condition and results of operations.

The Company does not believe its financial results were materially affected by the SARS-CoV-2 virus pandemic during the three months ended March 31, 2022. However, the extent to which the SARS-CoV-2 virus pandemic may affect the Company’s future financial results and operations will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the pandemic, the availability and effectiveness of vaccines and treatment options, and current or future domestic and international actions to contain it and treat it. The Company continues to ~~be subject to risks and uncertainties as a result~~evaluate the potential impact of the SARS-CoV-2 virus ~~pandemic. The~~ pandemic ~~and related public health developments, have adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. With~~on its business, including the ~~surge~~potential impact of the ~~Delta variant~~pandemic on the commercial launch of TYRVAYA Nasal Spray and its acceptance by patients and prescribers, and any potential supply-chain challenges, as well as the potential impact of the ~~virus across~~pandemic on its pipeline and the ~~United States (U.S.) during the second half~~conduct of ~~2021,~~clinical trials and preclinical

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

studies In addition, the Company ~~delayed~~has taken a variety of measures in an effort to ensure the availability and functioning of the Company's critical infrastructure and to promote the safety and security of its ~~plans~~employees, including remote working arrangements for employees and investing in personal protective equipment for the return to the office. The Company commenced a voluntary return to the office for its employees ~~until at least December 2021. However, the~~in March 2022. The Company’s sales force is primarily working in-person and has been instructed to follow all locally required SARS-CoV-2 related precautions. The Company will continue monitoring SARS-CoV-2 infection rates and make practical decisions ~~about voluntary reopening~~ in compliance with Centers for Disease Control and Prevention, ~~(CDC),~~ federal, state and local guidelines. As

The Company continues to evaluate and develop pipeline candidates for the potential treatment of ~~September 30, 2021,~~various medical indications. The ongoing SARS-CoV-2 virus pandemic may impact access to supplies necessary to conduct preclinical studies, cause delay to the timelines to initiate or complete in vitro or in vivo animal studies, or may indirectly impact the operations of third parties that are necessary for the Company ~~has not been materially affected by~~to advance preclinical projects. If the ~~adverse~~SARS-CoV-2 virus pandemic continues and persists for an extended period of time, the Company could experience significant disruptions to its clinical development timelines, which could adversely affect its business, financial condition and results of the pandemic, however, it is not possible to predict the duration or magnitude of the adverse results of the pandemic or the full extent of its effects on the Company's financial condition, liquidity or results of operations. ~~The extent to which the global pandemic will impact the Company’s business beyond September 2021 will depend on future developments that are highly uncertain and cannot be predicted.~~

Basis of Presentation

The unaudited interim condensed financial statements and accompanying notes have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying unaudited condensed financial statements contain all adjustments, which are of a normal recurring nature, necessary to state fairly the Company’s financial position as of ~~September 30, 2021~~March 31, 2022 and ~~as of~~ December 31, ~~2020,~~2021, the results of operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ and cash flows for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021. While management believes that the disclosures presented are adequate to mitigate the risk of the information being misleading, these unaudited condensed financial statements should be read in conjunction with the audited financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. The results of the Company’s operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for the full year.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses in the ~~condensed~~ financial statements and accompanying ~~notes. Significant items subject~~notes as of the date of the financial statements. On an ongoing basis, management evaluates its estimates, including those related to ~~such estimates~~the valuation of stock-based awards, revenue and ~~assumptions include stock-based compensation,~~gross-to-net deductions, inventory, income taxes, net embedded derivative liability bifurcated from the ~~Credit Agreement~~Company's long-term credit agreement and certain research and development accruals. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates, and such differences could be material to the Company’s financial position and results of operations.

Significant Accounting Policies Update

The Company’s significant accounting policies are disclosed in Note 1, Nature of Business, ~~Basis of Presentation and Significant Accounting Policies~~ in the Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. The Company

~~OYSTER POINT PHARMA, INC.~~

~~Notes to Unaudited Interim Condensed Financial Statements (continued)~~

~~adopted new~~ updated its stock-based compensation accounting ~~policies,~~policy, as described below, ~~as a result of~~in connection with the ~~events and transactions that took place~~Performance Stock Units (PSUs) granted during the ~~nine~~three months ended ~~September 30 2021.~~March 31, 2022.

Stock-Based Compensation

~~Effective April 1, 2021, the Company established its first offering period under the Company's 2019 Employee~~ - Performance Stock ~~Purchase Plan (the ESPP), as described in Note 4,~~ ~~Stockholders' Equity~~. Stock-based compensation expense related to purchase rights issued under the ESPP, is based on the Black-Scholes option-pricing model fair value of the estimated number of awards as of the beginning of the offering period. Stock-based compensation expense is recognized using the straight-line method over the offering period.

The determination of the grant date fair value of shares purchased under the ESPP is affected by the estimated fair value of the Company's common stock as well as other assumptions and judgments, which are estimated as follows:

•~~Expected term. The expected term for the ESPP is the beginning of the offering period to the end of each purchase period.~~

•Expected volatility. As the Company has a limited trading history of its common stock, the expected volatility is estimated based on the third quartile of the range of the observed volatilities for comparable publicly traded biotechnology and pharmaceutical related companies over a period equal to length of the offering period. The comparable companies are chosen based on industry, stage of development, size and financial leverage of potential comparable companies.

•Risk-free interest rate. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of the offering period.

•~~Expected dividend rate. The Company has not paid and does not anticipate paying any dividends in the near future. Accordingly, the Company has estimated the dividend yield to be zero.~~

~~Revenue~~Units

~~The~~In January 2022, the Company ~~entered into the License Agreement with Ji Xing during the three months ended September 30, 2021,~~granted PSUs to certain executive officers, as further described in Note 8, 6~~License~~, Stockholders' Equity and ~~Collaboration Agreements~~. ~~The License Agreement provides for Ji Xing to~~ ~~develop and commercialize certain Company products in exchange~~ ~~for payments by the licensee that include a non-refundable, up-front license fee, development and sales-based milestone payments, as well as royalties on net sales of licensed products~~Equity Incentive Plans. ~~In connection with the License Agreement, the Company adopted revenue policies under the guidance of ASC 606,~~ ~~Revenue from Contracts with Customers~~,The PSUs are subject to ~~recognize revenue~~vesting based on the ~~transfer~~Company’s attainment of ~~control~~pre-established performance milestones and service conditions. The performance milestones are comprised of ~~promised goods or services in an amount that reflects the consideration to which the Company expects to receive in exchange for those goods~~two non-market milestones and services. Revenue is recognized when the Company transfers control of a good or service to the customer in an amount that reflects the transaction price allocated to the distinct goods or services. U.S. GAAP provides a five-step model for recognizing revenue from contracts with customers:one market milestone.

1.~~Identify~~The fair value of the ~~contract with the customer~~

2.~~Identify the performance obligations within the contract~~

3.~~Determine the transaction price~~

4.~~Allocate the transaction price to the performance obligations~~

5.~~Recognize revenue when (or as) the performance obligations are satisfied~~

~~License Revenue —~~ ~~The Company recognizes license revenue when the licensee has the ability to direct the use of and benefit from the licensed intellectual property.~~

~~Royalty Revenue —The Company recognizes royalty revenue from licensees~~non-market milestones is based on ~~third-party sales~~the market price of ~~licensed products and~~the Company’s stock as of the date of grant. The fair value of the market performance milestone is ~~recorded when~~estimated using a Monte Carlo simulation. The probability of the ~~related third-party product sale occurs.~~

~~Development and Sales Milestone Revenue —The Company recognizes development and sales-based milestone revenue when the development and sales milestones occur.~~

~~Loan Commitment Fees, Debt Issuance and Discount Costs~~

~~As described in Note 7,~~ ~~Long-term Debt,~~ ~~the Company entered into a term loan credit facility~~ ~~with OrbiMed during the three months ended September 30, 2021.The Company capitalizes initial loan commitment fees that are directly associated with~~number of

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

~~obtaining access~~actual shares expected to ~~capital under its term loan credit facility. Loan commitment fees related~~be earned is considered in the grant date valuation, and therefore, stock-based compensation expense is not adjusted at the vesting date to ~~undrawn tranches are recorded in other assets on~~reflect the ~~Company's condensed balance sheet and are amortized using a straight-line method over the term~~actual number of the loan commitment. Debt issuance and discount costs that are attributable to the specific tranches drawn on the term loan credit facility are recorded as a reduction of the carrying amount of the debt liability incurred and are amortized to interest expense using the effective interest method over the repayment term. If the Company draws down on the term loan credit facility, it will reclassify the capitalized loan commitment fees on a pro-rata basis to debt issuance and discount costs that reduce the carrying amount of the debt liability.shares earned.

~~Non-Marketable Equity Investment~~

~~In connection with~~The Company records stock-based compensation expense over the ~~License Agreement described in Note 8,~~ ~~License and Collaboration Agreements,~~ estimated service period for each performance-based milestone subject to the achievement of the milestones being considered probable. At each reporting date, the Company ~~received~~ ~~397,562 senior common shares from Ji Xing valued at $0.4 million as of September 30, 2021 (the Investment).~~ The Investment was recorded at fair value and will be subject to impairment analysis on a periodic basis. The impairment analysis would involve an assessment of both qualitative and quantitative factors, which may include regulatory approvalassesses whether achievement of the ~~investee's product or technology, as well as~~milestones are considered probable and, if so, records stock-based compensation expense based on the investee’s financial metrics, such as subsequent rounds of financing that may indicate the Investment is impaired. If the Investment is considered impaired, the Company will recognize an impairment through other income (expense), net in the statements of operations and establish a new carrying value for the Investment.

~~Net Embedded Derivative Asset or Liability~~

~~Certain contracts may contain~~ ~~explicit terms that affect some or all~~portion of the ~~cash flows or the value of other exchanges required by the contract. When these embedded features in a contract act in a manner similar~~service period elapsed to ~~a derivative financial instrument and are not clearly and closely related~~date with respect to the ~~economic characteristics of the host contract, the Company bifurcates the embedded feature and accounts for it as an embedded derivative asset or liability in accordance~~milestones, with ~~guidance under ASC 815-40,~~ ~~Derivatives and Hedging. Embedded derivatives are measured at fair value with changes in fair value reported in other income, net in the condensed statement of operations~~.

a cumulative catch-up.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ~~(the FASB)~~ under its accounting standards codifications (ASC) or other standard setting bodies and are adopted by the Company as of the specified effective ~~date, unless otherwise discussed below.~~date. For the three months ended March 31, 2022, there were no newly adopted accounting pronouncements that had a material impact to the Company's condensed financial statements. As of March 31, 2022, there are no recently issued but not yet adopted accounting pronouncements that are expected to materially impact the Company's condensed financial statements.

~~ASU 2020-10 — In October 2020, the FASB issued ASU 2020-10,~~ ~~Codification Improvements,~~ which updated various codification topics by clarifying or improving disclosure requirements to align with the Securities and Exchange Commission’s (SEC’s) regulations. The amendments in ASU 2020-10 are effective for annual periods beginning after December 15, 2020, for public business entities. The Company adopted ASU 2020-10 on January 1, 2021 and its adoption did not have a material effect on the Company’s financial statements and related disclosures.Reclassification

~~ASU 2016-13 — In June 2016,~~Beginning in 2021, sales and marketing expenses are reported separately from selling, general and administrative expenses in the ~~FASB issued ASU 2016-13,~~ ~~Financial Instruments~~ - ~~Credit Losses (Topic 326): Measurement~~Company’s statements of ~~Credit Losses on Financial Instruments.~~ operations and comprehensive loss. The ~~standard introduced the expected credit~~condensed statement of operations and comprehensive loss ~~methodology~~ for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendment in ASU 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized costs basis. The guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those years, for public business entities. The Company adopted ASU 2016-13 on January 1,three months ended March 31, 2021 has been conformed to separately present sales and ~~its adoption did not have a material effect on the Company's financial statements and related disclosures.~~marketing expenses.

2. Inventory

Inventory, net consisted of the following (in thousands):


	March 31, 2022		December 31, 2021
Raw materials	$	1,128	$	2,524
Work in process	2,256		3,053
Finished goods	710		509
Inventory, net	$	4,094	$	6,086

Raw materials in the amount of $2.2 million are not expected to be incorporated into products that will be sold within the next 12 months and are included in other assets on the condensed balance sheet as of March 31, 2022.

3. Fair Value Measurements

The Company assesses the fair value of financial instruments as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering

~~OYSTER POINT PHARMA, INC.~~

~~Notes to Unaudited Interim Condensed Financial Statements (continued)~~

such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

Level 1 Quoted prices in active markets for identical assets or liabilities.

Level 2 Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or model derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Valuations derived from valuation techniques in which one or more significant inputs to the valuation model are unobservable.

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As further discussed in Note 7,8, Long-term Debt, in connection with entering into a Credit Agreement in 2021, the Company is required to make quarterly payments to OrbiMed Royalty & Credit Opportunities III, LP (OrbiMed) in the form of a revenue sharing fee, which was evaluated under ASC 815-40, Derivatives and Hedging, and determined to be an embedded derivative liability. In addition, the Company has the right to optionally prepay, in whole or in part, the outstanding principal amount of the term loan in an amount equal to the outstanding principal, accrued and unpaid interest, together with other fees and payments required under the term loan. This prepayment option has been determined to qualify as an embedded derivative asset under ASC 815-40, Derivatives and Hedging. ~~The~~Lastly, the term loan contains a lender-held put option that requires the Company to repay $5 million of the outstanding principal amount of the term loan if the Company fails to achieve certain pre-defined levels of OC-01 net recurring revenues for the trailing four quarters, which commences with the quarter ending December 31, 2022 and continues through the maturity of the term loan.

These 3 embedded ~~derivative asset and liability~~derivatives have been bifurcated and netted to result in a net embedded derivative liability, ~~and~~which is classified as a Level 3 financial liability in the fair value hierarchy as of ~~September 30, 2021.~~ March 31, 2022. The net embedded derivative liability is recorded in other liabilities on the Company's condensed balance sheets.

The valuation method for ~~both~~the embedded derivatives includes certain unobservable Level 3 inputs including revenue projections, probability and timing of future cash flows, ~~probability of regulatory approval, discounts~~discount rates and risk-free rates of interest. The change in fair value due to the remeasurement of the net embedded derivative liability is recorded asin other (expense) income, net in the Company’s condensed ~~statement~~statements of operations and comprehensive loss.

The following table reconciles the beginning and ending balances for the Company’s net embedded derivative liability that is carried at fair value as a long-term ~~liabilities~~liability on the Company's condensed balance ~~sheet~~sheets using significant unobservable inputs (Level 3) (in thousands):


	Three Months Ended March 31, 2022

Beginning balance as of January 1	$	2,345

Change in fair value of the net embedded derivative liability	2,690
Ending balance as of March 31	$	5,035

As of March 31, 2022, financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):


	Fair Value Measurements as of March 31, 2022
	Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Money market funds	119,378		—		—		119,378
Total assets	$	119,378	$	—	$	—	$	119,378
Liabilities:
Net embedded derivative liability	—		—		5,035		5,035
Total liabilities	$	—	$	—	$	5,035	$	5,035

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

Three months ended September 30, Nine months ended September 30,
2021 2021
Beginning balance: $ —�� $ —
Net embedded derivative liability 450 450
Change in fair value of the net embedded derivative liability (212) (212)
Ending balance $ 238 $ 238

As of ~~September 30,~~December 31, 2021, financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):

Fair Value Measurements at September 30, 2021
Quoted Price in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total
Assets:
Money market funds 183,166 — — 183,166
Total assets $ 183,166 $ — $ — $ 183,166
Liabilities:
Net embedded derivative liability — — 238 238
Total liabilities $ — $ — $ 238 $ 238

~~As of December 31, 2020, financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):~~


		Fair Value Measurements at December 31, 2020									Fair Value Measurements as of December 31, 2021
		Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total			Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:	Assets:									Assets:
Money market funds	Money market funds	191,585		—		—		191,585		Money market funds	162,376		—		—		162,376
Total assets	Total assets	$	191,585	$	—	$	—	$	191,585	Total assets	$	162,376	$	—	$	—	$	162,376
Liabilities:	Liabilities:									Liabilities:
Net embedded derivative liability	Net embedded derivative liability	—		—		—		—		Net embedded derivative liability	—		—		2,345		2,345
Total liabilities	Total liabilities	$	—	$	—	$	—	$	—	Total liabilities	$	—	$	—	$	2,345	$	2,345

Money market funds are included in cash and cash equivalents on the Company's condensed balance sheets and are classified within Level 1 of the fair value hierarchy as they are valued using quoted market prices.

The carrying amounts reflected in the Company's condensed balance sheets for cash equivalents, ~~other receivable-related party,~~ restricted cash, accounts receivable, and accounts payable approximate their fair values, due to their short-term nature.

~~OYSTER POINT PHARMA, INC.~~

~~Notes to Unaudited Interim Condensed Financial Statements (continued)~~

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Investment ~~in Ji Xing Senior Common Shares~~ - Related Party

~~In connection with entering into~~The Company accounts for the ~~License Agreement~~senior common shares received under a collaboration and license agreement with Ji Xing ~~as described in Note 8,~~Pharmaceuticals Limited (Ji Xing), ~~License and Collaboration Agreements,~~ ~~the Company received 397,562 senior common shares of Ji Xing on August 5, 2021 (Investment), which were accounted for~~ as a non-marketable equity investment (the Investment). Ji Xing is an entity affiliated with RTW Investments, LP. RTW Investments, LP, is one of the Company's beneficial owners and, ~~valued~~ as ~~of August 5, 2021.~~a result, the Investment is considered to be a related party transaction. The Investment is classified within Level 3 in the fair value hierarchy because the fair value was determined based on a market approach in which one or more significant inputs to the valuation model are unobservable. The Investment is subject to non-recurring fair value measurements for the evaluation of potential impairment losses and observable price changes in orderly transactions for an identical or similar investment of Ji Xing.

~~The following table represents significant unobservable inputs used in determining the estimated fair value of~~There was no impairment expense recorded for the Investment ~~as of August 5, 2021 (in thousands):~~

during the three months ended
March 31, 2022

~~Valuation Technique~~

~~Unobservable Inputs~~

~~Value~~

~~Asset~~

~~Investment~~

~~Market Approach - Backsolve method~~

~~Equity values of recent rounds of financing by the issuer~~

~~443~~

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are money market funds, which are included in cash and cash equivalents on the Company's condensed balance sheets. The Company attempts to minimize the risks related to cash and cash equivalents by using highly-rated financial institutions that invest in a broad and diverse range of financial instruments. The Company's investment portfolio is maintained in accordance with its investment policy that defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer.

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

4. Property and Equipment, net

Property and equipment, net consisted of the following (in thousands):



	March 31, 2022		December 31, 2021
Laboratory equipment	$	798	$	585
Furniture and fixtures	73		73
Leasehold improvements	263		226
Marketing equipment	258		258
Office equipment	68		68
Construction-in-progress	1,408		1,524
Total property and equipment	$	2,868	$	2,734
Accumulated depreciation	(311)		(237)
Property and equipment, net	$	2,557	$	2,497

5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

September 30, 2021 December 31, 2020
Accrued compensation 7,000 3,500
Accrued professional services 3,161 1,244
Accrued research and development expense 1,013 3,541
Total accrued expenses and other current liabilities $ 11,174 $ 8,285


	March 31, 2022		December 31, 2021
Accrued gross-to-net deductions	$	4,163	$	4,837
Accrued compensation	8,014		9,153
Accrued professional services	6,109		5,451
Accrued research and development expense	1,145		1,243
Accrued other expense	284		827
Total accrued expenses and other current liabilities	$	19,715	$	21,511

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

4.6. Stockholders' Equity and Equity Incentive Plans

Common Stock

The Company is authorized to issue 1,000,000,000 shares of common stock, at a par value of $0.001 per share. Each share of common stock is entitled to 1 vote.

The ~~Company~~Company's outstanding equity awards as well as reserved common stock for future issuance is as follows:

September 30, 2021 December 31, 2020
Outstanding options under the 2016 Equity Incentive Plan 2,370,256 2,567,566
Outstanding options under the 2019 Equity Incentive Plan 2,031,932 918,145
Outstanding options under the 2021 Inducement Plan 270,600 —
Equity awards available for grant under the 2019 Equity Incentive Plan (1)
1,588,105 1,790,106
Equity awards available for grant under the 2021 Inducement Plan 379,400 —
Unvested restricted stock units (RSUs) 178,595 61,215
Shares reserved for purchase under the Employee Stock Purchase Plan (the ESPP) 270,000 270,000
Total 7,088,888 5,607,032


	March 31, 2022	December 31, 2021
Outstanding options under the 2016 Equity Incentive Plan (the 2016 Plan)	1,863,246	1,935,240
Outstanding options under the 2019 Equity Incentive Plan (the 2019 Plan)	3,148,375	2,078,232
Outstanding options under the 2021 Equity Inducement Plan (the 2021 Plan)	456,900	270,600
Outstanding performance stock units (PSUs) under the 2019 Plan	444,500	—
Unvested restricted stock units (RSUs) under the 2019 Plan	397,304	179,149
Equity awards available for grant under the 2019 Plan (1)	854,755	1,535,488
Equity awards available for grant under the 2021 Plan	193,100	379,400
Shares reserved for purchase under the Employee Stock Purchase Plan (the ESPP) (2)	491,242	225,447
Total	7,849,422	6,603,556

(1) — Effective January 1, ~~2021,~~2022, in connection with the evergreen provision contained in the 2019 Plan, an additional 1,070,967 shares of common stock were reserved for issuance under the 2019 ~~Equity Incentive~~ Plan, ~~(the~~including 7,784 shares of common stock that have become available for issuance under the 2019 ~~Plan) 1,035,619 shares were added~~Plan as a result of the forfeiture, termination, tender to or withholding for payment of an exercise price or for tax withholding obligations, expiration or repurchase of stock options, restricted stock units or other stock awards that had been granted under the 2016 Plan, pursuant to the terms of the 2019 Plan.

~~2021 Inducement Plan~~(2) Effective January 1, 2022, in connection with an evergreen provision contained in the ESPP, an additional 265,795 shares of common stock were reserved for issuance under the ESPP.

Performance Stock Units

In ~~July 2021,~~January 2022, the Company granted PSUs to certain executive officers. The PSUs are subject to vesting based on the Company’s attainment of pre-established performance milestones and service conditions. The performance milestones are comprised of two non-market milestones and one market milestone. The non-market performance milestones are subject to attaining certain forecasted net product revenues and future prescriptions of TYRVAYA Nasal Spray, and the market performance milestone is subject to (i) at least one of the non-market milestones being met and (ii) attaining total shareholder return based on the change in the price of the Company's common stock. Depending on the terms of the PSUs and the outcome of the performance milestones, a recipient may ultimately earn 0% to 125% (as specified for each PSU grant) of the target number of PSUs granted.

The number of PSUs that may vest and be issued are based upon the determination of the Compensation Committee of the Company's Board of Directors ~~approved~~that one or more of the ~~adoption~~three performance milestones are achieved in the period beginning on the vesting commencement date of January 1, 2022 and ending on June 30, 2023, with the PSUs vesting on July 1, 2024, subject to the participant continuing their service through such vesting date.

The fair value of the non-market milestones is based on the market price of the Company’s stock as of the date of grant. The fair value of the market performance milestone is estimated using a Monte Carlo simulation. The probability of the number of actual shares expected to be earned is considered in the grant date valuation, and therefore, stock-based compensation expense is not adjusted at the vesting date to reflect the actual number of shares earned. The Monte Carlo simulation assumes that at least one of the non-market milestones are met and includes the following assumptions:

•Expected term - 1.48 years.

•Expected volatility - Historical volatility of the Company's ~~2021 Inducement Plan (the Inducement Plan),~~common stock price over a lookback period that is commensurate to the performance period, which is used exclusively for grants of awards to individuals who were not previously employees or directors of the Company (or following a bona fide period of non-employment) as a material inducement to such individuals’ entry into employment with the Company.61.3%.

•Risk-free interest rate - The ~~Company reserved 650,000 shares of its common stock that may be issued under the Inducement Plan. The terms and conditions of the Inducement Plan are substantially similar to those of the 2019 Plan.~~

~~Stock Options~~

The following table summarizes stock option activity under the 2016 Equity Incentive Plan, the 2019 Plan and the 2021 Inducement Plan during the nine months ended September 30, 2021 (in thousands, except shares, contractual term and per share data):

Outstanding Options
Number of Shares Underlying Outstanding Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value
Balance, January 1, 2021 3,485,711 $ 10.74 8.2 $ 36,506
Options granted 1,479,153 16.59
Options exercised (171,610) 3.53 2,272
Options forfeited (120,466) 19.42 342
Balance, September 30, 2021 4,672,788 12.64 8.1 17,535
Shares vested and exercisable as of September 30, 2021 2,058,694 7.15 7.0 14,885
Vested and expected to vest as of September 30, 2021 4,672,788 $ 12.64 8.1 $ 17,535

Interpolated Constant Maturity U.S. Treasury Curve, which is 0.64%.

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

•Expected dividend rate - The Company has estimated the dividend yield to be zero.

The Company records stock-based compensation expense over the estimated service period for each performance-based milestone subject to the achievement of the milestones being considered probable. At each reporting date, the Company assesses whether achievements of the milestones are considered probable and, if so, records stock-based compensation expense based on the portion of the service period elapsed to date with respect to the milestones, with a cumulative catch-up. The Company did not record stock-based compensation expense related to the PSUs during the three months ended March 31, 2022.

Stock Options

The following table summarizes stock option activity under the 2016 Plan, the 2019 Plan and the 2021 Plan during the three months ended March 31, 2022 (in thousands, except shares, contractual term and per share data):


	Outstanding Options
	Number of Shares Underlying Outstanding Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2022	4,284,072	$	13.54	8.1	$	28,874
Options granted	1,268,995	15.52			—
Options exercised	(69,930)	1.09			995
Options forfeited	(14,616)	16.17			12
Outstanding at March 31, 2022	5,468,521	14.15		8.3	12,193
Shares vested and exercisable as of March 31, 2022	2,111,311	10.84		7.1	10,526
Vested and expected to vest as of March 31, 2022	5,468,521	$	14.15	8.3	$	12,193

The weighted average fair value of options granted during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 was ~~$10.88~~$11.47 per share. As of ~~September 30, 2021,~~March 31, 2022, the total unrecognized stock-based compensation expense for stock options was ~~$28.8~~$36.7 million, which is expected to be recognized over a weighted average period of ~~2.9~~3.0 years.

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

Restricted Stock Units

~~Restricted stock units (the RSUs)~~The RSUs are granted to the Company's directors and ~~certain~~ employees. The value of an RSU award is based on the Company's stock price on the date of the grant. The shares underlying the RSUs are not issued until the RSUs vest. ~~Upon vesting, each RSU converts into one share of the Company's common stock.~~

Activity with respect to the Company's restricted stock units during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 was as follows (in thousands, except share, contractual term, and per share data):

Outstanding RSUs
Number of Shares Underlying Outstanding Awards Weighted Average Grant Date Fair Value per Share Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value
Outstanding at January 1, 2021 61,215 $ 23.83 1.4 $ 1,152
Restricted stock units granted 154,431 18.26 2,820
Restricted stock units vested (32,153) 27.15 648
Restricted units forfeited (4,898) 18.77 87
Balance, September 30, 2021 178,595 18.56 2.5 2,116
Unvested and expected to vest as of September 30, 2021 178,595 $ 18.56 2.5 $ 2,116


	Outstanding RSUs
	Number of Shares Underlying Outstanding Awards	Weighted Average Grant Date Fair Value per Share		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2022	179,149	$	17.52	2.4	$	3,271
Restricted stock units granted	239,223	15.74			3,765
Restricted stock units vested	(20,618)	18.77			241
Restricted units forfeited	(450)	16.00			5
Outstanding at March 31, 2022	397,304	16.39		3.1	4,625
Unvested and expected to vest as of March 31, 2022	397,304	$	16.39	3.1	$	4,625

As of ~~September 30, 2021,~~March 31, 2022, the total unrecognized stock-based compensation expense for RSUs was ~~$2.6~~$5.5 million which is expected to be recognized over a weighted average period of ~~2.6~~3.3 years.

~~2019 Employee Stock Purchase Plan~~

In October 2019, the Company adopted the ESPP, which became effective on October 29, 2019. Effective April 1, 2021, the Company established its first offering period under the ESPP, which began on April 16, 2021 and ends on November 15, 2021. After the first offering period, the ESPP provides for automatic ~~six~~-month offering periods. The ESPP allows eligible employees to purchase shares of the Company's common stock at a 15% discount through payroll deductions, subject to plan limitations. At the end of each offering period, employees are able to purchase shares at 85% of the lower of the fair market value of the Company's common stock on the first trading day of the offering period or on the last day of the offering period. Because the first offering period has not yet expired, no shares have been purchased under the ESPP as of September 30, 2021.

Stock-Based Compensation Expense

~~Total~~The following is a summary of stock-based compensation expense ~~related to the Company's equity incentive plans was as follows~~by function recognized (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Research and development $ 485 $ 246 $ 1,311 $ 702
Selling, general and administrative 2,630 1,744 7,532 4,077
Total stock-based compensation expense $ 3,115 $ 1,990 $ 8,843 $ 4,779


	Three Months Ended March 31,
	2022		2021
Sales and marketing	$	1,252	$	524
General and administrative	2,475		1,790
Research and development	632		366
Total stock-based compensation expense	$	4,359	$	2,680

1314

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

5.7. Net Loss Per Share

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data):


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020			2022		2021
Numerator:	Numerator:									Numerator:
Net loss	Net loss	$	(17,670)	$	(16,305)	$	(58,595)	$	(48,288)	Net loss	$	(47,892)	$	(18,909)
Denominator:	Denominator:									Denominator:
Weighted average shares outstanding, basic and diluted	Weighted average shares outstanding, basic and diluted	26,037,975		25,797,282		25,984,412		23,544,035		Weighted average shares outstanding, basic and diluted	26,631,577		25,924,096
Net loss per share, basic and diluted	Net loss per share, basic and diluted	$	(0.68)	$	(0.63)	$	(2.25)	$	(2.05)	Net loss per share, basic and diluted	$	(1.80)	$	(0.73)

The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:

As of September 30,
2021 2020
Options to purchase common stock 4,672,788 3,205,831
Unvested restricted stock units 178,595 63,929
Shares committed under the ESPP 30,170 —
Total 4,881,553 3,269,760

~~OYSTER POINT PHARMA, INC.~~

~~Notes to Unaudited Interim Condensed Financial Statements (continued)~~

~~6. Leases~~

~~The Company is party to several operating and finance lease agreements related to office and laboratory space and office equipment.~~

In February 2021, the Company entered into a lease agreement for laboratory and office space in New Jersey for a three-year term beginning on March 1, 2021 and ending on February 29, 2024. Total future minimum lease payments under the Company's operating lease agreements are $0.7 million as of September 30, 2021. Total lease payments required over the life of the Company's operating leases are $1.6 million. Rent expense was $0.4 million and $0.3 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The remaining lease terms were between 0.8 and 2.4 years as of September 30, 2021.

~~Supplemental balance sheet information for the Company's leases is as follows (in thousands):~~

September 30, 2021 December 31, 2020
Operating lease right-of-use assets $ 629 $ 644
Finance lease right-of-use assets 22 34
Total right-of-use assets $ 651 $ 678
Operating lease liabilities $ 464 $ 400
Finance lease liabilities 17 18
Total lease liabilities $ 481 $ 418
Operating lease liabilities, non-current $ 172 $ 250
Finance lease liabilities, non-current 7 19
Total lease liabilities, non-current $ 179 $ 269

~~The maturities of the lease liabilities under non-cancelable operating and finance leases are as follows (in thousands):~~

As of September 30, 2021 Finance Leases Operating Leases Total
2021 (remainder) $ 5 $ 138 $ 143
2022 16 376 392
2023 4 126 130
2024 — 21 21
Total undiscounted cash flows 25 661 686
Less: imputed interest (1) (25) (26)
Total lease liabilities 24 636 660
Less: current portion (17) (464) (481)
Lease liabilities $ 7 $ 172 $ 179

~~In August 2021, the Company entered into a lease agreement for office space in Boston, Massachusetts for a~~ ~~five-year term beginning on December 1, 2021 and ending on November 30, 2026. The lease will be classified as an operating lease in accordance with Accounting Standards Codification Topic 842,~~ ~~Leases. Total future minimum lease payments under this agreement are $2.7 million as of September 30, 2021 with the first lease payment due on December 1, 2021.~~


	March 31,
	2022	2021
Options to purchase common stock	5,468,521	4,033,044
Unvested restricted stock units	397,304	140,595

Shares committed under the ESPP	80,275	—
Total	5,946,100	4,173,639

7.8. Long-term Debt

Credit Facility with OrbiMed

On August 5, 2021, the Company entered into ~~a $125 million term loan credit facility (the~~the Credit ~~Agreement)~~Agreement with OrbiMed ~~Royalty & Credit Opportunities III, LP,~~ as administrative agent and initial ~~lender (OrbiMed). The Credit Agreement provides for loans to be funded in~~ ~~3 separate tranches: the first $45 million tranche was funded on August 10, 2021, the~~

~~OYSTER POINT PHARMA, INC.~~

~~Notes to Unaudited Interim Condensed Financial Statements (continued)~~

~~second $50 million tranche to be funded, at the option of the Company, upon FDA approval of TYRVAYA Nasal Spray for the signs and symptoms of dry eye disease~~, with an approved label that includes eye dryness score data from clinical trials, among other conditions, and the third $30 million tranche to be funded on or prior to June 30, 2023, at the option of the Company, upon the Company having received at least $40 million in net recurring revenue from the sale and/or licensing of TYRVAYA Nasal Spray in any twelve month period prior to March 31, 2023, among other conditions, including having already drawn on the second tranche.

lender. The term ~~loans~~loan underlying the Credit Agreement ~~mature~~matures on August 5, 2027 and ~~are~~is structured for full principal repayment at maturity. The term ~~loans bear~~loan bears interest at the secured overnight financing rate (with a floor of 0.40%) per annum) plus a spread of 8.10% per annum (Contractual Interest). Upon an event of default, the Contractual Interest rate shall increase by 3%. The Company is required to pay a 6% exit fee (the Exit Fee), or $2.7 million for the first $45 million tranche at the time of the loan maturity; further, in connection with any prepayment event, the Company must also pay a prepayment premium equal to 10% of the principal amount of the loans drawn if the prepayment occurs prior to the first anniversary of the closing date, 8% after the first anniversary and prior to the second anniversary of the closing date, 6% after the second anniversary and prior to the third anniversary, and 4% after the third anniversary and prior to the fourth anniversary of the closing date. An early prepayment fee shall not be payable at any time on or after the earlier to occur of (a) the drawing of the second tranche and (b) the fourth anniversary of the closing date. Additionally, any repayment of the debt will be subject to a buyout amount, which is the revenue interest cap described below, minus the revenue sharing fee (the Revenue Sharing Fee) payments made to date to OrbiMed under the Credit Agreement.annum.

~~Commencing with the fourth full fiscal quarter after the~~ ~~TYRVAYA Nasal Spray~~ approval, if the Company does not meet certain minimum recurring revenue thresholds from the sale and/ or licensing of OC-01 in the last four quarters, the Credit Agreement requires a $5 million repayment of principal on the interest payment date following such fiscal quarter. This test is applied each quarter following commencement of the Credit Agreement. The Company is permitted to prepay at any time, in whole or in part, the term loans, subject to the payment of a prepayment fee, an exit fee, and a buyout amount. The term loans are also required to be mandatorily prepaid with the proceeds of certain asset sales and casualty events and the issuance of convertible debt and would be subject to prepayment upon the occurrence of an event of default, upon if the loans become an Applicable High Yield Discount Obligation, or upon if it becomes illegal for the lender to lend the loans to the Company. The optional prepayment feature, the contingent prepayment features, and the contingent interest features that are unrelated to the Company’s credit worthiness meet the criteria to be accounted for as embedded derivatives because their economic characteristics are not clearly and closely related to that of the debt host and they meet the definition of a derivative.The optional prepayment feature has been bifurcated as an embedded derivative asset; however, because the probability of triggering the contingent repayment and the contingent interest features is remote, the fair values of these features are currently immaterial.

~~Commencing with the fourth quarter of 2021, the~~ Company is required to make quarterly payments to OrbiMed in the form of ~~the Revenue Sharing Fee~~a revenue sharing fee in an amount equal to 3%3.0% of all net revenue from fiscal year net sales and licenses of OC-01 up to ~~$300~~$300.0 million and 1% of all revenue from fiscal year sales and licenses of TYRVAYA Nasal Spray in excess of ~~$300~~$300.0 million and up to ~~$500~~$500.0 million, subject to caps on such fiscal year net sales and license revenues. ~~These caps increase both on an annual fiscal year basis and upon funding~~As of March 31, 2022, the ~~second and third term loan tranches.~~ ~~The Revenue Sharing Fee~~Company has accrued $0.1 million for the first tranche is capped at a fixed $9 million. The Company is subject to additional Revenue Sharing Fee cap amounts for any future tranches drawn. The Company is obligated to pay the Revenue Sharing Fee cap amount regardless of the level of net sales and license revenues. If the Company were to make a prepayment of the term loan, in whole or part, or when the Company repays the principal of the loan at maturity, it is obligated to pay a buyout amount,revenue sharing fee which is ~~composed of~~classified in accrued expenses and other current liabilities on the ~~Revenue Sharing Fee cap amount minus and Revenue Sharing Fees paid since the origination of the term loan.~~Company's condensed balance sheet.

The Company has separated the Revenue Sharing Fee feature from the host debt instrument and accounted for it as an embedded derivative liability because its economic characteristics are not clearly and closely related to that of the host contract, and it meets the definition of a derivative. In addition, the Company has the right to optionally prepay, in whole or in part, the outstanding principal amount of the term loan in an amount equal to the outstanding principal, accrued and unpaid interest, together with early prepayment fee, the exit fee and buyout amount (if applicable). This prepayment option has been determined to qualify as an embedded derivative asset. ~~The Revenue Sharing Fee feature does not meet the scope exception in~~ ~~ASC 815,~~ ~~Derivatives and Hedging~~, for non-exchange-traded contracts for which the settlement is based on a specified volume of sales or service revenues of one of the parties to the contract because it does not affect the variability of payment, only the timing of certain payments under the debt host. The embedded derivative asset and liability have been netted together to result in a net embedded derivative liability, which is recorded in other long-term liabilities on the Company’s condensed balance sheet. This bifurcation of the net embedded derivative liability resulted in an adjustment to increase the debt discount on the loan drawn under the first tranche.The discount created by the bifurcated net embedded derivative liability, together with the exit fee, the buyout amount, and any debt issuance fees attributable to the ~~initial tranche~~drawn tranches are deferred and amortized using the effective interest method over the life of the term loan, which resulted in an effective interest rate of ~~14.11%~~13.98% on the loan as of ~~September 30, 2021.~~

~~OYSTER POINT PHARMA, INC.~~

~~Notes to Unaudited Interim Condensed Financial Statements (continued)~~

The value of the net embedded derivative liability as of August 5, 2021 and September 30, 2021 was $0.4 million and $0.2 million, respectively, with the change in fair value of $0.2 million recorded in other income, net in the condensed statement of operations for the three and nine months ended September 30, 2021.March 31, 2022.

In connection with entering into the Credit Agreement ~~and as shown in the table below,~~ the Company incurred loan commitment fees, which were capitalized and recorded in other assets on the Company's condensed balance sheet as of ~~September 30, 2021.~~March 31, 2022. The Company amortizes loan commitment fees on a straight-line basis over the term of the loan commitment. ~~The balance of the~~Undrawn loan commitment fees, ~~and~~net of accumulated amortization, ~~recorded on the Company’s condensed balance sheet~~ were $0.5 million and $0.6 million as ~~follows:~~of March 31, 2022 and December 31, 2021, respectively.


	~~September 30, 2021~~

~~Loan commitment fees~~	$	~~1,981~~
~~Accumulated amortization of loan commitment fees~~	~~(271)~~
~~Loan commitment fees, net~~	$	~~1,710~~

In connection with entering into the Credit Agreement, and as shown in the table below, the Company incurred debt issuance costs, which were capitalized and recorded as a contra-liability on the Company's condensed balance sheet as of ~~September 30, 2021.~~ The debt issuance and discount costs are being accreted over the life of the tranche drawn by the Company using the effective interest method, which currently include the $2.7 million exit fee which will be paid upon maturity of the first tranche, the $9.0 million Revenue Sharing Fee, as well as the net embedded derivative liability recorded in connection with the Revenue Sharing Fee. The balances of the long-term debt, debt issuance and discount costs, net embedded derivative liability, and accumulated accretion recorded on the Company's condensed balance sheet were as follows:


	~~September 30, 2021~~

~~Long-term debt~~	$	~~45,000~~
~~Debt issuance and discount costs~~	~~(2,868)~~
~~Net embedded derivative liability~~	~~(450)~~
~~Accumulated accretion of long-term debt related costs~~	~~237~~
~~Long-term debt, net~~	$	~~41,919~~

During the three months and nine months ended September 30, 2021, the Company recorded interest expense of $1.1 million in each period, of which $0.5 million related to the amortization of the loan commitment fees and accretion of the Revenue Sharing Fee and the related net embedded derivative liability, as well as debt issuance and discount costs.

~~The following table identifies the Company's obligations under the Credit Agreement as of September 30, 2021 (in thousands):~~

Less than a year 1-3 years 3-5 years More than 5 years Total
Debt Principal $ — $ — $ — $ 45,000 $ 45,000
Exit Fee — — — 2,700 2,700
Contractual Interest on debt 3,878 7,767 7,756 3,283 22,684
Revenue Sharing Cap (a)
— — — 9,000 9,000
Total obligations $ 3,878 $ 7,767 $ 7,756 $ 59,983 $ 79,384

~~(a) —~~ ~~The Revenue Sharing Fee is capped at $9 million and timing of payments will vary based on the Company's net sales of OC-01.~~

~~The Company’s obligations under the Credit Agreement are secured by all or s~~ubstantially all of its assets and property, subject to customary exceptions. Any material subsidiaries that the Company (other than certain immaterial subsidiaries) forms or acquires after closing are required to provide a guarantee of the Company’s obligations under the Credit Agreement and provide a pledge of their assets.

1715

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

The balances of the long-term debt, debt issuance and discount costs, net of amortization and accretion recorded on the Company's condensed balance sheet were as follows:


	March 31, 2022		December 31, 2021
Long-term debt	$	95,000	$	95,000
Debt issuance and discount costs, net of amortization	(4,364)		(5,185)
Long-term debt, net	$	90,636	$	89,815

During the three months ended March 31, 2022, the Company recorded interest expense of $3.1 million, of which $1.0 million related to the amortization of the loan commitment fees and accretion of the debt issuance and discount costs.

The Credit Agreement contains customary affirmative and negative covenants, including but not limited to the Company’s ability to enter into certain forms of indebtedness, as well as to pay dividends and other restricted payments. The Credit Agreement also includes provisions for customary events of default. The Credit Agreement ~~required~~requires compliance with a minimum liquidity covenant of ~~$20 million~~ ~~prior to TYRVAYA Nasal Spray approval and now requires $5 million following the approval of~~ ~~TYRVAYA Nasal Spray~~ ~~approval.~~$5.0 million. The Company was in compliance with the minimum liquidity requirement as of ~~September 30, 2021.~~March 31, 2022.

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

9. Leases

The Company is party to non-cancelable operating leases for office and laboratory space in New Jersey and Massachusetts.

The Company's variable lease payments primarily consist of maintenance and other operating expenses from its real estate leases. Variable lease payments are excluded from the right of use assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company leases certain office equipment under finance leases with remaining lease terms of less than 4.2 years.

Supplemental balance sheet information for the Company's leases is as follows (in thousands):


	March 31, 2022		December 31, 2021
Operating lease right-of-use assets	$	2,645	$	2,884
Finance lease right-of-use assets	55		18
Total right-of-use assets	$	2,700	$	2,902

Operating lease liabilities	$	684	$	779
Finance lease liabilities	31		16
Total lease liabilities	$	715	$	795

Operating lease liabilities, non-current	$	1,974	$	2,114
Finance lease liabilities, non-current	30		4
Total lease liabilities, non-current	$	2,004	$	2,118

~~On October 19, 2021, the Company entered into a waiver and amendment (Amendment) to the Credit Agreement, to waive certain labeling requirements required for, and to permit the availability~~The maturities of the ~~second $50 million tranche of funding~~lease liabilities under ~~the Credit Agreement (among other customary funding provisions)~~non-cancelable operating and make certain other amendments thereto, subject to the terms and conditions contained therein. Because the label approving TYRVAYA Nasal Spray for the signs and symptoms of dry eye disease did not include eye dryness score data from clinical trials, the Amendment was required in order for the Company to draw the second tranche and to be eligible to draw the third tranche under the Credit Agreement. ~~The Amendment also increased the amount of principal that is required to be repaid if the Company does not meet certain minimum recurring revenue thresholds from the sale and/or licensing of~~ ~~TYRVAYA Nasal Spray~~ on a quarterly basis for the most recently ended four fiscal quarter period, from $5 million to $10 million if (i) the Company does not meet such minimum recurring revenue thresholds from the sale and/or licensing of TYRVAYA Nasal Spray in the last four quarters and (ii) an improper promotional event has occurred. The Company delivered a notice to OrbiMed on October 19, 2021 that it intended to borrow the second tranche and the Company received the second tranche funding on November 4, 2021. The Company would also be barred from drawing the second tranche in the event an improper promotional event occurs prior to the funding of the second tranche.finance leases are as follows (in thousands):


As of March 31, 2022	Finance Leases		Operating Leases		Total
2022 (remainder)	$	25	$	634	$	659
2023	22		666		688
2024	16		572		588
2025	—		562		562
2026	—		525		525
Total undiscounted cash flows	63		2,959		3,022
Less: imputed interest	(2)		(301)		(303)
Total lease liabilities	61		2,658		2,719
Less: current portion	(31)		(684)		(715)
Lease liabilities	$	30	$	1,974	$	2,004

8.Rent expense was $0.3 million and $0.1 million for the three months ended March 31, 2022 and March 31, 2021, respectively.

OYSTER POINT PHARMA, INC.

Notes to Unaudited Interim Condensed Financial Statements (continued)

10. License and Collaboration Agreements

Ji Xing ~~Pharmaceuticals Limited - Related Party~~

OnIn August 5, 2021, the Company entered into a license and collaboration agreement ~~(the License Agreement)~~ with Ji Xing Pharmaceuticals Limited (Ji Xing), which is an entity affiliated with RTW Investments, LP. RTW Investments, LP is one of the Company's beneficial owners and, as a result, the License Agreement is considered to be a related party transaction. Pursuant to the License Agreement, theXing. The Company granted Ji Xing an exclusive license to develop and commercialize OC-01 (varenicline solution) nasal spray and OC-02 (simpinicline) nasal spray pharmaceutical products,, for all prophylactic uses for, and treatment of, ophthalmology diseases or disorders ~~(the Field)~~ in the greater China region, including mainland China, Hong Kong Special Administrative Region, Macau Special Administrative Region, and Taiwan (the Territory). Ji Xing will be responsible for development, regulatory, manufacturing and commercialization activities inregion. Per the Territory, and the Company will be responsible for supplying the drug substance and finished products of OC-01 (varenicline solution) and OC-02 (simpinicline) for Ji Xing’s clinical development at quantities to be agreed by the parties, subject to one or more separate supply agreements as contemplated by the License Agreement. Ji Xing is prohibited from engaging in certain competitive activities during the termterms of the License Agreement. Subject to certain limitations, the Company may not commercialize any nAChR agonist in the Field in the Territory, without first offering Ji Xing a right of first negotiation for such product in the Territory. The Company has also granted Ji Xing a right of first negotiation to expand indications or uses of OC-01 (varenicline solution) or OC-02 (simpinicline) in the Territory.

In August 2021, the Company recognized $17.9 million of revenue in connection with the License Agreement, which is inclusive of 397,562 senior common shares of Ji Xing valued at $0.4 million. The Company received $15.0 million in cash consideration during the three months ended September 30, 2021 and included $2.5 million in other receivable-related party on the condensed balance sheet as of September 30, 2021.

As provided for in the License Agreement, the Company is entitled to receive an additional 397,561 senior common shares of Ji Xing, which occurred on October 28, 2021, and $5.0 million in development milestone payments upon the FDA approval of TYRVAYA Nasal Spray, which occurred on October 15, 2021. Per the License Agreementagreement, the Company is eligible to receive ~~up to $204.8 million in aggregate~~ development and sales-based milestone payments and royalty payments that are tiered on future net sales of OC-01 and OC-02 and are based on royalty rates between 10% and 20%. The License Agreement will remain in effect, unless terminated earlier, until the expiration of all royalty terms for all licensed products in the Territory under the License Agreement. Ji Xing may terminate the License Agreement for convenience by providing at least 180 days written notice. Each party has the right to terminate the License Agreement for the other party’s uncured material breach or insolvency.OC-02. The Company may also terminate the License Agreement if Ji Xing, its affiliates or sublicensees challenges the enforceability, validity or scope of certain patents owned by the Company, subject to customary exceptions set forth in the License Agreement. Upon termination,did not recognize any license ~~granted by~~or milestone revenue during the ~~Company to Ji Xing will terminate, and all sublicenses granted by Ji Xing shall also terminate.~~three months ended March 31, 2022 or March 31, 2021.

~~OYSTER POINT PHARMA, INC.~~

~~Notes to Unaudited Interim Condensed Financial Statements (continued)~~

Adaptive Phage Therapeutics

In May 2021, the Company entered into a research collaboration agreement with Adaptive Phage Therapeutics (APT) for the development of potential biological treatments for multiple ophthalmic diseases. Under the terms of the collaboration agreement, the Company has the option and certain rights to obtain an exclusive license to develop and commercialize APT’s technology for ophthalmic diseases and disorders. Under the license terms, if such option is exercised, the Company would make potential development and regulatory milestones payments, as well as the potential to make sales-related milestones and tiered royalty payments of net sales, if a licensed phage therapy is approved by the FDA or certain other regulatory authorities. Pursuant to the terms of the agreement, the Company paid a one-time, non-refundable, upfront payment of $0.5 million for the collaboration and option agreement which was included in research and development expense for the nine months ended September 30, 2021.authorities. The Company has not exercised the option granted under the agreement as of March 31, 2022~~September 30, 2021.~~.

Pfizer Inc.

The Company is party to a non-exclusive patent license agreement with Pfizer Inc. (Pfizer), which granted the Company non-exclusive rights under Pfizer’s patent rights covering varenicline tartrate to develop, manufacture, and commercialize the OC-01 (varenicline solution) nasal spray product. Pursuant to the license agreement, the Company is required to pay a one-time sales-based milestone payment of ~~$10~~$10.0 million if annual U.S. net sales of TYRVAYA Nasal Spray exceed ~~$250~~$250.0 million prior to December 31, 2026. The Company is also required to pay royalties based on annual U.S. tiered net sales of TYRVAYA Nasal Spray at percentages ranging from 7.5% to 15% until the expiration of the royalty term. The royalty obligation to Pfizer ~~commences~~commenced upon the first commercial sale of TYRVAYA Nasal Spray and expires upon the later of (a) the expiration of all regulatory or data exclusivity granted to Pfizer in connection with varenicline in the United States; and (b) the expiration or abandonment of the last valid claims of the licensed patents. ~~No milestone was achieved or royalties accrued as of September 30,~~The Company recorded $0.2 million and no royalty expense during the three months ended March 31, 2022 and 2021, ~~and December 31, 2020.~~respectively.

11. Commitments and Contingencies

~~Commitments~~

~~In addition to disclosures in these condensed financial statements, the following are the Company's commitments as of September 30, 2021:~~

~~Purchase Commitment~~

~~In July 2021, the Company entered into a manufacturing and supply agreement with a contract manufacturing organization (CMO) to manufacture and supply~~ ~~TYRVAYA Nasal Spray~~ for an initial term of three years. Under this agreement, the Company will pay a minimum capacity reservation fee in the amount of $2.5 million for each of the next three years ending December 31, 2021, 2022, and 2023, respectively. The minimum capacity reservation fee is subject to ~~potential future credit allowances based upon the prior year's manufacturing production,~~ ~~as provided for in the agreement. The Company made no minimum capacity reservation fee payments as of September 30, 2021.~~

Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and that such expenditures can be reasonably estimated. Significant judgment is required to determine both probability and the estimated amount. There are no matters pending that the Company currently believes are reasonably possible or probable of having a material impact to the Company's business, financial position, results of operations, or statements of cash flows.

~~OYSTER POINT PHARMA, INC.~~

~~Notes to Unaudited Interim Condensed Financial Statements (continued)~~

~~10. Subsequent events~~

~~On October 15, 2021, TYRVAYA Nasal Spray was approved by the FDA for the treatment of the signs and symptoms of dry eye disease.~~

On October 19, 2021, the Company entered into the Amendment to the Credit Agreement, to waive certain labeling requirements required for, and to permit the availability of, the second $50 million tranche of funding under the Credit Agreement (among other customary funding provisions) and make certain other amendments thereto, subject to the terms and conditions contained therein. Because the label approving TYRVAYA Nasal Spray for the signs and symptoms of dry eye disease did not include eye dryness score data from clinical trials, the Amendment was required in order for the Company to draw the second tranche and to be eligible to draw the third tranche under the Credit Agreement. The Company delivered notice to OrbiMed on October 19, 2021 that it intended to borrow the second tranche and the Company received the second tranche funding on November 4, 2021.

The Amendment also increased the amount of principal that is required to be repaid if the Company does not meet certain minimum recurring revenue thresholds from the sale and/or licensing of TYRVAYA Nasal Spray on a quarterly basis for the most recently ended four fiscal quarter period, from $5 million to $10 million if (i) the Company does not meet such minimum recurring revenue thresholds from the sale and/or licensing of TYRVAYA Nasal Spray in the last four quarters and (ii) an improper promotional event has occurred.

In October 2021, the Company received an additional 397,561 of the senior common shares of Ji Xing and $5.0 million in development milestone payments which were contingent upon the FDA approval of TYRVAYA Nasal Spray which occurred on October 15, 2021.

2018

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion analyzes the Company's historical financial condition and results of operations. As you read this discussion and analysis, refer to the Company's financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, which represents the results of operations for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021. Also refer to the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, which includes detailed discussions of various items impacting the Company's business, results of operations and financial condition. The discussion and analysis below has been organized as follows:

•Executive summary, including a description of the business and recent events that are important to understanding the results of operations and financial condition;

•Results of operations, including an explanation of significant differences between the periods in the specific line items of the condensed statements of operations;

•Financial condition addressing the Company's sources of liquidity, future funding requirements, cash flow, sources and uses of cash, updates to contractual obligations and commitments, and off-balance sheet arrangements; and

•Critical accounting policies, significant judgements and estimates, which are most important to both the portrayal of the Company's results of operations and financial condition.

Some of the information contained in the following discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to the Company’s plans and strategy for its business, includes forward-looking statements within the meaning of Section 27A of the Act and Section 21E of the Exchange Act that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 and in this Quarterly Report on Form 10-Q, the Company’s actual results could differ materially from the results described in or implied by these forward-looking statements. Please also see the section of this Quarterly Report on Form 10-Q titled “Special Note Regarding Forward-Looking Statements.”

2119

Executive Summary

Introduction and Overview

The Company began selling TYRVAYA Nasal Spray in November 2021 and generated net product revenues of $2.7 million for the three months ended March 31, 2022. The Company expects its product revenue to ~~continue to finance its operations through private~~increase if it gains market share and ~~public equity, debt financing, collaborative or other arrangements with corporate sources or through other sources of financing.~~TYRVAYA Nasal Spray obtains insurance coverage from additional third-party payors. The ~~Company’s~~Company generated net losses ~~were $58.6~~of $47.9 million and ~~$48.3~~$18.9 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2022, and 2021, respectively, and ~~2020, respectively. As of September 30, 2021, the Company~~ had an accumulated deficit of $303.3 million as of March 31, 2022. The Company has historically financed its operations primarily through the sale and issuance of its securities. In August 2021, the Company secured debt capital in the form of a long-term credit facility to help finance its operations. ~~$213.3 million~~. The Company expects that its ~~selling, general and administrative expenses will continue to increase as the Company commercializes~~ ~~TYRVAYA Nasal Spray~~ ~~following its recent approval by the FDA. Additionally,~~ operating expenses will increase as ~~the Company~~it expands its commercialization of TYRVAYA Nasal Spray, advances its other product candidates through preclinical and clinical development, seeks regulatory approval, and prepares for and, if approved, proceeds to ~~commercialization;~~commercialization of its other product candidates, acquires, discovers, validates and develops additional product candidates; obtains, maintains, protects and enforces its intellectual property ~~portfolio; and hires additional personnel.~~portfolio.

Recent Events

~~FDA~~ Approval of ~~TYRVAYA Nasal Spray~~the Ji Xing Pharmaceuticals Application to Conduct a Phase 3 Clinical Trial of OC-01 in China

On ~~October 15, 2021,~~ ~~TYRVAYA Nasal Spray~~ ~~was~~March 21, 2022, Ji Xing announced that the Center for Drug Evaluation of the National Medical Products Administration of China approved byits Clinical Trial Application for the ~~FDA~~phase 3 clinical trial of OC-01 (varenicline tartrate) nasal spray for the treatment of ~~the signs and symptoms of dry eye disease. TYRVAYA Nasal Spray is the first and only nasal spray approved for the treatment of dry eye disease.~~ TYRVAYA Nasal Spray is believed to bind to cholinergic receptors to activate the trigeminal parasympathetic pathway resulting in increased production of basal tear film as a treatment for dry eye disease. TYRVAYA Nasal Spray is a highly selective cholinergic agonist delivered twice daily as a multi-dose, aqueous nasal spray into each nostril to activate basal tear production. Nasal spray administration provides a new way to treat dry eye disease without administering medication onto an already irritated ocular surface.

~~Credit Facility with OrbiMed~~

On August 5, 2021, Company entered into a $125 million term loan credit facility (the Credit Agreement) with OrbiMed Royalty & Credit Opportunities III, LP, as administrative agent and initial lender (OrbiMed). The Credit Agreement provides for loans to be funded in three separate tranches: the first $45 million tranche was funded on August 10, 2021, the second $50 million tranche to be funded, at the option of the Company, upon FDA approval of ~~TYRVAYA Nasal Spray~~ ~~for the~~ signs and symptoms of dry eye disease with an approved label that includes eye dryness score data from clinical trials, among other conditions, and the third $30 million tranche to be funded on or prior to June 30, 2023, at the option of thein China. The Company ~~upon the Company having received at least $40 million in net recurring revenue from the sale and/or licensing of~~ ~~TYRVAYA Nasal Spray~~ ~~in any twelve month period prior to March 31, 2023, among other conditions, including having already drawn on the second tranche.~~

~~Ji Xing License and Collaboration Agreement~~

On August 5, 2021, the Company entered into a license and collaboration agreement (the License Agreement) with Ji Xing Pharmaceuticals Limited (Ji Xing), a biotechnology company headquartered in Shanghai, China and backed by RTW

~~Investments, LP (RTW). Pursuant to the License Agreement, the Company has~~ granted Ji Xing an exclusive license to develop and commercialize OC-01 (varenicline solution) nasal spray and OC-02 (simpinicline) nasal ~~sprays,~~spray pharmaceutical products, for all prophylactic uses for, and treatment of, ophthalmology diseases or disorders in the greater China ~~region. Ji Xing will be responsible for the development, regulatory, manufacturing and commercialization activities costs~~region in the greater China region, including mainland China, Hong Kong Special Administrative Region, Macau Special Administrative Region, and Taiwan. The Company will be responsible for supplying the drug substance and finished products of OC-01 (varenicline solution) and OC-02 (simpinicline) for Ji Xing's clinical development at quantities to be agreed by the parties for a period of up to twelve months, subject to one or more separate supply agreements as contemplated by the License Agreement. In August 2021, the Company recognized $17.9 million of revenue in connection with the License Agreement, which is inclusive of 397,562 of Ji Xing senior common shares valued at $0.4 million. The Company received $15.0 million in cash consideration during the three months ended September 30, 2021 and included $2.5 million in other receivable-related party on the condensed balance sheet as of September 30, 2021. In October 2021, the Company received an additional 397,561 senior common shares of Ji Xing and $5.0 million in development milestone payments upon the FDA approval of TYRVAYA Nasal Spray which occurred on October 15, 2021. Per the License Agreement, the Company is eligible to receive up to $204.8 million in aggregate development and sales-based milestone payments and royalty payments that are tiered on future net sales of OC-01 and OC-02 and based on royalty rates between 10% and 20%.

~~Commercial Launch~~ ~~Agreements~~

~~In anticipation~~Expansion of ~~the Company's commercial launch of~~Commercial Coverage for TYRVAYA Nasal Spray ~~in the fourth quarter of 2021, the Company entered into wholesaler, patient services, manufacturing and supply, as well as a third party logistics services agreements.~~

~~Full Onboarding~~Effective February 19, 2022, TYRVAYA Nasal Spray was placed on the Express Scripts National Preferred, Basic, and High Performance Formularies, which collectively make up an estimated 26 million lives. Subsequently, formulary coverage for TYRVAYA Nasal Spray has been established with additional third-party payors. According to a third-party syndicated source, TYRVAYA now has commercial coverage for up to approximately 95 million lives, or 52% of all U.S. ~~Sales Representatives~~commercial lives. The Company anticipates receiving coverage determinations for all major commercial payors in the U.S. by mid-2022.

The Company has fully onboarded its planned field force of 150-200 sales resources in 2021, who have been in the field communicating the Company's dry eye disease-state awareness campaign and will now begin promoting TYRVAYA Nasal Spray to eye care practitioners. TYRVAYA Nasal Spray is now available at U.S. regional wholesalers for distribution to pharmacies, and samples are available to eye care practitioners.

~~Preclinical Data Highlighting Potent Activity of TYRVAYA Nasal Spray and OC-02 (simpinicline) against SARS-CoV-2 Virus and Variants.~~

In July 2021, the Company announced preclinical data in non-human primates and in vitro models evaluating TYRVAYA Nasal Spray against SARS-CoV-2 and the alpha and beta variants, the viruses that cause COVID-19 disease. Administration of TYRVAYA Nasal Spray to non-human primates was observed to inhibit viral replication in the nose within 24 hours of infectious SARS-CoV-2 challenge with absence of subgenomic RNA at Day 3 and Day 5 post-challenge. The results were published on the preprint server bioRxiv. In addition, varenicline was observed to inhibit cellular entry and replication of SARS-CoV-2 and its alpha and beta variants in multiple human cell types. Lastly, OC-02 (simpinicline) was also observed to inhibit cellular entry and replication of SARS-CoV-2 alpha variant in Calu-3 human cells at very low concentrations. Additional preclinical studies with SARS-CoV-2 variants are currently underway.

~~2021 Inducement Plan~~

In July 2021, the Company's Board of Directors approved the adoption of the 2021 Inducement Plan (the Inducement Plan), which is used exclusively for grants of awards to individuals who were not previously employees or directors of the Company (or following a bona fide period of non-employment) as a material inducement to such individuals’ entry into employment with the Company. The Company has reserved 650,000 shares of its common stock that may be issued under the Inducement Plan. The terms and conditions of the Inducement Plan are substantially similar to those of the 2019 Plan.

Continued Enrollment of ~~First Subject~~Subjects in the OLYMPIA Phase 2 Clinical Trial of TYRVAYA Nasal Spray ~~(varenicline solution) Nasal Spray~~ for Patients with Neurotrophic Keratopathy

~~In June 2021,~~During the three months ended March 31, 2022, the Company ~~announced~~continued enrollment of ~~the first subject~~subjects in the OLYMPIA Phase 2 clinical trial of ~~TYRVAYA Nasal Spray~~OC-01 for the treatment of Stage 1 Neurotrophic Keratopathy (NK). Enrollment is expected to be completed inby the end of 2022.

~~Pipeline Expansion with~~Additional Pre-Clinical Studies for Enriched Tear Film (ETF™) Gene Therapy to Target ~~Ophthalmic Diseases~~Neurotrophic Keratopathy

~~In June 2021,~~During the three months ended March 31, 2022, the Company ~~announced~~progressed in its multiple pre-clinical studies for the ~~expansion of its pipeline with the introduction of its~~ proprietary ETF™ gene therapy ~~and proof-of-concept in vivo study results from it first gene therapy candidate, OC-101. Preclinical study results from a 42-day proof-of-concept in vivo study demonstrated~~with OC-101 (AAV-NGF), a single, intralacrimal gland injection of an adeno-associated virus (AAV) vector ~~that delivers~~containing the human ~~Nerve Growth Factor~~nerve growth factor (NGF) ~~gene. A single injection produced statistically significant increase of NGF in tear film, as compared to control. Preclinical~~gene for Stage 2/3 NK patients. Earlier pre-clinical study results ~~also~~ demonstrated that following AAV transduction of the lacrimal gland, cholinergic activation with ~~TYRVAYA Nasal Spray~~OC-01 produced a statistically significant increase of NGF levels in tear film of a rabbit model, as compared to control, potentially indicating OC-01’s ability to

modulate lacrimal secretion of NGF. ~~No macroscopic or microscopic safety findings were observed associated with either~~Additional pre-clinical studies using a porcine model have further demonstrated the capability of ETF Gene Therapy to deliver a protein to the tear film following intralacrimal gland ~~administration of TYRVAYA Nasal Spray or intranasal administration of TYRVAYA Nasal Spray.~~injection.

Research Collaboration with Adaptive Phage Therapeutics, Inc. to Target Ophthalmic Diseases

In May 2021, the Company entered into a research collaboration agreement with Adaptive Phage Therapeutics ~~(APT)~~ for the development of potential biological treatments for multiple ophthalmic diseases. Under the terms of the collaboration agreement, the Company has the option and certain rights to obtain an exclusive license to develop and commercialize APT’s technology for ophthalmic diseases and disorders. Under the license terms, if such option is exercised, the Company would pay

~~for~~ potential development and regulatory milestones, as well as ~~the~~ potential ~~for~~ sales-related milestones and tiered royalties of net sales, if a licensed phage therapy is approved by the FDA or certain other regulatory authorities. Pursuant to the terms of the agreement, the Company paid a one-time, non-refundable, upfront payment of $0.5 million for the research collaboration ~~and option~~ agreement, which was included in research and development expense ~~for~~during the ~~nine months~~year ended ~~September 30,~~December 31, 2021. The Company has not exercised the option granted under the agreement as of March 31, 2022.

The Impact of the SARS-CoV-2 Virus Pandemic

~~During the nine months ended September 30, 2021, the~~The Company does not believe its financial results ~~of the Company~~ were ~~not significantly~~materially affected by the SARS-CoV-2 virus ~~pandemic.~~pandemic during the three months ended March 31, 2022. However, the extent to which the SARS-CoV-2 virus pandemic may affect the Company’s future financial results and operations will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the pandemic, the availability and effectiveness of vaccines and treatment options, and current or future domestic and international actions to contain it and treat it. The Company continues to evaluate the potential impact of the SARS-CoV-2 virus pandemic as it initiated commercialization of the TYRVAYA Nasal Spray, including potential supply-chain challenges, and the potential impact on its trials, expected timelines and costs, ~~as well as potential supply-chain challenges as it prepares itself for commercialization of the~~ ~~TYRVAYA Nasal Spray~~ ~~and~~ as it continues to learn more about the impact of the SARS-CoV-2 virus pandemic on the biopharmaceutical industry. In addition, the Company has taken a variety of measures in an effort to ensure the availability and functioning of the Company's critical infrastructure and to promote the safety and security of its employees, including ~~previously instituted~~ remote working arrangements for employees ~~through at least the third quarter of 2021~~ and investing in personal protective equipment for the ~~future~~ return to the office. ~~With the surge of the Delta variant of the virus across the United States during the second half of 2021, the~~The Company ~~delayed the planned~~commenced a voluntary return to the office for its employees ~~until at least December 2021. However, the~~in March 2022. The Company’s sales force is primarily working in-person and have been instructed to follow all locally required SARS-CoV-2 related precautions. The Company will continue monitoring ~~COVID-19~~ SARS-CoV-2 infection rates and make practical decisions ~~about voluntary reopening~~ in compliance with Centers for Disease Control and Prevention, federal, state and local guidelines.

The Company continues to evaluate and develop pipeline candidates for the potential treatment of various medical indications. The ongoing SARS-CoV-2 virus pandemic may impact access to supplies necessary to conduct preclinical studies, cause delay to the timelines to initiate or complete in vitro or in vivo animal studies or may indirectly impact the ~~operation~~operations of third parties that are necessary for the Company to advance preclinical projects. If the SARS-CoV-2 virus pandemic continues and persists for an extended period of time, the Company could experience significant disruptions to its clinical development timelines, which could adversely affect its business, financial condition and results of operations.

For further discussion of the risks that the Company faces as a result of the SARS-CoV-2 virus pandemic refer to the ”Risk ~~Factors~~”Factors” section of the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020 and the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2021 and June 30,~~ 2021.

2521

Results of Operations

Comparison of the Results of Operations for the Three Months Ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~

The following table summarizes the Company's results of operations for the periods indicated (in thousands, except percentages):

Three Months Ended September 30,
2021 2020 $ Change % Change
Revenue:
License revenue - related party $ 17,943 $ — $ 17,943 100 %
Total revenue 17,943 $ — 17,943 100 %
Research and development:
Clinical, preclinical 1,467 2,148 (681) (32) %
Chemistry, manufacturing and controls (CMC) 3,727 4,676 (949) (20) %
Other 1,020 1,386 (366) (26) %
Total research and development 6,214 8,210 (1,996) (24) %
Selling, general and administrative 28,497 8,112 20,385 251 %
Loss from operations (16,768) (16,322) (446) 3 %
Other income (expense)
Other income, net 222 17 205 1206 %
Interest expense (1,124) — (1,124) 100 %
Total other expense, net (902) 17 (919) N/M
Net loss $ (17,670) $ (16,305) $ (1,365) 8 %


	Three Months Ended March 31,
	2022		2021		$ Change		% Change

Revenue:
Product revenue, net	$	2,704	$	—	$	2,704	100	%


Total revenue	2,704		—		2,704		100	%
Cost of product revenue	336		—		336		100	%
Operating expenses:
Sales and marketing	26,966		4,567		22,399		490	%
General and administrative	12,932		8,525		4,407		52	%
Research and development	4,681		5,828		(1,147)		(20)	%
Total operating expenses	44,579		18,920		25,659		136	%
Loss from operations	(42,211)		(18,920)		(23,291)		123	%
Other (expense) income:
Interest expense	(3,066)		—		(3,066)		100	%
Other (expense) income, net	(2,615)		11		(2,626)		N/M
Total other (expense) income, net	(5,681)		11		(5,692)		N/M
Net loss and comprehensive loss	$	(47,892)	$	(18,909)	$	(28,983)	153	%

N/M - Not Meaningful.

~~License~~Product Revenue, ~~- Related Party~~Net

In ~~connection with~~Product revenue, net was $2.7 million for the ~~License Agreement entered into with Ji Xing,~~three months ended March 31, 2022, and was related to sales of TYRVAYA Nasal Spray, which was launched in the ~~Company recognized $17.9 million~~U.S. in ~~license revenue~~November 2021. Approximately 19,000 TYRVAYA Nasal Spray prescriptions, written by over 4,500 unique eye care professionals, were filled during the three months ended ~~September 30,~~March 31, 2022. The Company did not generate any revenues from product sales during the three months ended March 31, 2021.

Cost of Product Revenue

Cost of product revenue for the three months ended March 31, 2022 was $0.3 million.Cost of product revenue consisted of product royalty expenses, third-party manufacturing costs, reserves for inventory obsolescence and material costs of $0.7 million. This was partially offset by a $0.4 million supplier credit recognized during the three months ended March 31, 2022. In preparation of the commercial launch, the Company expensed to research and development expense all material costs related to inventory produced prior to the FDA approval date of TYRVAYA Nasal Spray on October 15, 2021 (pre-approval inventory). Because pre-approval inventory was charged to research and development expense, the unit cost of product revenue will be lower until the Company fully utilizes product manufactured prior to the FDA approval date of TYRVAYA Nasal Spray.

Sales and Marketing

Sales and marketing expense increased by $22.4 million during the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The ~~license revenue~~increase was ~~recognized upon~~primarily due to higher payroll-related expenses of $11.6 million, inclusive of an increase in stock-based compensation of $0.7 million, as well as sales commission expense, which was driven by onboarding a commercial field force in the ~~transfer~~second half of ~~control~~2021. The Company also incurred higher marketing expenses of

$8.5 million in connection with advertising, sample expense, trade shows, and other marketing efforts related to the ~~licenses~~launch of TYRVAYA Nasal Spray.

General and Administrative Expenses

General and administrative expenses increased by $4.4 million during the three months ended March 31, 2022, compared to ~~Ji Xing~~the three months ended March 31, 2021. The increase was primarily driven by additional payroll-related expenses of $2.6 million due to an increase in headcount to support the Company's business operations, inclusive of an increase in stock-based compensation of $0.7 million. The Company also incurred higher other general and ~~was comprised~~administrative expenses of ~~$17.5~~$1.3 million ~~cash consideration, of which $2.5 million was included~~, compared to the three months ended March 31, 2021 related to accounting, legal, insurance and other professional services. The increase in other ~~receivable-related party on~~general and administrative expense was driven by the ~~condensed balance sheet as of September 30, 2021, and non-cash consideration of 397,562 senior common shares of Ji Xing valued at $0.4 million.~~ ~~The receipt of the Ji Xing senior common shares was recorded as~~Company's transition from a ~~non-marketable equity investment and included in other assets on the condensed balance sheet as of September 30, 2021.~~clinical-stage to a commercial stage company.

Research and Development Expenses

Research and development expenses decreased by ~~$2.0~~$1.1 million during the three months ended ~~September 30, 2021~~March 31, 2022, compared to the three months ended March 31, 2021~~September 30, 2020.~~. The decrease was ~~driven by lower CMC expenses incurred~~primarily due to decreased research and development activity relating to OC-01 following its approval by the Company in the third quarter of 2021 compared to the third quarter of 2020, which included significant pre-approval inventory costs, as well as expenses related to the preparation of the NDA filing in December 2020. The Company also incurred lower clinical and pre-clinical expense due to the timing and number of the studies conducted during the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

~~Selling, General and Administrative Expenses~~

~~Selling, general and administrative expenses increased by $20.4 million during the three months ended~~ ~~September 30, 2021 compared to thethree~~ months ended September 30, 2020. The increase was driven by higher payroll-related expenses of $11.2 million, inclusive of increase in stock-based compensation of $0.8 million, primarily driven by onboarding a commercial field force during the three months ended September 30,FDA on October 15, 2021. The Company incurred higher commercial planning expenses of $5.2 million in anticipation of a U.S. launch of TYRVAYA Nasal Spray, and higher general and administrative expenses of $3.1 million, related to accounting, legal, facilities, and information technology costs. The Company also incurred higher medical affairs costs in the amount of $0.9 million during the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

Interest Expense

The Company incurred ~~$1.1~~$3.1 million of interest expense during the three months ended ~~September 30, 2021~~March 31, 2022, which related to the Credit ~~Agreement.~~Agreement with OrbiMed entered into in August 2021. Interest expense for the three months ended ~~September 30, 2021 includes~~March 31, 2022 included contractual interest, as well as the amortization of loan commitment fees and accretion of other long-term debt related costs. The Company had no interest expense during the three months ended March 31, 2021.

Other (Expense) Income, net

Other (expense) income, net, for the three months ended March 31, 2022 consisted of a $2.7 million change in the fair value of the net embedded derivative liability, which was recorded in connection with the Company's Credit Agreement with OrbiMed, partially offset by interest earned on money market funds. Other (expense) income, net, for the three months ended March 31, 2021 primarily consisted of interest income earned on money market funds.

~~Comparison of the Nine Months Ended September 30, 2021 and 2020~~

~~The following table summarizes the Company's results of operations for the periods indicated (in thousands, except percentages):~~

Nine Months Ended September 30,
2021 2020 $ Change % Change
Revenue:
License revenue - related party $ 17,943 $ — $ 17,943 100 %
Total revenue 17,943 — 17,943 100 %
Research and development:
Clinical, preclinical 5,468 10,141 (4,673) (46) %
Chemistry, manufacturing and controls (CMC) 12,772 14,236 (1,464) (10) %
Other 532 3,727 (3,195) (86) %
Total research and development 18,772 28,104 (9,332) (33) %
Selling, general and administrative 56,885 20,641 36,244 176 %
Loss from operations (57,714) (48,745) (8,969) 18 %
Other income (expense)
Other income, net 243 457 (214) (47) %
Interest expense (1,124) — (1,124) 100 %
Total other expense, net (881) 457 (1,338) (293) %
Net loss $ (58,595) $ (48,288) $ (10,307) 21 %

~~License Revenue - Related Party~~

In ~~connection with the License Agreement entered into with Ji Xing, the~~ Company recognized $17.9 million in license revenue during the nine months ended September 30, 2021. The license revenue was recognized upon the transfer of control of the licenses to Ji Xing and was comprised of $17.5 million cash consideration, of which $2.5 million was included in other receivable-related party on the condensed balance sheet as of September 30, 2021, and non-cash consideration of 397,562 senior common shares of Ji Xing valued at $0.4 million. ~~The receipt of the Ji Xing senior common shares was recorded as a non-marketable equity investment and included in other assets on the condensed balance sheet as of September 30, 2021.~~

~~Research and Development Expenses~~

~~Research and development expenses decreased by $9.3 million during the nine months ended September 30, 2021 compared to the nine~~ ~~months ended September 30, 2020. The decrease in clinical, preclinical, and CMC expense of~~ $6.1 million was primarily due to the completion of the ONSET-2 Phase 3 clinical trial in May 2020. The decrease in other research and development costs of $3.2 million was primarily driven by the application fee waiver granted to the Company in April 2021. In December 2020, the Company paid a fee of $2.9 million to the FDA under the Prescription Drug User Fee Act (PDUFA) in conjunction with the filing of its NDA for TYRVAYA Nasal Spray. The Company filed a request with the FDA to grant a waiver and refund the fee under the small business waiver provision of the PDUFA. Due to the uncertainty regarding the collectability of this refund, the Company recorded the filing fee in research and development expense in December 2020. In February 2021, the FDA granted the Company’s request for the waiver. The refund was recorded as a reduction in other research and development expense for the nine months ended September 30, 2021.

~~Selling, General and Administrative Expenses~~

Selling, general and administrative expenses increased by $36.2 million during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase was driven by higher payroll-related expenses of $20.6 million, inclusive of increase in stock-based compensation of $3.4 million. The increase in payroll-related expenses is related to the onboarding of commercial sales force and other employees to support the anticipated commercial launch of TYRVAYA Nasal Spray in the fourth quarter of 2021. In addition to the increase in payroll-related expenses related to the anticipated launch of the product, the Company also incurred higher marketing and advertising expenses of $9.0 million. The Company incurred higher other general and administrative expenses of $4.3 million, related to accounting, legal, facilities, and information technology costs. The Company also incurred an increase in medical affairs costs in the amount of $2.3 million during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

~~Interest Expense~~

The Company incurred $1.1 million of interest expense during the nine months ended September 30, 2021 related to the Credit Agreement. Interest expense for the three months ended September 30, 2021 includes contractual interest, as well as the amortization of loan commitment fees and accretion of other long-term debt related costs.

2823

Liquidity and Capital Resources

Sources of Liquidity

The Company's principal sources of liquidity include cash on hand and borrowings under the Company's Credit Agreement ~~the Company~~ ~~entered into~~ with OrbiMed, as further described in ~~August 2021. In August 2021,~~Note 8, Long-term Debt, to the Company's condensed financial statements. The Company ~~drew upon the first tranche of~~has $30.0 million remaining under the credit facility, inwhich may be funded, at the amount of $45.0 million and received proceeds of $40.2 million, net of loan commitment fees, debt issuance and discount costs. In October 2021, the Company entered into the Amendment, to waive certain labeling requirements required for, and to permit the availabilityoption of the ~~second $50 million tranche of funding under the Credit Agreement (among other customary funding provisions) and make certain other amendments thereto. The~~ Company, delivered a notice to OrbiMed on October 19, 2021 that it intended to borrow the second tranche and the Company received the second tranche funding on November 4, 2021. The Company would also be barred from drawing the second tranche in the event an improper promotional event occurs prior to the funding of the second tranche. The Credit Agreement provides for the third $30 million tranche to be funded on or prior to June 30, 2023, ~~at the option of the Company,~~ upon the Company having received at least ~~$40~~$40.0 million in TYRVAYA Nasal Spray net recurring revenue, ~~from~~as defined in the ~~sale and/or licensing of~~ ~~TYRVAYA Nasal Spray~~Credit Agreement, in any twelve-month period prior to March 31, 2023, among other ~~conditions, including having already drawn on the second tranche.~~conditions.

As of ~~September 30,~~March 31, 2022, and December 31, 2021, the Company had cash and cash equivalents of ~~approximately $184.2~~$143.4 million and ~~$80~~$193.4 million, respectively.

~~remaining under the term loan credit facility, which will be available upon the achievement of certain events and the passage of time.~~

~~In November 2020, the~~The Company ~~entered into a~~is party to an at-the-market sales agreement with Cowen and Company, LLC ~~(the Agent)~~(Agent), pursuant to which the Company may offer and sell shares of its common stock having an aggregate offering price of up to ~~$100~~$100.0 million from time to time through the ~~Agent (the ATM).~~Agent. As of March 31, 2022, the Company had not sold any shares of common stock pursuant to the sales agreement and $100.0 million in shares remained available under the sales agreement.

~~Future Funding Requirements~~

Based on the Company's current business plan, management believes that its available cash and cash equivalents will be sufficient to fund the Company's planned operations for at least 12 months from the filing date of this Quarterly Report on Form 10-Q.Going Concern

Since inception, the Company has incurred recurring losses and negative cash flows from operations. The Company generated net losses of ~~$58.6~~$47.9 million and ~~$48.3~~$18.9 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively, and had an accumulated deficit of ~~$213.3~~$303.3 million as of ~~September 30, 2021.~~March 31, 2022. The Company has cash and cash equivalents of $143.4 million as of March 31, 2022. The Company has historically financed its operations primarily through the sale and issuance of its securities. In August 2021, the Company entered into the Credit Agreement with OrbiMed to help finance its operations. The Company is also a party to a license agreement with Ji Xing, according to which it is eligible to receive additional development and sales-based milestone payments and royalties in future periods. On October 15, 2021, the Company's first product, TYRVAYA Nasal Spray, was approved by the FDA for ~~the~~ treatment of ~~the~~ signs and symptoms of dry eye disease. The Company commenced commercial shipments of TYRVAYA Nasal Spray in November 2021 and generated net product revenues of $2.7 million in the three months ended March 31, 2022.

The current global macro-economic environment is volatile, which may result in supply chain constraints and elevated rates of inflation. In addition, the Company is subject to ~~all of~~risks and uncertainties common to companies in the ~~risks typically related~~biopharmaceutical industry, including, but not limited to, the ~~development~~ability to secure sufficient capital to fund operations, competition from other companies’ products, the availability and ~~sale~~sufficiency of third-party payor coverage and reimbursement, compliance with law and government regulations, the ability to develop and bring to market new ~~pharmaceutical~~ products, protection of proprietary technology, and ~~it may encounter unforeseen expenses, difficulties, complications, delays~~dependence on third parties and ~~other unknown factors that may adversely affect its business. The Company will require additional funds as it commercializes~~key personnel. Successfully commercializing TYRVAYA Nasal Spray ~~any~~requires significant sales and marketing efforts, and the Company’s pipeline programs may require significant additional research and development efforts, including extensive preclinical and clinical testing. These activities will in turn require significant amounts of capital, qualified personnel and adequate infrastructure. There can be no assurance when, if ever, the Company will realize significant revenue from the sales of TYRVAYA Nasal Spray or if the development efforts supporting the Company’s pipeline, including future ~~products,~~clinical trials, will be successful.

Based on the Company’s current business plan, management believes that the Company’s available cash and cash equivalents may not be sufficient to fund its operations for the ~~foreseeable future.~~next twelve months from the date these financial statements are issued without generating positive cash flows through product sales and by raising additional capital from outside sources. The future viability of the Company is ~~unable~~dependent on its ability to ~~entirely~~ fund ~~these~~its operations through the sales and licensing of TYRVAYA Nasal Spray, its ability to draw on the $30.0 million third tranche of the long-term credit facility, as further described in Note 8, Long-term Debt, and raise additional capital through equity offerings, including through the Company's at-the-market sales program, or other collaborative or strategic arrangements. The Company’s ability to draw on the third tranche is contingent upon achieving at least $40.0 million in TYRVAYA Nasal Spray net recurring revenue, as defined in the Credit Agreement, in any twelve-month period on or before March 31, 2023, and without an improper promotional event having occurred, among other conditions. The Credit Agreement also requires the Company to maintain a minimum level of cash and permitted cash equivalent investments, as defined, of at least $5.0 million at all times in a deposit account subject to control by the lender. If the Company is in violation of this covenant and as long as an event of default resulting from such violation is continuing, the lender could exercise remedies, which include but are not limited to, the acceleration of all outstanding debt under the Credit Agreement. In addition, the Company has generated limited revenue from initial sales of TYRVAYA Nasal Spray, and given its limited

commercial history, cannot guarantee that its commercialization efforts ~~with~~will result in product revenues that meet its ~~current financial resources~~sales expectations or those of analysts and ~~there~~investors. Although the Company believes that it will continue to raise capital to fund its operations as it has in the past, the Company’s ability to raise equity capital may depend on the stability of U.S. capital markets and the demand from investors. There can be no assurance that itthe Company will be ~~able~~successful in raising this additional capital or that such capital, if available, will be on terms that are acceptable to ~~secure such~~the Company.

These conditions raise substantial doubt about the Company’s ability to continue as a going concern within the next twelve months from the filing date of this Quarterly Report on Form 10-Q. The ability to continue as a going concern is dependent upon profitable future operations, positive cash flows from operations, and obtaining additional financing ~~on a timely basis, if at all, that will be sufficient to meet these needs.~~from outside sources. If adequate funds are unavailable on a timely basis from operations orand additional sources of financing, the Company may have to delay ~~reduce~~ or ~~eliminate certain commercial related expenses, included in selling, general and administrative expenses, as well as delay,~~ reduce ~~or eliminate~~ the scope of its marketing and commercialization efforts or ~~eliminate one or more of~~make other changes to its ~~research or development programs,~~operating plan, which ~~would~~could materially and adversely affect ~~its~~the Company's business, financial condition and operations.

Future Funding Requirements

The Company’s primary uses of capital have been, and the Company expects will continue to be, developing and commercializing TYRVAYA Nasal Spray, including the costs and timing associated with marketing activities, patient services, obtaining third-party payor coverage and reimbursement and maintaining regulatory compliance. The Company ~~may seek~~also expects that it will continue to ~~raise~~use capital ~~through private or public equity or debt financings, collaborative or other arrangement with corporate sources, or through other sources of financing.~~to advance its clinical and preclinical development programs.

The Company anticipates that it will need to raise substantial additional capital, the requirements for which will depend on many factors, including:

•the cost and timing associated with commercializing TYRVAYA Nasal Spray, including the costs and timing associated with marketing activities, patient services, obtaining third-party payor coverage and reimbursement and maintaining regulatory compliance;

•the scope, timing, rate of progress and costs of the Company's drug discovery efforts, preclinical development activities, laboratory testing, ~~and~~ clinical trials and regulatory review for the Company's product ~~candidates;~~

•~~the number~~candidates, and ~~scope of clinical programs the Company decides to pursue;~~

•the cost and timing ~~and outcome of preparing for and undergoing~~associated with commercializing such product candidates, if they receive regulatory ~~review of the Company's product candidates;~~approval;

•the scope and costs of development and commercial manufacturing activities;

•the ~~cost and timing associated with commercializing of the Company's product candidates, if they receive marketing approval;~~

•~~the~~ extent to which the Company acquires or in-licenses other product candidates and technologies;

•the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing the Company's intellectual property rights and defending intellectual property-related claims;

•the Company's ability to establish and maintain collaborations on favorable terms, if at all;

•its efforts to enhance operational systems and the Company's ability to attract, hire and retain qualified personnel, including personnel to support the commercialization of TYRVAYA Nasal Spray and the development ~~of the Company's product candidates~~ and ~~ultimately,~~ the sale of ~~the Company's~~additional products, following FDA approval;

•the Company's ability to manufacture products, the reliability of its supply chain, labor shortages, backlog and any increase in costs as a result of inflation;

•the Company's implementation of operational, financial and management systems;

•any current or future potential effects of the SARS-CoV-2 virus pandemic on the Company's business, operations, preclinical and clinical development and commercialization timelines and plans; and

•the costs associated with being a public company.

A change in the outcome of any of these or other variables with respect to the commercialization of TYRVAYA Nasal Spray or development of any of the Company's product candidates could significantly change the costs and timing associated with the development of that product candidate.

Furthermore, the Company's operating plans may change in the future, and it will continue to require additional capital to meet operational needs and capital requirements associated with such operating plans. If additional funds are raised by issuing equity securities, the Company's stockholders may experience dilution. Any future debt financing into which the Company might enter may impose upon it additional covenants that restrict the Company's operations, including limitations on its ability to incur liens or additional debt, pay dividends, repurchase its common stock, make certain investments or engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that it raises may contain terms that are not favorable to the Company or its stockholders.

The SARS-CoV-2 virus pandemic has impacted global economies, the rate of inflation, supply chains, distribution networks and consumer behavior around the world. Adequate funding may not be available to the Company on acceptable terms or at all, and any uncertainty and volatility in capital markets caused by the SARS-CoV-2 virus pandemic, or other events may negatively impact the availability and cost of capital. The Company's failure to raise capital as and when needed could have a negative impact on its financial condition and ability to pursue its business strategies. If the Company is unable to raise additional funds when needed, it may be required to delay, reduce, or ~~terminate some~~eliminate certain commercial expenses, including in selling, general and administrative expenses, as well as delay, reduce, or ~~all~~eliminate one or more of its research or development ~~programs and clinical trials or~~programs. The Company may also be required to sell or license to others, rights to its product candidates in certain territories or indications that it would prefer to develop and commercialize itself. The Company may seek to raise capital through private or public equity or debt offerings, or collaborative and other arrangements.If the Company ~~is required~~chooses to enter into collaborations and other arrangements to supplement its funds, it may have to give up certain rights, thereby limiting its ability to develop and commercialize the product candidates or may have other terms that are not favorable to the Company, ~~or its stockholders,~~ which could materially affect its business, results of operation and financial condition.

See ~~Item 1A.~~ ~~Risk Factors~~ tothose factors set forth in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 and in this Quarterly Report on Form 10-Q for additional risks associated with the Company's substantial capital requirements.

Cash Flow Discussion

The following table sets forth the primary sources and uses of cash, cash equivalents and restricted cash for each of the periods presented below (in thousands):


		Nine Months Ended September 30,							Three Months Ended March 31,
		2021		2020		$ Change			2022		2021		$ Change
Net cash (used in) provided by:	Net cash (used in) provided by:							Net cash (used in) provided by:
Operating activities	Operating activities	$	(47,895)	$	(37,348)	$	(10,547)	Operating activities	$	(49,705)	$	(16,530)	$	(33,175)
Investing activities	Investing activities	(1,250)		(342)		(908)		Investing activities	(85)		(340)		255
Financing activities	Financing activities	40,726		112,884		(72,158)		Financing activities	(218)		195		(413)
Net (decrease) increase in cash and cash equivalents, and restricted cash		$	(8,419)	$	75,194	$	(83,613)
Net decrease in cash and cash equivalents, and restricted cash								Net decrease in cash and cash equivalents, and restricted cash	$	(50,008)	$	(16,675)	$	(33,333)

Cash Flows Used in Operating Activities

Net cash used in operating activities ~~increased by $10.5 million for~~during the ~~nine~~three months ended ~~September 30, 2021~~ ~~compared to the~~ ~~nine~~ ~~months ended September 30, 2020,~~March 31, 2022, was $49.7 million, which was due to ~~higher~~ net loss, adjusted for non-cash items, ~~during the period~~ in the amount of ~~$6.2~~$39.3 million, ~~as well as a decrease in~~and higher working capital needs in the amount of ~~$4.3~~$10.4 million. The ~~decrease in~~higher working capital ~~was driven~~needs were primarily ~~by timing of the $2.5 million receivable due from Ji Xing in connection with the License Agreement, as well as timing of payments to the Company's service providers. The Company's higher net loss was~~ driven by the ~~preparation for the~~Company's commercial launch of TYRVAYA Nasal Spray in November 2021, which resulted in increases in prepaid expenses and other current assets of $5.0 million and inventory of $0.4 million, partially offset by decreases in accounts receivable of $0.9 million. In addition, there were decreases in accounts payable of $3.9 million and accrued expenses and other current liabilities of $1.7 million, primarily due to the ~~fourth quarter~~timing of ~~2021, as well as continued development of the Company's product candidates.~~payments to vendors.

Net cash used in operating activities during the three months ended March 31, 2021, was $16.5 million, which was due to net loss, adjusted for non-cash items, in the amount of $16.1 million and higher working capital needs in the amount of $0.4 million.

Cash Flows Used in Investing Activities

Net cash used in investing activities ~~increased~~decreased by ~~$0.9~~$0.3 million for the three~~nine~~ months ended ~~September 30, 2021~~March 31, 2022 compared to the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021, primarily related to partial payments for equipment to be used in manufacturing of TYRVAYA Nasal Spray ~~as well as purchases of laboratory equipment.~~during the three months ended March 31, 2021.

Cash Flows Used in and Provided by Financing Activities

Net cash provided by financing activities decreased by ~~$72.2~~$0.4 million for the three~~nine~~ months ended ~~September 30, 2021~~March 31, 2022 compared to the ~~nine~~three months ended ~~September 30, 2020. The Company received $112.6~~March 31, 2021, primarily due to a $0.2 million revenue sharing fee paid to OrbiMed and payment of withholding taxes related to stock based compensation to the Company's employees, in addition to lower proceeds from the ~~follow on public offering during~~exercise of the ~~second quarter of 2020, compared to net~~ ~~proceeds from long-term debt~~ ~~of $40.2 million received during the nine months ended September 30, 2021 under the Credit Agreement~~.options.

Contractual Obligations and Commitments

~~In connection with the Credit Agreement and as further described in~~ ~~Note 7,~~ ~~Long-term Debt, the Company is required to make certain contractual payments in future periods. The Credit Agreement matures on August 5, 2027 and the loan is structured for full principal repayment at maturity.~~

~~The following table identifies the Company's obligations under the Credit Agreement as of September 30, 2021 (in thousands):~~

Less than 1 year 1-3 years 3-5 years More than 5 years Total
Debt Principal $ — $ — $ — $ 45,000 $ 45,000
Exit Fee — — — 2,700 2,700
Contractual Interest on debt 3,878 7,767 7,756 3,283 22,684
Revenue Sharing Cap (a)
— — — 9,000 9,000
Total obligations $ 3,878 $ 7,767 $ 7,756 $ 59,983 $ 79,384

~~(a) —~~ ~~The Revenue Sharing Fee is capped at $9 million and timing of payments will vary based on the Company's net sales of OC-01.~~

In August 2021, the Company entered into a lease agreement for office space in Boston, Massachusetts for a five-year term beginning on December 1, 2021 and ending on November 30, 2026. Total future minimum lease payments under this lease are $2.7 million as of September 30, 2021 with the first lease payment to be made on December 1, 2021.

As of ~~September 30, 2021,~~March 31, 2022, other than noted above, there have been no other material changes in the contractual obligations and commitments from those disclosed in the financial statements and the related notes included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

Off-Balance Sheet Arrangements

As of ~~September 30, 2021~~March 31, 2022, the Company does not have any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Critical Accounting ~~Policies, Significant Judgments and~~ Estimates

The Company's financial statements have been prepared in accordance with U.S. GAAP. The preparation of these condensed financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed financial statements and the reported revenues and expenses incurred during the reporting periods. The Company bases its estimates on historical experience, terms of existing contracts, commonly accepted industry practices and on other assumptions that it believes are reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. The future effects of the SARS-CoV-2 virus pandemic on the Company's results of operations, cash flows, and financial position are unclear, however the Company believes it has used reasonable estimates and assumptions in preparing the interim condensed financial statements. Actual results may differ from these estimates under different assumptions or conditions.

The Company’s critical accounting policies and estimates are included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. The Company periodically reviews its accounting policies, estimates and assumptions and makes adjustments when facts and circumstances dictate. In addition to the accounting policies that are described in the Company's ~~2020~~2021 Annual Report on Form 10-K, the following critical accounting policies were affected by critical accounting estimates in connection with the Company offering its employees an option to purchase the Company's common stock under the ESPP effective April 1, 2021 and the Company entering into the License Agreement with Ji Xing in August 2021.

~~Stock-Based Compensation~~

Effective April 1, 2021, the Company established its first offering period under the ESPP. Stock-based compensation expense related to purchase rights issued under the ESPP, is based on the Black-Scholes option-pricing model fair value of the estimated number of awards as of the beginning of the offering period. Stock-based compensation expense is recognized using the straight-line method over the offering period.

The determination of the grant date fair value of shares purchased under the ESPP is affected by the estimated fair value of our common stock as well as other assumptions and judgments, which are estimated as follows:

•~~Expected term. The expected term for ESPP is the beginning of the offering period to the end of each purchase period.~~

•~~Expected dividend rate. The Company has not paid and does not anticipate paying any dividends in the near future. Accordingly, the Company has estimated the dividend yield to be zero.~~

~~Revenue~~

~~The Company entered into the License Agreement with Ji Xing~~updated during the three months ended ~~September 30, 2021, as further described in Note 8,~~ March 31, 2022:

Stock-Based Compensation - Performance Stock Units~~License and Collaboration Agreements~~. ~~The License Agreement provides for Ji Xing to~~ ~~develop and commercialize certain Company products in exchange~~ ~~for payments by the licensee that include a non-refundable, up-front license fee, development and sales-based milestone payments, as well as royalties on net sales of licensed products.~~ ~~In connection with the License Agreement, the Company adopted revenue policies in accordance with ASU 606.~~ ~~The Company recognizes license revenue when the licensee has the ability to direct the use of and benefit from the licensed intellectual property.~~

As described in Note 6, Stockholders' Equity and Equity Incentive Plans, the Company granted PSUs to certain executive officers in January 2022. The issuance of the PSUs is contingent upon meeting several performance milestones, as provided for in the PSU award agreements. The non-market performance milestones are subject to attaining certain forecasted net product revenues and future prescriptions of TYRVAYA Nasal Spray, and the market performance milestone is tied to total shareholder return based on the change in the price of the Company's common stock. The measurement of stock-based compensation expense for the PSUs considers the probability of achievement of the non-market milestones. The forecasted net product revenue and future prescriptions of TYRVAYA Nasal Spray involve management's judgment, which, in and of themselves, could materially affect the measurement of the stock-based compensation cost of the PSUs as reported in the financial statements and related footnote disclosures. The fair value of the market milestone was estimated using a Monte Carlo simulation in a risk-neutral framework and includes an assumption that at least one of the non-market milestones are met, in addition to the assumptions described in Note 6, Stockholders' Equity and Equity Incentive Plans.

Recent Accounting Pronouncements

See “Recent Accounting Pronouncements” inNote 1, Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies to the Company's unaudited interim condensed financial statements included in this Quarterly Report.

JOBS Act

The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Section 107(b) of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company has irrevocably elected not to avail itself of this extended transition period, and, as a result, it will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies. The Company intends to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

The Company will remain an emerging growth company until the earliest to occur of: (1) the last day of its first fiscal year in which it has total annual revenues of more than $1.07 billion; (2) the date it qualifies as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (3) the date on which it has issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) the last day of the fiscal year ending after the fifth anniversary of its initial public offering.

ITEM 3 — Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

The Company's Credit Agreement is a variable rate term loan credit facility, which subjects the Company to the risk of loss associated with movements in market interest rates. As of ~~September 30, 2021,~~March 31, 2022, a 1% change in interest rates would result in less than ~~$0.5~~a $0.9 million change in interest expense on a rolling twelve-month basis.

In addition, as of ~~September 30, 2021,~~March 31, 2022, the Company had cash equivalents of ~~$183.2~~$143.4 million, consisting of interest-bearing money market funds, which would be affected by changes in the general level of U.S. interest rates. However, due to the short-term maturities and the low-risk profile of cash equivalents, a change in interest rates would not have a material effect on the Company's interest income generated from its money-market funds.

In March 2022, the U.S. Federal Reserve raised its benchmark federal funds interest rate by a quarter percentage point to a range between 0.25% to 0.50% in an effort to address rising concerns about inflation in the U.S. economy. Many economists have projected that the Federal Reserve will raise interest rates several more times in 2022 and 2023 to a projected high of 2.75% by the end of 2023, which may affect the Company’s future cost of borrowing and returns on its interest-bearing money market funds.

Inflation

Inflationary factors such as increases in the cost of the Company's component products and overhead costs may adversely affect operating results. Although the Company does not believe that inflation has had a material impact on its financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on the Company's ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of the Company's products do not increase with these increased costs.

ITEM 4 — Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of ~~September 30, 2021~~,March 31, 2022, management, with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on the evaluation of its disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of ~~September 30, 2021~~March 31, 2022 to provide reasonable assurance that information required to be disclosed in the Company's reports under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company's management, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the quarter ended ~~September 30, 2021~~March 31, 2022 that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1 — Legal Proceedings.

None.

ITEM 1A — Risk Factors.

Information regarding risk factors appears in Part I, Item 1A, Risk Factors, in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. The Company has reviewed the risk factors, and, except as presented below, there have been no material changes in the Company’s risk factors since those reported in its Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021.

The Company believes its current cash and cash equivalents may not be sufficient to fund its business for the next twelve months from the date these condensed financial statements are issued, raising substantial doubt about the Company's ability to continue as a going concern.

As of March 31, 2022, the Company had approximately $143.4 million of cash and cash equivalents. Based on the Company’s current business plan, management believes that the Company’s available cash and cash equivalents may not be sufficient to fund its operations for the next twelve months following the filing of this Quarterly Report on Form 10-Q without generating positive cash flows through increased product sales and by raising additional capital from outside sources. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for the ~~three~~next twelve months ~~ended June 30, 2021~~.

following the filing of this Quarterly Report on Form 10-Q. In addition, the Company’s current operating plan is based on current assumptions that may prove to be wrong, and the Company could use its available capital resources sooner than it currently expects. The Company may ~~face difficulties from changes~~be forced to ~~current regulations and future legislation.~~

Indelay or reduce the ~~United States, the European Union and other jurisdictions there have been a number~~scope of legislative and regulatory changes and proposed changes to the healthcare system that could affect the Company's future results of operations. Existing regulatory policies may change and additional government regulations may be enacted that could prevent,its commercialization or development programs and/or limit or delay regulatory approval of the product candidates. The Company cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If the Company is slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, orcease its operations if it is unable to ~~maintain regulatory compliance, it may lose any marketing approval that may have been obtained and~~obtain additional funding to support its current business plan. Management’s plans to finance the ~~Company may not achieve or sustain profitability.~~

~~For example,~~Company’s operations are described in March 2010, the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (or collectively, the ACA), was passed, which substantially changed the way healthcare is financed by both the government and private insurers, and continues to significantly impact the U.S. pharmaceutical industry.

The ACA contains provisions that may reduce the profitability of drug products through increased rebates for drugs reimbursed by Medicaid programs, extension of Medicaid rebates to Medicaid managed care plans, mandatory discounts for certain Medicare Part D beneficiaries and annual fees based on pharmaceutical companies’ share of sales to federal health care programs. The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the U.S. Department of Health and Human Services (HHS) Secretary as a condition for states to receive federal matching funds for the manufacturer’s outpatient drugs furnished to Medicaid patients. The ACA made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs from 15.1% of average manufacturer price (AMP), to 23.1% of AMP and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. The ACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization and by enlarging the population potentially eligible for Medicaid drug benefits.

~~There have been judicial, Congressional and executive branch challenges to certain aspects~~Note 1 of the ACA. While Congress has not passed comprehensive repeal legislation, several bills affecting the implementation of certain taxes under the ACA have passed. On December 22, 2017, President Trump signed into law federal tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Act), whichunaudited condensed consolidated financial statements included ~~a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA~~elsewhere in this Quarterly Report on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On June 17, 2021 the U.S. Supreme Court dismissed a challenge on procedural grounds that argued the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Thus, the ACA will remain in effect in its current form. Further, prior to the U.S. Supreme Court ruling, President Biden issued an executive order on January 28, 2021 that initiated a special enrollment period for purposes of obtaining health insurance coverage through the ACA marketplace, which began on February 15, 2021 and remained open through August 15, 2021. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is possible that the ACA will be subject to judicial or Congressional challenges in the future. It is unclear how any such challenges and the healthcare reform measures of the Biden administration will impact the ACA and the Company's business.

In addition, other legislative changes have been proposed and adopted in the United States since the ACA was enacted. These changes included aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, effective April 1, 2013, which, due to subsequent legislative amendments, will stay in effect through 2030 unless additional Congressional action is taken. However, COVID-19 relief legislation suspended the 2% Medicare sequester from May 1, 2020 through December 31, 2021. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These new laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on customers for the Company's product candidates, if approved, and accordingly, the financial operations.

Moreover, payment methodologies may be subject to changes in healthcare legislation and regulatory initiatives. There has been heightened governmental scrutiny recently over the manner in which drug manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. For example, at the federal level, the Trump administration used several means to propose or implement drug pricing reform, including through federal budget proposals, executive orders and policy initiatives. For example, On July 24, 2020 and September 13, 2020, the Trump administration announced several executive orders related to prescription drug pricing that seek to implement several of the administration's proposals. As a result, the FDA also released a final rule, on September 24, 2020 providing guidance for states to build and submit importation plans for drugs from Canada. Further, on November 20, 2020, HHS finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The implementation of the rule has been delayed by the Biden administration from January 1, 2022 to January 1, 2023 in response to ongoing litigation. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers, the implementation of which have also been delayed until January 1, 2023. In addition, on November 20, 2020, the Centers for Medicare & Medicaid Services (CMS) issued an interim final rule implementing President Trump’s Most Favored Nation executive order, which would tie Medicare Part B payments for certain physician-administered drugs to the lowest price paid in other economically advanced countries. As a result of litigation challenging the Most Favored Nation model, on August 10, 2021, CMS published a proposed rule that seeks to rescind the Most Favored Nation Model interim final rule. Additionally, on March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into law, which eliminates the statutory Medicaid drug rebate cap, currently set at 100% of a drug’s average manufacturer price, for single source and innovator multiple source drugs, beginning January 1, 2024. Further, in July 2021, the Biden administration released an executive order that included multiple provisions aimed at prescription drugs. In response to Biden’s executive order, on September 9, 2021, HHS released a Comprehensive Plan for Addressing High Drug Prices that outlines principles for drug pricing reform and sets out a variety of potential legislative policies that Congress could pursue to advance these principles. In addition, Congress is considering drug pricing as part of the budget reconciliation process.

At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

The Company expects that the ACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that the Company receives for any approved product. It is possible that additional governmental action is taken in response to address the SARS-CoV-2 virus pandemic. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent the Company from being able to generate revenue, attain profitability or commercialize its product candidates.

Form 10-Q. In the European Union, similar political, economic and regulatory developments may affect the Company's ability to profitably commercialize its product candidates, if approved. In addition to continuing pressure on prices and cost containment measures, legislative developments at the European Union or member state level may result in significant additional requirements or obstaclesevent that may increase the Company's operating costs. The delivery of healthcare in the European Union, including the establishment and operation of health services and the pricing and reimbursement of medicines, is almost exclusively a matter for national, rather than EU, law and policy. National governments and health service providers have different priorities and approaches to the delivery of health care and the pricing and reimbursement of products in that context. In general, however, the healthcare budgetary constraints in most EU member states have resulted in restrictions on the pricing and reimbursement of medicines by relevant health service providers. Coupled with ever-increasing EU and national regulatory burdens on those

wishing to develop and market products, this could prevent or delay marketing approval of the Company's product candidates, restrict or regulate post-approval activities and affect its ability to commercialize its product candidates, if approved.

~~Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for biotechnology products. The Company~~these plans cannot be sure whether additional legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, particularly in light of the recent presidential election, or what the impact of such changes on the marketing approvals of the Company's product candidates, if any, may be. In addition, increased scrutiny by Congress of the FDA approval process may significantly delay or prevent marketing approval, as well as subject the Company to more stringent product labeling and post-marketing testing and other requirements.

If the Company is unable to obtain and maintain patent protection for its technology and products, or if the scope of the patent protection obtained is not sufficiently broad, the Company may not be able to compete effectively ~~in its markets.~~

The Company relies upon a combination of patents, trademarks, trade secret protection, and confidentiality agreements to protect the intellectual property related to its development programs and product candidates. The Company's success depends in part on its ability to obtain and maintain patent protection in the United States and other countries with respect to TYRVAYA Nasal Spray and other product candidates. The Company seeks to protect its proprietary position by filing patent applications in the United States and abroad related to its development programs and product candidates. The patent prosecution process is expensive and time-consuming, and the Company may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner.

The patents and patent applications that the Company owns may fail to result in issued patents with claims that protect TYRVAYA Nasal Spray or other product candidates in the United States or in other foreign countries. There is no assurance that all of the potentially relevant prior art relating to the Company's patents and patent applications has been found, which can prevent a patent from issuing from a pending patent application, or be used to invalidate a patent. Even if patents do successfully issue and even if such patents cover TYRVAYA Nasal Spray or other product candidates, third parties may challenge their validity, enforceability or scope, which may result in such patents being narrowed, invalidated or held unenforceable. Any successful opposition to these patents or any other patents owned by or licensed to the Company could deprive it of rights necessary for the successful commercialization of any product candidates that it may develop.

The European patent related to varenicline, the active ingredient in TYRVAYA Nasal Spray, has been opposed. There is a risk that the European patent will be invalidated, or have its claims amended, through the opposition process. Invalidation or amendment could have a material impact on our ability to commercialize in Europe and/or a material adverse impact to deter competition from potential competitors in Europe. There is a risk that we may face additional oppositions in Europe as additional patents are granted.

~~Further, if the Company encounters delays in regulatory approvals, the period of time during which it could market a product candidate under patent protection could be reduced.~~

~~The patent application process is subject to numerous risks and uncertainties, and~~realized, there can be no assurance that the Company ~~or any of its potential future collaborators~~ will be ~~successful in protecting its product candidates by obtaining and defending patents. These risks and uncertainties include the following:~~able to continue as a going concern.

•Business disruptions could seriously harm the ~~U.S. Patent~~Company's future revenue and ~~Trademark office, or USPTO~~financial condition and ~~various foreign governmental patent agencies require compliance with a number~~increase its costs and expenses.

The Company's operations, and those of ~~procedural, documentary, fee payment~~its CROs, CMOs, suppliers, and other ~~provisions during~~third-party contractors and consultants upon which the ~~patent process, the noncompliance with which can result in abandonment~~Company relies, could be subject to wildfires, earthquakes, tsunamis, power shortages or ~~lapse~~outages, floods or monsoons, public health crises, such as pandemics and epidemics, political crises, such as terrorism, war (including trade wars), political instability or other conflicts, and other natural or man-made disasters or other events outside of ~~a patent or patent application, and partial or complete loss of patent rights in the relevant jurisdiction;~~

•~~patent applications may not result in any patents being issued;~~

•~~patents may be challenged, invalidated, modified, revoked, circumvented, found to be unenforceable or otherwise may not provide any competitive advantage;~~

•the Company's ~~competitors, many~~control that could disrupt business. The occurrence of ~~whom have substantially greater resources than the Company does and many~~any of ~~whom have made significant investments in competing technologies, may seek or may have already obtained patents that will limit, interfere with or block~~these business disruptions could seriously harm the Company's ~~ability to make, use~~operations and ~~sell~~financial condition and increase its ~~product candidates;~~

•~~there may be significant pressure on~~costs and expenses. For example, in connection with the ongoing conflict between Russia and Ukraine, the U.S. government and ~~international governmental bodies to limit~~other governments have imposed certain sanctions against Russia. The invasion of Ukraine by Russia and the ~~scope of patent protection both inside and outside~~retaliatory measures that have been taken, or could be taken in the future, by the United States ~~for disease treatments~~and other countries have created global security concerns that ~~prove successful,~~could result in a broader regional conflict and otherwise have a lasting impact on regional and global economies or adversely affect the Company’s business, its supply chain or its collaborators. Further, the Company may be subject to elevated cybersecurity risk due to the ongoing conflict between Russia and Ukraine. In addition, the Company relies on third-party manufacturers to produce TYRVAYA Nasal Spray and its other product candidates. The Company's ability to obtain supplies necessary to develop and manufacture TYRVAYA Nasal Spray and its other product candidates, or other necessary supplies, could be disrupted if the operations of the Company’s suppliers are affected by a man-made or natural disasters or other business interruptions, including due to the ongoing conflict between Russia and Ukraine. Damage or extended periods of interruption to the Company’s corporate, development or research facilities due to fire, natural disaster, power loss, communications failure, unauthorized entry or other events could cause the Company to cease or delay the marketing of TYRVAYA Nasal Spray, or the development of some or all of its product candidates. Although the Company maintains property damage and business interruption insurance coverage, the insurance might not cover all losses under such circumstances and the Company's business may be seriously harmed by such delays and interruptions.

The Company may not be able to protect its intellectual property rights throughout the world, which could impair its business.

Filing, prosecuting, and defending patents covering TYRVAYA Nasal Spray, OC-02 and any future product candidate throughout the world would be prohibitively expensive. Competitors may use the Company's technologies in jurisdictions where it has not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where it may have or obtain patent protection, but where patent enforcement is not as ~~a matter of public policy regarding worldwide health concerns; and~~strong as that in the U.S. These

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•~~countries~~unauthorized products may compete with the Company's products in such jurisdictions and take away the Company's market share where it does not have any issued or licensed patents and any future patent claims or other ~~than the United States~~intellectual property rights may ~~have patent laws less favorable~~not be effective or sufficient to ~~patentees than those upheld by U.S. courts, allowing foreign competitors a better opportunity to create, develop and market competing products.~~prevent them from so competing.

The ongoing conflict between Russia and Ukraine and related sanctions could significantly devalue our Russian, Belarusian, and Eurasian patents and/or patent ~~prosecution process~~applications. Recent Russian decrees may also significantly limit our ability to enforce Russian patents. We cannot predict when or how this situation will change.

The Company is ~~also expensive~~exposed to interest rate risk under the Credit Agreement, which could cause the Company’s debt service obligations to increase significantly.

The Company is exposed to market risk from changes in interest rates. The term loan underlying the Credit Agreement is based on the Secured Overnight Funding Rate (SOFR), a floating rate, subject to a minimum rate set in the Credit Agreement. The Federal Reserve has recently raised, and ~~time consuming,~~may in the future further raise, interest rates to combat the effects of recent high inflation. An increase in the SOFR above the set minimum rate would increase the Company’s debt service obligations, which could have a negative impact on the Company’s cash flow, financial position or operating results, including cash available for servicing the Company’s indebtedness, or result in increased borrowing costs in the future.

Market and economic conditions may negatively impact the Company's business, financial condition and stock price.

Concerns over inflation, energy costs, geopolitical issues, including the ongoing conflict between Russian and Ukraine, unstable global credit markets and financial conditions, and volatile oil prices could lead to periods of significant economic instability, diminished liquidity and credit availability, declines in consumer confidence and discretionary spending, diminished expectations for the global economy and expectations of slower global economic growth going forward. For example, in March 2022, the U.S. Consumer Price Index (CPI), which measures a wide-ranging basket of goods and services, rose 8.5% from the same month a year ago, which represents the largest CPI increase since December of 1981. The Company's general business strategy may be adversely affected by any such inflationary fluctuations, economic downturns, volatile business environments and continued unstable or unpredictable economic and market conditions. Additionally, rising costs of goods and services purchased by the Company, including its raw materials used in manufacturing its product, may have an adverse effect on the Company’s gross margins and profitability in future periods. If economic and market conditions continue to deteriorate or do not ~~be able~~improve, it may make any necessary debt or equity financing more difficult to ~~file~~complete, more costly and ~~prosecute all~~more dilutive to the Company’s stockholders. Failure to secure any necessary ~~or desirable patent applications at a reasonable cost or~~financing in a timely manner or in all jurisdictions where protection may be commercially advantageous. It is also possible that the Company will fail to identify patentable aspects of its research and development output before it is too late to obtain patent protection. Moreover, if the Company chooses to license certain patent rights in the future from third parties, it may not have the right to control the preparation, filing and prosecution of such patent applications, or to maintain the patents, directed to technology that it licenses from those third parties. The Company may also require the cooperation of its future licensor, if any, in order to enforce the licensed patent rights, and such cooperation may not be provided. Therefore, any licensed patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of the Company's business. The Company cannot be certain that patent prosecution and maintenance activities by any of its future licensors have been or will be conducted in compliance with applicable laws and regulations, which may affect the validity and enforceability of such patents or any patents that may issue from such applications. If they fail to do so, this could cause the Company to lose rights in any applicable intellectual property that it in-licenses, and as a result its ability to develop and commercialize products or product candidates may be adversely affected and it may be unable to prevent competitors from making, using and selling competing products.

If the patent applications the Company holds or may in-license in the future with respect to its development programs and product candidates fail to issue, if their breadth or strength of protection is threatened, or if they fail to provide meaningful exclusivity for TYRVAYA Nasal Spray or other product candidates, it could dissuade other companies from collaborating with the Company to develop product candidates, and threaten its ability to commercialize TYRVAYA Nasal Spray or other product candidates. Any such outcomeon favorable terms could have a ~~materially~~material adverse effect on the ~~Company's business.~~

~~The patent position of biotechnology~~Company’s financial performance and ~~pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions, and has been and will continue~~stock price or could require the Company to ~~be the subject of litigation and new legislation.~~delay or abandon development or commercialization plans. In addition, the laws of foreign countries may not protect the Company's rights to the same extent as the laws of the United States. For example, many countries restrict the patentability of methods of treatment of the human body. Publications in scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing, or in some cases not at all. Therefore, the Company cannot know with certainty whether it was the first to make the inventions claimed in its own patents or pending patent applications, orthere is a risk that it were the first to file for patent protection of such inventions. As a result of these and other factors, the issuance, scope, validity, enforceability, and commercial value of the Company patent rights are highly uncertain. The Company's pending and future patent applications may not result in patents being issued which protect its technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of the Company patents or narrow the scope of its patent protection.

Moreover, the Company may be subject to a third-party pre-issuance submission of prior art to the USPTO or become involved in opposition, derivation, reexamination, inter partes review, post-grant review or interference proceedings challenging its patent rights or the patent rights of others. The costs of defending patents or enforcing its proprietary rights in post-issuance administrative proceedings and litigation can be substantial and the outcome can be uncertain. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate, the Company's patent rights, allow third parties to commercialize its technology or products and compete directly with the Company, without payment to it, or result in its inability to manufacture or commercialize products without infringing third party patent rights. In addition, if the breadth or strength of protection provided by the Company's patents and patent applications is threatened, it could dissuade companies from collaborating to license, develop or commercialize current or future product candidates.

The issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, and patents in which the Company has an interest may be challenged in the courts or patent offices in the United States and abroad. Such challenges may result in loss of exclusivity or in patent claims being narrowed, invalidated or held unenforceable, in whole or in part, which could limit the Company ability to stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection of its technology and products. Generally, issued patents are granted a term of 20 years from the earliest claimed non-provisional filing date. In certain instances, patent term can be adjusted to recapture a portion of delay incurred by the USPTO in examining the patent application (patent term adjustment). The scope of patent protection may also be limited.

Without patent protection for the Company's current or future product candidates, it may be open to competition from generic versions of such products. Given the amount of time required for the development, testing, and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. As a result, the Company's patent portfolio may not provide it with sufficient rights to exclude others from commercializing products similar or identical to its own.

~~Depending upon the timing, duration and specifics of FDA marketing approval of TYRVAYA Nasal Spray and other product candidates,~~ one or more of the ~~Company's U.S. patents may be eligible for limited patent term restoration under the Drug Price Competition~~Company’s current and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years beyond the normal expiration of the patent as compensation for patent term lost during drug developmentfuture service providers, manufacturers, suppliers, hospitals and the FDA regulatory review process, which is limited to the approved indication (or any additional indications approved during the period of extension). This extension is based on the first approved use of a productother medical facilities, third-party payers, and is limited to only one patent that covers the approved product, the approved use of the product, or a method of manufacturing the product. However, the applicable authorities, including the FDA and the USPTO in the United States, and any equivalent regulatory authority in other countries, may not agree with the Company assessment of whether such extensions are available, and may refuse to grant extensions to its patents, or may grant more limited extensions than the Company requests. The Company may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time-period or the scope of patent protection affordedpartners could be less than the Company requests. If it is unable to extend the expiration date of its existing patents or obtain new patents with longer expiry dates, the Company's competitors may be able to take advantage of its investment in development and clinical trialsnegatively affected by ~~referencing its clinical and preclinical data to obtain approval of competing products following its patent expiration and launch their product earlier than might otherwise be the case.~~

~~The terms of the Company’s credit facility place restrictions on the Company’s operating and financial flexibility.~~

On August 5, 2021, the Company entered into a $125 million term loan credit facility (the Credit Agreement) with OrbiMed Royalty & Credit Opportunities III, LP, as administrative agent and initial lender. The Company’s ability to draw on the second $50 million tranche and third $30 million tranche under the Credit Agreement is subject to conditions, including, for the third tranche, having previously drawn on the second tranche, and the Company may not meet such conditions to draw on the tranches. On October 19, 2021, the Company entered into a waiver and amendment (the Amendment) to the Credit Agreement to waive certain labeling requirements required for, and to permit the availability of, the second $50 million tranche of funding under the Credit Agreement (among other customary funding provisions) and make certain other amendments thereto, subject to the terms and conditions contained therein. Because the label approving TYRVAYA Nasal Spray for the signs and symptoms of dry eye disease did not include eye dryness score data from clinical trials, the Amendment was required in order for the Company to draw the second tranche and to be eligible to draw the third tranche under the Credit Agreement. The Company would also be barred from drawing the second tranche in the event an improper promotional event occurs prior to the funding of the second tranche.

~~Borrowings under the Credit Agreement are secured by all or substantially all of the Company’s assets, subject to customary exceptions.Additionally, the Credit Agreement contains operating restrictions and covenants that restrict, and any future financing agreements that we may enter into may further restrict,~~difficult economic factors, which could adversely affect the Company’s ability to ~~finance~~attain its ~~operations, engage in business activities~~operating goals on schedule and on budget or ~~expand or fully pursue its business strategies. For example, the Credit Agreement limits the Company’s ability to, among other things:~~

•~~incur additional debt;~~

•~~incur liens;~~

•~~make investments, acquisitions, loans or advances;~~

•~~sell assets;~~

•~~make restricted payments, including dividends and distributions on, and redemptions, repurchases or retirement of, the Company’s capital stock;~~

•~~enter into fundamental changes, including mergers and consolidations;~~

•~~enter into transactions with affiliates;~~

•~~change the nature of the Company’s business;~~

•~~make prepayments of certain debt;~~

•~~modify or terminate material agreements; and~~

•~~enter into certain outbound licenses of material intellectual property.~~

~~These restrictions are subject to certain exceptions. In addition, the Credit Agreement requires that the Company~~ meet certain reporting and operating covenants, including a minimum liquidity covenant. The Company’s ability to comply with these covenants may be affected by events beyond its control, and the Company may not be able to meet those covenants.

The Credit Agreement includes customary events of default, including failure to pay principal, interest or certain other amounts when due; material inaccuracy of representations and warranties; breach of covenants; specified cross-default to other material indebtedness; certain bankruptcy and insolvency events; certain ERISA events; certain undischarged judgments; material impairment of security interests; material adverse change and material regulatory events, in certain cases subject to certain thresholds and grace periods. A breach of any of these covenants could result in an event of default under the Credit Agreement. In addition, if the Company defaults under the terms of the Credit Agreement, including failure to satisfy the operating covenants, the lender may accelerate all of the Company’s repayment obligations and take control of the secured assets. Any declaration by the lender of an event of default could significantly harm the Company business and prospects and could cause the price of the Company’s common stock to decline.

~~The pharmaceutical industry in China is highly regulated, and such regulations are subject to change, which may negatively affect the commercialization of our medicines and drug candidates.~~

On August 5, 2021, the Company entered into a license and collaboration agreement (License Agreement) with Ji Xing, a biotechnology company headquartered in Shanghai and backed by RTW. Pursuant to the License Agreement, the Company has granted Ji Xing an exclusive license to develop and commercialize OC-01 (varenicline solution) and OC-02 (simpinicline), for all prophylactic uses for, and treatment of, ophthalmology diseases or disorders in the greater China region, including mainland China, Hong Kong Special Administrative Region, Macau Special Administrative Region, and Taiwan. The pharmaceutical industry in China is subject to comprehensive government regulation and supervision, encompassing the approval, registration, manufacturing, packaging, licensing and marketing of new medicines. In recent years, the regulatory framework in China for pharmaceutical companies has undergone significant changes, which we expect will continue. Any such change may cause delays in or prevent the successful research, development, manufacturing or commercialization of OC-01 and OC-02 in the greater China region and may reduce the current benefits the Company believes are available to it from licensing such products to be developed, manufactured and sold in the greater China region. In addition, any failure by us or our partners to maintain compliance with applicable laws and regulations or obtain and maintain required licenses and permits may result in the suspension or termination of our business activities in China or create other legal risks.

The Company has no prior experience in marketing, selling and commercializing its products and related services, and if the Company is unable to successfully commercialize TYRVAYA Nasal Spray and related services, its business and ~~operating results will be adversely affected.~~

The Company has no prior experience marketing and selling its products and related services. Future sales of TYRVAYA Nasal Spray will depend in large part on the Company’s ability to effectively market and sell our product and services, successfully manage our sales force, and increase the scope of our marketing efforts. The Company may also enter into additional distribution arrangements in the future. Because the Company has no prior experience in marketing and selling its products, its ability to forecast demand, the infrastructure required to support such demand and the sales cycle to customers is unproven. If the Company does not build an efficient and effective marketing and sales organization and sales program, its business and operating results will be adversely affected.

financial objectives.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

ITEM 3. Defaults Upon Senior Securities.

None.

ITEM 4. Mine Safety Disclosures.

None.

ITEM 5. Other Information.

None.

ITEM 6. Exhibits.

Exhibit

Number

Exhibit

Number

Description

Form

File No.

Number

Filing Date

Exhibit

Number

Description

Form

File No.

Number

Filing Date

3.1

Amended and Restated Certificate of Incorporation

8-K

001-39112

3.1

November 5, 2019

3.1

Amended and Restated Certificate of Incorporation

8-K

001-39112

3.1

November 5, 2019

3.2

Amended and Restated Bylaws

8-K

001-39112

3.2

November 5, 2019

3.2

Amended and Restated Bylaws

8-K

001-39112

3.2

November 5, 2019

10.1*

Credit Agreement and Guaranty, dated as of August 5, 2021, by and among Oyster Point Pharma, Inc., OrbiMed Royalty & Credit Opportunities III, LP and the other parties thereto, as amended by the Waiver and Amendment, dated as of October 19, 2021, by and among Oyster Point Pharma, Inc., OrbiMed Royalty & Credit Opportunities III, LP. and the other parties thereto.

10.2*†

License and Collaboration Agreement, dated as of August 5, 2021, by and between Oyster Point Pharma, Inc. and Ji Xing Pharmaceuticals Limited.

10.1*†

Consulting Services Agreement, dated as of March 14, 2022, between Oyster Point Pharma, Inc. and William J. Link.

31.1*

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.1*

Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*

Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*+

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.1*+

Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*+

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*+

Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

† Portions of this exhibit (indicated by asterisks) have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.

+ The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the

Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

4332

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	OYSTER POINT PHARMA, INC.

Date: ~~November 4, 2021~~May 5, 2022	By:	/s/ Jeffrey Nau
		Jeffrey Nau, Ph.D., M.M.S.
		President, Chief Executive Officer and Director


Date: ~~November 4, 2021~~May 5, 2022	By:	/s/ Daniel Lochner
		Daniel Lochner
		Chief Financial Officer

4433


	As of September 30,
	2021	2020
Options to purchase common stock	4,672,788	3,205,831
Unvested restricted stock units	178,595	63,929
Shares committed under the ESPP	30,170	—
Total	4,881,553	3,269,760


As of September 30, 2021	Finance Leases		Operating Leases		Total
2021 (remainder)	$	5	$	138	$	143
2022	16		376		392
2023	4		126		130
2024	—		21		21
Total undiscounted cash flows	25		661		686
Less: imputed interest	(1)		(25)		(26)
Total lease liabilities	24		636		660
Less: current portion	(17)		(464)		(481)
Lease liabilities	$	7	$	172	$	179


	Less than a year		1-3 years		3-5 years		More than 5 years		Total
Debt Principal	$	—	$	—	$	—	$	45,000	$	45,000
Exit Fee	—		—		—		2,700		2,700
Contractual Interest on debt	3,878		7,767		7,756		3,283		22,684
Revenue Sharing Cap (a)	—		—		—		9,000		9,000
Total obligations	$	3,878	$	7,767	$	7,756	$	59,983	$	79,384


	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
Debt Principal	$	—	$	—	$	—	$	45,000	$	45,000
Exit Fee	—		—		—		2,700		2,700
Contractual Interest on debt	3,878		7,767		7,756		3,283		22,684
Revenue Sharing Cap (a)	—		—		—		9,000		9,000
Total obligations	$	3,878	$	7,767	$	7,756	$	59,983	$	79,384