Insite Vision (INSV) 10-Q 2015 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2015

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 0-22332

INSITE VISION INCORPORATED

(Exact name of registrant as specified in its charter)

Delaware	94-3015807
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
965 Atlantic Avenue, Alameda, California	94501
(Address of principal executive offices)	(Zip Code)

(510)865-8800

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding as of August 10, 2015
Common Stock, $0.01 par value per share	131,951,033 shares

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets at June 30, 2015 (unaudited) and December 31, 2014		1
	Condensed Consolidated Statements of Operations for the three and six months ended June  30, 2015 and 2014 (unaudited)		2
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited)		3
	Notes to Condensed Consolidated Financial Statements (unaudited)		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		23
Item 4.	Controls and Procedures		23
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		24
Item 1A.	Risk Factors		26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 3.	Defaults Upon Senior Securities		41
Item 4.	Mine Safety Disclosures		41
Item 5.	Other Information		41
Item 6.	Exhibits		41
Signatures			42

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

InSite Vision Incorporated

Condensed Consolidated Balance Sheets

(in thousands, except share data)	June 30, 2015			December 31, 2014
	(Unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	1,755		$	1,656
Accounts receivable		357			349
Prepaid expenses and other current assets		187			36
Debt issuance costs, net		922			1,267
Total current assets		3,221			3,308
Property and equipment, net		1,436			1,597
Total assets	$	4,657		$	4,905
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	583		$	611
Accrued liabilities		1,160			660
Accrued compensation and related expense		1,880			1,655
Accrued royalties		890			892
Accrued interest		141			85
Lease incentive, current		186			186
Secured notes payable		11,255			5,199
Warrant liability		1,336			1,191
Total current liabilities		17,431			10,479
Deferred revenue		1,000			1,000
Lease incentive		836			928
Total liabilities		19,267			12,407
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.01 par value, 5,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.01 par value, 350,000,000 shares and 240,000,000 shares authorized at June 30, 2015 and December 31, 2014, respectively; 131,951,033 shares issued and outstanding at June 30, 2015 and December 31, 2014		1,320			1,320
Additional paid-in capital		166,797			166,440
Accumulated deficit		(182,727	)		(175,262	)
Total stockholders’ deficit		(14,610	)		(7,502	)
Total liabilities and stockholders’ deficit	$	4,657		$	4,905

(1) Derived from the Company’s audited consolidated financial statements as of December 31, 2014.

See accompanying notes to condensed consolidated financial statements.

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InSite Vision Incorporated

Condensed Consolidated Statements of Operations

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
(in thousands, except per share data)	2015			2014			2015			2014
Revenues:
Royalties	$	353		$	252		$	712		$	1,398
Licensing fee		—			6,000			3,000			6,000
Other revenues		39			97			56			104
Total revenues		392			6,349			3,768			7,502
Expenses:
Research and development		4,108			2,535			6,212			5,082
General and administrative		2,029			1,400			3,667			3,340
Cost of revenues, principally royalties to third parties		145			158			276			296
Total expenses		6,282			4,093			10,155			8,718
Income (loss) from operations		(5,890	)		2,256			(6,387	)		(1,216	)
Gain on extinguishment of debt		—			35,999			—			35,999
Interest expense and other, net		(715	)		(1,420	)		(1,278	)		(3,207	)
Change in fair value of warrant liability		(32	)		314			200			894
Net income (loss)	$	(6,637	)	$	37,149		$	(7,465	)	$	32,470
Net income (loss) per share:
Income (loss) per share - basic	$	(0.05	)	$	0.28		$	(0.06	)	$	0.25
Income (loss) per share - diluted	$	(0.05	)	$	0.28		$	(0.06	)	$	0.25
Weighted average shares used in per-share calculation:
- Basic		131,951			131,951			131,951			131,951
- Diluted		131,951			131,951			131,951			132,333

See accompanying notes to condensed consolidated financial statements.

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InSite Vision Incorporated

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Six months ended June 30,
(in thousands)	2015			2014
OPERATING ACTIVITIES:
Net income (loss)	$	(7,465	)	$	32,470
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		170			165
Amortization of debt issuance costs		845			185
Amortization of lease incentive		(92	)		(92	)
Gain on extinguishment of debt		—			(35,999	)
Stock-based compensation		357			462
Change in fair value of warrant liability		(200	)		(894	)
Changes in operating assets and liabilities:
Accounts receivable		(8	)		725
Other receivables		—			1,007
Prepaid expenses and other current assets		(151	)		(86	)
Accounts payable		(28	)		148
Accrued liabilities		500			(994	)
Accrued compensation and related expense		225			318
Accrued royalties		(2	)		95
Accrued interest		56			2,003
Deferred revenues		—			993
Net cash provided by (used in) operating activities		(5,793	)		506
INVESTING ACTIVITIES:
Purchase of property and equipment		(9	)		(282	)
Decrease in short-term investments		—			5,000
Net cash provided by (used in) investing activities		(9	)		4,718
FINANCING ACTIVITIES:
Proceeds from secured notes payable, net of issuance costs		5,901			—
Payment of secured notes payable		—			(6,000	)
Net cash provided by (used in) financing activities		5,901			(6,000	)
Net increase (decrease) in cash and cash equivalents		99			(776	)
Cash and cash equivalents at beginning of period		1,656			3,251
Cash and cash equivalents at end of period	$	1,755		$	2,475
Supplemental disclosure of cash flow information:
Interest received	$	—		$	1
Interest paid	$	345		$	1,018
Income taxes paid	$	1		$	1
Non-cash investing activities - Lease incentive	$	—		$	201
Non-cash financing activities - Debt extinguishment	$	—		$	36,047
Non-cash financing activities - Warrant issuance	$	345		$	—

See accompanying notes to condensed consolidated financial statements.

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InSite Vision Incorporated

Notes to Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

Note 1. Significant Accounting Policies and Use of Estimates

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of InSite Vision Incorporated (“InSite” or the “Company”) and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the preparation of the condensed consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial results and financial condition have been included. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for any future period.

The Company operates in one segment using one measure of profitability to manage its business. All of the Company’s long-lived assets are located in the United States. Revenues are primarily royalties from the North American license (the “Akorn License”) of AzaSite^® to Akorn, Inc. (“Akorn”).

In January 2015, the Company entered into a license agreement with Nicox S.A. (“Nicox”), a France-based publicly traded company, for the development and commercialization of AzaSite (1% azithromycin), AzaSite Xtra^TM (2% azithromycin) and BromSite^TM (0.075% bromfenac) in Europe, Middle East and Africa (105 total countries). Under the terms of the license, the Company received an upfront payment of $3.0 million and could potentially receive $13.75 million in milestone payments. The Company will also receive tiered, mid-single digit to double-digit royalties on the net sales of these three products.

Under the license agreement, Nicox can request up to twelve full-time equivalent (“FTE”) employees from the Company to assist with presenting data to regulatory authorities in the European Union, obtaining European Union regulatory approvals and dealing with the approved product manufacturer in the United States. Nicox has agreed to reimburse the Company for the use of its employees. Should the twelve FTE employees be needed for a full year, the reimbursement to the Company would be approximately $3.6 million.

A joint collaboration and development committee will oversee further product development of the licensed products for the European Union including AzaSite Xtra and any additional indications for BromSite. The Company has the right to utilize the jointly developed data for regulatory approval outside of the Nicox territory including in the United States. Each company will bear 50% of the development cost.

In the fourth quarter of 2014, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain purchasers (the “Purchasers”). Pursuant to the Purchase Agreement, the Company agreed to sell 12% Senior Secured Notes (the “Notes”) to the Purchasers and issue warrants to purchase shares of the Company’s common stock. The Company sold Notes to the Purchasers having an aggregate principal amount of $5.2 million in the fourth quarter of 2014 and had the option to sell additional Notes to the Purchasers in an aggregate principal amount of $2.6 million until October 9, 2016. In accordance with the Purchase Agreement, on April 17, 2015, the Company sold Notes to the Purchasers having an aggregate principal amount equal to $2.6 million and issued warrants to purchase an aggregate of 3,464,456 shares of the Company’s common stock at an exercise price of $0.18 per share. The Company has no remaining borrowings under the Purchase Agreement.

Riverbank Capital Securities acted as the placement agent (the “Placement Agent”) for the offering of Notes and warrants pursuant to the Purchase Agreement and received $155,900, a 6% cash commission on the gross proceeds from the sale of the Notes and issuance of the warrants on April 17, 2015. Timothy McInerney, the Chairman of the Board of the Company and a member of the Company’s Board of Directors, is a principal of the Placement Agent and was a Purchaser in the offering of Notes and warrants under the same terms as the other Purchasers.

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On June 8, 2015, the Company, QLT Inc., a corporation incorporated under the laws of British Columbia (“QLT”), and Isotope Acquisition Corp., a Delaware corporation and indirect wholly owned subsidiary of QLT (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which Merger Sub will merge with and into the Company, and the Company will be the surviving corporation (the “Surviving Corporation”) in the merger and a wholly owned indirect subsidiary of QLT (the “Merger”).

Pursuant to the terms of the Merger Agreement, each share of the Company’s common stock issued and outstanding (the “Company Common Stock”) (except shares owned by QLT or a subsidiary of QLT and shares held by stockholders who exercise their appraisal rights under Delaware law) will be cancelled and will be automatically converted into the right to receive 0.048 of validly issued, fully paid and non-assessable shares of QLT common shares (the “Merger Consideration”). No fractional shares will be issued in connection with the Merger, and the Company’s stockholders will receive cash in lieu of any fractional shares in the Merger pursuant to the terms of the Merger Agreement.

Pursuant to the terms of the Merger Agreement, each option to acquire shares of Company Common Stock that is outstanding and unexercised will terminate and have no further effect, and the holder thereof will have no right to receive any consideration therefor. However, holders of any such options will have at least five days prior to the closing of the Merger to fully exercise their options.

Pursuant to the terms of the Merger Agreement, each holder of a warrant to purchase shares of Company Common Stock (collectively, the “Company Warrants”) will have the right to elect to surrender such holder’s warrants to the Company as the surviving corporation of the Merger in return for a cash payment. Each Company Warrant that has not been cancelled in exchange for a cash payment form the Company in accordance with the terms of the Company Warrants will become converted into and become a warrant to purchase QLT common shares and QLT will assume each such Company Warrant in accordance with its terms.

Pursuant to the terms of the Merger Agreement, the Company was required to submit to the United States Food and Drug Administration (the “FDA”) a new drug application (“NDA”) with respect to BromSite™. The Company filed the NDA with the FDA on June 11, 2015. In addition, QLT’s obligation to consummate the Merger is conditioned on, among other things, (1) the FDA not having issued a written communication refusing to file the NDA with respect to BromSite for review by August 10, 2015, which is the 60th day following the FDA’s receipt of the BromSite NDA, and (2) the FDA not having asserted a deficiency that is reasonably likely to require one or more additional clinical studies with respect to BromSite by August 24, 2015, which is the 74th day following the FDA’s receipt of the BromSite NDA.

The Merger Agreement is subject to adoption by the Company’s stockholders, among other things.

The Merger Agreement contains certain termination rights for each of the Company and QLT, including the right of each party to terminate the Merger Agreement if the Merger has not been consummated by December 8, 2015. The Company may be required to pay to QLT a termination fee of $1,170,000.

In connection with the consummation of the Merger, certain holders of the Company’s outstanding Notes have agreed to waive their rights to a mandatory redemption of such holders’ Notes in connection with the consummation of the Merger.

See Note 7—Subsequent Events for additional information.

Secured Note

In connection with the execution of the Merger Agreement, the Company and QLT entered into a secured note (the “QLT Note”) pursuant to which QLT agreed to provide a secured line of credit of up to $9,853,333 to the Company. Interest accrues on the amounts borrowed at the rate of 12% per annum. All borrowings under the QLT Note will be due and payable 12 months following the termination of the Merger Agreement except that our obligation to repay those amounts will accelerate and become due and payable on the occurrence of any event of default or on the termination of the Merger Agreement under the following circumstances: (1) QLT terminates the Merger Agreement as

5

a result of our Board of Directors (A) changing or withdrawing its recommendation following the time of its receipt of a superior proposal or (B) failing to reaffirm its recommendation within five days of QLT requesting such reaffirmation following a publicly announced acquisition proposal; (2) we terminate the Merger Agreement to engage in a competing transaction constituting a superior proposal; or (3) we complete a competing transaction following certain termination events under the Merger Agreement.

Pursuant to the terms of the QLT Note, the Company borrowed $2,360,000 in connection with the Company’s preparation of the BromSite NDA. The Company has the right to draw an additional $600,000 to finance certain manufacturing costs, and beginning in June 2015, may also borrow up to $1,100,000 per month for six months, and up to $293,333 in December. The Company also borrowed $1,100,000 in June 2015. As of June 30, 2015, total borrowings from the QLT Note were $3,460,000.

The QLT Note is secured by substantially all of the assets of the Company pursuant to the terms of a Security Agreement. The QLT Note is further secured by certain copyrights, trademarks, patents and patent applications of the Company pursuant to the terms of an IP Security Agreement.

All borrowings under the QLT Note will accelerate and become due and payable under certain circumstances in which the Merger Agreement terminates, including if (1) QLT terminates the Merger Agreement as a result of the Company’s Board effecting a change in its recommendation that Company stockholders vote in favor of the Merger or recommend an alternative transaction or due to the Company’s material breach of its obligations relating to the solicitation of a competing transaction, (2) the Company terminates the Merger Agreement to engage in a competing transaction, or (3) the Company completes a competing transaction following the termination of the Merger Agreement.

The Company has incurred significant losses since inception. Clinical trials and costs to prepare an NDA for the Company’s product candidates with the FDA are very expensive and difficult, in part because they are subject to rigorous regulatory requirements. As of June 30, 2015, the Company’s accumulated deficit was $182.7 million and cash and cash equivalents were $1.8 million. The Company’s ability to fund its operations is dependent primarily upon its ability to consummate the Merger with QLT or raise or have access to sufficient funding to execute on its business plan.

Absent the transactions contemplated by the Merger Agreement including the secured line of credit of up to $9,853,333 granted by QLT to the Company, the Company expects that its cash and cash equivalents balance, anticipated cash flows from operations and the net proceeds from existing debt financing arrangements would have only been adequate to fund its operations until approximately July 2015. In their audit report related to the Company’s consolidated financial statements for the year ended December 31, 2014, which is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, the Company’s auditors refer to the Company’s recurring losses from operations, available cash equivalent balances and accumulated deficit and a substantial doubt about its ability to continue as a going concern. The Company expects the secured line of credit granted to it by QLT will fund operations until completion of the Merger; however, if the Merger Agreement terminates prior to completion, no additional funding from QLT would be available and if the Company is unable to enter into a strategic transaction or secure sufficient additional funding, its management believes that it will need to cease operations and liquidate its assets. The Company’s financial statements were prepared on the assumption that it will continue as a going concern and do not include any adjustments should it be unable to continue as a going concern.

These unaudited condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Use of Estimates

The preparation of financial statements requires the Company to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

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Warrant Liability

The Company issued warrants to purchase shares of the Company’s common stock in connection with a private placement equity financing transaction in July 2011 and private placement debt financing transactions in the fourth quarter of 2014 and the second quarter of 2015. The Company accounts for these warrants as a liability measured at fair value due to a provision included in the warrant agreements that provides the warrant holders with an option to require the Company (or its successor) to purchase their warrants for cash in the event of a “Fundamental Transaction” (as defined in the warrant agreements). The actual amount of cash required if the mandatory purchase option is exercised would be determined using the Black-Scholes Option Pricing Model (the “Black-Scholes Model”) as determined in accordance with the terms of the warrant agreements. The fair value of the warrant liability is estimated using the Black-Scholes Model, which requires inputs such as the remaining term of the warrants, share price volatility and risk-free interest rate. These assumptions are reviewed on a monthly basis and changes in the estimated fair value of the outstanding warrants are recognized each reporting period in the Condensed Consolidated Statements of Operations under “Change in fair value of warrant liability.”

Fair Value Measurements

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1:	Quoted prices in active markets for identical assets or liabilities.
Level 2:	Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3:	Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

The Company’s financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and debt obligations. Accounts receivable and accounts payable are reflected in the accompanying unaudited condensed consolidated financial statements at cost, which approximates fair value due to the short-term nature of these instruments. While the Company believes its valuation methodologies are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

At June 30, 2015, less than $0.1 million of the Company’s cash and cash equivalents consisted of Level 1 U.S. Treasury-backed government securities or money market funds that are measured at fair value on a recurring basis.

As discussed above, the fair value of the warrant liability, determined using Level 3 criteria, was initially recorded on the grant date and remeasured at June 30, 2015 and December 31, 2014 using the Black-Scholes Model, which requires inputs such as the remaining term of the warrants, share price volatility and risk-free interest rate. These inputs are subjective and generally require significant analysis and judgment to develop. A significant increase (decrease) of any of the subjective variables would result in a correlated increase (decrease) in the warrant liability and an inverse effect on net income (loss).

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The fair value of the warrant liability was estimated using the following weighted-average assumptions, as determined in accordance with the terms of the warrant agreements, at June 30, 2015 and December 31, 2014:

	June 30, 2015			December 31, 2014
Risk-free interest rate		0.8	%		0.9	%
Remaining term (years)		2.3			2.4
Expected dividends		0.0	%		0.0	%
Volatility		100.0	%		101.2	%

The expected dividend yield was set at zero because the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility was based on the historical volatility of the Company’s common stock and was equal to the greater of 100% or the 30-day volatility rate. The risk-free interest rates were taken from the Daily Federal Yield Curve Rates as published by the Federal Reserve and represent the yields on actively traded U.S. Treasury securities for a term equal to the remaining term of the warrants.

The following table provides a summary of changes in the fair value of the Company’s warrant liability, its only Level 3 financial liability, for the six months ended June 30, 2015 (in thousands):

Balance at December 31, 2014	$	1,191
Initial fair value of warrants as of date of issuance	$	345
Net decrease in fair value of warrant liability for all outstanding warrants on remeasurement		(200	)
Balance at June 30, 2015	$	1,336

The net decrease in the estimated fair value of the warrant liability was recognized as income under “Change in fair value of warrant liability” in the Condensed Consolidated Statements of Operations.

The warrant liability’s exposure to market risk will vary over time depending on interest rates and the Company’s stock price. Although the table above reflects the current estimated fair value of the warrant liability, it does not reflect the gains or losses associated with market exposures, which will depend on actual market conditions during the remaining life of the warrants.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers. The FASB and the International Accounting Standards Board (“IASB”) initiated a joint project to clarify the principles for recognizing revenue and developed a common revenue recognition standard for U.S. generally accepted accounting principles (“GAAP’) and International Financial Reporting Standards (“IFRS”). Under the guidance, an entity should recognize revenue when the entity satisfies a performance obligation within a contract at a determined transaction price. This update is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. The Company does not expect that the adoption of this standard will materially impact the Company’s consolidated statement of financial position or results of operations.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (“ASU 2014-15”), Presentation of Financial Statements – Going Concern. This standard includes guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern within one year after the financial statements are issued. If conditions or events raise substantial doubt, the entity must disclose the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, management’s evaluation of those conditions or events, and management’s plans to mitigate the conditions or events. This update is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect that the adoption of this standard will materially impact the Company’s consolidated statement of financial position or results of operations.

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In April 2015, the FASB issued Accounting Standards Update No. 2015-03 (“ASU 2015-03”), Simplifying the Presentation of Debt Issuance Costs. This standard requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The update is effective for annual and interim reporting periods beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis. The Company does not expect that the adoption of this standard will materially impact the Company’s consolidated statement of financial position or results of operations.

Note 2. Stock-Based Compensation

Equity Incentive Program

In 2007, the Company’s stockholders approved the Company’s 2007 Performance Incentive Plan (the “2007 Plan”), which provides for grants of options and other equity-based awards to the Company’s employees, directors and consultants. Options granted under this plan, and its predecessor plan, expire 10 years after the date of grant and become exercisable at such times and under such conditions as determined by the Company’s Board of Directors (generally, with 25% vesting after one year and the balance vesting on a daily basis over the next three years of service). Upon termination of the optionee’s service, unvested options terminate and vested options generally expire three months thereafter, if not exercised. Only nonqualified stock options have been granted under these plans to date. On January 1 of each calendar year during the term of the 2007 Plan, the shares of common stock available for issuance under the 2007 Plan will be increased by the lesser of (i) 2% of the total outstanding shares of common stock on December 31 of the preceding calendar year and (ii) 3,000,000 shares. The Board of Directors of the Company delayed the effectiveness of the January 1, 2015 increase in the number of shares available for issuance under the 2007 Plan until the Company’s stockholders approved an increase in the authorized shares of common stock under the Company’s Certificate of Incorporation from 240,000,000 to 350,000,000. The share increase was approved by the Company’s stockholders on March 31, 2015 and effected on April 1, 2015. Therefore, on April 1, 2015, the shares of common stock available for issuance under the 2007 Plan increased by 2,639,020 shares.

Stock-based Compensation

The Company’s stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. All of the Company’s stock compensation is accounted for as an equity instrument.

The effect of recording stock-based compensation for the three and six months ended June 30, 2015 and 2014 was as follows (in thousands):

	Three months ended					Six months ended
	June 30,					June 30,
	2015		2014			2015			2014
Stock-based compensation expense by type of award:
Employee stock options	$	166	$	211		$	358		$	466
Scientific Advisory Board stock options		—		(1	)		(1	)		(4	)
Total stock-based compensation expense	$	166	$	210		$	357		$	462

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Stock-based compensation included in expense line items in the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014 was as follows (in thousands):

	Three months ended				Six months ended
	June 30,				June 30,
	2015		2014		2015		2014
Research and development	$	78	$	81	$	171	$	186
General and administrative		88		129		186		276
	$	166	$	210	$	357	$	462

During the six months ended June 30, 2015 and 2014, the Company granted options to purchase 2,875,000 and 2,777,000 shares of common stock, respectively, with an estimated total grant date fair value of $415,000 and $555,000, respectively. Based on the Company’s historical experience of option pre-vesting cancellations and estimates of future forfeiture rates, the Company has assumed an annualized forfeiture rate of 10% for its options for all periods disclosed. Accordingly, for the quarters ended June 30, 2015 and 2014, the Company estimated that the stock-based compensation for the awards not expected to vest was $236,000 and $276,000, respectively.

As of June 30, 2015, unrecorded deferred stock-based compensation balance related to stock options was $1.0 million and will be recognized over an estimated weighted-average amortization period of 2.6 years.

Valuation assumptions

The Company estimates the fair value of stock options using a Black-Scholes valuation model using the graded-vesting method with the following weighted-average assumptions:

	Six months ended June 30,
Stock Options	2015			2014
Risk-free interest rate		1.3	%		1.7	%
Expected term (years)		5			5
Expected dividends		0.0	%		0.0	%
Volatility		88.8	%		88.2	%

The expected dividend yield was set at zero because the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility was based on the historical volatility of the Company’s common stock and the expected moderation in future volatility over the period commensurate with the expected life of the options and other factors. The risk-free interest rates were taken from the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal Reserve and represent the yields on actively traded U.S. Treasury securities for terms equal to the expected term of the options. The expected term calculation was based on the terms utilized by the Company’s peers, observed historical option exercise behavior and post-vesting forfeitures of options by the Company’s employees. No options were granted during the three months ended June 30, 2015 and 2014.

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The following is a summary of activity for the indicated periods:

	Number of shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2014		20,744,641		$	0.37
Granted		2,875,000			0.21
Exercised		—			0.00
Forfeited		(70,736	)		0.28
Expired		(287,030	)		0.60
Outstanding at June 30, 2015		23,261,875		$	0.34		6.78	$	0
Options vested and expected to vest at June 30, 2015		22,544,709		$	0.35		6.70	$	0
Options exercisable at June 30, 2015		16,121,962		$	0.38		5.87	$	0

At June 30, 2015, the Company had 3,635,503 shares of common stock available for grant or issuance under its 2007 Plan. The weighted average grant date fair value of options granted during the six months ended June 30, 2015 and 2014 was $0.14 and $0.20 per share, respectively. No options were exercised during the six months ended June 30, 2015 and 2014.

Note 3. Net Income (Loss) per Share

Basic net income (loss) per share has been computed using the weighted-average number of common shares outstanding during the period. Dilutive net income (loss) per share was computed using the sum of the weighted average number of common shares outstanding and the potential number of dilutive common shares outstanding during the period. Potential common shares consist of the shares issuable upon exercise of stock options and warrants. Potentially dilutive securities have been excluded from the computation of diluted net income (loss) per share in 2015 and 2014 as their inclusion would be anti-dilutive. For the three months ended June 30, 2015 and 2014, respectively, 46,595,777 and 35,449,287 options and warrants were excluded from the calculation of diluted net income (loss) per share because the effect was anti-dilutive. For the six months ended June 30, 2015 and 2014, respectively, 46,595,777 and 34,067,149 options and warrants were excluded from the calculation of diluted net income (loss) per share because the effect was anti-dilutive.

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The following table sets forth the computation of basic and diluted net income (loss) per share:

	Three months ended					Six months ended
	June 30,					June 30,
(in thousands, except per share data)	2015			2014		2015			2014
Numerator:
Net income (loss)	$	(6,637	)	$	37,149	$	(7,465	)	$	32,470
Denominator:
Weighted-average shares outstanding		131,951			131,951		131,951			131,951
Effect of dilutive securities:
Stock options		—			—		—			382
Weighted-average shares outstanding for diluted loss per share		131,951			131,951		131,951			132,333
Net income (loss) per share:
Basic	$	(0.05	)	$	0.28	$	(0.06	)	$	0.25
Diluted	$	(0.05	)	$	0.28	$	(0.06	)	$	0.25

Note 4. Warrant Liability

In July 2011, the Company completed a private placement equity financing transaction in which it sold shares of its common stock and warrants to purchase shares of its common stock. The Company sold a total of 36,978,440 shares of common stock, at a price of $0.60 per share, and issued warrants to purchase up to 14,791,376 shares of common stock. The warrants are exercisable at $0.75 per share and expire five years from the date of issuance. The private placement resulted in $22.2 million in gross proceeds and approximately $20.4 million in net proceeds to the Company after deducting placement agent fees, legal, accounting and other costs associated with the transaction. The Company used the net proceeds of the transaction to fund clinical trials and for general corporate purposes, including working capital.

In the fourth quarter of 2014 and the second quarter of 2015, the Company completed private placement debt financing transactions for an aggregate principal amount of $7.8 million. In connection with the debt financings, in the fourth quarter of 2014, the Company issued warrants to purchase up to 2,053,169 shares, 200,620 shares and 2,824,281 shares of common stock that are exercisable at $0.33, $0.31 and $0.26, respectively, per share. In the second quarter of 2015, the Company issued warrants to purchase up to 3,464,456 shares of common stock that are exercisable at $0.18 per share. The warrants expire five years from the date of issuance.

As discussed in Note 1, the warrants issued in 2011, 2014 and 2015 included a provision that provides the warrant holders with an option to require the Company (or its successor) to purchase the warrants for cash in an amount equal to the Black-Scholes value in the event of a “Fundamental Transaction” (as defined in the warrant agreements). Accordingly, the fair value of the warrants at the issuance date was estimated using the Black-Scholes Model, as determined in accordance with the terms of the warrant agreements, and the Company recorded a warrant liability of $6.4 million in 2011, $1.0 million in 2014 and $0.3 million in 2015. The warrant liability was remeasured to $1.3 million and $1.2 million at June 30, 2015 and December 31, 2014, respectively. The Company recorded a decrease to the warrant liability of approximately $0.2 and $0.9 million for the six months ended June 30, 2015 and 2014, respectively, which was recognized as income in the Company’s Condensed Consolidated Statement of Operations. Additional disclosures regarding the assumptions used in calculating the fair value of the warrant liability are included in Note 1.

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Note 5. Common Stock Warrants

The following table shows outstanding warrants as of June 30, 2015, all of which were issued in the July 2011 private placement equity financing transaction and in the 2014 and 2015 private placement debt financing transactions. All of the outstanding warrants have cashless exercise provisions in the event the registration statement registering the resale of the shares of common stock issuable upon exercise of the warrants is not effective or the prospectus forming a part of the registration statement is not current. All warrants are exercisable for common stock.

Date Issued	Warrant Shares		Exercise Price		Expiration Date		Potential Proceeds if Exercised for Cash
July 18, 2011		14,791,376	$	0.75		July 18, 2016	$	11,093,532
October 9, 2014		2,053,169	$	0.33		October 9, 2019	$	677,546
November 21, 2014		200,620	$	0.31		November 21, 2019	$	62,192
December 10, 2014		2,824,281	$	0.26		December 10, 2019	$	734,313
April 17, 2015		3,464,456	$	0.18		April 17, 2020	$	623,602
Total		23,333,902					$	13,191,185

Note 6. Legal Proceedings

The Company is subject to various claims and legal actions during the ordinary course of its business.

In April 2011, the Company received a Notice Letter that Sandoz, Inc. or Sandoz, filed an Abbreviated New Drug Application, or ANDA, with the FDA seeking marketing approval for a 1% azithromycin ophthalmic solution, or the Sandoz Product, prior to the expiration of the five U.S. patents listed in the Orange Book for AzaSite, which include four of our patents and one patent licensed to us by Pfizer. In the paragraph IV Certification accompanying the Sandoz ANDA filing, Sandoz alleges that the claims of the Orange Book listed patents are invalid, unenforceable and/or will not be infringed upon by the Sandoz Product. On May 26, 2011, the Company, Merck and Pfizer filed a patent infringement lawsuit against Sandoz and related entities. The plaintiff companies agreed that Merck would take the lead in prosecuting this lawsuit. Before the trial, the patents involved in the litigation were limited to the one Pfizer patent and three of our patents. On October 4, 2013, the United States District Court for the District of New Jersey entered a Final Judgment in favor of us and the other plaintiffs finding all the asserted claims of the patents in the litigation valid and infringed by Sandoz and related entities. The Court Order specified that the effective date of any FDA approval of a Sandoz ANDA for generic 1% azithromycin ophthalmic solution products would be no earlier than the expiration date of the patents in the litigation. On November 4, 2013, Sandoz filed an appeal of this decision to the United States Court of Appeals for the Federal Circuit. On November 15, 2013, Akorn acquired Inspire from Merck, and as such, acquired the rights to AzaSite in North America. Akorn took the lead in prosecuting this lawsuit. On April 9, 2015, the Court of Appeals for the Federal Circuit affirmed the decision of the district court holding that Sandoz failed to show that the asserted claims in the patents-in-suit would have been obvious to a person of ordinary skill in the art. In accordance with the judgment of the Court of Appeals entered on April 9, 2015, pursuant to Rule 41(a) of the Federal Rules of Appellate Procedures, the formal mandate was issued on May 18, 2015 to close this case since Sandoz did not seeken banc review by the Federal Circuit of its initial decision or seek review by the Supreme Court.

In May 2013, the Company received a Notice Letter that Mylan Pharmaceuticals, Inc. or Mylan, filed an ANDA with the FDA seeking marketing approval for a 1% azithromycin ophthalmic solution, or the Mylan Product, prior to the expiration of the U.S. patents listed in the Orange Book for AzaSite, which include three of the Company’s patents and one patent licensed to the Company by Pfizer. In the paragraph IV Certification accompanying the Mylan ANDA filing, Mylan alleges that the claims of the Orange Book listed patents are invalid, unenforceable and/or will not be infringed upon by the Mylan Product. On June 14, 2013, the Company, Merck and Pfizer filed a patent infringement lawsuit against Mylan and a related entity. On November 15, 2013, Akorn acquired Inspire from Merck, and as such, acquired the rights to AzaSite in North America. The plaintiff companies agreed that Akorn would take the lead in prosecuting this lawsuit. The filing of this lawsuit triggered an automatic stay, or bar, of the FDA’s approval of the ANDA for up to 30 months or until a final district court decision of the infringement lawsuit, whichever comes first. In February 2015, all of the parties involved in the lawsuit executed a Settlement Agreement including all of the patents in the lawsuit and submitted the same to the United States District Court for the District of New Jersey. On March 4, 2015, the district court issued an Order for Dismissal, without prejudice.

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On July 24, 2014, Karin Stiens filed a complaint against Bausch & Lomb, Dr. Lance Ferguson and the Company (Fayette (Kentucky) Circuit Court Civil Action No. 14-CI-2829) alleging that she suffered ophthalmological damage when Dr. Ferguson engaged in off-label use of Besivance^® in a photorefractive keratectomy procedure as a prophylactic antibiotic. The plaintiff alleges that Bausch & Lomb and the Company negligently tested, marketed and distributed Besivance, and negligently informed medical providers and consumers about Besivance. The complaint contains no facts supporting these general allegations, no facts supporting the plaintiff’s claim of permanent injuries and no allegations asserting Kentucky jurisdiction over the Company. The plaintiff has not pleaded any specific amount in damages nor made any demand. The Company filed its answer on August 18, 2014. Bausch & Lomb has assumed costs of this action. The Company currently expects to file a motion for summary judgment to dismiss InSite Vision from the lawsuit.

The Company and QLT issued press releases announcing the execution of the Merger Agreement on June 8, 2015. On June 17, 2015, a purported class action lawsuit entitled Speiser, et al. v. Insite Vision, Inc., et al., Civil Action No. RG15774540, was filed in California Superior Court for Alameda County, naming as defendants the Company, all of its directors, QLT Inc. and Isotope Acquisition Corp. On July 10, 2015, a second purported class action entitled McKinley v. Ruane, et al., Civil Action No. RG15777471, was filed in the same court, naming the same defendants. In both cases, the plaintiffs, who claim to be stockholders of the Company, allege in their complaints that the Company’s directors breached fiduciary duties to the stockholders by agreeing to enter into a merger transaction with QLT because the merger consideration is inadequate and the process by which the transaction was agreed to was flawed. The plaintiffs also allege that QLT and Isotope aided and abetted the breaches of duty by the Company’s directors. The plaintiffs seek to enjoin consummation of the transaction or, in the alternative, to recover unspecified money damages, together with costs and attorneys’ fees. Attorneys for the plaintiffs in both cases have indicated that they will seek to consolidate the cases into a single action. The cases are currently at a preliminary stage; the defendants have not filed responses to the complaints and no discovery has taken place. The Company and its directors believe that the complaints are without merit and intend to defend themselves vigorously.

There are currently no other claims or legal actions that would have a material adverse impact on our financial position, operations or potential performance.

Note 7. Subsequent Events

In accordance with the QLT Note, the Company borrowed an additional $1,100,000 from QLT in July 2015.

In August 2015, the Company received an unsolicited proposal from a multi-national pharmaceutical company to acquire all outstanding shares of its common stock at a price of $0.25 per share in cash. The Company remains subject to the Merger Agreement and the Company’s Board of Directors has not changed its recommendation in support of the Merger, the Merger Agreement, or its recommendation that the Company’s stockholders adopt the Merger Agreement.

The Company evaluated subsequent events through the date on which the financial statements were issued and determined that there were no subsequent events that required adjustments or disclosures to the financial statements for the quarter ended June 30, 2015.

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

The discussion in this Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties, such as statements of our clinical, financial and strategic plans, objectives, expectations and intentions. The cautionary statements made in this report should be read as applicable to all related forward-looking statements wherever they appear in this document. Our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below under “Risk Factors,” as well as elsewhere herein. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence or identification of unanticipated events.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.

Overview

We are an ophthalmic product development company advancing ophthalmic pharmaceutical products to address unmet eye care needs. Our current portfolio of products is based on our proprietary DuraSite^® sustained drug delivery technology.

We have incurred significant losses since inception. Clinical trials and costs to prepare an NDA for our product candidates with the FDA are very expensive and difficult, in part because they are subject to rigorous regulatory requirements. As of June 30, 2015, our accumulated deficit was $182.7 million and cash and cash equivalents were $1.8 million. Our ability to fund our operations is dependent primarily upon our ability to consummate the Merger with QLT or raise or have access to sufficient funding to execute on our business plan.

Absent the transactions contemplated by the Merger Agreement including the secured line of credit of up to $9,853,333 granted by QLT to us, we expect that our cash and cash equivalents balance, anticipated cash flows from operations and the net proceeds from existing debt financing arrangements would have only been adequate to fund our operations until approximately July 2015. In their audit report related to our consolidated financial statements for the year ended December 31, 2014, which is included in our Annual Report on Form 10-K for the year ended December 31, 2014, our auditors refer to our recurring losses from operations, available cash and cash equivalent balances and accumulated deficit and a substantial doubt about our ability to continue as a going concern. We expect the secured line of credit granted to us by QLT will fund operations until completion of the Merger; however, if the Merger Agreement terminates prior to completion, no additional funding from QLT would be available and if we are unable to enter into a strategic transaction or secure sufficient additional funding, our management believes that we will need to cease operations and liquidate our assets. Our financial statements were prepared on the assumption that we will continue as a going concern and do not include any adjustments that might result should we be unable to continue as a going concern.

Our DuraSite sustained drug delivery technology is a proven synthetic polymer-based formulation designed to extend the residence time of a drug relative to conventional topical therapies. It enables topical delivery of a drug as a solution, gel or suspension and can be customized for delivering a wide variety of drug candidates. We have focused our research and development and commercial support efforts on the following topical products formulated with our DuraSite drug delivery technology.

• AzaSite^® (azithromycin ophthalmic solution) 1% is a DuraSite formulation of azithromycin, a broad spectrum ocular antibiotic approved by the U.S. Food and Drug Administration (FDA) in April 2007 to treat bacterial conjunctivitis (pink eye). It is commercialized in the United States by Akorn, Inc. (Akorn). We received a 25% royalty on net sales of AzaSite in North America through March 31, 2014, which was required to service the outstanding, non-recourse promissory notes due 2019 of our wholly-owned subsidiary, Azithromycin Royalty Sub, LLC (AzaSite Notes). On June 10, 2014, we entered into an amendment to the North American license (Akorn License) of AzaSite to Akorn. Under the amendment,

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Akorn paid us an amendment fee of $6.0 million, which was used to repurchase and cancel the AzaSite Notes, in return for a lower royalty on net sales of AzaSite in North America. Effective April 1, 2014, for annual net sales of AzaSite, the royalty is (1) 8.0% on net sales less than $20.0 million, which increased to 9.0% effective March 4, 2015 after we, Akorn and Pfizer entered into a settlement agreement with Mylan Pharmaceuticals, Inc. (Mylan), which sought to launch generic versions of AzaSite, (2) 12.5% on net sales greater than or equal to $20.0 million and less than or equal to $50.0 million and (3) 15.0% on net sales in excess of $50.0 million.

• Besivance^® (besifloxacin ophthalmic suspension) 0.6% is a DuraSite formulation of besifloxacin, a broad spectrum ocular antibiotic approved by the FDA in May 2009 to treat bacterial conjunctivitis (pink eye). Besivance was developed by Bausch + Lomb Incorporated (Bausch & Lomb) (wholly-owned by Valeant Pharmaceuticals International, Inc. (Valeant) as of August 2013) and was launched in the United States in the second half of 2009. In 2011, Besivance was launched internationally in select countries. Until we sold the Besivance royalty rights in April 2013, we received a middle single-digit royalty on net sales of Besivance globally. In April 2013, we sold the rights to receive royalty payments on sales of Besivance, beginning on January 1, 2013, for $15 million at closing, with an additional $1 million paid in February 2014 after certain 2013 Besivance sales targets were met. Under the terms of the agreement, if the purchasers receive specified levels of total cash from the Besivance royalty, the royalty would be returned to us in whole or in part. Patent protection for Besivance in the United States expires in 2021.

• BromSite^TM is a DuraSite formulation of bromfenac in development for the treatment of post-operative inflammation and prevention of post-operative eye pain. We initiated a Phase 1/2 clinical trial for this product candidate in August 2010 and we received positive top-line results from this study in the first quarter of 2011, which demonstrated the efficacy and safety of BromSite. In the third quarter of 2011, we completed an additional Phase 2 clinical trial to investigate the pharmacokinetics (PK) of BromSite in humans. We received positive top-line results that showed that the mean concentration of bromfenac in the aqueous humor of patients using BromSite was more than double compared to the currently available bromfenac eye product. In July 2012, we initiated a Phase 3 clinical trial for this product candidate and completed patient enrollment in November 2012. The BromSite Phase 3 clinical trial enrolled 268 patients undergoing cataract surgery in a two-arm trial designed to evaluate the efficacy and safety of BromSite against the DuraSite vehicle alone. In March 2013, we received positive top-line results from this Phase 3 clinical trial demonstrating statistically significant superiority compared to vehicle (p < 0.001) in prevention of ocular pain and treatment of inflammation among patients following cataract surgery. In May 2013, we initiated the second Phase 3 clinical trial for this product candidate, which was completed in November 2013 with 248 patients enrolled. We received positive top-line results from this confirmatory Phase 3 clinical trial in December 2013. We completed the New Drug Application (NDA) for this product candidate in February 2015 and filed the NDA with the FDA on June 11, 2015. In May 2014, the Swedish Medical Products Agency (MPA) concluded that the existing Phase 3 clinical data for BromSite was likely sufficient to support the filing of a Marketing Authorization Application (MAA) with the MPA. In July 2014, the U.S. Patent and Trademark Office (USPTO) issued a patent on BromSite. The patent provides protection for bromfenac formulations in DuraSite, including ISV-101, until August 7, 2029.

• DexaSite^TM is a DuraSite formulation of dexamethasone in development for the treatment of ocular inflammation. In November 2011, we initiated a Phase 3 clinical trial for this product candidate in blepharitis and completed patient enrollment in the clinical trial in September 2012. This study enrolled 907 patients and we announced top-line results in July 2013. While DexaSite did not meet the primary endpoint of complete resolution of all clinical signs, it did meet the complete resolution of the symptom of blepharitis, lid irritation. Furthermore, DexaSite demonstrated statistically significant improvements in the disease’s clinical signs at the end of treatment on Day 15. After ongoing meetings with the FDA, in July 2014, the FDA agreed that the results of the Phase 3 clinical trial could potentially support marketing approval for DexaSite for the treatment of blepharitis. During the fourth quarter of 2014, we executed post-Phase 3 regulatory meetings with European Health Authorities and the FDA to outline our proposed filings. We currently plan to file an NDA with the FDA in 2017 for this product in this indication. As a next step toward this filing, we plan to execute additional regulatory meetings with European Health Authorities and the FDA during 2015 to attempt to harmonize the chemistry, manufacturing and controls (CMC) section in support of DexaSite NDA and MAA filings for this indication. In addition, in November 2013, we submitted a protocol to the FDA for Phase 3 clinical trials with respect to the use of DexaSite for the treatment of inflammation and prevention of eye pain in ocular surgery.

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• AzaSite Plus^TM is a fixed combination of azithromycin and dexamethasone in DuraSite for the treatment of ocular inflammation and infection (blepharitis and/or blepharoconjunctivitis) for which there is no FDA approved indicated treatment. In November 2011, we initiated a Phase 3 clinical trial for this product candidate in blepharitis and completed patient enrollment in the clinical trial in September 2012. This study enrolled 907 patients and we announced top-line results in July 2013. While AzaSite Plus did not meet the primary endpoint of complete resolution of all clinical signs, it did meet the complete resolution the symptom of blepharitis, lid irritation. Furthermore, AzaSite Plus did demonstrate statistically significant improvements in the disease’s clinical signs at the end of treatment on Day 15. We continue to meet with the FDA to review the overall results of the clinical trial and determine the next steps in the development of this product candidate.

• DuraSite^® 2 is our next-generation enhanced drug delivery system, which is designed to provide a broad platform for developing superior ophthalmic therapeutics. DuraSite 2 is based on the original DuraSite technology, and incorporates a cationic polymer to achieve sustained and enhanced ocular delivery of drugs. DuraSite 2 is designed to increase the tissue penetration for topically delivered ocular drugs with the aim of improved efficacy and dosing convenience. In August 2013, the USPTO issued a patent on DuraSite 2. The patent provides protection to March 5, 2029 for both the delivery system and the drugs that are formulated with DuraSite 2. In November 2013, we obtained preclinical data from a comparative study that demonstrated superior drug retention and tissue penetration compared to DuraSite. We plan to utilize the DuraSite 2 platform in the development of all future pipeline products. We plan to initiate a broad licensing program that provides access to industry partners through both exclusive and non-exclusive licensing and/or commercialization agreements.

• ISV-101 is a DuraSite formulation with a low concentration of bromfenac for the treatment of dry eye disease. We filed an Investigational New Drug Application (IND) with the FDA for this product candidate in the first quarter of 2011. We plan to initiate a Phase 1/2 clinical trial for this product candidate, but no time period has been set.

Major Developments

Our major developments and events in 2015 included:

• In January 2015, we entered into a license agreement with Nicox S.A. (Nicox), for the development and commercialization of AzaSite, AzaSite Xtra and BromSite in Europe, Middle East and Africa (105 total countries). Under the terms of the license, we received an upfront payment of $3.0 million and could potentially receive $13.75 million in milestone payments. We will also receive tiered, mid-single digit to double-digit royalties on the net sales of these three products. Nicox can request up to twelve full-time equivalent (FTE) employees from us to assist with presenting data to regulatory authorities in the European Union, obtaining European Union regulatory approvals and dealing with the approved product manufacturer in the United States. Nicox has agreed to reimburse us for the use of our employees. Should the twelve FTE employees be needed for a full year, the reimbursement to us would be approximately $3.6 million.

• In February 2015, we, Akorn and Pfizer entered into a settlement agreement to dismiss a patent infringement lawsuit against Mylan concerning Mylan’s Abbreviated New Drug Application (ANDA) seeking to launch generic versions of AzaSite with the FDA. Due to the settlement, under the terms of the Akorn License, the royalty rate increased from 8% to 9%, effective March 4, 2015, on sales of AzaSite in North America.

• In April 2015, pursuant to the Securities Purchase Agreement (Purchase Agreement) we entered into in 2014 with certain purchasers (Purchasers), we sold an additional aggregate principal amount of $2.6 million in 12% Senior Secured Notes (Notes) and issued warrants to purchase 3,464,456 shares of our common stock at an exercise price of $0.18 per share.

• In June 2015, we entered into the Merger Agreement pursuant to which Isotope Acquisition Corp. (Merger Sub) will, subject to the satisfaction or waiver of the conditions therein, merge with and into us and we will be the surviving corporation in the merger and an indirect wholly owned subsidiary of QLT (Merger). Pursuant to the terms of the Merger Agreement, each share of the Company’s common stock issued and outstanding (except shares owned by QLT or a subsidiary of QLT and shares held by stockholders who exercise their appraisal rights under Delaware law) will be cancelled

17

and will be automatically converted into the right to receive 0.048 of validly issued, fully paid and non-assessable shares of QLT common shares. In connection with the execution of the Merger Agreement, InSite and QLT entered into the QLT Note pursuant to which QLT agreed to provide us with a secured line of credit of up to $9,853,333.

• In June 2015, noteholders holding in the aggregate approximately $5.25 million in principal amount of the Notes each entered into the Amendment, Waiver and Consent with us whereby certain terms, including the maturity date, of all of the outstanding Notes were amended. Under the Amendment, Waiver and Consent, the outstanding principal balance of the Notes, together with all accrued and unpaid interest thereunder, becomes due and payable in a lump sum on the day which is the earlier to occur of (i) six months following the closing date of the Merger and (ii) 12 months after the date on which the Merger Agreement is terminated. Under the Amendment, Waiver and Consent, we agreed to repay all amounts outstanding under the Notes held by noteholders not party to the Amendment, Waiver and Consent within 10 days after the consummation of the Merger.

• In June 2015, we completed submission of the BromSite NDA to the FDA.

• In August 2015, we received an unsolicited proposal from a multi-national pharmaceutical company to acquire all outstanding shares of our common stock at a price of $0.25 per share in cash. We remain subject to the Merger Agreement and our Board of Directors has not changed its recommendation in support of the Merger, the Merger Agreement, or its recommendation that our stockholders adopt the Merger Agreement.

Business Strategy.

Our business strategy previously consisted of the following:

1. Develop our pipeline of ocular product candidates.We seek to identify new product candidates from proven drugs that can be improved by formulation in DuraSite 2, which can substantially reduce the clinical risk involved in these product candidates. As appropriate, we plan to conduct preclinical and clinical testing of our product candidates.

2. Partner our product candidates. When we deem it appropriate, we seek to partner with larger pharmaceutical companies to manufacture and market our products. Partnering agreements generally include upfront and milestone payments, as well as on-going royalty payments upon commercialization, payable to us.

Results of Operations

Revenues.

Our revenues for the three and six months ended June 30, 2015 and 2014 were:

Revenues

(in millions)

	Three months ended				Six months ended
	June 30,				June 30,
	2015		2014		2015		2014
AzaSite royalties	$	0.4	$	0.3	$	0.7	$	1.4
Licensing fee		—		6.0		3.0		6.0
Other revenues		—		—		0.1		0.1
Total	$	0.4	$	6.3	$	3.8	$	7.5

For the three months ended June 30, 2015 and 2014, AzaSite royalties were comprised of $0.4 million and $0.3 million, respectively, of royalties based on net sales. AzaSite royalties increased by 41% compared to 2014 due to a 25% increase in AzaSite net sales and due to the settlement agreement with Mylan, under the terms of the Akorn License, the royalty rate increased from 8% to 9%, effective March 4, 2015, on sales of AzaSite in North America. In June 2014, we received a $6.0 million license fee for the amendment to the Akorn License.

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For the six months ended June 30, 2015 and 2014, AzaSite royalties were comprised of $0.7 million and $1.4 million, respectively, of royalties based on net sales. Royalties on AzaSite declined by 49% compared to 2014 due to a reduction of the royalty rate from 25% to 8%, in connection with the amendment of the Akorn License effective on April 1, 2014 and an increase in the royalty rate to 9% in connection with the settlement agreement with Mylan. In January 2015, we entered into a license agreement with Nicox for the development and commercialization of AzaSite, AzaSite Xtra and BromSite in Europe, Middle East and Africa (105 total countries). Under the terms of this license, we received an upfront payment of $3.0 million in January 2015. In June 2014, we received a $6.0 million license fee for the amendment to the Akorn License.

Research and development expenses.

Our research and development (R&D) expenses for the three and six months ended June 30, 2015 and 2014 were:

R&D Cost by Program

(in millions)

	Three months ended				Six months ended
	June 30,				June 30,
Program	2015		2014		2015		2014
BromSite	$	2.4	$	1.1	$	2.7	$	1.9
AzaSite Plus/DexaSite		0.1		—		0.2		0.1
Programs - non-specific		1.6		1.4		3.3		3.1
Total	$	4.1	$	2.5	$	6.2	$	5.1

For the three and six months ended June 30, 2015, our BromSite program expenses were primarily related to the $2.3 million fee to file the NDA with the FDA in June 2015. Non-specific program costs, which comprised facility, internal personnel and stock-based compensation costs, are not allocated to a specific development program. We expect to incur additional R&D expense to develop new product candidates.

For the three and six months ended June 30, 2014, our BromSite program expenses were primarily related to costs to prepare to file an NDA with the FDA. Non-specific program costs, which comprised facility, internal personnel and stock-based compensation costs, are not allocated to a specific development program.

General and administrative expenses.

General and administrative expenses for the three months ended June 30, 2015 and 2014 were $2.0 million and $1.4 million, respectively. General and administrative expenses for the six months ended June 30, 2015 and 2014 were $3.7 million and $3.3 million, respectively. In 2015, we incurred higher legal and professional expenses of approximately $1.0 million related to the merger with QLT. In 2014, we incurred higher legal expenses of approximately $0.5 million from our on-going partnering efforts.

Cost of revenues.

Cost of revenues for the three months ended June 30, 2015 and 2014 were $0.1 million and $0.2 million, respectively. Cost of revenues for both the six months ended June 30, 2015 and 2014 were $0.3 million. Cost of revenues in each period primarily consisted of royalties to Pfizer.

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Gain on extinguishment of debt.

Gain on extinguishment of debt was $36.0 million for the three and six months ended June 30, 2014. On June 10, 2014, our subsidiary and the noteholders entered into a Note Purchase Agreement in which our subsidiary repurchased and cancelled the non-recourse AzaSite Notes for a single payment of $6.0 million. As a result of the cancellation, the remaining principal on the AzaSite Notes of $41.3 million and accrued interest of $2.8 million was extinguished. In addition, our subsidiary wrote-off the remaining balance of $2.1 million in debt issuance costs and incurred less than $0.1 million of legal and professional fees. For the three and six months ended June 30, 2014, the gain on the extinguishment of debt represented basic and diluted net income per share of $0.27 for each period.

Interest expense and other, net.

Interest expense and other, net, for the three months ended June 30, 2015 and 2014 was an expense of $0.7 million and $1.4 million, respectively. Interest expense and other, net, for the six months ended June 30, 2015 and 2014 was an expense of $1.3 million and $3.2 million, respectively. In 2015, interest expense was primarily related to the issuance of the Notes pursuant to the Purchase Agreement in the fourth quarter of 2014 and the second quarter of 2015 and the QLT Note issued in June 2015. In 2014, interest expense was primarily due to the interest expense on the AzaSite Notes issued in February 2008 and related amortization of the debt issuance costs incurred from our subsidiary’s issuance of the AzaSite Notes. The AzaSite Notes were repurchased and cancelled in June 2014.

Change in fair value of warrant liability.

Change in fair value of warrant liability was expense of less than $0.1 million and income of $0.3 million for the three months ended June 30, 2015 and 2014, respectively. Change in fair value of warrant liability was income of $0.2 million and $0.9 million for the six months ended June 30, 2015 and 2014, respectively. The non-cash other income was primarily driven by a decrease in our stock price which directly impacts the fair value of our warrant liability.

Liquidity and Capital Resources

In recent years, we have financed our operations primarily through private placements of equity securities, debt financings and payments from corporate collaborations. At June 30, 2015, our cash and cash equivalents were $1.8 million. It is our policy to invest our cash and cash equivalents in highly liquid securities, such as interest-bearing money market funds, treasury and federal agency notes. The current uncertain credit markets may affect the liquidity of such money market funds or other cash investments.

On October 9, 2014, we entered into the Purchase Agreement with the Purchasers pursuant to which we agreed to sell Notes in an aggregate principal amount of up to $15 million and issue warrants to purchase shares of our common stock. As of June 30, 2015, we had sold and issued Notes to the purchasers having an aggregate principal amount equal to $7.8 million and issued to the purchasers warrants to purchase an aggregate of 2,053,169 shares, 200,620 shares, 2,824,281 shares and 3,464,456 shares of common stock that are exercisable at $0.33, $0.31, $0.26 and $0.18, respectively. Our right to sell and issue additional Notes and to issue additional warrants in connection with such Notes expired upon the issuance of such Notes and additional warrants in April 2015.

In connection with the execution of the Merger Agreement, we and QLT entered into a secured note, or the QLT Note, pursuant to which QLT agreed, subject to the terms and conditions of the QLT Note, to provide us a secured line of credit of up to $9,853,333. Interest accrues on the amounts borrowed at the rate of 12% per annum. Pursuant to the terms of the QLT Note, we borrowed, contemporaneously with execution of the QLT Note, an amount equal to $2,360,000 in connection with our submission of the BromSite NDA. Provided that the Merger Agreement has not then been terminated and certain other conditions to borrowing continue to be satisfied, we have the right to draw an additional $600,000 to finance certain manufacturing costs and may also borrow up to $1,100,000 per month until November 30, 2015, and up to $293,333 in December 2015. In addition to the $2,360,000 borrowing in connection

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with the BromSite NDA submission, as of June 2015, we had borrowed $1,100,000 to fund operating expenses. The QLT Note is secured by a first priority security agreement over substantially all of our assets. The QLT Note also includes (i) certain restrictive covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur indebtedness, grant liens on assets, pay dividends or sell assets and (ii) events of default, including failure to pay amounts when due, breaches of representations and warranties in the loan documents and certain bankruptcy events. All borrowings under the QLT Note will be due and payable 12 months following the termination of the Merger Agreement except that our obligation to repay those amounts will accelerate and become due and payable on the occurrence of any event of default or on the termination of the Merger Agreement under the following circumstances: (1) QLT terminates the Merger Agreement as a result of our Board of Directors (A) changing or withdrawing its recommendation following the time of its receipt of a superior proposal or (B) failing to reaffirm its recommendation within five days of QLT requesting such reaffirmation following a publicly announced acquisition proposal; (2) we terminate the Merger Agreement to engage in a competing transaction constituting a superior proposal; or (3) we complete a competing transaction following certain termination events under the Merger Agreement.

In June 2015, noteholders holding in the aggregate approximately $5.25 million in principal amount of the Notes each entered into the Amendment, Waiver and Consent with InSite whereby certain terms, including the maturity date, of all of the outstanding Notes were amended. Under the Amendment, Waiver and Consent, the outstanding principal balance of the Notes, together with all accrued and unpaid interest thereunder, becomes due and payable in a lump sum on the day which is the earlier to occur of (i) six months following the closing date of the Merger and (ii) 12 months after the date on which the Merger Agreement is terminated. Under the Amendment, Waiver and Consent, we agreed to repay all amounts outstanding under the Notes held by noteholders not party to the Amendment, Waiver and Consent within 10 days after the consummation of the Merger.

We have incurred significant losses since inception. Clinical trials and costs to prepare an NDA for our product candidates with the FDA are very expensive and difficult, in part because they are subject to rigorous regulatory requirements. As of June 30, 2015, our accumulated deficit was $182.7 million and cash and cash equivalents were $1.8 million. Our ability to fund our operations is dependent primarily upon our ability to consummate the Merger with QLT or raise or have access to sufficient funding to execute on our business plan.

Absent the transactions contemplated by the Merger Agreement including the secured line of credit of up to $9,853,333 granted by QLT to us, we expect that our cash and cash equivalents balance, anticipated cash flows from operations and the net proceeds from existing debt financing arrangements would have only been adequate to fund our operations until approximately July 2015. In their audit report related to our consolidated financial statements for the year ended December 31, 2014, which is included in our Annual Report on Form 10-K for the year ended December 31, 2014, our auditors refer to our recurring losses from operations, available cash equivalent balances and accumulated deficit and a substantial doubt about our ability to continue as a going concern. We expect the secured line of credit granted to us by QLT will fund operations until completion of the Merger; however, if the Merger Agreement terminates prior to completion, no additional funding from QLT would be available and if we are unable to enter into a strategic transaction or secure sufficient additional funding, our management believes that we will need to cease operations and liquidate our assets. Our financial statements were prepared on the assumption that we will continue as a going concern and do not include any adjustments that might result should we be unable to continue as a going concern.

Net cash used in operating activities was $5.8 million for the six months ended June 30, 2015. Net cash provided by operating activities was $0.5 million for the six months ended June 30, 2014. In 2015, we incurred approximately $2.3 million in direct costs to file the NDA for BromSite with the FDA and higher legal and professional expenses of approximately $1.0 million related to the merger with QLT. In addition, we received a $3.0 million license fee for the license agreement with Nicox. In 2014, we incurred approximately $1.1 million in direct costs related to our Phase 3 clinical trials and costs to prepare to file an NDA for BromSite and higher legal expenses of approximately $0.5 million from our on-going partnering efforts. In addition, we received a $6.0 million license fee for the Amendment of the Akorn License.

Net cash used in investing activities was less than $0.1 million for the six months ended June 30, 2015. Net cash provided by investing activities was $4.7 million for the six months ended June 30, 2014. In 2014, we converted short-term investments to cash and cash equivalents to fund operating activities.

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Net cash provided by financing activities was $5.9 million for the six months ended June 30, 2015. Net cash used in financing activities was $6.0 million for the six months ended June 30, 2014. In 2015, we received gross proceeds of $3.5 million from the QLT Note. In addition in 2015, we received net proceeds of $2.4 million from the Notes, after deducting placement agent fees associated with the transaction. The Company incurred $0.2 million in placement agent fees and $0.3 million (non-cash) for the initial valuation of the warrants issued with the Notes. These amounts are recorded as debt issuance costs and are amortized over the expected life of the Notes. In 2014, we cancelled the AzaSite Notes for a payment of $6.0 million.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. The FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and developed a common revenue recognition standard for GAAP and IFRS. Under the guidance, an entity should recognize revenue when the entity satisfies a performance obligation within a contract at a determined transaction price. This update is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. We do not expect the adoption of this standard will materially impact our consolidated statement of financial position or results of operations.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern. This standard includes guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern within one year after the financial statements are issued. If conditions or events raise substantial doubt, the entity must disclose the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern, management’s evaluation of those conditions or events, and management’s plans to mitigate the conditions or events. This update is effective for interim and annual reporting periods beginning after December 15, 2016. Early adoption is permitted. We do not expect the adoption of this standard will materially impact our consolidated statement of financial position or results of operations.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03 (“ASU 2015-03”), Simplifying the Presentation of Debt Issuance Costs. This standard requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The update is effective for annual and interim reporting periods beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis. We do not expect that the adoption of this standard will materially impact our consolidated statement of financial position or results of operations.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following discusses our exposure to market risk related to changes in interest rates.

We have debt in the form of secured notes issued with fixed interest rates. As a result, our exposure to market risk caused by fluctuations in interest rates is minimal. We had $11.3 million in aggregate principal amount of the notes outstanding as of June 30, 2015, with a fixed interest rate of 12%. If the market interest rates were to increase by 10% from the June 30, 2015 levels, it would not result in an increase in interest expense. At June 30, 2015, our debt was reflected in the accompanying consolidated financial statements at face value.

The securities in our investment portfolio are not leveraged and are subject to minimal interest rate risk. Due to their original maturities of twelve months or less, the securities are classified as cash and cash equivalents or short-term investments. They are classified as trading securities principally bought and held for the purpose of selling them in the near term, with unrealized gains and losses included in earnings. Because of the short-term maturities of our investments, we do not believe that a change in market rates would have a significant negative impact on the value of our investment portfolio. While a hypothetical decrease in market interest rates by 10% from the June 30, 2015 levels would cause a decrease in interest income, it would not likely result in loss of principal.

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. To achieve this objective in the current economic environment, we maintain our portfolio in cash equivalents or short-term investments, including obligations of U.S. government-sponsored enterprises and money market funds. These securities are classified as cash and cash equivalents or short-term investments and consequently are recorded on the balance sheet at fair value. We do not utilize derivative financial instruments to manage our interest rate risks.

Item 4. Controls and Procedures

(a)Evaluation of disclosure controls and procedures.Our principal executive officer and principal financial officer, Timothy Ruane and Louis Drapeau, respectively, reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15(d)-15(e)) as of the end of the period covered by this Form 10-Q (the Evaluation Date). Based on that evaluation, Mr. Ruane and Mr. Drapeau concluded that our disclosure controls and procedures were effective as of the Evaluation Date in providing them with material information relating to us in a timely manner, as required to be disclosed in the reports we file under the Exchange Act.

(b)Changes in internal control over financial reporting.There was no change in our internal control over financial reporting that occurred during the second quarter of 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is subject to various claims and legal actions during the ordinary course of its business.

In April 2011, the Company received a Notice Letter that Sandoz, Inc. or Sandoz, filed an Abbreviated New Drug Application, or ANDA, with the FDA seeking marketing approval for a 1% azithromycin ophthalmic solution, or the Sandoz Product, prior to the expiration of the five U.S. patents listed in the Orange Book for AzaSite, which include four of our patents and one patent licensed to us by Pfizer. In the paragraph IV Certification accompanying the Sandoz ANDA filing, Sandoz alleges that the claims of the Orange Book listed patents are invalid, unenforceable and/or will not be infringed upon by the Sandoz Product. On May 26, 2011, we, Merck and Pfizer filed a patent infringement lawsuit against Sandoz and related entities. The plaintiff companies agreed that Merck would take the lead in prosecuting this lawsuit. Before the trial, the patents involved in the litigation were limited to the one Pfizer patent and three of our patents. On October 4, 2013, the United States District Court for the District of New Jersey entered a Final Judgment in favor of us and the other plaintiffs finding all the asserted claims of the patents in the litigation valid and infringed by Sandoz and related entities. The Court Order specified that the effective date of any FDA approval of a Sandoz ANDA for generic 1% azithromycin ophthalmic solution products would be no earlier than the expiration date of the patents in the litigation. On November 4, 2013, Sandoz filed an appeal of this decision to the United States Court of Appeals for the Federal Circuit. On November 15, 2013, Akorn acquired Inspire from Merck, and as such, acquired the rights to AzaSite in North America. Akorn took the lead in prosecuting this lawsuit. On April 9, 2015, the Court of Appeals for the Federal Circuit affirmed the decision of the district court holding that Sandoz failed to show that the asserted claims in the patents-in-suit would have been obvious to a person of ordinary skill in the art. In accordance with the judgment of the Court of Appeals entered on April 9, 2015, pursuant to Rule 41(a) of the Federal Rules of Appellate Procedures, the formal mandate was issued on May 18, 2015 to close this case since Sandoz did not seeken banc review by the Federal Circuit of its initial decision or seek review by the Supreme Court.

In May 2013, the Company received a Notice Letter that Mylan Pharmaceuticals, Inc. or Mylan, filed an ANDA with the FDA seeking marketing approval for a 1% azithromycin ophthalmic solution, or the Mylan Product, prior to the expiration of the U.S. patents listed in the Orange Book for AzaSite, which include three of our patents and one patent licensed to us by Pfizer. In the paragraph IV Certification accompanying the Mylan ANDA filing, Mylan alleges that the claims of the Orange Book listed patents are invalid, unenforceable and/or will not be infringed upon by the Mylan Product. On June 14, 2013, we, Merck and Pfizer filed a patent infringement lawsuit against Mylan and a related entity. On November 15, 2013, Akorn acquired Inspire from Merck, and as such, acquired the rights to AzaSite in North America. The plaintiff companies agreed that Akorn would take the lead in prosecuting this lawsuit. The filing of this lawsuit triggered an automatic stay, or bar, of the FDA’s approval of the ANDA for up to 30 months or until a final district court decision of the infringement lawsuit, whichever comes first. In February of 2015, all of the parties involved in the lawsuit executed a Settlement Agreement including all of the patents in the lawsuit and submitted the same to the United States District Court for the District of New Jersey. On March 4, 2015, the district court issued an Order for Dismissal, without prejudice.

On July 24, 2014, Karin Stiens filed a complaint against Bausch & Lomb, Dr. Lance Ferguson and the Company (Fayette (Kentucky) Circuit Court Civil Action No. 14-CI-2829) alleging that she suffered ophthalmological damage when Dr. Ferguson engaged in off-label use of Besivance in a photorefractive keratectomy procedure as a prophylactic antibiotic. The plaintiff alleges that Bausch & Lomb and the Company negligently tested, marketed and distributed Besivance, and negligently informed medical providers and consumers about Besivance. The complaint contains no facts supporting these general allegations, no facts supporting the plaintiff’s claim of permanent injuries and no allegations asserting Kentucky jurisdiction over the Company. The plaintiff has not pleaded any specific amount in damages nor made any demand. The Company filed its answer on August 18, 2014. Bausch & Lomb has assumed costs of this action. The Company currently expects to file a motion for summary judgment to dismiss InSite Vision from the lawsuit.

We and QLT issued press releases announcing the execution of the Merger Agreement on June 8, 2015. On June 17, 2015, a purported class action lawsuit entitled Speiser, et al. v. Insite Vision, Inc., et al., Civil Action No. RG15774540, was filed in California Superior Court for Alameda County, naming as defendants the Company, all of its directors, QLT Inc. and Isotope Acquisition Corp. On July 10, 2015, a second purported class action entitled

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McKinley v. Ruane, et al., Civil Action No. RG15777471, was filed in the same court, naming the same defendants. In both cases, the plaintiffs, who claim to be stockholders of the Company, allege in their complaints that the Company’s directors breached fiduciary duties to the stockholders by agreeing to enter into a merger transaction with QLT because the merger consideration is inadequate and the process by which the transaction was agreed to was flawed. The plaintiffs also allege that QLT and Isotope aided and abetted the breaches of duty by the Company’s directors. The plaintiffs seek to enjoin consummation of the transaction or, in the alternative, to recover unspecified money damages, together with costs and attorneys’ fees. Attorneys for the plaintiffs in both cases have indicated that they will seek to consolidate the cases into a single action. The cases are currently at a preliminary stage; the defendants have not filed responses to the complaints and no discovery has taken place. The Company and its directors believe that the complaints are without merit and intend to defend themselves vigorously.

There are currently no other claims or legal actions that would have a material adverse impact on our financial position, operations or potential performance.

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Item 1A. Risk Factors

The following description of the risk factors associated with our business includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in our quarterly report on Form 10-Q for the quarter ended March 31, 2015.

Completion of the Merger is subject to conditions, and if these conditions are not satisfied or waived, the Merger will not be completed

Completion of the Merger is subject to customary closing conditions, including, among other things, (i) the adoption of the Merger Agreement by our stockholders, (ii) the absence of any legal restraints or prohibitions on the consummation of the Merger, (iii) the effectiveness of the registration statement on Form S-4 relating to the merger and (iv) the approval of the listing of the QLT common shares to be issued in the Merger on NASDAQ and the TSX, subject to official notice of issuance. In addition, QLT’s and our respective obligations to complete the Merger are subject to other specified conditions, including, (a) with respect to QLT’s obligations (i) the FDA not having issued a written communication refusing to file the new drug application (NDA) with respect to BromSite™ (BromSite NDA) for review by August 10, 2015, which is the 60th day following the FDA’s receipt of the BromSite NDA, and (ii) the FDA not having asserted a deficiency that is reasonably likely to require one or more additional clinical studies with respect to BromSite by August 24, 2015, which is the 74th day following the FDA’s receipt of the BromSite NDA, (b) with respect to our obligations, QLT not having taken any action that would reasonably be expected to cause QLT to be treated as a “domestic corporation” within the meaning of the Internal Revenue Code of 1986, as amended (Code), as a result of the Merger and (c) with respect to the respective obligations of QLT and us, (i) subject to the standards set forth in the Merger Agreement, the accuracy of the representations and warranties of the other party, (ii) compliance of the other party with its covenants under the Merger Agreement in all material respects, and (iii) no events having occurred that would have a material adverse effect on the other party.

Any delay in completing the Merger could cause the combined company not to realize some or all of the benefits that QLT expects to achieve if the Merger is successfully completed within its expected timeframe. Further, there can be no assurance the conditions to the closing of the Merger will be satisfied or waived or the Merger will be completed.

Lawsuits have been filed against us, QLT and certain of our affiliates challenging the Merger, and an adverse ruling in such lawsuits may prevent the Merger from becoming effective or from becoming effective within the expected timeframe.

We and QLT issued press releases announcing the execution of the Merger Agreement on June 8, 2015. On June 17, 2015, a purported class action lawsuit entitled Speiser, et al. v. Insite Vision, Inc., et al., Civil Action No. RG15774540, was filed in California Superior Court for Alameda County, naming as defendants us, all of the members of our Board of Directors, QLT and Merger Sub. On July 10, 2015, a second purported class action entitled McKinley v. Ruane, et al., Civil Action No. RG15777471, was filed in the same court, naming the same defendants. In both cases, the plaintiffs, who claim to be our stockholders, allege in their complaints that members of our Board of Directors breached fiduciary duties to our stockholders by agreeing to enter into a Merger Agreement with QLT because the Merger consideration is inadequate and the process by which the transaction was agreed to was flawed. The plaintiffs also allege that we, QLT and Merger Sub aided and abetted the breaches of duty by the members of our Board of Directors. The plaintiffs seek to enjoin consummation of the transaction or, in the alternative, to recover unspecified money damages, together with costs and attorneys’ fees. Attorneys for the plaintiffs in both cases have indicated that they will seek to consolidate the cases into a single action. The cases are currently at a preliminary stage; the defendants have not filed responses to the complaints and no discovery has taken place. An adverse ruling in such lawsuits may prevent the Merger from becoming effective or from becoming effective within the expected timeframe.

The Merger Agreement limits our ability to pursue alternatives to the Merger and may discourage other companies from trying to acquire us for greater consideration than what QLT has agreed to pay

The Merger Agreement contains provisions that make it more difficult for us to sell our business to a party other than QLT. These provisions include a general prohibition of soliciting any acquisition proposal or offer for a competing transaction. In some circumstances upon termination of the Merger Agreement, we may be required to pay

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to QLT a termination fee of $1,170,000. In addition, any amounts drawn by us under the QLT Note will become due and payable to QLT. Further, there are only limited exceptions to our agreement that our board of directors will not withdraw or modify, in a manner adverse to QLT, the recommendation of our board in favor of approval of the Merger and to our agreement not to enter into an agreement with respect to an alternative transaction proposal.

These provisions might discourage a third party, including the multi national pharmaceutical company that has made the unsolicited proposal, that has an interest in acquiring all, or a significant part, of us from considering or proposing an acquisition, even if the party were prepared to pay consideration with a higher per share value than the value proposed to be received or realized in the Merger; or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee or expense payment that may become payable in certain circumstances.

The value of the Merger consideration is subject to changes based on fluctuations in the value of QLT’s common shares

The market value of QLT’s common shares will fluctuate during the period before the date of the special meeting of our stockholders to vote on approval of the Merger Agreement and will continue to fluctuate during the period prior to the effective time of the Merger, as well as thereafter.

Upon completion of the Merger, holders of our common stock will have the right to receive 0.048 of a validly issued, fully paid and non-assessable common share of QLT. It is impossible to accurately predict the market price of QLT’s common shares at the effective time and therefore impossible to accurately predict the value of the QLT common shares that holders of our common stock will receive in the Merger. Fluctuations in the market value of QLT’s common shares will likely cause fluctuations in the market value of our common stock.

Our management believes that, if the Merger is not completed and we are unable to enter into a strategic transaction or secure sufficient additional funding, we will need to cease operations and liquidate our assets.

We have incurred significant operating losses since our inception in 1986 and have pursued numerous drug development candidates that failed to achieve clinical end points or did not prove to have commercial potential. We expect to incur net losses for the foreseeable future or until we are able to achieve significant royalties or other revenues from sales of our products. Attaining significant revenue or profitability depends upon our ability, alone or with third parties, to develop our potential products successfully, conduct clinical trials, obtain required regulatory approvals and manufacture and market our products successfully. We may not ever achieve or be able to maintain significant revenue or profitability, including with respect to AzaSite, our lead product which has experienced declining sales in the United States, and has continued to decline further following Akorn’s acquisition of Inspire from Merck in November 2013. In addition, our right to receive minimum royalties from Merck terminated in September 2013. AzaSite has not been commercially launched outside the United States and we do not have any other products that have been approved for commercialization either in the United States or internationally.

We may need to cease operations and liquidate our assets if we lose the benefit of the QLT Note and/or the Merger is not completed.

In connection with the execution of the Merger Agreement, we and QLT entered into the QLT Note pursuant to which QLT agreed to provide a secured line of credit of up to $9,853,333 to us. The line of credit from QLT to us is intended to provide us with sufficient funding to operate our business through completion of the Merger. If the line of credit is no longer available and/or the Merger is not completed and we are unable to enter into a strategic transaction or secure sufficient additional funding, our management believes that we will need to cease operations and liquidate our assets.

It is difficult to evaluate our business because we are in an early stage of commercializing our products, our product candidates are still in clinical trials and successful development of pharmaceutical products is highly uncertain and requires significant expenditures, risk and time

We are still in an early stage of commercializing our products. AzaSite received regulatory approval in the U.S. in April 2007 and commercial sales of AzaSite began in the third quarter of 2007. Besivance received regulatory approval in May 2009 and commercial sales of Besivance began in the second half of 2009. We must receive approval

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in other countries prior to marketing AzaSite in such countries. Before regulatory authorities grant us marketing approval for additional products, we need to conduct significant additional research and development and preclinical and clinical testing and submit New Drug Applications, or NDAs. Successful development of pharmaceutical products is highly uncertain. Products that appear promising in research or development may be delayed or fail to reach later stages of development or the market for many reasons, including:

• preclinical tests may show the product to be toxic or lack efficacy in animal models;

• failure to receive the necessary U.S. or international regulatory approvals or a delay in receiving such approvals due to, among other things, slow enrollment in clinical studies, failure to achieve study endpoints within the time period prescribed by the study, or at all, additional time requirements for data analysis or Biological License Application, or BLA, or NDA preparation, discussions with the U.S. Food and Drug Administration, or FDA, FDA requests for additional preclinical or clinical data, analyses or changes to study design; or safety, efficacy or manufacturing issues;

• clinical trial results may show the product to be less effective than desired or to have harmful or problematic side effects;

• difficulties in formulating the product, scaling the manufacturing process, or getting necessary manufacturing approvals;

• even if safe and effective, manufacturing costs, pricing, reimbursement issues or other factors may make the product uneconomical;

• proprietary rights of others and their competing products and technologies may prevent the product from being developed or commercialized; or

• inability to compete with superior, equivalent, more cost-effective or more effectively promoted products offered by competitors.

Therefore, our research and development activities may not result in any commercially viable products.

Clinical trials are expensive, time-consuming and difficult to design, enroll and implement and there can never be any assurance that the results of such clinical trials will be favorable

Human clinical trials for our product candidates are very expensive and difficult to design, enroll and implement, in part because they are subject to rigorous regulatory requirements. A significant portion of our operating expenses in the past three years were incurred on our AzaSite Plus/DexaSite Phase 3 clinical trial and BromSite Phase 3 clinical trial. Despite the significant time, expense and resources devoted to the trial, the AzaSite Plus/DexaSite Phase 3 clinical trial did not meet its clinical endpoints as required by the FDA and the future development of these product candidates is uncertain. The clinical trial process is also time-consuming. We may experience difficulties or delays in enrolling our clinical trials, which can delay the trials and our ability to obtain ultimate approval of our product candidates. In addition, we require various clinical materials to conduct our clinical trials and any unavailability or delay in our ability to obtain these materials may delay our trials, cause them to be more expensive or preclude us from completing these trials, which would harm our ability to obtain approval for our product candidates and therefore harm our business. We estimate that any particular clinical trial may take over a year to complete and will be very expensive. Furthermore, we could encounter problems that might cause us to abandon or repeat clinical trials resulting in additional expense, further delays and potentially preventing the completion of such trials. The commencement and completion of clinical trials may be delayed or terminated due to several factors, including, among others:

• unforeseen safety issues;

• lack of effectiveness during clinical trials, including failure to meet required clinical endpoints;

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• difficulty in determining dosing and trial protocols;

• slower than expected rates of patient recruitment;

• difficulties in obtaining clinical materials or participants necessary for the conduct of our clinical trials;

• inability to monitor patients adequately during or after treatment; and

• inability or unwillingness of clinical investigators to follow our clinical protocols.

In addition, we or the FDA may suspend our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the FDA finds deficiencies in our submissions or the conduct of these trials. In any such case, we may not be able to obtain regulatory approval for our product candidates, in which case we would not obtain any benefit from our substantial investment in developing the product and conducting clinical trials for such products.

The results of our clinical trials may not support our product candidate claims

Even if our clinical trials are completed as planned, we cannot be certain that the results will support our product candidate claims. Even if pre-clinical testing and clinical trials for a product candidate are successful, this does not ensure that later clinical trials will be successful and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical trials and pre-clinical testing, meet our expectations or defined clinical endpoints, or satisfy the FDA or other regulatory bodies. The clinical trial process may fail to demonstrate that our product candidates are safe for humans or effective for indicated uses. In addition, our clinical trials involve relatively small patient populations. Because of the small sample size, the results of these clinical trials may not be indicative of future results. Any such failure would likely cause us to abandon the product candidate and may delay development of other product candidates. Any delay in, or termination of, our clinical trials will delay or preclude the filing of our NDAs with the FDA and, ultimately, our ability to commercialize our product candidates and generate product revenues.

For example, results from our 2008 Phase 3 clinical trial of AzaSite Plus for the treatment of blepharoconjunctivitis showed improved clinical outcomes as compared to treatment with a corticosteroid or antibiotic alone in the reduction of inflammatory signs and symptoms and bacterial eradication, respectively. However, the trial did not achieve its primary clinical endpoint as defined by the protocol. In 2013, our AzaSite Plus/DexaSite Phase 3 clinical trial also failed to meet its primary endpoint. The future development of these product candidates is unclear and we may not receive any return on our significant investments in AzaSite Plus or DexaSite. We cannot assure you that the FDA will accept the BromSite NDA or that we will ever achieve FDA approval for the commercialization of AzaSite Plus, DexaSite, BromSite or any other product candidate. Our lack of cash resources may cause us to have to delay filing an NDA for DexaSite, delaying any FDA approval and commercialization of that product.

Our strategy for commercialization of our products requires us to enter into successful arrangements with corporate collaborators

We generally intend to enter into partnering and collaborative arrangements with respect to the commercialization of our product candidates. However, we cannot assure you that we will be able to enter into such arrangements or that they will be beneficial to us. The success of our partnering and collaboration arrangements will depend upon many factors, including, among others:

• the progress and results of our preclinical and clinical testing and research and development programs;

• the time and cost involved in obtaining regulatory approvals;

• the market, or perceived market, for our product candidates;

• our financial condition, and ability to perform our obligations to our potential partners;

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• our ability to negotiate favorable terms with potential collaborators;

• the efforts and success of our collaborators in further developing or marketing the product;

• our ability to prosecute, defend and enforce patent claims and other intellectual property rights;

• the outcome of possible future legal actions; and

• competing technological and market developments.

We may not be able to enter into arrangements with third parties to support the commercialization of our products on acceptable terms, or at all, and may not be able to maintain any arrangement that we do enter into. If we pursue a partnership for our product candidates prior to successfully filing an NDA, completing Phase 3 trials or commencing commercialization, we will likely receive less favorable economic terms than if we successfully filed an NDA, completed Phase 3 trials or commenced commercialization.

The commercial success of our products is dependent on the diligent efforts of our corporate collaborators

Because we generally rely on third parties for the marketing and sale of our products, revenues that we receive will be highly dependent on the efforts and success of these third parties. In November 2013, Akorn acquired Inspire from Merck and Akorn became responsible for the commercialization of AzaSite in the United States. Prior to Akorn’s acquisition of Inspire, the monthly prescriptions and our earned royalty revenues on net sales of AzaSite by Merck had decreased significantly, a trend that has continued since Akorn’s acquisition of Inspire. In June 2014, we amended the Akorn License to, among other things, reduce the royalty rate we receive to a tiered royalty percentage ranging from 8.0% to 15.0% of AzaSite’s net sales, depending on the level of such sales. This lower tier of this royalty percentage range increased from 8.0% to 9.0% in connection with our settlement of the Mylan patent infringement lawsuit. We believe that our AzaSite royalties will likely decline further in future periods due to the reduced royalty rate and declining prescriptions for AzaSite. In addition, our partners, including Akorn, may terminate their relationships with us and/or may not diligently or successfully market or sell our products. Akorn can terminate the Akorn License at any time at its discretion. Akorn or other partners may also emphasize sales and marketing of their own or other products or pursue alternative or competing technologies or develop alternative products either on their own or in collaboration with others, including our competitors. In addition, marketing consultants and contract sales organizations that we use for our products may market products that compete with our products and we must rely on their efforts and ability to market and sell our products effectively.

If we fail to enter into future collaborations or our current collaborations are terminated, we will need to enter into new collaborations or establish our own sales and marketing organization; our royalties under the Akorn License are subject to reduction, termination and suspension

We may not be able to enter into or maintain collaborative arrangements with third parties, including Akorn. If we are not successful in entering into future collaborations or maintaining our existing collaborations, we may be required to find new corporate collaborators or establish our own sales and marketing organization.

We do not have a long-standing relationship with Akorn, which acquired Inspire from Merck in November 2013. Prior to Akorn’s acquisition of Inspire, and continuing since Akorn’s acquisition, the number of monthly prescriptions and sales of AzaSite have significantly declined. While the minimum royalty payments from Merck had previously made up for this decline, Merck’s minimum royalty payment obligations terminated in September 2013 and Akorn has no such obligations. Royalties under the Akorn License are subject to a cumulative reduction or offset in the event of patent invalidity, generic competition, uncured material breaches by us or in the event that Akorn is required to pay royalties, milestone payments or license fees to third parties for the continued use of AzaSite. In addition, the applicable royalty rate under the Akorn License is subject to reduction by up to 50% in any country during any period in which AzaSite does not have patent protection and Akorn’s obligation to pay royalties may be suspended entirely upon the occurrence of certain events, such as a requirement by the FDA or other governmental agency to suspend the marketing of AzaSite or withdraw it from the market in the United States or if we are unable to obtain commercial quantities of AzaSite for Akorn to market and sell. Despite Akorn’s acquisition of Inspire from Merck, we believe that our AzaSite royalties will likely decline further in future periods due to the reduced royalty rate and declining prescriptions for AzaSite.

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If the Akorn License is terminated, we will have to find a new marketing partner or market AzaSite ourselves. There can be no assurance that any new partnership would be possible or on similar terms as the Akorn License or that it would be successful. If the Akorn License is terminated, our efforts to find a new third-party collaborator or pursue direct commercialization efforts ourselves will divert the attention of senior management from our current business operations, which could delay the development or licensing of our other product candidates. If we elect to commercialize AzaSite ourselves, we would have to expend significant resources as we currently have no sales, marketing or distribution capabilities or experience, and have no current plans to establish any such resources. Our limited cash resources would likely preclude us from establishing any marketing or sales capabilities. Accordingly, our efforts to commercialize AzaSite ourselves, if undertaken, may not be successful and could harm our financial condition and results of operation. If we are unable to maintain existing collaborations, enter into additional collaborations or successfully market our products ourselves, our revenues and financial results would be significantly harmed.

Our future success depends on our ability to engage third parties to assist us with the development of new products, new indications for existing products and the conduct of our clinical trials to achieve regulatory approval for commercialization and any failure or delay by those parties to fulfill their obligations could adversely affect our development and commercialization plans

For our business model to succeed, we must continually develop new products or discover new indications for our existing products. As part of that process, we rely on third parties such as clinical research organizations, clinical investigators and outside testing labs for development activities, such as Phase 2 and/or Phase 3 clinical testing, and to assist us in obtaining regulatory approvals for our product candidates. We rely heavily on these parties for successful execution of their responsibilities but have no control over how these parties manage their businesses and cannot assure you that such parties will diligently or effectively perform their activities. For example, the clinical investigators that conducted our clinical trials, including our second BromSite Phase 3 clinical trial, were not our employees and we anticipate that any future clinical trials for any of our product candidates will also be conducted by third parties. We are responsible for ensuring that each of our clinical trials is conducted in accordance with applicable protocols, rules and regulations or in accordance with the general investigational plan and protocols for the trial as well as the various rules and regulations governing clinical trials in the United States and abroad. Any failure by those parties to perform their duties effectively, in compliance with clinical trial protocols, or on a timely basis, could delay or cause cancellation of our clinical trials, cause us to have to repeat the clinical trials, thereby increasing our expenses, harm our ability to develop and commercialize new products, subject us to potential liabilities and harm our business.

Physicians and patients may not accept or use our products

Even if the FDA approves our product candidates, physicians and patients may not accept or use them. Acceptance and use of our products will depend upon a number of factors including:

• perceptions by members of the health care community, including physicians, about the safety and effectiveness of our products;

• effectiveness of marketing and distribution efforts by us and our licensees and distributors;

• cost-effectiveness of our products relative to competing products or treatments;

• actual or perceived benefits of competing products or treatments;

• physicians’ comfort level and prior experience with and use of competing products or treatments; and

• availability of reimbursement for our products from government or other healthcare payers.

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We may require additional licenses or be subject to expensive and uncertain patent litigation in order to sell our products

A number of pharmaceutical and biotechnology companies and research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that may be related to our business. Some of these technologies, applications or patents may conflict with our technologies or patent applications. As is common in the pharmaceutical and biotech industry, from time to time we receive notices from third parties alleging various challenges to our patent rights. Such conflicts, if proven, could invalidate our issued patents, limit the scope of the patents, if any, that we may be able to obtain, result in the denial of our patent applications or block our rights to exploit our technology. If the USPTO or foreign patent agencies have issued or in the future issue patents to other companies that cover our activities, we may not be able to obtain licenses to these patents at a reasonable cost, or at all, or be able to develop or obtain alternative technology. If we do not obtain such licenses, we could encounter delays in or be precluded altogether from introducing products to the market. If we are required to obtain additional licenses from third parties for the sale of AzaSite in the United States and Canada, we will be required to pay for such additional licenses from our existing cash or royalties received from Akorn.

In addition, we may need to litigate in order to defend against claims of infringement by others, to enforce patents issued to us or to protect trade secrets or know-how owned or licensed by us. Litigation could result in substantial cost to and diversion of effort by us, which may harm our business, prospects, financial condition and results of operations, particularly given our limited and declining cash resources. We have also agreed to indemnify our licensees against infringement claims by third parties related to our technology, which could result in additional litigation costs and liability for us. In addition, our efforts to protect or defend our proprietary rights may not be successful or, even if successful, may result in substantial cost to us, thereby utilizing our very limited resources for purposes other than product development and commercialization.

If our products, methods, processes and other technologies infringe the proprietary rights of other parties, we could incur substantial costs and we may have to:

• obtain licenses, which may not be available on commercially reasonable terms, if at all;

• redesign our products or processes to avoid infringement;

• stop using the subject matter claimed in the patents held by others, which could preclude us from commercializing our products;

• pay damages; or

• defend litigation or administrative proceedings, which may be costly whether we win or lose, and which could result in a substantial diversion of our valuable management resources.

Our business depends upon our proprietary rights and we may not be able to protect, enforce, or secure our intellectual property rights adequately

Our success depends in large part on our ability to obtain patents, protect trade secrets, obtain and maintain rights to technology developed by others, and operate without infringing upon the proprietary rights of others. A substantial number of patents in the field of ophthalmology and genetics have been issued to pharmaceutical, biotechnology and biopharmaceutical companies. Moreover, competitors may have filed patent applications, may have been issued patents or may obtain additional patents and proprietary rights relating to products or processes competitive with ours. We cannot assure you that patents will be granted on a timely basis, or at all, on any of our patent applications or that the scope of any of our issued patents will be sufficiently broad to offer meaningful protection. We may not be able to develop additional proprietary products that are patentable. Even if we receive patent issuances, those issued patents may not provide us with adequate protection for our inventions or may be challenged by others.

From time to time, third parties have claimed and may in the future claim that our patents are invalid, unenforceable and/or will not be infringed by their products. For example, in April 2011, we received a letter (Notice Letter) from Sandoz, Inc. (Sandoz) providing notice that it filed an Abbreviated New Drug Application (ANDA) with

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the FDA seeking marketing approval for a 1% azithromycin ophthalmic solution (Sandoz Product) prior to the expiration of the five U.S. patents listed in the Orange Book for AzaSite which include four of our patents and one patent licensed to us by Pfizer. In the paragraph IV Certification accompanying the Sandoz ANDA filing, Sandoz alleges that the claims of the Orange Book listed patents are invalid, unenforceable and/or will not be infringed by the Sandoz Product. On May 26, 2011, we, Merck and Pfizer filed a patent infringement lawsuit against Sandoz and related entities. On October 4, 2013, the United States District Court for the District of New Jersey entered a Final Judgment in favor of us and the other plaintiffs finding all the asserted claims of the patents in the litigation valid and infringed by Sandoz and related entities. The Court Order specified that the effective date of any FDA approval of a Sandoz ANDA for generic 1% azithromycin ophthalmic solution products would be no earlier than the expiration date of the patents in the litigation. On November 4, 2013, Sandoz filed an appeal of this decision to the United States Court of Appeals for the Federal Circuit. On April 9, 2015, the Court of Appeals for the Federal Circuit affirmed the decision of the district court holding that Sandoz failed to show that the asserted claims in the patents-in-suit would have been obvious to a person of ordinary skill in the art. In accordance with the judgment of the Court of Appeals entered on April 9, 2015, pursuant to Rule 41(a) of the Federal Rules of Appellate Procedure, the formal mandate was issued on May 18, 2015 to close this case since Sandoz did not seeken banc review by the Federal Circuit of its initial decision or seek review by the Supreme Court.

In addition, in May 2013, we received a Notice Letter that Mylan Pharmaceuticals, Inc. (Mylan) filed an ANDA with the FDA seeking marketing approval for a 1% azithromycin ophthalmic solution (Mylan Product), prior to the expiration of the United States patents listed in the Orange Book for AzaSite, which include three of our patents and one patent licensed to us by Pfizer. In the paragraph IV Certification accompanying the Mylan ANDA filing, Mylan alleged that the claims of the Orange Book listed patents were invalid, unenforceable and/or would not be infringed upon by the Mylan Product. On June 14, 2013, we, Merck and Pfizer filed a patent infringement lawsuit against Mylan and a related entity. In February of 2015, all of the parties involved in the lawsuit executed a settlement agreement including all of the patents in the lawsuit. On March 4, 2015, the United District Court for the District of New Jersey issued an Order for Dismissal, without prejudice.

We intend to vigorously enforce our patent rights relating to AzaSite and contest any assertions that these patents are invalid and/or unenforceable, which may require us to spend significant resources.

Furthermore, the patents of others may impair our ability to commercialize our products. The patent positions of firms in the pharmaceutical and biotechnology industries generally are highly uncertain, involve complex legal and factual questions, and have recently been the subject of significant litigation. The USPTO and the courts have not developed, formulated, or presented a consistent policy regarding the breadth of claims allowed or the degree of protection afforded under pharmaceutical and genetic patents. Despite our efforts to protect our proprietary rights, others may independently develop similar products, duplicate any of our products or design around any of our patents. In addition, third parties from whom we have licensed or otherwise obtained technology may attempt to terminate or scale back our rights.

We also depend upon unpatented trade secrets to maintain our competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Our trade secrets may also be disclosed, and we may not be able to protect our rights to unpatented trade secrets effectively. To the extent that we, our consultants or our research collaborators use intellectual property owned by others, disputes also may arise as to the rights in related or resulting know-how and inventions.

The failure to successfully market and commercialize AzaSite has continued to harm sales of AzaSite, which has made it unlikely that we will receive significant future revenue from sales of AzaSite

To date, sales of AzaSite in the United States have been limited and have declined over the past several years. Any future success of the commercialization of AzaSite in the United States and our receipt of royalties under the Akorn License will depend on a number of factors, including, among others:

• the scope of Akorn’s marketing of AzaSite in the United States;

• Akorn’s commitment to continuing the Akorn License with us;

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• Akorn’s deployment of resources to market and sell AzaSite or lack thereof;

• Akorn’s marketing efforts outside of ophthalmologists;

• Akorn’s pricing decisions regarding AzaSite;

• Akorn’s marketing and selling of any current or future competing products;

• the effectiveness and extent of Akorn’s promotional, sales and marketing efforts;

• Akorn’s ability to build, train and retain an effective sales force;

• Akorn’s marketing efforts and success outside of eye care professionals, such as to pediatricians and primary care physicians;

• Akorn’s ability to successfully market AzaSite to physicians and patients;

• Akorn’s ability to compete against larger and more experienced competitors;

• the discovery of any side effects or negative efficacy findings for AzaSite;

• product recalls or product liability claims relating to AzaSite;

• the introduction of generic competition;

• the extent to which competing products for the treatment of bacterial conjunctivitis obtain more favorable formulary status than AzaSite; and

• the relevant parties’ ability to adequately maintain or enforce the intellectual property rights relevant to AzaSite.

Pediatricians and primary care physicians write more than 67% of prescriptions for ophthalmic antibiotics. However, Akorn has no experience calling on pediatricians and primary care physicians. Akorn’s focus on eye care professionals rather than pediatricians and primary care providers could result in lower AzaSite sales and therefore lower royalties paid to us. A large number of pharmaceutical companies, including those with competing products, much larger sales forces and much greater financial resources, and those with products for indications that are completely unrelated to AzaSite, compete for the time and attention of eye care professionals, pediatricians and primary care physicians. We have no control over how Akorn manages and operates its sales force, how effective Akorn’s sales efforts will be or Akorn’s pricing decisions regarding AzaSite.

Akorn could experience financial or other difficulties unrelated to AzaSite that could adversely affect the marketing or sale of AzaSite. Moreover, Akorn could change its commercial strategy and deemphasize or sell or sublicense its rights to AzaSite. We cannot prevent Akorn from developing or licensing a product that competes with AzaSite or limiting or withdrawing its support of AzaSite.

We only very recently licensed the rights to AzaSite, AzaSite Xtra and BromSite to Nicox in Europe, Middle East and Africa (EMEA). None of these products are approved for sale in EMEA and there can be no assurance that any such approval will be obtained nor that Nicox will be able to successfully commercialize any such products or we will receive significant, or any, royalties therefrom.

We rely on a sole source for the supply of the active pharmaceutical ingredient for AzaSite

We currently have a single supplier for azithromycin, the active drug incorporated into AzaSite, as well as AzaSite Plus and AzaSite Xtra. The supplier of azithromycin has a drug master file on the compound with the FDA and

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is subject to the FDA’s review and oversight. The supplier’s manufacturing facility is subject to potential natural disasters, including earthquakes, hurricanes, tornadoes, floods, fires or explosions, and other interruptions in operation due to factors including labor unrest or strikes, failures of utility services or microbial or other contamination. If the supplier were to fail or refuse to continue to supply us or Akorn, or in the future Nicox, if the FDA were to identify issues in the production of azithromycin that the supplier was unable to resolve quickly and cost-effectively, or if other issues were to arise that impact production, the manufacture and commercialization of AzaSite, or in the future AzaSite Xtra, could be interrupted which could prevent us from receiving future revenue from these products. Additional suppliers for azithromycin exist, but qualification of an alternative source would be required and could be time consuming and expensive and, during such qualification process, any shortage of azithromycin would negatively impact the sales of AzaSite and could delay the development timeline of AzaSite Plus and AzaSite Xtra.

In addition, certain of the raw materials that we use in formulating DuraSite, the drug delivery system used in AzaSite and our other products, are available only from Lubrizol Advanced Materials, Inc., or Lubrizol. Although we do not have a current supply agreement with Lubrizol, we have not encountered any difficulties obtaining necessary materials from Lubrizol. Any significant interruption in the supply of these raw materials could delay sales of AzaSite or other products, which could prevent us from receiving future revenue from these products.

We compete in highly competitive markets and our competitors’ financial, technical, marketing, manufacturing and human resources may surpass ours and limit our ability to develop and/or market our products and technologies

Our success depends upon developing and maintaining a competitive advantage in the development of products and technologies in our areas of focus. We have many competitors in the United States and abroad, including pharmaceutical, biotechnology and other companies with varying resources and degrees of concentration in the ophthalmic market. Our competitors may have existing products or products under development which may be technically superior to ours or which may be less costly or more acceptable to the market. Our competitors may obtain cost advantages, patent protection or other intellectual property rights that would block or limit our ability to develop our potential products. Competition from these companies is intense and is expected to increase as new products enter the market and new technologies become available. Many of our competitors have substantially greater financial, technical, marketing, manufacturing and human resources than we do, particularly in light of our current financial condition. In addition, they may succeed in developing technologies and products that are more effective, safer, less expensive or otherwise more commercially acceptable than any that we have or will develop. Our competitors may also obtain regulatory approval for commercialization of their products more effectively or rapidly than we will. If we decide to manufacture and market our products by ourselves, we will be competing in areas in which we have limited or no experience such as manufacturing efficiency and marketing capabilities.

If we cannot compete successfully for market share against other drug companies, we may not achieve sufficient product revenues and our business will suffer

The market for our product candidates is characterized by intense competition and rapid technological advances. If our product candidates receive FDA approval, they will compete with a number of existing and future drugs and therapies developed, manufactured and marketed by others. Existing or future competing products may provide greater therapeutic convenience or clinical or other benefits for a specific indication than our products or may offer comparable performance at a lower cost. If our products fail to capture and maintain market share, we may not achieve sufficient product revenues and our business will be harmed.

We compete against fully integrated pharmaceutical companies and smaller companies that are collaborating with larger pharmaceutical companies, academic institutions, government agencies and other public and private research organizations. Many of these competitors have products competitive with AzaSite already approved or in development, including Zymar and Ocuflox by Allergan, Vigamox and Ciloxan by Alcon, and Quixin by Johnson & Johnson. In addition, many of these competitors, either alone or together with their collaborative partners, operate larger research and development programs and have substantially greater financial resources than we do, as well as significantly greater experience in:

• developing drugs;

• undertaking pre-clinical testing and human clinical trials;

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• obtaining FDA and other regulatory approvals of drugs;

• formulating and manufacturing drugs;

• launching, marketing and selling drugs; and

• attracting qualified personnel, parties for acquisitions, joint ventures or other collaborations.

We have to attract and retain key employees to be successful

A critical factor to our success will be retaining our personnel or recruiting replacement personnel. Competition for skilled individuals in the biotechnology business, particularly in the San Francisco Bay Area, is highly competitive, and we may not be able to continue to attract and retain personnel necessary for the development of our business, particularly in light of our financial condition. Our ability to attract and retain such individuals may be harmed by our current financial situation, uncertainties regarding our ability to raise additional funds or continue our operations and the other challenges we face. In addition, our employees may leave us to pursue other opportunities due to uncertainties regarding our financial condition or announcements or rumors regarding potential strategic transactions. The loss of key personnel, the failure to recruit replacement personnel or to develop needed expertise would harm our business.

Our products are subject to government regulations and approvals which may delay or prevent the marketing of potential products and impose costly procedures upon our activities

The FDA and comparable agencies in state and local jurisdictions and in foreign countries impose substantial requirements upon preclinical and clinical testing, manufacturing and marketing of pharmaceutical products. Lengthy and detailed preclinical and clinical testing, validation of manufacturing and quality control processes, and other costly and time-consuming procedures are required. Satisfaction of these requirements typically takes several years and the time needed to satisfy them may vary substantially, based on the type, complexity and novelty of the pharmaceutical product. The effect of government regulation may be to delay or to prevent marketing of potential products for a considerable period of time and to impose costly procedures upon our activities. The FDA or any other regulatory agency may not grant approval on a timely basis, or at all, for any products we develop. Success in preclinical or early stage clinical trials does not assure success in later stage clinical trials. Data obtained from preclinical and clinical activities are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. If regulatory approval of a product is granted, such approval may impose limitations on the indicated uses for which a product may be marketed. Further, even after we have obtained regulatory approval, later discovery of previously unknown problems with a product may result in restrictions on the product, including withdrawal of the product from the market. Even if we receive FDA approval of a product for certain indicated uses, our competitors, including our collaborators, could market products for such indications even if such products have not been specifically approved for such indications. If the FDA determines regulatory approval is required, any delay in obtaining or failure to obtain regulatory approvals would make it difficult or impossible to market our products and would harm our business, prospects, financial condition, and results of operations.

The FDA’s policies may change and additional government regulations may be promulgated which could prevent or delay regulatory approval of our potential products. Moreover, increased attention to the containment of health care costs in the United States could result in new government regulations that could harm our business. Adverse governmental regulation might arise from future legislative or administrative action, either in the United States or abroad.

We have no experience in commercial manufacturing and if contract manufacturing is not available to us or does not satisfy regulatory requirements, we will have to establish our own regulatory compliant manufacturing capability and may not have the financial resources to do so

We have no experience manufacturing products for Phase 3 clinical trials and commercial purposes at our own facility. We have a pilot facility licensed by the State of California to manufacture a number of our products for Phase 1 and Phase 2 clinical trials but not for late stage clinical trials or commercial purposes. Therefore, we rely on a single contract manufacturer for a substantial portion of our manufacturing requirements. Any delays or difficulties that we may encounter in establishing and maintaining a relationship with qualified manufacturers to produce, package and distribute our products may harm our clinical trials, regulatory filings, market introduction and subsequent sales of our products.

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Contract manufacturers must adhere to cGMP regulations that are strictly enforced by the FDA on an ongoing basis through the FDA’s facilities inspection program, as well as by foreign governmental associations outside the United States. Contract manufacturing facilities must pass a pre-approval plant inspection before the FDA will approve an NDA. Some of the material manufacturing changes that occur after approval are also subject to FDA review and clearance or approval. While the FDA has approved the AzaSite manufacturing process and facility, the FDA or other regulatory agencies may not approve the process or the facilities by which any of our other products may be manufactured or could rescind their approval of the AzaSite manufacturing process or facility. Our dependence on third parties to manufacture our products may harm our ability to develop and deliver products on a timely and competitive basis. To the extent that we change manufacturers or engage additional manufacturers in the United States or abroad, we may experience delays, increased costs, quality-control issues and other issues that could harm our ability to conduct clinical trials and market and sell our products. Should we be required to manufacture products ourselves, we will:

• be required to expend significant amounts of capital to install a manufacturing capability;

• be subject to the regulatory requirements described above;

• be subject to similar risks regarding delays or difficulties encountered in manufacturing any such products; and

• require substantially more additional capital than we otherwise may require.

Therefore, we may not be able to manufacture any products successfully or in a cost-effective manner.

Uncertainties regarding healthcare reform and third-party reimbursement may impair our ability to raise capital, form collaborations and sell our products

The continuing efforts of governmental and third-party payers to contain or reduce the costs of healthcare through various means may harm our business. For example, in some foreign markets, the pricing or profitability of healthcare products is subject to government control. In the United States, there have been, and we expect there will continue to be, a number of federal and state proposals to implement similar government control, which could lead to lower reimbursement rates for our products or no reimbursement at all. The implementation or even the announcement of any of these legislative or regulatory proposals or reforms could harm our business by reducing the prices we or our partners are able to charge for our products, impeding our ability to achieve profitability, raise capital or form collaborations. In addition, the availability of reimbursement from third-party payers determines, in large part, the demand for healthcare products in the United States and elsewhere. Examples of such third-party payers are government and private insurance plans. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products and third-party payers are increasingly challenging the prices charged for medical products and services. If we or our partners succeed in bringing one or more products to the market, reimbursement from third-party payers may not be available or may not be sufficient to allow the sale of these products on a competitive or profitable basis.

Our insurance coverage may not adequately cover our potential product liability exposure

We are exposed to potential product liability risks inherent in the development, testing, manufacturing, marketing and sale of human therapeutic products. Product liability insurance for the pharmaceutical industry is expensive. Although we believe our current insurance coverage is adequate to cover likely claims we may encounter given our current stage of development and activities, our present product liability insurance coverage may not be adequate to cover all potential claims we may encounter, particularly if AzaSite is commercialized outside the United States and Canada. If AzaSite is commercialized in other countries, we may have to increase our coverage, which will be expensive, and we may not be able to obtain or afford adequate insurance coverage against potential claims in sufficient amounts or at a reasonable cost.

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Our use of hazardous materials may pose environmental risks and liabilities which may cause us to incur significant costs

Our research, development and manufacturing processes involve the controlled use of small amounts of hazardous solvents used in pharmaceutical development and manufacturing, including acetic acid, acetone, acrylic acid, calcium chloride, chloroform, dimethyl sulfoxide, ethyl alcohol, hydrogen chloride, nitric acid, phosphoric acid and other similar solvents. We retain a licensed outside contractor that specializes in the disposal of hazardous materials used in the biotechnology industry to properly dispose of these materials, but we cannot completely eliminate the risk of accidental contamination or injury from these materials. Our cost for the disposal services rendered by our outside contractor was not material for the years ended 2014, 2013, or 2012. In the event of an accident involving these materials, we could be held liable for any damages that result and any such liability could exceed our resources. Moreover, as our business develops we may be required to incur significant costs to comply with federal, state and local environmental laws, regulations and policies, especially to the extent that we manufacture our own products.

Management and principal stockholders may be able to exert significant control on matters requiring approval by our stockholders

As of June 30, 2015, our management and principal stockholders (those owning more than 5% of our outstanding shares) together beneficially owned approximately 45% of our shares of common stock. As a result, our management and principal stockholders, acting together or individually, may be able to exert significant control on matters requiring approval by our stockholders, including the election of all or at least a majority of our Board of Directors, the approval of amendments to our charter, and the approval of financing and business combinations, including the Merger.

The market prices for securities of biopharmaceutical and biotechnology companies such as ours have been and are likely to continue to be highly volatile due to reasons that are related and unrelated to our operating performance and progress; registration of the common stock underlying the warrants issued pursuant to the Purchase Agreement we entered into in connection with our October 2014 debt financing, or the subsequent sale of such common stock, may cause our stock price to decline; we have not paid dividends in the past and do not anticipate doing so in the future

The market prices for securities of biopharmaceutical and biotechnology companies, including ours, have been highly volatile. The market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. In addition, future announcements and circumstances such as our current financial condition and need for substantial additional funding to continue our operations beyond December 2015, the audit report included in this annual report on Form 10-K for the year ended December 31, 2014 that included an explanatory paragraph referring to our recurring losses from operations, available cash balance and accumulated deficit and a substantial doubt about our ability to continue as a going concern, our ability to obtain new financing, any announcements or rumors regarding strategic alternatives we pursue or that terminate, our likelihood of raising additional funding, the status of our relationships or proposed relationships with third-party collaborators, including Akorn, the results of testing and clinical trials, future sales of equity or debt securities by us, the exercise of outstanding options and warrants that could result in dilution to our current holders of common stock, developments in our patents or other proprietary rights or those of our competitors, our failure to meet analyst expectations, any litigation regarding the same, technological innovations or new therapeutic products, governmental regulation, or public concern as to the safety of products developed by us or others and general market conditions concerning us, our competitors or other biopharmaceutical companies may have a significant effect on the market price of our common stock. For example, in the twelve months ended June 30, 2015, our closing stock price fluctuated from a high of $0.36 to a low of $0.13. Such fluctuations can lead to securities class action litigation and make it difficult to obtain financing. Securities litigation against us could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business.

We filed a registration statement with the Securities and Exchange Commission, or SEC, to register the resale of the common stock issuable upon exercise of the warrants issued pursuant to the Purchase Agreement. The subsequent sale of the common stock covered by such registration statements may cause our stock price to decline.

We have not paid any cash dividends on our common stock and we do not anticipate paying any dividends on our common stock in the foreseeable future.

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Our common stock trades on the OTCBB

Our common stock currently trades on the over-the-counter bulletin board (OTCBB) market, although there are no assurances that it will continue to trade on this market. Over-the-counter (OTC) transactions involve risks in addition to those associated with transactions on a stock exchange. Listing on the OTC rather than a stock exchange could harm the trading volume and liquidity of our common stock and, as a result, the market price for our common stock might become more volatile. Listing on the OTC rather than on a major stock exchange could also cause a reduction in the number of investors willing or able to hold or acquire our common stock, transactions in our common stock could be delayed and securities analysts’ and news media coverage of us may be reduced. These factors could result in lower prices and larger spreads in the bid and ask prices for shares of common stock. Listing on the OTC rather than on a major stock exchange could also make our common stock substantially less attractive as collateral for loans, for investment by potential financing sources under their internal policies or state and federal securities laws or as consideration in future capital raising transactions. Furthermore, the listing on the OTC rather than a stock exchange may have other negative implications, including the potential loss of confidence by suppliers, partners and employees. Our OTC status may also make it more difficult and expensive for us to comply with state and federal securities laws in connection with future financings, acquisitions or equity issuances to employees and other service providers, thereby making it more difficult and expensive for us to raise capital, acquire other businesses using our stock and compensate our employees using equity.

We have adopted and are subject to anti-takeover provisions that could delay or prevent an acquisition of our Company and could prevent or make it more difficult to replace or remove current management

Provisions of our certificate of incorporation and bylaws may constrain or discourage a third party from acquiring or attempting to acquire control of us. Such provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. In addition, such provisions could also prevent or make it more difficult for our stockholders to replace or remove current management and could adversely affect the price of our common stock if they are viewed as discouraging takeover attempts, business combinations or management changes that stockholders consider in their best interest. Our Board of Directors has the authority to issue up to 5,000,000 shares of our preferred stock (Preferred Stock). Our Board of Directors has the authority to determine the price, rights, preferences, privileges and restrictions, including voting rights, of the unissued shares of Preferred Stock without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible financings, acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, even if the transaction might be desired by our stockholders. Provisions of Delaware law applicable to us could also delay or make more difficult a merger, tender offer or proxy contest involving us, including Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years unless conditions set forth in the Delaware General Corporation Law are met. The issuance of Preferred Stock or Section 203 of the Delaware General Corporation Law could also be deemed to benefit incumbent management to the extent that these provisions deter offers by persons who would wish to make changes in management or exercise control over management. Other provisions of our certificate of incorporation and bylaws may also have the effect of delaying, deterring or preventing a takeover attempt or management changes that our stockholders might consider in their best interest. For example, our bylaws limit the ability of stockholders to remove directors and fill vacancies on our Board of Directors. Our bylaws also impose advance notice requirements for stockholder proposals and nominations of directors and prohibit stockholders from calling special meetings or acting by written consent.

If earthquakes and other catastrophic events strike, our business may be negatively affected

Our corporate headquarters, including our research and development and pilot plant operations, are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster such as an earthquake would have a material adverse impact on our business, results of operations, and financial condition and impair our operations at our pilot facility. We also rely on a third-party manufacturing facility to produce products for

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commercialization and certain trials. If we were unable to use this third-party manufacturing facility due to a natural disaster at such facility or for other reasons, we would incur significant additional costs and delays in our product development timelines as we switched some manufacturing to our pilot plant operations, which are not intended for commercial manufacturing.

We are subject to risks related to our information technology systems and the information gathered in our clinical trials

We rely on information technology systems in order to conduct business, including internal and external communications, ordering materials for our operations, storing operational information and maintaining and reporting our results. These systems are vulnerable to interruption or failure due to the age of certain of our systems, viruses, malware, security breaches, fire, power loss, system malfunction and other events, which may be beyond our control. Systems interruptions or failures could reduce our ability to develop our products or continue our business, which could have a material adverse effect on our operations and financial performance.

Additionally, federal and state laws governing our ability to obtain and, in some cases, to use and disclose data we need to conduct research activities, including our clinical trials, could increase our costs of doing business. These laws’ requirements could further complicate our ability to obtain necessary research data from our collaborators. In the event that our systems are breached and certain clinical data is compromised, we could become subject to costs arising from failure to maintain the privacy of protected health information. Claims that we have violated individuals’ privacy rights or breached our privacy obligations, even if we are not found liable, could be expensive and time-consuming to defend, could result in adverse publicity and harm our reputation, and could harm our business.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not Applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The information required under this Item appears under the heading “Exhibit Index” of this Quarterly Report on Form 10-Q.

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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.

		INSITE VISION INCORPORATED
Dated: August 13, 2015	By:	/s/ Louis Drapeau
		Louis Drapeau Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

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EXHIBIT INDEX

Number	Exhibit Table
2.1*1	Agreement and Plan of Merger, dated as of June 8, 2015, by and among the Company, QLT and Merger Sub.
3.12	Certificate of Amendment to the Restated Certificate of Incorporation of the Company.
10.1*3	Secured Note, dated as of June 8, 2015, by and between the Company and QLT.
10.2*4	Security Agreement, dated as of June 8, 2015, by and between the Company and QLT.
10.35	IP Security Agreement, dated as of June 8, 2015, by and between InSite Vision Incorporated and QLT Inc.
10.46	Intercreditor Agreement, dated June 9, 2015, among the Company, QLT and U.S. Bank, as collateral agent.
10.57	Form of Amendment, Waiver and Consent.
31.1	Certificate of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certificate of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from InSite Vision, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statement of Income, (ii) the Consolidated Balance Sheet, (iii) the Consolidated Statement of Cash Flow, and (iv) Notes to Consolidated Financial Statements.

1. Incorporated by reference to Exhibit 2.1 in the Company’s Current Report on Form 8-K (File No. 000-22332), filed with the SEC on June 8, 2015.

2. Incorporated by reference to Exhibit 3.1 in the Company’s Current Report on Form 8-K (File No. 000-22332), filed with the SEC on April 2, 2015.

3. Incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form 8-K (File No. 000-22332), filed with the SEC on June 8, 2015.

4. Incorporated by reference to Exhibit 10.2 in the Company’s Current Report on Form 8-K (File No. 000-22332), filed with the SEC on June 8, 2015.

5. Incorporated by reference to Exhibit 10.3 in the Company’s Current Report on Form 8-K (File No. 000-22332), filed with the SEC on June 8, 2015.

6. Incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form 8-K (File No. 000-22332), filed with the SEC on June 11, 2015.

7. Incorporated by reference to Exhibit 10.2 in the Company’s Current Report on Form 8-K (File No. 000-22332), filed with the SEC on June 11, 2015.

* The Company has omitted schedules and other similar attachments to such agreement pursuant to Item 601(b) of Regulation S-K. InSite Vision Incorporated will furnish a copy of such omitted document to the SEC upon request.

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