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, 20212022
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 001-39112

OYSTER POINT PHARMA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware81-1030955
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
202 Carnegie Center, Suite 109106 Princeton, New Jersey
08540
(Address of principal executive offices)(Zip Code)
202 Carnegie Center, Suite 109Princeton, New Jersey
08540
(Former 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 29, 2021,November 4, 2022, the registrant had 26,163,86126,844,292 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 arecan be identified by terminologyterms 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. Thesesimilar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q, other than the statements regarding the proposed acquisition by Viatris Inc., do not assume the consummation of the proposed acquisition unless specifically stated otherwise. These forward-looking statements include, but are not limited to, statements about:
•expectations regarding the Company’s planned merger with Viatris Inc. including expected timing, completion and effects of the merger;
•plans relating to commercializing TYRVAYA® (varenicline solution) Nasal Spray and the Company's other product candidates, if approved, including the geographic areas of focus and sales strategy;
•the commercial success of TYRVAYA Nasal Spray and the Company’s other product candidates, once approved;
•the extent to which third-party coverage and reimbursement will be available from third-party payors, including government health administration authorities (including in connection with government healthcare programs, such as Medicare and Medicaid), private healthcare insurers and other healthcare funding organizations for TYRVAYA Nasal Spray and the Company’s other product candidates;
•the likelihood of the Company being able to maintain existing, or obtain additional insurance coverage from third-party payors and expand the commercial coverage with respect to TYRVAYA Nasal Spray;
•the likelihood of the Company's clinical trials demonstrating the safety and efficacy of its product candidates, and other positive results;
•the timing of the 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 products and 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 StatesU.S. and other countries 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 TYRVAYA Nasal Spray and the Company's other product candidates;
•the timing, likelihood or scope of regulatory filings and approvalapprovals 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 products and 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;
•the availability or likelihood of success of any strategic collaborations with third parties for the development or commercialization of the Company’s products and product candidates;
•existing regulations and regulatory developments in the United StatesU.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 products and product candidates, components for preclinical studies and clinical trials and potentiallyproducts and components for commercial supply;commercialization of TYRVAYA Nasal Spray and any additional approved products;
•the Company’sneed to hire additional personnel, and the Company's ability to recruitattract 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;
i

•the accuracy of estimates regarding expenses, future revenue,revenues, 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;
•the Company's ability to retain existing talent and attract new, highly skilled talent;
i

•the Company's estimates associated with the Company's plan to streamline operating expenses, including the associated reduction in force, and any resulting savings benefits the Company expects to achieve;
•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 resourcescapital resources.

Forward-looking statements include, without limitation, statements regarding the planned merger transaction with Viatris Inc., as well as and proceedspayments that may be made upon the satisfaction of specified milestones, which are each based on the Company’s current expectations and inherently involve significant risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, risks related to the initialCompany’s ability to complete the transaction on the proposed terms and follow-on public offerings.schedule or at all; whether the conditions for the tender offer in connection with the merger will be satisfied, or whether a sufficient number of shares will be tendered; the outcome of any future legal proceedings that may be instituted against the Company and/or others relating to the transaction; the failure (or delay) to receive any required regulatory approvals relating to the transaction; the possibility that competing offers will be made; uncertainty of the expected financial performance of the Company and its products, including whether any milestones will ever be achieved; and the occurrence of any event, change, or other circumstance that could give rise to the termination of the acquisition agreement.
The Company has based these forward-looking statements largely on its current expectations, including the Company's expectations regarding the Company's planned merger with Viatris, Inc., 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, 20202021 and the Company's Quarterly Reports on Form 10-Q for the periods ended March 31, 20212022 and June 30, 2021. 2022. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, theythese forward-looking statements should not be relied on as predictions of future events. The events and circumstances reflected in thesethe 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'sits 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'sits 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 shouldinvestors are cautioned not beto unduly relied upon.

rely upon these statements.
ii

TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
ITEM 1
1
1
2
3
4
57
ITEM 2
2122
ITEM 3
34
ITEM 4
3435
PART II – OTHER INFORMATION
ITEM 1
3536
ITEM 1A
3536
ITEM 2
4140
ITEM 3
4140
ITEM 4
41
ITEM 5
41
ITEM 6
41
SIGNATURES
4443

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, 2021December 31, 2020September 30, 2022December 31, 2021
ASSETSASSETSASSETS
Current AssetsCurrent AssetsCurrent Assets
Cash and cash equivalentsCash and cash equivalents$184,166 $192,585 Cash and cash equivalents$68,800 $193,372 
Other receivable - related party2,500 — 
Restricted cashRestricted cash— 61 
Accounts receivable, netAccounts receivable, net13,184 6,656 
Inventory, netInventory, net6,959 6,086 
Prepaid expenses and other current assetsPrepaid expenses and other current assets3,020 3,782 Prepaid expenses and other current assets8,764 9,075 
Total current assetsTotal current assets189,686 196,367 Total current assets97,707 215,250 
Property and equipment, netProperty and equipment, net1,976 804 Property and equipment, net2,438 2,497 
Restricted cash61 61 
Investment - related partyInvestment - related party886 886 
Other assetsOther assets2,635 — Other assets5,692 1,082 
Right-of-use assets, netRight-of-use assets, net651 678 Right-of-use assets, net2,478 2,902 
Total AssetsTotal Assets$195,009 $197,910 Total Assets$109,201 $222,617 
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current LiabilitiesCurrent LiabilitiesCurrent Liabilities
Accounts payableAccounts payable$3,506 $2,279 Accounts payable$4,145 $6,496 
Accrued expenses and other current liabilitiesAccrued expenses and other current liabilities11,174 8,285 Accrued expenses and other current liabilities24,360 21,511 
Lease liabilitiesLease liabilities481 418 Lease liabilities692 795 
Total current liabilitiesTotal current liabilities15,161 10,982 Total current liabilities29,197 28,802 
Lease liabilities, non-currentLease liabilities, non-current179 269 Lease liabilities, non-current1,811 2,118 
Long-term debt, netLong-term debt, net41,919 — Long-term debt, net92,218 89,815 
Other long-term liabilities238 — 
Total long-term liabilities42,336 269 
Other liabilitiesOther liabilities8,177 2,345 
Total LiabilitiesTotal Liabilities57,497 11,251 Total Liabilities131,403 123,080 
Commitments and Contingencies00
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, respectively26 26 
Commitments and Contingencies (Note 11)Commitments and Contingencies (Note 11)
Stockholders’ Equity (Deficit)Stockholders’ Equity (Deficit)
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; 0 outstandingPreferred 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, 26,831,485 and 26,579,585 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectivelyCommon stock, $0.001 par value per share; 1,000,000,000 shares authorized, 26,831,485 and 26,579,585 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively27 27 
Additional paid-in capitalAdditional paid-in capital350,832 341,384 Additional paid-in capital367,762 354,920 
Accumulated deficitAccumulated deficit(213,346)(154,751)Accumulated deficit(389,991)(255,410)
Total Stockholders’ Equity137,512 186,659 
Total Liabilities and Stockholders’ Equity$195,009 $197,910 
Total Stockholders’ Equity (Deficit)Total Stockholders’ Equity (Deficit)(22,202)99,537 
Total Liabilities and Stockholders’ Equity (Deficit)Total Liabilities and Stockholders’ Equity (Deficit)$109,201 $222,617 
The accompanying notes are an integral part of these condensed financial statements.
1

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,
2021202020212020
Revenue:
License revenue - related party$17,943 $— $17,943 $— 
Total revenue17,943 — 17,943 — 
Operating expenses:
Research and development$6,214 $8,210 $18,772 $28,104 
Selling, general and administrative28,497 8,112 56,885 20,641 
Total operating expenses34,711 16,322 75,657 48,745 
Loss from operations(16,768)(16,322)(57,714)(48,745)
Other income (expense):
Other income, net222 17 243 457 
Interest expense(1,124)— (1,124)— 
Total other income (expense), net    (902)17 (881)457 
Net loss and comprehensive loss$(17,670)$(16,305)$(58,595)$(48,288)
Net loss per share, basic and diluted$(0.68)$(0.63)$(2.25)$(2.05)
Weighted average shares outstanding, basic and diluted26,037,975 25,797,282 25,984,412 23,544,035 

Three Months Ended
September 30,		Nine Months Ended September 30,
2022202120222021
Revenue:
Product revenue, net$5,591 $— $12,988 $— 
License revenue - related party— 17,943 — 17,943 
Total revenue5,591 17,943 12,988 17,943 
Cost of product revenue1,348 — 2,994 — 
Operating expenses:
Sales and marketing22,094 18,170 77,169 28,947 
General and administrative12,149 10,327 39,079 27,938 
Research and development3,913 6,214 13,258 18,772 
Total operating expenses38,156 34,711 129,506 75,657 
Loss from operations(33,913)(16,768)(119,512)(57,714)
Other (expense) income, net
Interest expense(3,495)(1,124)(9,717)(1,124)
Other income (expense), net661 222 (5,352)243 
Total other (expense) income, net    (2,834)(902)(15,069)(881)
Net loss and comprehensive loss$(36,747)$(17,670)$(134,581)$(58,595)
Net loss per share, basic and diluted$(1.37)$(0.68)$(5.03)$(2.25)
Weighted average shares outstanding, basic and diluted26,830,756 26,037,975 26,736,177 25,984,412 

The accompanying notes are an integral part of these condensed financial statements.
2

OYSTER POINT PHARMA, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share amounts)
(unaudited)
Common StockAdditional Paid-In CapitalAccumulated DeficitTotal Stockholders’ Equity
SharesAmount
Balance at January 1, 202125,890,490 $26 $341,384 $(154,751)$186,659 
Net loss— — — (18,909)(18,909)
Issuance of common stock upon exercise of stock options55,046 — 218 — 218 
Issuance of common stock upon vesting of restricted stock units15,252 — — — — 
 Stock-based compensation expense— — 2,680 — 2,680 
Balance at March 31, 202125,960,788 $26 $344,282 $(173,660)$170,648 
Net loss— — — (22,016)(22,016)
Issuance of common stock upon exercise of stock options28,748 — 104 — 104 
Issuance of common stock upon vesting of restricted stock units16,901 — — — — 
Stock-based compensation expense— — 3,048 — 3,048 
Balance at June 30, 202126,006,437 $26 $347,434 $(195,676)$151,784 
Net loss— — (17,670)(17,670)
Issuance of common stock upon exercise of stock options87,816 — 283 — 283 
Stock-based compensation expense— — 3,115 — 3,115 
Balance at September 30, 202126,094,253 $26 $350,832 $(213,346)$137,512 
Common StockAdditional Paid-In CapitalAccumulated DeficitTotal Stockholders’ Equity (Deficit)
SharesAmount
Balance at January 1, 202226,579,585 $27 $354,920 $(255,410)$99,537 
Net loss— — — (47,892)(47,892)
Issuance of common stock upon exercise of stock options69,930 — 76 — 76 
Issuance of common stock upon vesting of restricted stock units20,618 — — — — 
Shares withheld for taxes(7,436)— (87)— (87)
Stock-based compensation expense— — 4,359 — 4,359 
Balance at March 31, 202226,662,697 $27 $359,268 $(303,302)$55,993 
Net loss— — — (49,942)(49,942)
Issuance of common stock upon vesting of restricted stock units37,550 — — — — 
Issuance of common stock under the employee stock purchase plan (ESPP)128,926 — 541 — 541 
Stock-based compensation expense— — 4,183 — 4,183 
Balance at June 30, 202226,829,173 $27 $363,992 $(353,244)$10,775 
Net loss— — — (36,747)(36,747)
Issuance of common stock upon vesting of restricted stock units2,312 — — — — 
Stock-based compensation expense— — 3,770 — 3,770 
Balance at September 30, 202226,831,485 $27 $367,762 $(389,991)$(22,202)


Common StockAdditional Paid-In CapitalAccumulated DeficitTotal Stockholders’ Equity
SharesAmount
Balance at January 1, 202021,366,950 $21 $221,508 $(84,231)

$137,298 
 Net loss— — — (16,519)

(16,519)
 Issuance of common stock upon exercise of stock options3,530 — 4 — 4 
 Stock-based compensation expense— — 1,180 — 

1,180 
Balance at March 31, 202021,370,480 $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 8,1254,312,500 5 112,620 — 112,625 
Issuance of common stock upon exercise of stock options60,425 — 82 — 82 
Stock-based compensation expense— — 1,609 — 1,609 
Balance at June 30, 202025,743,405 $26 $337,003 $(116,214)$220,815 
Net loss— — — (16,305)(16,305)
Issuance of common stock upon exercise of stock options87,755 — 173 — 173 
Issuance of common stock upon vesting of restricted stock units13,601 — — — — 
Stock-based compensation expense— — 1,990 — 1,990 
Balance at September 30, 202025,844,761 $26 $339,166 $(132,519)$206,673 

The accompanying notes are an integral part of these condensed financial statements.
3

OYSTER POINT PHARMA, INC.
Common StockAdditional Paid-In CapitalAccumulated DeficitTotal Stockholders’ Equity
SharesAmount
Balance at January 1, 202125,890,490 $26 $341,384 $(154,751)$186,659 
Net loss— — — (18,909)(18,909)
Issuance of common stock upon exercise of stock options55,046 — 218 — 218 
Issuance of common stock upon vesting of restricted stock units15,252 — — — — 
Stock-based compensation expense— — 2,680 — 2,680 
Balance at March 31, 202125,960,788 $26 $344,282 $(173,660)$170,648 
Net loss— — — (22,016)(22,016)
Issuance of common stock upon exercise of stock options28,748 — 104 — 104 
Issuance of common stock upon vesting of restricted stock units16,901 — — — — 
Stock-based compensation expense— — 3,048 — 3,048 
Balance at June 30, 202126,006,437 $26 $347,434 $(195,676)$151,784 
Net loss— — — (17,670)(17,670)
Issuance of common stock upon exercise of stock options87,816 ��� 283 — 283 
Stock-based compensation expense— — 3,115 — 3,115 
Balance at September 30, 202126,094,253 $26 $350,832 $(213,346)$137,512 
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
20212020
Cash flows from operating activities
Net loss$(58,595)$(48,288)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense8,843 4,779 
Depreciation91 57 
Amortization and accretion of long-term debt related costs508 — 
Reduction in the carrying amount of the right-of-use assets371 285 
Non-cash consideration for license revenue - related party(443)— 
Change in fair value of net embedded derivative liability(212)— 
Changes in assets and liabilities:
Other receivable - related party(2,500)— 
Prepaid expenses and other current assets395 2,172 
Accounts payable1,215 1,784 
Lease liabilities(371)(283)
Accrued expenses and other current liabilities2,921 2,146 
Other assets(118)— 
Net cash used in operating activities(47,895)(37,348)
Cash flows from investing activities
Purchases of property and equipment(1,250)(342)
Net cash used in investing activities(1,250)(342)
Cash flows from financing activities
Payment of deferred equity offering costs(30)— 
Proceeds from follow-on equity offering, net of issuance costs— 112,625 
Net proceeds from long-term debt40,151 — 
Proceeds from the exercise of stock options605 259 
Net cash provided by financing activities40,726 112,884 
Net (decrease) increase in cash, cash equivalents and restricted cash(8,419)75,194 
Cash, cash equivalents and restricted cash at the beginning of the period192,646 139,198 
Cash, cash equivalents and restricted cash at the end of the period$184,227 $214,392 
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents$184,166 $214,331 
Restricted cash61 61 
Cash, cash equivalents and restricted cash$184,227 $214,392 
Supplemental Cash Flow Information
Cash paid during the period for:
Interest$617 $— 
Non-cash investing and financing activities:
Right-of-use assets acquired through leases344 $320 

The accompanying notes are an integral part of these condensed financial statements.
4

OYSTER POINT PHARMA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


Nine Months Ended September 30,
20222021
Cash flows from operating activities
Net loss$(134,581)$(58,595)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense12,312 8,843 
Depreciation261 91 
Amortization and accretion of long-term debt related costs3,085 508 
Reduction in the carrying amount of the right-of-use assets709 371 
Provision for inventory obsolescence(73)— 
Non-cash consideration for license revenue - related party— (443)
Change in fair value of net embedded derivative liability5,806 (212)
Changes in assets and liabilities:
Accounts receivable, net(6,528)— 
Inventory(5,600)— 
Prepaid expenses and other current assets311 395 
Other receivable - related party— (2,500)
Other assets(102)(118)
Accounts payable(2,352)1,215 
Lease liabilities - operating leases(669)(357)
Accrued expenses and other current liabilities2,889 2,921 
Other liabilities26 — 
Net cash used in operating activities(124,506)(47,881)
Cash flows from investing activities
Purchases of property and equipment(203)(1,250)
Net cash used in investing activities(203)(1,250)
Cash flows from financing activities
Payment of deferred offering costs— (30)
Net proceeds from long-term debt— 40,151 
Repayment of long-term debt(429)— 
Repayment of principal on finance leases(26)(14)
Payment of withholding taxes related to stock-based compensation(87)— 
Proceeds from the issuance of common stock under the ESPP542 — 
Proceeds from the exercise of stock options76 605 
Net cash provided by financing activities76 40,712 
Net decrease in cash, cash equivalents and restricted cash(124,633)(8,419)
Cash, cash equivalents and restricted cash at the beginning of the period193,433 192,646 
Cash, cash equivalents and restricted cash at the end of the period$68,800 $184,227 
5

OYSTER POINT PHARMA, INC.
CONDENSED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(unaudited)
Nine Months Ended September 30,
20222021
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents$68,800 $184,166 
Restricted cash— 61 
Cash, cash equivalents and restricted cash$68,800 $184,227 
Supplemental Cash Flow Information
Cash paid during the period for:
Interest$6,632 $617 
Non-cash investing and financing activities:
Right-of-use assets acquired through leases$285 $344 


The accompanying notes are an integral part of these condensed financial statements.
6

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 $134.6 million for the nine months ended September 30, 2022, and had an accumulated deficit of $390.0 million as of September 30, 2022. The Company had cash and cash equivalents of $68.8 million as of September 30, 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 intosecured debt capital in the form of a $125 million term loanlong-term credit facility of up to $125.0 million (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 Debtand Note 10, Subsequent Events.

On August 5, 2021, the. The Company entered intois 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 aggregateadditional development and sales-based milestone payments and royalty payments that are tiered onroyalties in future periods. In addition, the Company began selling TYRVAYA Nasal Spray in November 2021 and generated net salesproduct revenues of OC-01 and OC-02 and are based on royalty rates between 10% and 20%.$13.0 million for the nine months ended September 30, 2022.

Based on the Company’s current business plan, management believes that the Company’s available cash and cash equivalents will not be sufficient to fund its operations for the next twelve months from the date these condensed financial statements are issued, and that the future viability of the Company is dependent on its ability to fund its operations through the sales and licensing of TYRVAYA Nasal Spray and raising additional capital. Management believes that it may be able to raise such additional capital by 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. There can be no assurance the Company will be able to raise such additional equity capital. In addition, the Company may have the ability to draw up to $30.0 million on the third tranche of the Credit Agreement. This 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. There can be no assurance that the Company will meet the net recurring revenue minimum threshold to enable the Company to draw on the third tranche. The Credit Agreement also requires the Company to maintain a minimum level of cash and permitted cash equivalent investments 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 an event of default resulting from such violation is continuing, the lender could exercise remedies, including but not limited to, the acceleration of all outstanding debt under the Credit Agreement. While the Company has generated limited revenue from initial sales of TYRVAYA Nasal Spray, and given its limited commercial history, the Company 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 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 demand from investors, among other factors. There can be no assurance that the Company will be successful in commercializing TYRVAYA Nasal Spray or raising this additional capital or that such capital, including under the at-the-market sales agreement, if 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 reduce the scope of its operations and planned capital expenditures.
5
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Notes to Unaudited Interim Condensed Financial Statements (continued)
The Company incurred net losses of $58.6 million and $48.3 million for the nine months ended September 30, 2021 and 2020, respectively, 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 of TYRVAYA Nasal Spray, including to establish commercial scale manufacturing arrangements and to provide for the marketing, commercial operations and distribution of the product. The Company expended and will continue to expend funds to complete the research, development and clinical testing of its product candidates. The Company will require additional funds as it commercializes TYRVAYA Nasal Spray and to commercialize any future products. The Company is unable to entirely fund these efforts with its current financial resources and there can be no assurance that it will be able to secure such additional financing on a timely basis, if at all, that will be sufficient to meet these needs.
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 eliminatemake 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. Additionally, the Company may decide to enter into additional license agreements or other collaborative or strategic arrangements to supplement its funds, which may require the Company to give up certain commercial related expenses, included in selling, generalrights, thereby limiting its ability to develop and administrative expenses,commercialize TYRVAYA Nasal Spray, as well as delay, reduceother product candidates in the pipeline, or eliminatemay have other terms that are not favorable to the scope of one or more of its research or development programs,Company, which wouldcould materially and adversely affect its business, results of operations and financial conditioncondition.

Additionally, while the Merger Agreement (as defined in Note 12, Subsequent Events) is in effect, the Company is subject to restrictions on our business activities, generally requiring the Company to conduct its business in the ordinary course, consistent with past practice, and operations.subjecting the Company to a variety of specified limitations absent Viatris Inc.’s prior consent. These limitations include, among other things, restrictions on the Company’s ability to acquire other businesses and assets, sell, transfer or license the Company’s assets, make investments, repurchase or issue securities, pay dividends, make capital expenditures, amend the Company’s organizational documents, issue securities and incur indebtedness.

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 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. However, 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 cashis subject to risks and cash equivalents of $184.2 million as of September 30, 2021. Management believes thatuncertainties common to companies in the Company’s current cash and cash equivalents will bebiopharmaceutical industry, including, but not limited to, the ability to secure sufficient capital to fund its planned operations, for at least 12 monthscompetition from other companies’ products, the dateavailability and sufficiency of issuancethird-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 UpdateThe current global macro-economic environment is volatile, resulting in global supply chain constraints and elevated rates of inflation, which may impact the Company to varying degrees. 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 continuesrelies on single source manufacturers and suppliers for the supply of its FDA-approved product and its product candidates. This adds to the manufacturing risks faced by the Company, which could be subjectleft without backup facilities in the event of any failure by a supplier. In addition, if the Company decides to risksmove to a different or add additional manufacturers and uncertainties assuppliers 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
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Notes to Unaudited Interim Condensed Financial Statements (continued)
suppliers could have a resultnegative 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 nine months ended September 30, 2022, a majority of the Company's sales of TYRVAYA Nasal Spray were to four large wholesale drug distributors, and the Company is expected to 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. The pandemic and related public health developments, have adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. With the surge of the Delta variant of the virus across the United States (U.S.) during the second half of 2021, the Company delayed its plans for a voluntary return to the office for its employees until at least December 2021. However, thethree and nine months ended September 30, 2022. The Company will continue monitoring SARS-CoV-2 infection rates andto make practical decisions about voluntary reopening in compliance with Centers for Disease Control and Prevention, (CDC), federal, state and local guidelines. As of September 30, 2021,guidelines with respect to the Company has not been materially affected by the adverse 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.SARS-CoV-2 virus pandemic. The extent to which the globalSARS-CoV-2 virus pandemic will impactmay affect the Company’s business beyond September 2021Company's future financial results and operations will depend on future developments thatwhich 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, 20212022 and as of December 31, 2020,2021, the results of operations for the three and nine months ended September 30, 20212022 and 2020,2021, and cash flows for the nine months ended September 30, 20212022 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 subjectnotes as of the date of the financial statements. On an ongoing basis, management evaluates its estimates, including those related to such estimatesthe 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 AgreementCompany'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 1,2, Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies,in the Annual Report on Form 10-K for the year ended December 31, 2020.2021. The Company updated its stock-based compensation accounting policy, as described below, in connection with the Performance Stock Units (PSUs) granted during the nine months ended September 30, 2022.

Stock-Based Compensation - Performance Stock Units

In January 2022 and July 2022, the Company granted PSUs to certain executive officers, as further described in Note 6, Stockholders' Equity and Equity Incentive Plans - Performance Stock Units. The PSUs are subject to vesting based on the Company’s attainment of pre-established performance milestones and service conditions. The performance milestones for the January 2022 PSUs are comprised of two non-market milestones and one market milestone. The July 2022 PSUs will vest upon the continuation of service to the Company and/or achievement of a market milestone. The fair values of the grants are measured
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Notes to Unaudited Interim Condensed Financial Statements (continued)
adopted new accounting policies, as described below, as a result of the events and transactions that took place during the nine months ended September 30 2021.

Stock-Based Compensation
Effective April 1, 2021, the Company established its first offering period under the Company's 2019 Employee Stock Purchase Plan (the ESPP), as described in Note 4,6, 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

The Company entered into the License Agreement with Ji Xing during the three months ended September 30, 2021, as further described in Note 8, 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 under the guidance of ASC 606, Revenue from Contracts with Customers, to recognize revenue based on the transfer of control of promised goods or services in an amount that reflects the consideration to which the Company expects to receive in exchange for those goods 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:

1.Identify 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 based on third-party sales of licensed products and is recorded when 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
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Notes to Unaudited Interim Condensed Financial Statements (continued)
obtaining access to capital under its term loan credit facility. Loan commitment fees related to undrawn tranches are recorded in other assets on the Company's condensed balance sheet and are amortized using a straight-line method over the term 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.

Non-Marketable Equity Investment

In connection with the License Agreement described in Note 8, License and Collaboration Agreements, 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 approval of the investee's product or technology, as well as 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 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 to a derivative financial instrument and are not clearly and closely related 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 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.

Incentive Plans - Performance Stock Units.
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 nine months ended September 30, 2022, there were no newly adopted accounting pronouncements that had a material impact to the Company's condensed financial statements. As of September 30, 2022, there are no recently issued but not yet adopted accounting pronouncements that are expected to materially impact the Company's condensed financial statements.

Reclassification

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 SecuritiesThe condensed statement of operations 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.

ASU 2016-13 — In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard introduced the expected creditcomprehensive loss methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendmentthree and nine months ended September 30, 2021 has been conformed to separately present sales and marketing expenses which were previously reported in ASU 2016-13 also modified the accountingselling, general and administrative expenses. Certain prior year amounts have been reclassified 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, 2021 and its adoption did not have a material effect on the Company's financial statements and related disclosures.comparative purposes.


2.    Inventory

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

September 30, 2022December 31, 2021
Raw materials$1,144 $2,524 
Work in process5,500 3,053 
Finished goods315 509 
Inventory, net$6,959 $6,086 

Raw materials in the amount of $4.8 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 September 30, 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
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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.

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 the 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
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Notes to Unaudited Interim Condensed Financial Statements (continued)
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. TheLastly, the term loan contains a lender-held put option that requires the Company to repay $5.0 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. This put option has been determined to qualify as an embedded derivative assetliability under ASC 815-40, Derivatives and liabilityHedging.

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

The valuation method for boththe embedded derivatives includes certain unobservable Level 3 inputs including revenue projections probability and timing of future cash flows, probability of regulatory approval, discountsfor 2022 through 2027, revenue volatility, yield volatility, discount rates, credit spreads, operational leverage 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 statementstatements 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 liabilitiesliability on the Company's condensed balance sheetsheets using significant unobservable inputs (Level 3) (in thousands):
20222021
Beginning balance as of January 1$2,345 $— 
Recognition of net embedded derivative liability— 450 
Change in fair value of the net embedded derivative liability5,806 (212)
Ending balance as of September 30$8,151 $238 

As of September 30, 2022, financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
Fair Value Measurements as of September 30, 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 funds42,696 — — 42,696 
Total assets$42,696 $— $— $42,696 
Liabilities:
Net embedded derivative liability— — 8,151 8,151 
Total liabilities$— $— $8,151 $8,151 

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Notes to Unaudited Interim Condensed Financial Statements (continued)
Three months ended September 30,Nine months ended September 30,
20212021
Beginning balance:$—��$— 
Net embedded derivative liability450 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 funds183,166 — — 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, 2020Fair 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)TotalQuoted 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 fundsMoney market funds191,585 — — 191,585 Money market funds162,376 — — 162,376 
Total assetsTotal assets$191,585 $— $— $191,585 Total assets$162,376 $— $— $162,376 
Liabilities:Liabilities:Liabilities:
Net embedded derivative liabilityNet embedded derivative liability— — — — Net embedded derivative liability— — 2,345 2,345 
Total liabilitiesTotal liabilities$— $— $— $— Total liabilities$— $— $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.

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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 License Agreementa license agreement with Ji Xing, as described in Note 8,10, License and Collaboration Agreements, the Company received 397,562 senior common shares of Ji Xing onin August 5, 2021 (Investment)and 397,561 senior common shares in October 2021 (the Investment), which were accounted for as a non-marketable equity investment and valued as of August 5, 2021.2021 and October 15, 2021, respectively. Ji Xing is an entity affiliated with RTW Investments, LP. RTW Investments, LP, is one of the Company's beneficial owners and, as 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 ofThere was no impairment expense recorded for the Investment as of August 5, 2021 (in thousands):
during the three or nine months ended
September 30, 2022
Valuation TechniqueUnobservable InputsValue
Asset
InvestmentMarket Approach - Backsolve methodEquity 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.

12
3.
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):
September 30, 2022December 31, 2021
Laboratory equipment$605 $585 
Manufacturing equipment502 — 
Furniture and fixtures27 73 
Leasehold improvements121 226 
Marketing equipment258 258 
Office equipment68 68 
Construction-in-progress1,169 1,524 
Total property and equipment$2,750 $2,734 
Accumulated depreciation(312)(237)
Property and equipment, net$2,438 $2,497 



5.    Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):
September 30, 2021December 31, 2020
Accrued compensation7,000 3,500 
Accrued professional services3,161 1,244 
Accrued research and development expense1,013 3,541 
Total accrued expenses and other current liabilities$11,174 $8,285 

September 30, 2022December 31, 2021
Accrued gross-to-net deductions$7,762 $4,837 
Accrued compensation10,876 9,153 
Accrued inventory70 594 
Accrued professional services3,981 5,451 
Accrued research and development expense1,085 1,156 
Accrued other expense586 320 
Total accrued expenses and other current liabilities$24,360 $21,511 
1113
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 1one vote.

The CompanyCompany's outstanding equity awards as well as reserved common stock for future issuance is as follows:
September 30, 2021December 31, 2020
Outstanding options under the 2016 Equity Incentive Plan2,370,2562,567,566
Outstanding options under the 2019 Equity Incentive Plan2,031,932918,145
Outstanding options under the 2021 Inducement Plan270,600—
Equity awards available for grant under the 2019 Equity Incentive Plan (1)
1,588,1051,790,106
Equity awards available for grant under the 2021 Inducement Plan379,400—
Unvested restricted stock units (RSUs)178,59561,215
Shares reserved for purchase under the Employee Stock Purchase Plan (the ESPP)270,000270,000
Total7,088,8885,607,032
September 30, 2022December 31, 2021
Outstanding options under the 2016 Equity Incentive Plan (the 2016 Plan)1,800,3341,935,240
Outstanding options under the 2019 Equity Incentive Plan (the 2019 Plan)2,775,9262,078,232
Outstanding options under the 2021 Equity Inducement Plan (the 2021 Plan)514,883270,600
Outstanding performance stock units (PSUs) under the 2019 Plan1,038,250—
Unvested restricted stock units (RSUs) under the 2019 Plan987,428179,149
Equity awards available for grant under the 2019 Plan (1)
66,3801,535,488
Equity awards available for grant under the 2021 Plan135,117379,400
Shares reserved for purchase under the Employee Stock Purchase Plan (the ESPP) (2)
362,316225,447
Total7,680,6346,603,556
(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, (theincluding 7,784 shares of common stock that have become available for issuance under the 2019 Plan) 1,035,619 shares were addedPlan 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

July 2022 PSU Grant

In July 2021,2022, the Company's Board of Directors approvedgranted 350,000 PSUs to the adoptionCompany’s President and Chief Executive Officer and 300,000 PSUs to the Company’s Chief Financial and Business Officer. Upon vesting, each PSU will entitle the grantee to receive one share of the Company’s common stock based on the following conditions and the executive officer’s continued service with the Company:

•50% of the PSUs will vest on July 6, 2023 (Tranche 1); and
•The remaining 50% of the PSUs will vest at such time, if any, during the period that begins on July 6, 2023, and ending on July 6, 2024, as the thirty-day volume-weighted average stock price (VWAP) of the Company’s common stock reaches $6.00 per share (Tranche 2).

The fair value of Tranche 1 is based on the market price of the Company's 2021 Inducement Plan (the Inducement Plan),stock at the date of grant. The fair value of Tranche 2 is estimated using a Monte Carlo simulation in a risk-neutral framework and uses the following inputs to determine the fair value:

•Expected term - 2.00 years.
•Expected volatility - Historical volatility of the Company's common stock price over a lookback period that is commensurate to the vesting period, which is used exclusively68.8%.
•Risk-free interest rate - The Constant Maturity U.S. Treasury Curve, which is 2.95%.
•Expected dividend rate - The Company has estimated the dividend yield to be zero.
•Derived service period - 1.123 years.
14
OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)

The Company recorded stock-based compensation expense of $0.6 million related to these PSUs for grantsthe three and nine months ended September 30, 2022.

January 2022 PSU Grant

In January 2022, the Company granted a target number of awardsPSUs to individuals who were not previously employees or directorscertain executive officers that 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 Company (or followingnon-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 bona fiderecipient may ultimately earn 0% to 125% (as specified for each PSU grant) of the target number of PSUs granted of 310,600.

The number of PSUs that may vest and be issued is based upon the determination of the Compensation Committee of the Company's Board of Directors that one or more of the three performance milestones are achieved in the period beginning on the vesting commencement date of non-employment) as a material inducement to such individuals’ entry into employmentJanuary 1, 2022 and ending on June 30, 2023, with the Company.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 common stock price over a lookback period that is commensurate to the performance period, which is 61.3%.
•Risk-free interest rate - The Interpolated Constant Maturity U.S. Treasury Curve, which is 0.64%.
•Expected dividend rate - The Company reserved 650,000 shares of its common stock that mayhas estimated the dividend yield to be issued underzero.

The Company records stock-based compensation expense over the Inducement Plan. The terms and conditionsestimated service period for each performance-based milestone subject to the achievement of the Inducement Plan are substantially similar to thosemilestones being considered probable. At each reporting date, the Company assesses whether achievements of the 2019 Plan.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 these PSUs during the three or nine months ended September 30, 2022.

Stock Options
The following table summarizes stock option activity under the 2016 Equity Incentive Plan, the 2019 Plan and the 2021 Inducement Plan duringfor the nine months ended September 30, 20212022 (in thousands, except shares, contractual term and per share data):
Outstanding Options
Number of Shares Underlying Outstanding OptionsWeighted Average Exercise PriceWeighted Average Remaining Contractual Term (Years)Aggregate Intrinsic Value
Balance, January 1, 20213,485,711 $10.74 8.2$36,506 
Options granted1,479,153 16.59 
Options exercised(171,610)3.53 2,272 
Options forfeited(120,466)19.42 342 
Balance, September 30, 20214,672,788 12.64 8.117,535 
Shares vested and exercisable as of September 30, 20212,058,694 7.15 7.014,885 
Vested and expected to vest as of September 30, 20214,672,788 $12.64 8.1$17,535 

Outstanding Options
Number of Shares Underlying Outstanding OptionsWeighted Average Exercise PriceWeighted Average Remaining Contractual Term (Years)Aggregate Intrinsic Value
Outstanding at January 1, 20224,284,072 $13.54 8.1$28,874 
Options granted1,458,967 14.45 — 
Options exercised(69,930)1.09 995 
Options forfeited(581,966)17.44 23 
Outstanding at September 30, 20225,091,143 13.53 7.83,122 
Shares vested and exercisable as of September 30, 20222,562,866 11.55 6.83,023 
Vested and expected to vest as of September 30, 20225,091,143 $13.53 7.8$3,122 
12
15
OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
The weighted average fair value of options granted during the nine months ended September 30, 20212022 was $10.88$10.32 per share. As of September 30, 2021,2022, the total unrecognized stock-based compensation expense for stock options was $28.8$25.1 million, which is expected to be recognized over a weighted average period of 2.92.6 years.

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 duringRSUs for the nine months ended September 30, 20212022 was as follows (in thousands, except share, contractual term, and per share data):
Outstanding RSUs
Number of Shares Underlying Outstanding AwardsWeighted Average Grant Date Fair Value per ShareWeighted Average Remaining Contractual Term (Years)Aggregate Intrinsic Value
Outstanding at January 1, 202161,215 $23.83 1.4$1,152 
Restricted stock units granted154,431 18.26 2,820 
Restricted stock units vested(32,153)27.15 648 
Restricted units forfeited(4,898)18.77 87 
Balance, September 30, 2021178,595 18.56 2.52,116 
Unvested and expected to vest as of September 30, 2021178,595 $18.56 2.5$2,116 

Outstanding RSUs
Number of Shares Underlying Outstanding AwardsWeighted Average Grant Date Fair Value per ShareWeighted Average Remaining Contractual Term (Years)Aggregate Intrinsic Value
Outstanding at January 1, 2022179,149 $17.52 2.4$3,271 
Restricted stock units granted918,357 7.43 6,822 
Restricted stock units vested(60,480)17.86 451 
Restricted stock units forfeited(49,598)14.37 251 
Outstanding at September 30, 2022987,428 8.27 2.15,549 
Vested and expected to vest as of September 30, 2022987,428 $8.27 2.1$5,549 
As of September 30, 2021,2022, the total unrecognized stock-based compensation expense for RSUs was $2.6$6.6 million which is expected to be recognized over a weighted average period of 2.62.4 years.
2019 Employee Stock Purchase Plan

In October 2019, theThe Company adopted themaintains an 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 onat the first trading daybeginning or the end of the offering period, or on the last daywhichever is lower through payroll deductions. The Company issued 128,926 shares of the offering period. Because the first offering period has not yet expired, no shares have been purchasedcommon stock under the ESPP as ofduring the nine months ended September 30, 2021.2022.

Stock-Based Compensation Expense
TotalThe following is a summary of stock-based compensation expense related to the Company's equity incentive plans was as followsby function recognized (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Research and development$485 $246 $1,311 $702 
Selling, general and administrative2,630 1,744 7,532 4,077 
Total stock-based compensation expense$3,115 $1,990 $8,843 $4,779 

Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Sales and marketing$549 $812 $2,882 $1,959 
General and administrative2,664 1,818 7,605 5,573 
Research and development557 485 1,825 1,311 
Total stock-based compensation expense$3,770 $3,115 $12,312 $8,843 

1316
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 September 30,Nine Months Ended September 30,
20212020202120202022202120222021
Numerator:Numerator:Numerator:
Net lossNet loss$(17,670)$(16,305)$(58,595)$(48,288) Net loss$(36,747)$(17,670)$(134,581)$(58,595)
Denominator:Denominator:Denominator:
Weighted average shares outstanding, basic and dilutedWeighted average shares outstanding, basic and diluted26,037,975 25,797,282 25,984,412 23,544,035  Weighted average shares outstanding, basic and diluted26,830,756 26,037,975 26,736,177 25,984,412 
Net loss per share, basic and dilutedNet loss per share, basic and diluted$(0.68)$(0.63)$(2.25)$(2.05)Net loss per share, basic and diluted$(1.37)$(0.68)$(5.03)$(2.25)

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,
20212020
Options to purchase common stock4,672,788 3,205,831 
Unvested restricted stock units178,595 63,929 
Shares committed under the ESPP30,170 — 
Total4,881,553 3,269,760 

14
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, 2021December 31, 2020
Operating lease right-of-use assets$629 $644 
Finance lease right-of-use assets2234
Total right-of-use assets$651 $678 
Operating lease liabilities$464 $400 
Finance lease liabilities1718
Total lease liabilities$481 $418 
Operating lease liabilities, non-current$172 $250 
Finance lease liabilities, non-current719
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, 2021Finance LeasesOperating LeasesTotal
2021 (remainder)$5 $138 $143 
202216 376 392 
20234 126 130 
2024— 21 21 
Total undiscounted cash flows25 661 686 
Less: imputed interest(1)(25)(26)
Total lease liabilities24 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.
September 30,
20222021
Options to purchase common stock5,091,143 4,672,788 
Unvested restricted stock units987,428 178,595 
Performance stock units650,000 — 
Shares committed under the ESPP93,831 30,170 
Total6,822,402 4,881,553 

7.
8. Long-term Debt

Credit Facility with OrbiMed

On August 5, 2021, the Company entered into a $125 million term loan credit facility (thethe 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
15
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 loansloan underlying the Credit Agreement maturematures on August 5, 2027 and areis structured for full principal repayment at maturity. The term loans bearloan bears interest at the secured overnight financing rate (SOFR, as defined in the Credit Agreement) (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 Feea 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 basisAs of September 30, 2022 and upon funding ofDecember 31, 2021, the secondCompany accrued $0.2 million and third term loan tranches. The Revenue Sharing Fee$0.2 million, respectively, 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 ofclassified 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 tranchedrawn 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%16.04% on the loan as of September 30, 2021.

16
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, 2021.2022.

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, 2021.2022. The Company amortizes loan commitment fees on a straight-line basis over the term of the loan commitment. The balance of theUndrawn loan commitment fees, andnet of accumulated amortization, recorded on the Company’s condensed balance sheet were as follows:


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,$0.3 million 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$0.6 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 costs237 
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, 2022 and December 31, 2021, (in thousands):
Less than a year1-3 years3-5 yearsMore than 5 yearsTotal
Debt Principal$— $— $— $45,000 $45,000 
Exit Fee— — — 2,700 2,700 
Contractual Interest on debt3,878 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 
respectively.

(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 substantially 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.
17
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:

September 30, 2022December 31, 2021
Long-term debt$95,000 $95,000 
Debt issuance and discount costs, net of amortization(2,782)(5,185)
Long-term debt, net$92,218 $89,815 

During the three and nine months ended September 30, 2022, the Company recorded interest expense of $3.5 million and $9.7 million, respectively, of which $1.0 million and $3.1 million, respectively, are 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 requiredrequires 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 requirementall covenants as of September 30, 2021.2022.

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 3.8 years.
Supplemental balance sheet information for the Company's leases is as follows (in thousands):
September 30, 2022December 31, 2021
Operating lease right-of-use assets$2,444 $2,884
Finance lease right-of-use assets3418
Total right-of-use assets$2,478 $2,902
Operating lease liabilities$675 $779
Finance lease liabilities1716
Total lease liabilities$692 $795
Operating lease liabilities, non-current$1,791 $2,114
Finance lease liabilities, non-current204
Total lease liabilities, non-current$1,811$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 availabilityThe maturities of the second $50 million tranche of fundinglease 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.

8.    License and Collaboration Agreements

Ji Xing Pharmaceuticals Limited - Related Party

On 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,finance leases are as a result, the License Agreement is considered to be a related party transaction. Pursuant to the License Agreement, 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 in 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 term 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 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 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. 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, any license granted by the Company to Ji Xing will terminate, and all sublicenses granted by Ji Xing shall also terminate.follows (in thousands):

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OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
As of September 30, 2022Finance LeasesOperating LeasesTotal
2022 (remainder)$4 $194 $198 
202318 792 810 
202416 646 662 
2025— 562 562 
2026— 525 525 
Total undiscounted cash flows38 2,719 2,757 
Less: imputed interest(1)(253)(254)
Total lease liabilities37 2,466 2,503 
Less: current portion(17)(675)(692)
Lease liabilities$20 $1,791 $1,811 
Rent expense was $0.2 million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and was $0.8 million and $0.4 million for the nine months ended September 30, 2022 and 2021, respectively.

10.    License and Collaboration Agreements
Ji Xing
In August 2021, the Company entered into a license and collaboration agreement with Ji Xing. 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 in the greater China region. Per the terms of the agreement, the Company is eligible to receive development and sales-based milestone payments and royalty payments that are tiered on future net sales of OC-01 and OC-02.
The Company did not recognize any license or milestone revenue during the three or nine months ended September 30, 2022. The Company recognized $17.9 million of revenue in connection with the license and collaboration agreement, which is inclusive of 397,562 senior common shares of Ji Xing that the Company received in August 2021 valued at $0.4 million during the three and nine months ended September 30, 2021.

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 topotentially make sales-related milestones and tiered royalty payments ofbased on net sales, if a licensed phage therapy is approved by the FDA or certain other regulatory authorities. 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. The Company has not exercised the option granted under the agreement as of September 30, 2021.2022.

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 commencescommenced 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 asRoyalty expense is recorded in the cost of product revenue in the condensed statements of operations and comprehensive loss. The Company recorded royalty expense of $0.4 million and
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OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
$1.0 million during the three and nine months ended September 30, 20212022, respectively, and December 31, 2020.no royalty expense during the three and nine months ended September 30, 2021.

9.
11.    Commitments and Contingencies

Purchase Commitments

In addition to disclosures in these condensed financial statements, the following are the Company's commitments asAs of September 30, 2021:2022, the Company has non-cancelable commitments for the purchase of raw materials and materials for research and development, packaging and product manufacturing costs of approximately $5.4 million, consisting of $3.7 million for the remainder of 2022 and $1.7 million for 2023. No purchase commitments have been made beyond year 2023. The Company made purchases of $8.1 million and $2.3 million under its purchase commitments during the nine months ended September 30, 2022 and 2021, respectively.

Purchase CommitmentManufacturing and Supply Commitments

In July 2021, the Company entered into a manufacturing and supply agreement with a contract manufacturing organization (CMO)CMO to manufacture and supply TYRVAYA Nasal Spray for an initial term of three years. Under this agreement, the Company will paypays a minimum capacity reservation fee in the amount of $2.5 million for each of the next three years ending December 31, 2021,twelve months ended October 2022, 2023 and 2023, respectively.2024. 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. TheIn October 2022, the Company made nopaid the $1.8 million minimum capacity reservation fee payments asfor the twelve months ended October 2023.

As of September 30, 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, 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.


12.    Subsequent Events

Pending Transaction with Viatris Inc.

On November 7, 2022, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Viatris Inc. and Iris Purchaser Inc. (Purchaser), a wholly owned subsidiary of Viatris Inc. The Merger Agreement provides that, subject to satisfaction of customary closing conditions, including the completion of the Offer (as defined below), Purchaser will merge with and into the Company, with the Company continuing as the surviving corporation as a wholly owned subsidiary of Viatris Inc. (the Merger).

Pursuant to the terms and subject to the conditions of the Merger Agreement, Viatris Inc. has agreed to cause Purchaser to commence a tender offer (Offer) to acquire all of the outstanding shares of common stock of the Company for (i) $11.00 per share in cash plus (ii) the right to receive one contingent value right payment (CVR) per share, which represents the right to receive a Milestone Payment, defined as $1.00 per share in cash if Milestone One (as defined below) is achieved or $2.00 per share in cash if Milestone Two (as defined below) is achieved, net of applicable withholding taxes and without interest. Milestone One will be met if the Company both i) recognizes at least $21.6 million net revenue from sales of TYRVAYA Nasal Spray for the twelve months ended December 31, 2022; and (ii) achieves at least 131,822 total TYRVAYA Nasal Spray prescriptions in the United States for the twelve months ended December 31, 2022. Milestone Two will be met if the Company both (i) recognizes at least $24.0 million net revenue from sales of TYRVAYA Nasal Spray for the twelve months ended December 31, 2022; and (ii) achieves at least 146,469 total TYRVAYA Nasal Spray prescriptions in the United States for the twelve months ended December 31, 2022. If Milestone One is achieved and Milestone Two is not achieved, the stockholders who had shares of the Company’s
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OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
10.    Subsequent eventscommon stock acquired by Viatris Inc. in connection with the Offer shall receive a Milestone Payment of $1.00 per share in cash. If Milestones One and Two are achieved, the stockholders who had shares of the Company’s common stock acquired by Viatris Inc. in connection with the Offer shall receive a Milestone Payment of $2.00 per share in cash. If Milestone One is not achieved, no Milestone Payment will become payable and stockholders who had shares of the Company’s common stock acquired by Viatris, Inc. in connection with the Offer shall not receive additional consideration.

The Merger Agreement contains customary representations and warranties, and is anticipated to close in the first quarter of 2023, subject to the satisfaction of customary closing conditions, including the completion of the Offer. However, there can be no assurance that the conditions to the completion of the Offer and the Merger will be satisfied or waived, that the Offer and the Merger will be completed on the expected timeframe or at all, or that the Offer and the Merger will be consummated as contemplated by the Merger Agreement. If the Merger Agreement is terminated under specified circumstances, the Company will be required to pay Viatris Inc. a termination fee of approximately $11.9 million.As a result of the Merger, the Company will cease to be a publicly traded company.


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.

2021

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, 20212022 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 Company's pending merger with Viatris Inc. and 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,flows, 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 Company's expectations in connection with the pending merger with Viatris Inc., 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, 20202021 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.”

The forward-looking statements in this Quarterly Report on Form 10-Q, other than the statements regarding the pending merger with Viatris Inc., do not assume the consummation of the proposed merger unless specifically stated otherwise.
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Executive Summary

Introduction and Overview

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.

The Company expects to continue to finance its operations through privatebegan selling TYRVAYA Nasal Spray in November 2021 and public equity, debt financing, collaborative or other arrangements with corporate sources or through other sourcesgenerated net product revenues of financing. The Company’s net losses were $58.6$13.0 million and $48.3 million for the nine months ended September 30, 20212022. The Company expects its product revenue to increase if it gains market share and 2020, respectively. AsTYRVAYA Nasal Spray obtains insurance coverage from additional third-party payors. The Company generated net losses of $134.6 million and $58.6 million for the nine months ended September 30, 2022, and 2021, the Companyrespectively, and had an accumulated deficit of $213.3$390.0 million. as of September 30, 2022. The Company expects thathas financed its selling, generaloperations primarily through the sale and administrative expenses will continue to increase asissuance of its securities. In August 2021, the Company commercializes TYRVAYA Nasal Spray following its recent approval bysecured debt capital in the FDA. Additionally, operating expenses will increase as the Company advances its other product candidates through preclinical and clinical development, seeks regulatory approval, and prepares for and, if approved, proceedsform of a long-term credit facility of up to commercialization; acquires, discovers, validates and develops additional product candidates; obtains, maintains, protects and enforces its intellectual property portfolio; and hires additional personnel.

Recent Events

FDA Approval of TYRVAYA Nasal Spray

On October 15, 2021, TYRVAYA Nasal Spray was approved by the FDA 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$125.0 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 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.help finance its operations.

Recent Events

Pending Transaction with Viatris Inc.

On October 19, 2021,November 7, 2022, the Company entered into an Agreement and Plan of Merger (Merger Agreement) by and among the Company, Viatris Inc. and Iris Purchaser Inc. (Purchaser), a waiver and amendment (the Amendment)wholly owned subsidiary of Viatris Inc. The Merger Agreement provides that, subject to satisfaction of customary closing conditions, including the Credit Agreement to waive certain labeling requirements required for, and to permit the availabilitycompletion of the second $50 million trancheOffer (as defined below), Purchaser will merge with and into the Company, with the Company continuing as the surviving corporation as a wholly owned subsidiary of funding under the Credit Agreement (among other customary funding provisions) and make certain other amendments thereto, subjectViatris Inc. (the Merger).

Pursuant to the terms and subject to the conditions contained therein. The Amendment also increasedof the amountMerger Agreement, Viatris Inc. has agreed to cause Purchaser to commence a tender offer (Offer) to acquire all of principal thatthe outstanding shares of common stock of the Company for (i) $11.00 per share in cash plus (ii) the right to receive one contingent value right payment (CVR) per share, which represents the right to receive a Milestone Payment, defined as $1.00 per share in cash if Milestone One (as defined below) is required toachieved or $2.00 per share in cash if Milestone Two (as defined below) is achieved, net of applicable withholding taxes and without interest. Milestone One will be repaidmet if the Company does not meet certain minimum recurringboth (i) recognizes at least $21.6 million net revenue thresholds from the sale and/or licensingsales of TYRVAYA Nasal Spray on a quarterly basis for the most recentlytwelve months ended four fiscal quarter period,December 31, 2022; and (ii) achieves at least 131,822 total TYRVAYA Nasal Spray prescriptions in the United States for the twelve months ended December 31, 2022. Milestone Two will be met if the Company both (i) recognizes at least $24.0 million net revenue from $5 million to $10 million if (i) the company does not meet such minimum recurring revenue thresholds from the sale and/or licensingsales of TYRVAYA Nasal Spray for the twelve months ended December 31, 2022; and (ii) achieves at least 146,469 total TYRVAYA Nasal Spray prescriptions in the last four quartersUnited States for the twelve months ended December 31, 2022. If Milestone One is achieved and (ii) an improper promotional event has occurred. The Company delivered notice to OrbiMed on October 19, 2021 that it intended to borrowMilestone Two is not achieved, the second tranchestockholders who had shares of the Company’s common stock acquired by Viatris Inc. in connection with the Offer shall receive a Milestone Payment of $1.00 per share in cash. If Milestones One and Two are achieved, the Company receivedstockholders who had shares of the second tranche funding on November 4, 2021.Company’s common stock acquired by Viatris Inc. in connection with the Offer shall receive a Milestone Payment of $2.00 per share in cash. If Milestone One is not achieved, no Milestone Payment will become payable and stockholders who had shares of the Company’s common stock acquired by Viatris Inc. in connection with the Offer shall not receive additional consideration.

Ji Xing LicensePursuant to the terms and Collaborationand subject to the conditions of the Merger Agreement,

On August 5, 2021, the Merger will be affected pursuant to Section 251(h) of the Delaware General Corporation Law, which permits completion of the Merger without a vote of the holders of common stock upon the acquisition by Purchaser of a majority of the aggregate voting power of common stock. As a result of the Merger, the Company entered intowill cease to be a licensepublicly traded company. The Merger Agreement contains customary representations and collaboration agreement (the License Agreement) with Ji Xing Pharmaceuticals Limited (Ji Xing), a biotechnology company headquarteredwarranties. The Merger is anticipated to close in Shanghai, Chinathe first quarter of 2023, subject to the satisfaction of customary closing conditions, including completion of the Offer. However, there can be no assurance that the conditions to the completion of the Offer and backedthe Merger will be satisfied or waived, that the Offer and the Merger will be completed on the expected timeframe or at all, or that the Offer and the Merger will be consummated as contemplated by RTWthe Merger Agreement. If the Merger Agreement is
2223

Investments, LP (RTW). Pursuant toterminated under specified circumstances provided in the LicenseMerger Agreement, the Company will be required to pay Viatris Inc. a termination fee of approximately $11.9 million.

The foregoing description of the Merger Agreement and the Transactions does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached hereto as Exhibit 2.1 to this Quarterly Report on Form 10-Q and incorporated by reference herein. Please also see “Item 1A. Risk Factors—Risks related to the pending merger with Viatris Inc.”.

Operating Expense Streamlining Plan

In the second quarter of 2022, the Company announced a plan to streamline operating expenses. The plan, which has since been implemented, included a reduction in force and certain other cost-cutting measures. These measures, which were approved by the Company's Board of Directors, served to better align the Company's workforce with the anticipated current needs of its business, maximize the commercial potential of TYRVAYA Nasal Spray, and create value for the Company's stakeholders. The Company reduced its operating expenses, primarily driven by lower non-employee-related general and administrative and research and development expenses, and to a lesser extent, by the reduction of approximately 40 positions across the organization.

Ji Xing Pharmaceuticals Enrolls Patients in a Phase 3 Clinical Trial of OC-01 in China

The Company 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.region in August 2021. In July 2022, Ji Xing will be responsible forannounced that the development, regulatory, manufacturing and commercialization activities costsfirst patients have been enrolled 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 productsits Phase 3 clinical study of OC-01 (varenicline solution) nasal spray in China. The study is being carried out in over 20 leading clinical centers across China and OC-02 (simpinicline) for Ji Xing's clinical development at quantitiesis designed to be agreed byevaluate 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, 2021efficacy 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 salessafety of OC-01 nasal spray for the treatment of the signs and OC-02 and based on royalty rates between 10% and 20%.symptoms of dry eye disease to support a new drug application in China.

Expansion of Commercial Launch Agreements

In anticipation of the Company's commercial launch ofCoverage 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.

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Full Onboarding of U.S. Sales Representatives

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 2021,2022, the Company announced preclinical data in non-human primates and in vitro models evaluatingintroduced expanded patient access programs to include more eligible patients. As of the third quarter of 2022, TYRVAYA Nasal Spray against SARS-CoV-2 andis covered by commercial prescription drug plans managed by the alpha and beta variants, the viruses that cause COVID-19 disease. Administration ofnation’s top three Pharmacy Benefit Manager Group Purchasing Organizations. The Company expects to expand market access to TYRVAYA Nasal Spray to non-human primates was observed to inhibit viral replicationwith additional coverage for Medicare Part D patients in the nose within 24 hours of infectious SARS-CoV-2 challenge with absence of subgenomic RNA at Day 32023 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.beyond.

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 SubjectSubjects 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 nine months ended September 30, 2022, the Company announcedcontinued enrollment of the first subjectsubjects in the OLYMPIA Phase 2 clinical trial of TYRVAYA Nasal SprayOC-01 for the treatment of Stage 1 Neurotrophic Keratopathy (NK). NK is a degenerative disease resulting from a loss on corneal sensation, which causes progressive damage to the top layer of the cornea and can negatively impact visual acuity. Enrollment is expected to bewas completed in 2022.October 2022 and study results are expected in the first quarter of 2023.

Pipeline Expansion withAdditional Pre-Clinical Studies for Enriched Tear Film (ETF™) Gene Therapy to Target Ophthalmic DiseasesNeurotrophic Keratopathy and Vernal and Atopic Keratoconjunctivitis patients

In June 2021,During the nine months ended September 30, 2022, the Company announcedprogressed 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 demonstratedwith OC-101 (AAV-NGF). OC-101 (AAV-NGF) is administered as a single, intralacrimal gland injection of an adeno-associated virus (AAV) vector that deliverscontaining the human Nerve Growth Factornerve growth factor (NGF) gene. A single injection produced statistically significant increase of NGFgene for Stages 2 and 3 NK patients. The Company submitted a Pre-IND meeting request and briefing document to the U.S. FDA for the OC-101 (AAV-NGF) program and received a response from FDA on the briefing document questions. The Company expects to begin the final IND enabling study for this platform in tear film, as compared to control. Preclinical study results2023. The Company also demonstrated that following AAV transduction of the lacrimal gland, cholinergic activation with TYRVAYA Nasal Spray produced 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 the intralacrimal gland administration of TYRVAYA Nasal Spray or intranasal administration of TYRVAYA Nasal Spray.

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) forannounced the development of potential biological treatments for multiple ophthalmic diseases. UnderOC-103 (AAV-DAO). OC-103 (AAV-DAO) is administered as a single, intralacrimal gland injection of an adeno-associated virus (AAV) vector containing the terms of the collaboration agreement, the Company has the optionenzyme diamine oxidase (DAO) in vernal and certain rightsatopic keratoconjunctivitis patients. OC-103 (AAV-DAO) is planned 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 paybegin preclinical animal studies in 2023.

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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 collaboration and option agreement which was included in research and development expense for the nine months ended September 30, 2021.
The Impact of the SARS-CoV-2 Virus Pandemic

DuringThe Company does not believe its financial results were materially affected by the SARS-CoV-2 virus pandemic during the three and nine months ended September 30, 2021, the financial results of the2022. The Company were not significantly affected by the SARS-CoV-2 virus pandemic. However, thewill continue to make practical decisions in compliance with Centers for Disease Control and Prevention, federal, state and local guidelines. 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 impact of the SARS-CoV-2 virus pandemic 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 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 Company delayed the planned voluntary return to the office for its employees until at least December 2021. However, the Company will continue monitoring COVID-19 infection rates and make practical decisions about voluntary reopening in compliance with Centers for Disease Control and Prevention, federal, state and local guidelines.predicted.

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 indirectly impact the operation 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.

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Results of Operations

Comparison of the Results of Operations for the Three Months Ended September 30, 20212022 and 20202021

The following table summarizes the Company's results of operations for the periods indicated (in thousands, except percentages):
Three Months Ended September 30,
20212020$ Change% Change
Revenue:
License revenue - related party$17,943 $— $17,943 100 %
Total revenue17,943 $— 17,943 100 %
Research and development:
Clinical, preclinical1,467 2,148 (681)(32)%
Chemistry, manufacturing and controls (CMC)3,727 4,676 (949)(20)%
Other1,020 1,386 (366)(26)%
     Total research and development6,214 8,210 (1,996)(24)%
Selling, general and administrative28,497 8,112 20,385 251 %
Loss from operations(16,768)(16,322)(446)3 %
Other income (expense)
Other income, net222 17 205 1206 %
Interest expense(1,124)— (1,124)100 %
Total other expense, net(902)17 (919)N/M
Net loss$(17,670)$(16,305)$(1,365)8 %
Three Months Ended September 30,
20222021$ Change% Change
Revenue:
Product revenue, net$5,591 $— $5,591 100 %
License revenue - related party— 17,943 (17,943)100 %
Total revenue5,591 17,943 (12,352)(69)%
Cost of product revenue1,348 — 1,348 100 %
Operating expenses:
Sales and marketing22,094 18,170 3,924 22 %
General and administrative12,149 10,327 1,822 18 %
Research and development3,913 6,214 (2,301)(37)%
Total operating expenses38,156 34,711 3,445 10 %
Loss from operations(33,913)(16,768)(17,145)102 %
Other (expense) income:
Interest expense(3,495)(1,124)(2,371)211 %
Other income, net661 222 439 198 %
Total other (expense) income, net(2,834)(902)(1,932)214 %
Net loss and comprehensive loss$(36,747)$(17,670)$(19,077)108 %

Product Revenue, Net
N/M - Not Meaningful.
Product revenue, net was $5.6 million for the three months ended September 30, 2022, and was related to sales of TYRVAYA Nasal Spray, which was launched in the U.S. in November 2021. Approximately 34,000 TYRVAYA Nasal Spray prescriptions, written by approximately 6,100 unique eye care professionals, were filled during the three months ended September 30, 2022. The Company did not generate any revenues from product sales during the three months ended September 30, 2021.

License Revenue - Related Party

InThe Company did not recognize any license revenue during the three months ended September 30, 2022. T connection with the License Agreement entered into with Ji Xing, thehe Company recognized $17.9 million in license revenue during the three months ended September 30, 2021 in connection with the License Agreement entered into with Ji Xing. The license revenue was recognized upon the transfer of control of the licenses to Ji Xing
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and was comprised of $17.5 million cash consideration, and non-cash consideration of 397,562 senior common shares of Ji Xing valued at $0.4 million.

Cost of Product Revenue

Cost of product revenue for the three months ended September 30, 2022 was $1.3 million, which consisted of material costs, third-party manufacturing costs, and royalty expense.

Sales and Marketing

Sales and marketing expenses increased by $3.9 million during the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was primarily due to higher payroll-related expenses of $3.1 million, which was driven by the growth of the Company's sales force since 2021. Other sales and marketing expenses increased by $0.8 million during the three months ended September 30, 2022 compared to the three months ended September 30, 2021, in connection with samples, trade shows, educational programs, patient services, payor access and other marketing efforts related to the commercialization of TYRVAYA Nasal Spray.

General and Administrative Expenses

General and administrative expenses increased by $1.8 million during the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was primarily driven by additional payroll-related expenses of $2.7 million due to an increase in headcount to support the Company's business operations, including an increase in stock compensation expense of $0.8 million. Other general and administrative expenses decreased by $0.9 million during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 primarily related to a decrease in sponsorships, public relations and recruiting activities.

Research and Development Expenses

Research and development expenses decreased by $2.3 million during the three months ended September 30, 2022, compared to the three months ended September 30, 2021. The decrease was primarily due to decreased research and development activity relating to OC-01 following its approval by the FDA on October 15, 2021, and lower payroll-related expenses of $0.7 million.

Interest Expense

The Company incurred $3.5 million and $1.1 million of interest expense during the three months ended September 30, 2022 and 2021, respectively, related to the Credit Agreement, which the Company entered into with OrbiMed in August 2021. Interest expense for both periods included contractual interest, as well as the amortization of loan commitment fees and accretion of other long-term debt related costs. Interest expense for the three months ended September 30, 2022 relates to $95.0 million of outstanding borrowings under the Credit Agreement for the entire three-month period. For the three months ended September 30, 2021, the Company had outstanding borrowings under the Credit Agreement of $45.0 million from August 5, 2021 to September 30, 2021. In addition, the variable rates of interest for a portion of the three months ended September 30, 2022 were higher than the variable rates of interest in the prior year period.

Other Income, net

Other income for the three months ended September 30, 2022 of $0.7 million consisted of a $0.4 million change in the fair value of the net embedded derivative liability related to the Credit Agreement, in addition to interest earned on money market funds. Other income for the three months ended September 30, 2021 primarily consisted of $0.2 million of income associated with the change in the fair value of the net embedded derivative liability, as well as interest income earned on money market funds.


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Comparison of the Results of Operations for the Nine Months Ended September 30, 2022 and 2021

The following table summarizes the Company's results of operations for the periods indicated (in thousands, except percentages):
Nine Months Ended September 30,
20222021$ Change% Change
Revenue:
Product revenue, net$12,988 $— $12,988 100 %
License revenue - related party— 17,943 (17,943)100 %
Total revenue12,988 17,943 (4,955)(28)%
Cost of product revenue2,994 — 2,994 100 %
Operating expenses:
Sales and marketing77,169 28,947 48,222 167 %
General and administrative39,079 27,938 11,141 40 %
Research and development13,258 18,772 (5,514)(29)%
Total operating expenses129,506 75,657 53,849 71 %
Loss from operations(119,512)(57,714)(61,798)107 %
Other (expense) income:
Interest expense(9,717)(1,124)(8,593)765 %
Other (expense) income, net(5,352)243 (5,595)(2302)%
Total other (expense) income, net(15,069)(881)(14,188)1610 %
Net loss and comprehensive loss$(134,581)$(58,595)$(75,986)130 %

Product Revenue, Net

Product revenue, net was $13.0 million for the nine months ended September 30, 2022, and was related to sales of TYRVAYA Nasal Spray, which was launched in the U.S. in November 2021. Approximately 83,000 TYRVAYA Nasal Spray prescriptions, written by over 8,600 unique eye care professionals, were filled during the nine months ended September 30, 2022. The Company did not generate any revenues from product sales during the nine months ended September 30, 2021.

License Revenue - Related Party

The Company did not recognize any license revenue during the nine months ended September 30, 2022. The Company recognized $17.9 million in license revenue during the nine months ended September 30, 2021 in connection with the License Agreement entered into with Ji Xing. 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.

Cost of Product Revenue

Cost of product revenue for the nine months ended September 30, 2022 was $3.0 million, which consisted of material costs, third-party manufacturing costs, and royalty expenses. The receiptIn preparation of the Ji Xing senior common sharescommercial launch, the Company expensed all material costs related to pre-approval inventory to research and development expense. This resulted in a lower unit cost of product revenue than the Company's cost per unit during the nine months ended September 30, 2022 as the Company utilized this pre-approval inventory.

Sales and Marketing

Sales and marketing expenses increased by $48.2 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was recorded as a non-marketable equity investmentprimarily due to higher payroll-related expenses of $25.8 million, which was primarily driven by the growth of the Company's sales force since 2021. The increase in payroll-related expenses included an increase in commission expense of $5.1 million, in addition to an increase in severance expense of $1.5 million due to the operating expenses streamlining plan announced on June 28, 2022. Other sales and marketing expenses increased by
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$22.4 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, in connection with advertising, samples, trade shows, educational programs, patient services, payor access and other marketing efforts related to the commercialization of TYRVAYA Nasal Spray.

General and Administrative Expenses

General and administrative expenses increased by $11.1 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily driven by additional payroll-related expenses of $8.4 million due to an increase in headcount to support the Company's business operations. The increase in payroll-related expenses included an increase in stock compensation expense of $2.0 million. Other general and administrative expenses increased by $2.7 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, related to accounting, consulting, public relations, legal, insurance and other professional services, partially offset by decreases in sponsorships, recruiting activities and software services. The increase in other assets ongeneral and administrative expenses was primarily driven by the condensed balance sheet as of September 30, 2021.Company's transition from a clinical-stage to a commercial stage company.

Research and Development Expenses

Research and development expenses decreased by $2.05.5 million during the nine months ended threeSeptember 30, 2022 compared to the nine months ended September 30, 2021 compared to the three months ended2021. September 30, 2020. The decrease was driven by lower CMC expenses incurredprimarily due to decreased research and development activity relating to OC-01 following its approval by the CompanyFDA on October 15, 2021. This was partially offset by an increase in the third quarterstock compensation expense of 2021 compared$0.5 million, in addition to the third quarteran increase in severance expense 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$0.6 million 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.

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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 increasereduction in stock-based compensation of $0.8 million, primarily driven by onboarding a commercial field force during the three months ended September 30, 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.announced on June 28, 2022.

Interest Expense

The Company incurred $1.1 $9.7 million and $1.1 million of interest expense during the threenine months ended September 30, 2022 and 2021, respectively, related to the Credit Agreement. Interest expense for the threenine months ended September 30, 2021 includes2022 included contractual interest, as well as the amortization of loan commitment fees and accretion of other long-term debt related costs.
Interest expense for the nine months ended
September 30, 2022 relates to $95.0 million of outstanding borrowings under the Credit Agreement for the entire nine-month period. For the nine months ended September 30, 2021, the Company had outstanding borrowings under the Credit Agreement of $45.0 million from August 5, 2021 to September 30, 2021. In addition, the variable rates of interest for a portion of the nine months ended September 30, 2022 were higher than the variable rates of interest in the prior year period.

Other (Expense) Income, net

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,
20212020$ Change% Change
Revenue:
License revenue - related party$17,943 $— $17,943 100 %
Total revenue17,943 — 17,943 100 %
Research and development:
Clinical, preclinical5,468 10,141 (4,673)(46)%
Chemistry, manufacturing and controls (CMC)12,772 14,236 (1,464)(10)%
Other532 3,727 (3,195)(86)%
     Total research and development18,772 28,104 (9,332)(33)%
Selling, general and administrative56,885 20,641 36,244 176 %
Loss from operations(57,714)(48,745)(8,969)18 %
Other income (expense)
Other income, net243 457 (214)(47)%
Interest expense(1,124)— (1,124)100 %
Total other expense, net(881)457 (1,338)(293)%
Net loss$(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.

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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 developmentOther expense for the nine months ended September 30, 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased2022 of $5.4 million consisted of a $5.8 million change in the fair value of the net embedded derivative liability related to the Credit Agreement, partially offset by $36.2 million duringinterest earned on money market funds. Other income for the nine months ended September 30, 2021 compared toprimarily consisted $0.2 million of income associated with 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 Spraychange in the fourth quarter of 2021. In addition to the increase in payroll-related expenses related to the anticipated launchfair value 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.net embedded derivative liability, as well as interest income earned on money market funds.

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.

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Liquidity and Capital Resources

Sources of Liquidity

The Company's principal sources of liquidity include cash on hand and borrowings under the Credit Agreement, as further described in Note 8, Long-term Debt, to the Company's condensed financial statements. The Company has $30.0 millionentered into with OrbiMed in August 2021. In August 2021, the Company drew upon the first tranche of the credit facility in 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, remaining to waive certain labeling requirements required for, and to permit the availability of, the second $50 million tranche of fundingbe drawn 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 borrowwhich may be funded, at the second tranche andoption of 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, fromas defined in the sale and/or licensing of TYRVAYA Nasal SprayCredit Agreement, in any twelve-month period prior to March 31, 2023, among other conditions, including having already drawnconditions. There can be no assurance that the Company will meet the net recurring revenue minimum threshold to enable the Company to draw on the secondthird tranche.

As of September 30, 2022 and December 31, 2021, the Company had cash and cash equivalents of approximately $184.2$68.8 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, theThe Company entered into ais 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 September 30, 2022, the Company had not sold any shares of common stock pursuant to the sales agreement and $100.0 million in shares remained available to be sold under the at-the-market program. There can be no assurance the Company will be able to raise such additional equity capital, or that any equity capital that may be raised will be at market conditions that are favorable to the Company.

Future Funding RequirementsAdditionally, while the Merger Agreement is in effect, the Company is subject to restrictions on its business activities, generally requiring the Company to conduct our business in the ordinary course, consistent with past practice, and subjecting the Company to a variety of specified limitations absent Viatris Inc.’s prior consent. These limitations include, among other things, restrictions on the Company’s ability to acquire other businesses and assets, sell, transfer or license the Company’s assets, make investments, repurchase or issue securities, pay dividends, make capital expenditures, amend the Company’s organizational documents, issue securities and incur indebtedness.

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$134.6 million and $48.3$58.6 million for the nine months ended September 30, 20212022 and 2020,2021, respectively, and had an accumulated deficit of $213.3$390.0 million as of September 30, 2021.2022. The Company has cash and cash equivalents of $68.8 million as of September 30, 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 $13.0 million in the nine months ended September 30, 2022.

The current global macro-economic environment is volatile, which has resulted in global supply chain constraints and elevated rates of inflation, which may continue to impact the Company to varying degrees. In addition, the Company is subject to all ofrisks and uncertainties common to companies in the risks typically relatedbiopharmaceutical industry, including, but not limited to, the developmentability to secure sufficient capital to fund operations, competition from other companies’ products, the availability and salesufficiency 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, delaysdependence on third parties and other unknown factors that may adversely affect its business. The Company will require additional funds as it commercializeskey personnel. Successfully commercializing TYRVAYA Nasal Spray anyrequires 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 will 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 unabledependent on its ability to entirely fund these efforts with its current financial resourcesoperations through the sales and therelicensing of TYRVAYA
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Nasal Spray, and raise additional capital through equity offerings, including through the Company's at-the-market sales program, or other collaborative or strategic arrangements. In addition, the Company may have the ability to draw up to $30.0 million on the third tranche of the Credit Agreement, as further described in Note 8, Long-term Debt. This 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. There can be no assurance that the Company will meet the net recurring revenue minimum threshold to enable the Company to draw on the third tranche. 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 will result in product revenues that meet its sales expectations or those of analysts and 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 ableno assurance that the Company will be successful in raising this additional capital or that such capital, if available, will be on terms that are acceptable to secure suchthe 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 ofmake other changes to its research or development programs,operating plan, which wouldcould materially and adversely affect itsthe 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 seekalso expects that it will continue to raiseuse 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 completion of the Company's pending merger with Viatris Inc.;
•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 numbercandidates, and scope of clinical programs the Company decides to pursue;
•the cost and timing and outcome of preparing for and undergoingassociated 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;
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•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'sadditional 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;
•the impact and effectiveness of the Company's operating expenses streamlining plan, including the reduction in force, announced June 28, 2022; and
•the costs associated with being a public company.
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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 someeliminate certain commercial expenses, including in selling, general and administrative expenses, as well as delay, reduce, or alleliminate one or more of its research or development programs and clinical trials orprograms. 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 requiredchooses 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, 20202021 and in this Quarterly Report on Form 10-Q for additional risks associated with the Company's substantial capital requirements.


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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,Nine Months Ended September 30,
20212020$ Change20222021$ Change
Net cash (used in) provided by:Net cash (used in) provided by:Net cash (used in) provided by:
Operating activitiesOperating activities$(47,895)$(37,348)$(10,547)Operating activities$(124,506)$(47,881)$(76,625)
Investing activitiesInvesting activities(1,250)(342)(908)Investing activities(203)(1,250)1,047 
Financing activitiesFinancing activities40,726 112,884 (72,158)Financing activities76 40,712 (40,636)
Net (decrease) increase in cash and cash equivalents, and restricted cash$(8,419)$75,194 $(83,613)
Net decrease in cash and cash equivalents, and restricted cashNet decrease in cash and cash equivalents, and restricted cash$(124,633)$(8,419)$(116,214)

Cash Flows Used in Operating Activities

Net cash used in operating activities increasedduring the nine months ended September 30, 2022, was $124.5 million, which was primarily attributable to the Company's net loss, adjusted for non-cash items, in the amount of $112.5 million, and working capital needs in the amount of $12.0 million. Working capital needs were primarily driven by $10.5the Company's commercialization of TYRVAYA Nasal Spray, which resulted in increases in accounts receivable of $6.5 million forand inventory of $5.6 million. There was also a decrease in accounts payable of $3.6 million, primarily due to the timing of payments to vendors.

Net cash used in operating activities during the nine months ended September 30, 2021 compared, was $47.9 million, which was primarily attributable to the nine months ended September 30, 2020, due to higherCompany's net loss, adjusted for non-cash items, during the period in the amount of $6.2$49.4 million as well as a decrease inand working capital of $4.3 million. The decrease in working capital was driven 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 commercial launch of TYRVAYA Nasal Sprayneeds in the fourth quarteramount of 2021, as well as continued development of the Company's product candidates.$1.7 million.

Cash Flows Used in Investing Activities

Net cash used in investing activities increaseddecreased by $0.9$1.0 million for the ninenine months ended September 30, 20212022 compared to the nine months ended September 30, 20202021, primarily related to partial payments for equipment to be used in the manufacturing of TYRVAYA Nasal Spray as well as purchases of laboratory equipment.purchased during 2021.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities decreased by $72.2 million for the ninenine months ended September 30, 20212022 decreased by $40.6 million compared to the nine months ended September 30, 2020. The Company received $112.62021. Financing activities for the current period included a $0.4 million in revenue sharing fee paid to OrbiMed, payment of withholding taxes related to stock-based compensation to the Company's employees and lower proceeds from the follow on public offering duringexercise of employee stock options, partially offset by $0.5 million in proceeds received under the second quarter of 2020, compared to net Company's Employee Stock Purchase Plan.
proceeds from long-term debt
of $40.2 million received duringNet cash provided by financing activities for the nine months ended September 30, 2021 was $40.7 million, which was primarily related to net proceeds of $40.2 million funded on August 10, 2021 under the first tranche of the Credit Agreement.

Agreement.
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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.Purchase Commitments

The following table identifies the Company's obligations under the Credit Agreement asAs of September 30, 2022, the Company has non-cancelable commitments for the purchase of raw materials and materials for research and development, packaging and product manufacturing costs of approximately $5.4 million, consisting of $3.7 million for the remainder of 2022 and $1.7 million for 2023. No purchase commitments have been made beyond year 2023. The Company made purchases of $8.1 million and $2.3 million under its purchase commitments during the nine months ended September 30, 2022 and 2021, (in thousands):
Less than 1 year1-3 years3-5 yearsMore than 5 yearsTotal
Debt Principal$— $— $— $45,000 $45,000 
Exit Fee— — — 2,700 2,700 
Contractual Interest on debt3,878 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 
respectively.

(a) — The Revenue Sharing Fee is capped at $9 millionManufacturing 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.Supply Commitments

In July 2021, the Company entered into a manufacturing and supply agreement with a contract manufacturing organization (CMO)CMO to manufacture and supply TYRVAYA Nasal Spray for an initial term of three years. Under this agreement, the Company will paypays a minimum capacity reservation fee in the amount of $2.5 million for each of the next three years ending December 31, 2021,twelve months ended October 2022, 2023 and 2023, respectively.2024. 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. TheIn October 2022, the Company made nopaid the $1.8 million minimum capacity reservation fee payments as of September 30, 2021.

In February 2021,for 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 this agreement are $0.7 million as of September 30, 2021.twelve months ended October 2023.

As of September 30, 2021,2022, 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, 20212022, 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.
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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 20202021 Annual Report on Form 10-K, the following critical accounting policies were affected by critical accounting estimatesupdated during the nine months ended September 30, 2022.


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Stock-Based Compensation - Performance Stock Units

The Company granted PSUs to certain executive officers during the nine months ended September 30, 2022. The issuance of the PSUs is contingent upon meeting several milestones, as provided for in connectionthe January 2022 and July 2022 PSU award agreements.

For the January PSU 2022 grants, the non-market performance milestones are subject to attaining certain forecasted net product revenues and future prescriptions of TYRVAYA Nasal Spray. 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. The fair value of the market milestone for these PSUs 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, among other assumptions as described in Note 6, Stockholders' Equity and Equity Incentive Plans. The measurement of stock-based compensation expense for these 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.

For the July PSU 2022 grants, the grant amount is contingent on the executive officers' continued service with the Company offering its employees an option to purchase the Company's commonand a thirty-day volume-weighted average 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,price (VWAP) performance milestone. VWAP performance milestone is based on the Black-Scholes option-pricing modelachievement of reaching a certain stock price. The fair value of the estimated number of awards asVWAP-based portion of the beginning ofaward was estimated using a Monte Carlo simulation based on assumptions including 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 volatility. As the Company has a limited trading history of its common stock, therisk free interest rate, 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 aderived service period, equal to length of the offering period. The comparable companies are chosen based on industry, stage of development, sizeamong others, as described in Note 6, Stockholders' Equity 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.Equity Incentive Plans.

Revenue

The Company entered into the License Agreement with Ji Xing during the three months ended September 30, 2021, as further described in Note 8, 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.

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.

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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 based on the SOFR, which subjects the Company to the risk of lossvariability in cash outflow for interest expense associated with movements in market interest rates. As of
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September 30, 2021,2022, a 1% change in interest rates would result in less than $0.5an approximate $0.9 million change in interest expense on a rolling twelve-month basis.

In addition, as of September 30, 2021,2022, the Company had cash equivalents of $183.2$42.7 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 September 2022, the U.S. Federal Reserve raised its benchmark federal funds interest rate to 3.00%-3.25% 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. Any increase to the federal fund interest rates will likely negatively affect the Company’s future cost of borrowing.

Inflation

Inflationary factors such as increases in the cost of the Company's component products and overhead costs may adversely affect operating results. 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, 2021,2022, 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, 20212022 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, 20212022 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, 20202021.

Risks related to the pending merger with Viatris Inc.

The completion of the Merger and the Offer are subject to conditions, some or all of which may not be satisfied or completed on a timely basis, if at all. Failure to complete the Merger could have material adverse effects on the Company.

On November 7, 2022, the Company entered into the Merger Agreement. The Merger Agreement provides that, subject to satisfaction of the closing conditions detailed therein, including the completion of the Offer, Purchaser will merge with and into the Company, with the Company continuing as the surviving corporation as a wholly owned subsidiary of Viatris Inc.. Pursuant to the terms and subject to the conditions of the Merger Agreement, Purchaser will commence the Offer to acquire all of the outstanding shares of common stock of the Company. The completion of the Merger and the Offer are subject to a number of conditions, which make the completion and timing of the Offer and Merger uncertain. There can be no assurance that the conditions to the completion of the Offer and the Merger will be satisfied or waived, that the Offer and the Merger will be completed on the expected timeframe or at all, or that the Offer and the Merger will be consummated as contemplated by the Merger Agreement.

If the Merger is not consummated within the expected time frame or at all, the Company may be subject to a number of material risks and its financial results and operations may be materially adversely affected. Following the announcement of entry into the Merger Agreement, the price of the Company's common stock increased. In the event the Merger is not timely consummated, the price of the Company’s common stock may decline. In addition, some costs related to the Merger must be paid whether or not the Merger is completed, and the Company has incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed transaction, as well as the diversion of management and resources towards the Merger, for which the Company will have received little or no benefit if completion of the Merger does not occur. In such an event, the Company may also experience negative reactions from the Company’s investors, customers, suppliers, and employees. In addition, if the Merger Agreement is terminated under specified circumstances, the Company will be required to pay Viatris Inc. a termination fee of approximately $11.9 million. Additionally, if the Merger is not consummated within the expected time frame or at all, the Company believes its current cash and cash equivalents will not be sufficient to fund its business and the Company may be forced to delay or reduce the scope of its commercialization or development programs and/or limit or cease its operations if it is unable to obtain additional funding to support its current business plan. Please also see “—The Company believes its current cash and cash equivalents will 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.”

The announcement and pendency of the Merger could adversely affect the Company’s business, financial results or operations.

The announcement and pendency of the Merger could cause disruptions and create uncertainty surrounding the Company’s business. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the transaction is consummated, and could cause suppliers, customers and other counterparties to change existing business relationships. Changes to existing business relationships, including termination or modification, could negatively affect the Company’s revenues, earnings and cash flow, as well as the market price of the Company’s common stock.

While the Merger Agreement is in effect, the Company is subject to restrictions on our business activities, generally requiring us to conduct our business in the ordinary course, consistent with past practice, and subjecting us to a variety of specified limitations absent Viatris Inc.’s prior consent. These restrictions, include, among other things, restrictions on the
36

Company’s ability to acquire other businesses and assets, sell, transfer or license the Company’s assets, make investments, repurchase or issue securities, pay dividends, make capital expenditures, amend the Company’s organizational documents, issue securities and incur indebtedness. These restrictions could prevent or delay the Company’s pursuit of strategic corporate or business opportunities, result in the Company’s inability to respond effectively to competitive pressures, industry developments, developments relating to the Company’s customers and suppliers, and future opportunities, and may as a result or otherwise have a significant negative impact on the Company’s business, results of operations and financial condition.

The Merger Agreement limits the Company’s ability to pursue alternative transactions, which could deter a third party from proposing an alternative transaction.

The Merger Agreement contains customary “no-shop” restrictions that, subject to certain exceptions, inhibit the Company’s ability to solicit alternative transaction proposals from third parties and engage in discussions or negotiations with third parties regarding transaction proposals. In the event the Company receives any inquiries, proposals or offers with respect to, or that would reasonably be expected to lead to, an acquisition proposal, or any request for information concerning the Company that would reasonably be expected to make an acquisition proposal, then the Company is required to provide promptly (and in any event within 24 hours after receipt thereof) certain information concerning such inquiry, proposal or offer with Viatris Inc. It is possible that these or other provisions in the Merger Agreement, including a termination fee of approximately $11.9 million payable to Viatris Inc. under certain circumstances, might discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of the Company’s outstanding common stock from considering an acquisition or might result in a potential competing acquirer proposing an overall lower per-share consideration amount than it might otherwise have proposed to offer.

If the Merger occurs, our stockholders will not be able to participate in any upside to the Company’s business.

Upon consummation of the Merger, the Company’s stockholders will receive $11.00 plus the CVR payment, if any, in cash without interest, subject to any applicable withholding of taxes, per share of the Company’s common stock owned by them, but will not receive any shares of Viatris Inc.’s common stock. As a result, if, following the Merger, the Company’s business performs well, the Company’s current stockholders will not receive any additional consideration, and will therefore not receive any benefit from the performance of the Company’s business.

Lawsuits may be filed against us and the members of the Company’s board of directors arising out of the proposed Merger, which may delay or prevent the proposed Merger.

Putative stockholder complaints, including stockholder class action complaints, and other complaints may be filed against the Company, its board of directors, Viatris Inc., Viatris Inc.’s board of directors, and others in the future in connection with the transactions contemplated by the Merger Agreement. The outcome of future litigation is uncertain, and the Company may not be successful in defending against any such future claims. Future lawsuits that may be filed against the Company, its board of directors, Viatris Inc., or Viatris Inc.’s board of directors could delay or prevent the consummation of the Merger, divert the attention of the Company’s management and employees from our day-to-day business, and otherwise adversely affect the Company financially.

The following risk factors do not take into account the planned merger transaction by Viatris Inc. and assume that the Company continues to operate its business.

The Company believes its current cash and cash equivalents will 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 September 30, 2022, the Company had approximately $68.8 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 will not be sufficient to fund its operations for the next twelve months from the issuance of the condensed financial statements that are included elsewhere in 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. 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 be forced to delay or reduce the scope of its commercialization or development programs and/or limit or cease its operations if it is unable to obtain additional funding to support its current business plan. Management’s plans to finance the Company’s operations are described in Note 1 of the unaudited condensed financial statements included elsewhere in this Quarterly Report on Form 10-
37

Q. In the event that these plans cannot be effectively realized, there can be no assurance that the Company will be able to continue as a going concern.

The Company’s plan to streamline operating expenses and the associated workforce reduction announced on June 28, 2022 may not result in anticipated savings, could result in total costs and expenses that are greater than expected and could disrupt our business.

On June 28, 2022, the Company announced a plan to streamline operating expenses, including a reduction in the workforce. As a result of this plan, the Company has, and intends to seek to continue to, reduce its operating expenses going forward. However, these estimates are subject to several assumptions, and actual results may differ. The Company may not realize, in full or in part, the anticipated benefits and savings from this plan due to unforeseen difficulties, delays or unexpected costs. If the Company is unable to realize the expected operational efficiencies and cost savings from the announced plan, its operating results and financial condition would be adversely affected. The Company also cannot guarantee that it will not have to undertake additional workforce reductions or restructuring activities in the future. Furthermore, the Company’s plan, including the reduction in force, may be disruptive to its operations. For example, the Company’s workforce reductions could yield unanticipated consequences, such as attrition beyond planned staff reductions, increased difficulties in its day-to-day operations and reduced employee morale. If employees who were not affected by the reduction in force seek alternative employment, this could result in the Company seeking contractor support at unplanned additional expense or harm the Company’s productivity. The Company’s workforce reductions could also harm its ability to attract and retain qualified management, scientific, clinical, and manufacturing personnel who are critical to the Company’s business. Any failure to attract or retain qualified personnel could prevent the Company from successfully commercializing its product or developing its potential product candidates.

If the Company loses key personnel or fails to recruit and integrate replacement personnel successfully, its ability to manage its business could be impaired.

The Company’s future success depends upon the continued service of its key management, technical, sales, and other critical personnel. The Company’s officers and other key personnel are employees-at-will, and the Company cannot provide assurance that it will be able to retain them. Key personnel have left the Company in the past, and there may be additional departures of key personnel from time to time in the future. Additionally, the Company’s common stock is currently trading at a price below the exercise price of many of the outstanding options held by the Company’s employees. As a result, these “underwater” options are less useful as a motivation and retention tool for the three months ended June 30, 2021Company’s existing employees. The loss of any key employee could result in significant disruptions to the Company’s operations. Competition for these individuals is intense, and the Company may not be able to attract, assimilate or retain highly qualified personnel. In addition, the recruitment and integration of replacement personnel could be time consuming, may cause additional disruptions to the Company’s operations, and may ultimately be unsuccessful.

Business disruptions could seriously harm the Company's future revenue and financial condition and increase its costs and expenses.
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The Company's operations, and those of its CROs, CMOs, suppliers, and other third-party contractors and consultants upon which the Company relies, could be subject to wildfires, earthquakes, tsunamis, power shortages or 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 the Company's control that could disrupt business. The occurrence of any of these business disruptions could seriously harm the Company's operations and financial condition and increase its costs and expenses. For example, in connection with the ongoing conflict between Russia and Ukraine, the U.S. government and other governments have imposed certain sanctions against Russia. The invasion of Ukraine by Russia and the retaliatory measures that have been taken, or could be taken in the future, by the United States and other countries have created global security concerns that 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
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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 strong as that in the U.S. These 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 intellectual property rights may not be effective or sufficient to prevent them from so competing.

The ongoing conflict between Russia and Ukraine and related sanctions could significantly devalue the Company's Russian, Belarusian, and Eurasian patents and/or patent 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 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 raised, and may in the future further raise, interest rates to combat the effects of recent high inflation. Any further increase in the SOFR will 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 September 2022, the U.S. Consumer Price Index (CPI), which measures a wide-ranging basket of goods and services, rose 8.2% from the same month a year ago. 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 the costs of the 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 improve, it may make any necessary debt or equity financing more difficult to complete, more costly and more dilutive to the Company’s stockholders. Failure to secure any necessary financing in a timely manner or on favorable terms could have a material adverse effect on the Company’s financial performance and stock price or could require the Company to delay or abandon development or commercialization plans. In addition, there is a risk that one or more of the Company’s current and future service providers, manufacturers, suppliers, hospitals and other medical facilities, third-party payers, and other partners could be negatively affected by such difficult economic factors, which could adversely affect the Company’s ability to attain its operating goals on schedule and on budget or meet its business and financial objectives.

The Company may face difficulties in commercializing and achieving reimbursement of its products from changes to current regulations and future legislation.

In the United States,U.S., the European Union and other jurisdictions there have been a number 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, 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 StatesU.S. or abroad. If the Company is slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if it is unable to maintain regulatory compliance, it may lose any marketing approval that may have been obtainedbe unable to successfully commercialize its products, and the Company may not achieve or sustain profitability.

For example, 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 changedaffects the way healthcare is financed by both the government and private insurers, and continues to significantly impactimpacts the U.S. pharmaceutical industry.

The ACA contains provisions that maycan reduce the
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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 extensive judicial, Congressional and executive branch challenges to certain aspects of the ACA. While Congress has not passed comprehensiveACA, as well as efforts and proposals to revise or repeal legislation, several bills affecting the implementation of certain taxes underlaw and its application, to control the ACA have passed. On December 22, 2017, President Trump signed into law federal tax legislation commonly referredprices at which pharmaceutical products are sold, and to asimplement other healthcare reform measures. Such efforts can be expected to continue in the Tax Cuts and Jobs Act (the Tax Act), which included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year thatfuture, but it 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 ACAunclear what measures will be subject to judicialenacted or Congressional challenges in the future. It is unclearimplemented, or how any such challenges and the healthcare reform measures of the Biden administration will impact the ACA andthey might affect the Company's business.

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In addition, other legislative and administrative changes have been proposed and adopted in the United States since the ACA was enacted.U.S. in recent years, and others continue to be proposed. These changes included aggregateinclude reductions to payments made under the Medicare paymentsprogram. In addition, during 2021, the Biden administration proposed additional potential legislative and administrative actions 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, reducedreform drug pricing. For example, the recently enacted Inflation Reduction Act (IRA) seeks to address drug pricing by, among other things, allowing the Department of Health and Human Services to negotiate the price of certain single source drugs covered under Medicare, payments to several providers,penalizing manufacturers of products under Medicare Part B and increased the statute of limitations periodMedicare Part D for the government to recover overpayments to providers from three to five years.price increases that outpace inflation, and capping Medicare beneficiaries’ annual out-of-pocket drug expenses. These recent laws, administrative decisions and proposals, and any new lawsones that follow, may result in additional reductions in payments from Medicare and other healthcare funding, which could have a material adverse effect on customers for the Company's products and product candidates, if approved, and accordingly, on the financialCompany’s results of 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 have been adopted, or may be adopted in the future, maycould result in more rigorous healthcare insurance 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.

In the European Union and other countries, 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 obstacles 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, healthcare budgetary constraints 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
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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 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 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:

•the U.S. Patent and Trademark office, or USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other provisions during the patent process, the noncompliance with which can result in abandonment or lapse 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 of whom have substantially greater resources than the Company does and many of whom have made significant investments in competing technologies, may seek or may have already obtained patents that will limit, interfere with or block the Company's ability to make, use and sell its product candidates;
•there may be significant pressure on the U.S. government and international governmental bodies to limit the scope of patent protection both inside and outside the United States for disease treatments that prove successful, as a matter of public policy regarding worldwide health concerns; and
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•countries other than the United States may have patent laws less favorable to patentees than those upheld by U.S. courts, allowing foreign competitors a better opportunity to create, develop and market competing products.

The patent prosecution process is also 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 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 outcome could have a materially adverse effect on the Company's business.

The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions, and has been and will continue to be the subject of litigation and new legislation. 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, or 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.

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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 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 development 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 product 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 afforded 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 trials 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, the Company’s ability to finance its operations, engage in business activities 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.

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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.

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

None.
ITEM 3. Defaults Upon Senior Securities.
None.
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ITEM 4. Mine Safety Disclosures.
None.
ITEM 5. Other Information.
None.

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ITEM 6. Exhibits.

41

Exhibit
Number
Exhibit
Number
DescriptionFormFile No.NumberFiling Date
Exhibit
Number
DescriptionFormFile No.NumberFiling Date
2.1†2.1†8-K001-391122.1November 8, 2022
3.13.18-K001-391123.1November 5, 20193.18-K001-391123.1November 5, 2019
3.23.28-K001-391123.2November 5, 20193.28-K001-391123.2November 5, 2019
10.1*
10.2*†
31.1* 31.1* 31.1*
31.2* 31.2* 31.2*
32.1*+ 32.1*+ 32.1*+
32.2*+ 32.2*+ 32.2*+
101.INS101.INSXBRL Instance Document101.INSXBRL Instance Document
101.SCH101.SCH

XBRL Taxonomy Extension Schema Document101.SCH

XBRL Taxonomy Extension Schema Document
101.CAL101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF101.DEF

XBRL Taxonomy Extension Definition Linkbase Document101.DEF

XBRL Taxonomy Extension Definition Linkbase Document
101.LAB101.LAB

XBRL Taxonomy Extension Label Linkbase Document101.LAB

XBRL Taxonomy Extension Label Linkbase Document
101.PRE101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

*    Filed herewith.
†    Portions of this exhibit (indicated by asterisks) have beenSchedules omitted pursuant to Item 601(b)(10)(iv)601 of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule to the SEC upon request.
+    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 CommissionSEC and are not to be incorporated by reference into any filing of the
42

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.
4342

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, 202110, 2022By:/s/ Jeffrey Nau
Jeffrey Nau, Ph.D., M.M.S.
President, Chief Executive Officer and Director

Date: November 4, 202110, 2022By:/s/ Daniel Lochner
Daniel Lochner
Chief Financial Officer and Chief Business Officer

4443