EyePoint Pharmaceuticals, Inc. - Quarter Report: 2018 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2018

OR

For the transition period from                      to                     

COMMISSION FILE NUMBER 000-51122

EyePoint Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

(617) 926-5000

(Registrant’s telephone number, including area code)

pSivida Corp.

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically 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  ☒    No  ☐

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

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

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

There were 54,029,917 shares of the registrant’s common stock, $0.001 par value, outstanding as of May 7, 2018.

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EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

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PART I. FINANCIAL INFORMATION

EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share amounts)

See notes to condensed consolidated financial statements

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EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands, except per share amounts)

See notes to condensed consolidated financial statements

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EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except share amounts)

See notes to condensed consolidated financial statements

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EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

See notes to condensed consolidated financial statements

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EYEPOINT PHARMACEUTICALS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The accompanying condensed consolidated financial statements of EyePoint Pharmaceuticals, Inc. (formerly pSivida Corp.) and subsidiaries (collectively, the “Company”) as of March 31, 2018 and for the three and nine months ended March 31, 2018 and 2017 are unaudited. Certain information in the footnote disclosures of these financial statements has been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in its Annual Report on Form 10-K for the fiscal year ended June 30, 2017 (“fiscal 2017”). In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended June 30, 2017, and include all adjustments, consisting only of normal recurring adjustments, that are necessary for the fair presentation of the Company’s financial position, results of operations, comprehensive loss and cash flows for the periods indicated. The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make assumptions and estimates that affect, among other things, (i) reported amounts of assets and liabilities; (ii) disclosure of contingent assets and liabilities at the date of the consolidated financial statements; and (iii) reported amounts of revenues and expenses during the reporting period. The results of operations for the three and nine months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the entire fiscal year or any future period.

The Company is a specialty biopharmaceutical company committed to developing and commercializing innovative ophthalmic products for the treatment of eye diseases. The Company’s lead product, DEXYCU™ (dexamethasone intraocular suspension) 9%, was approved by the U.S. Food and Drug Administration (“FDA”) in February 2018 for the treatment of post-operative inflammation. DEXYCU is administered as a single dose at the end of ocular surgery and is the first long-acting intraocular product approved by the FDA for the treatment of post-operative inflammation. DEXYCU utilizes the Company’s proprietary Verisome^® drug-delivery platform, which allows for a single injection that releases drug over time. There are over four million cataract surgeries performed annually in the United States (“U.S.”) and the Company plans to launch DEXYCU in the U.S. in the first half of 2019 with a primary focus on its use following cataract surgery. The Company’s lead product candidate is YUTIQ™ for the treatment of non-infectious uveitis affecting the posterior segment of the eye (“three-year uveitis”). Injected into the eye in an office visit, YUTIQ is a tiny micro-insert that delivers a micro-dose of a corticosteroid to the back of the eye on a sustained constant (zero order release) basis for approximately three years. On March 19, 2018, the FDA accepted the Company’s New Drug Application (“NDA”) for YUTIQ and it has set an FDA Prescription Drug User Fee Act (“PDUFA”) action date of November 5, 2018. YUTIQ is based on the Company’s proprietary Durasert™ sustained-release drug delivery technology platform, which can deliver drugs for predetermined periods of time ranging from months to years. Posterior segment uveitis is the third leading cause of blindness in the U.S. and affects between 55,000 to 120,000 people. If approved in November 2018, we expect to launch YUTIQ in the U.S. in the first half of 2019.

The Company has financed its operations primarily from sales of equity securities, debt and the receipt of license fees, milestone payments, research and development funding and royalty income from its collaboration partners. The Company has a history of operating losses and, to date, has not had significant recurring cash inflows from revenue. The Company’s anticipated recurring use of cash to fund operations in combination with no probable source of additional capital raises substantial doubt about its ability to continue as a going concern for one year from the issuance of its financial statements. The Company believes that its cash and cash equivalents of $16.3 million at March 31, 2018, and expected proceeds from existing collaboration agreements, will enable the Company to maintain its current and planned operations (including continuation of its two Phase 3 clinical trials for YUTIQ and commercial launch of DEXYCU and, if approved, YUTIQ) through approximately the third quarter of calendar year 2018. In order to extend the Company’s ability to fund its operations beyond then, including its planned U.S. commercial launch of DEXYCU and, if approved, YUTIQ, the Company has filed a preliminary proxy statement for a special meeting of stockholders to be held on June 22, 2018 for the purpose of approving, among other things, the issuance of up to approximately $25.5 million of units (each, a “Unit”), with each Unit consisting of (i) one share of the Company’s common stock and (ii) one warrant to purchase one share of the Company’s common stock (the “Second Tranche Transaction”). The Company may also draw down an additional $5.0 million pursuant to a credit agreement among the Company, as borrower, SWK Funding LLC, as agent, and the lenders party thereto from time to time, subject to a minimum capital raise of at least $20 million of net cash proceeds from an additional equity offering, which would be satisfied by the Second Tranche Transaction, or permitted subordinated debt financing (“Minimum Capital Raise”). There is no assurance that the Company will receive significant revenues from its planned commercialization of DEXYCU or, if approved, YUTIQ, or from its product license revenues under existing collaboration agreements or be able to obtain financing from any other sources. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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New accounting pronouncements are issued periodically by the Financial Accounting Standards Board (“FASB”) and are adopted by the Company as of the specified effective dates. Unless otherwise disclosed below, the Company believes that recently issued and adopted pronouncements will not have a material impact on the Company’s financial position, results of operations and cash flows or do not apply to the Company’s operations.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in U.S. GAAP. In August 2015, the FASB issued ASU 2015-14, which officially deferred the effective date of ASU 2014-09 by one year, while also permitting early adoption. As a result, ASU 2014-09 will become effective on July 1, 2018. The Company has initiated an assessment of the potential changes from adopting ASU 2014-09 and two revenue streams are expected to be impacted under the standard. The Company plans to adopt the new standard effective July 1, 2018 using the modified retrospective method. The Company is still evaluating aspects of ASU 2014-09 and has not determined how it may impact its consolidated financial statements or related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As a result, ASU 2016-02 will become effective on July 1, 2019. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is evaluating the impact the adoption of this standard will have on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), to clarify the definition of a business by adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets versus businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this standard early to account for the acquisition of Icon Bioscience, Inc. (“Icon”) (see Note 3).

Fair Value Measurements

The Company accounts for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

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Impairment of Intangible Assets

The Company’s finite life intangible assets include its newly acquired DEXYCU product and its previously acquired Durasert and Tethadur™ patented technologies. The Durasert and Tethadur intangible assets were amortized on a straight-line basis over twelve years and became fully amortized as of December 31, 2017. The DEXYCU intangible asset is being amortized based on the pattern in which the economic benefits of the intangible asset are expected to be consumed. The intangible asset lives were determined based upon the anticipated period that the Company would derive future cash flows from the intangible assets, considering the effects of legal, regulatory, contractual, competitive and other economic factors. The Company continually monitors whether events or circumstances have occurred that indicate that the remaining estimated useful life of its intangible assets may warrant revision. The Company assesses potential impairments to its intangible assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the future undiscounted net cash flows expected to result from the use of an asset are less than its carrying value. If the Company considers an asset to be impaired, the impairment charge to be recognized is measured by the amount by which the carrying value of the asset exceeds its estimated fair value.

Derivative Instruments

Derivative financial liabilities are recorded at fair value, with gains and losses arising from changes in fair value recognized in change in fair value of derivative liability within the consolidated statements of operations and comprehensive loss at each period end while such instruments are outstanding. The derivative liabilities are being valued using Monte Carlo simulation models. Refer to Notes 8 and 9 for additional information.

On March 28, 2018, the Company and its newly-created wholly-owned subsidiary, Oculus Merger Sub, Inc., acquired Icon, a specialty biopharmaceutical company, through a reverse triangular merger (the “Icon Acquisition”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) between the Company, Icon, and Shareholder Representative Services LLC (“SRS”), solely in its capacity as representative of Icon’s securityholders. The Icon Acquisition will be accounted for as an asset acquisition because substantially all of the fair value of the gross assets acquired were deemed to be concentrated in a group of similar identifiable assets related to Icon’s lead product, DEXYCU. A portion of the Icon Acquisition was funded by an equity financing and a debt financing, both of which closed concurrently with the Icon Acquisition (see Notes 8 and 9).

Pursuant to the Merger Agreement, the Company made a closing payment of $15.0 million to SRS, net of an estimated $127,000 working capital adjustment, and is obligated to pay certain post-closing contingent cash payments upon the achievement of specified milestones and based upon certain net sales and partnering revenue standards, in each case subject to the terms and conditions set forth in the Merger Agreement. These include but are not limited to (i) a one-time development milestone of $15.0 million payable in cash upon the first commercial sale of DEXYCU in the United States, (ii) sales milestone payments totaling up to $95.0 million upon the achievement of certain sales thresholds and subject to certain Centers for Medicare & Medicaid Services reimbursement conditions set forth in the Merger Agreement, (iii) quarterly earn-out payments equal to 12% on net sales of DEXYCU in a given year, which earn-out payments will increase to 16% of net sales of DEXYCU in such year beginning in the calendar quarter for such year to the extent aggregate annual consideration of DEXYCU exceeds $200.0 million in such year, (iv) quarterly earn-out payments equal to 20% of partnering revenue received by the Company for DEXYCU outside of the United States, and (v) single-digit percentage quarterly earn-out payments with respect to net sales and/or partnering income, if any, resulting from future clinical development, regulatory approval and commercialization of any other product candidates the Company acquired in the Icon Acquisition.

The purchase price on the date of the Icon Acquisition was $32.0 million, comprised of the closing consideration of $15.0 million, including the assumption of an estimated $127,000 of net current liabilities of Icon, the contingent development milestone payment of $15.0 million and transaction costs of approximately $2.0 million. Given the stage of development of DEXYCU, the Company has determined these payments do not represent research and development costs. The contingent consideration in the form of sales milestones will be capitalized as additional intangible assets when any such consideration becomes probable and can be reasonably estimated. Sales-based royalty payments will be expensed as incurred.

The $32.0 million purchase price was allocated to a single finite-lived intangible asset with an expected amortization life of approximately 13 years. The amortization expense will be based on the pattern in which the economic benefits of the intangible asset are expected to be consumed. The acquisition did not have a net tax impact due to a full valuation allowance against the acquired net deferred tax assets.

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Alimera

Under a collaboration agreement with Alimera, as amended in March 2008 (the “Prior Alimera Agreement”), the Company licensed to Alimera the rights to develop, market and sell certain product candidates, including ILUVIEN^® for diabetic macular edema (“DME”), and Alimera assumed all financial responsibility for the development of the licensed products. In addition, the Company was entitled to receive 20% of any net profits (as defined) on sales of each licensed product (including ILUVIEN) by Alimera, measured on a quarter-by-quarter and country-by-country basis. Alimera was entitled to recover 20% of previously incurred and unapplied net losses (as defined) for commercialization of each product in a country, but only by an offset of up to 4% of the net profits earned in that country each quarter, reducing the Company’s net profit share to 16% in each country until those net losses were recouped. In the event that Alimera sublicensed commercialization in any country, the Company was entitled to 20% of royalties and 33% of non-royalty consideration received by Alimera, less certain permitted deductions. The Company was also entitled to reimbursement of certain patent maintenance costs with respect to the patents licensed to Alimera.

Because the Company had no remaining performance obligations under the Prior Alimera Agreement, all amounts received from Alimera were generally recognized as revenue upon receipt or at such earlier date, if applicable, on which any such amounts were both fixed and determinable and reasonably assured of collectability. In instances when payments were received and subject to a contingency, revenue was deferred until such contingency was resolved.

On July 10, 2017, the Company entered into a further amended and restated collaboration agreement (the “Amended Alimera Agreement”), pursuant to which the Company (i) licensed its Durasert three-year uveitis product candidate (called YUTIQ in the U.S. and planned to be called ILUVIEN in Europe, the Middle East and Africa (“EMEA”)) to Alimera for the EMEA and (ii) converted the net profit share arrangement for each licensed product (including ILUVIEN) under the Prior Alimera Agreement to a sales-based royalty on a calendar quarter basis commencing July 1, 2017, with payments from Alimera due 60 days following the end of each quarter.

Sales-based royalties start at the rate of 2%. Commencing January 1, 2019 (or earlier under certain circumstances), the sales-based royalty will increase to 6% on aggregate calendar year net sales up to $75 million and 8% in excess of $75 million. Alimera’s share of contingently recoverable accumulated ILUVIEN commercialization losses under the Prior Alimera Agreement, capped at $25 million, are to be reduced as follows: (i) $10.0 million was cancelled in lieu of an upfront license fee on the effective date of the Amended Alimera Agreement; (ii) for calendar years 2019 and 2020, 50% of earned sales-based royalties in excess of 2% will be offset against the quarterly royalty payments otherwise due from Alimera; (iii) on January 1, 2020, another $5 million will be cancelled, provided, however, that such date of cancellation may be extended under certain circumstances related to Alimera’s regulatory approval process for ILUVIEN for three-year uveitis, with such extension, if any, subject to mutual agreement by the parties; and (iv) commencing in calendar year 2021, 20% of earned sales-based royalties in excess of 2% will be offset against the quarterly royalty payments due from Alimera until such time as the balance of the original $25 million of recoverable commercialization losses has been fully recouped.

Following the completion of the Amended Alimera Agreement, the Company withdrew its previously filed EU marketing approval application and its EU orphan drug designation for three-year uveitis, and Alimera was responsible for filing a Type II variation for ILUVIEN for the treatment of three-year uveitis. In January 2018, Alimera received validation of a Type II variation submitted in December 2017 in all seventeen European countries in which it previously received regulatory approval for ILUVIEN for DME. If the variation is approved, Alimera plans to commercialize the three-year uveitis indication under its ILUVIEN trademark.

Revenue under the Prior Alimera Agreement and/or the Amended Alimera Agreement totaled $234,000 and $290,000 for the three months ended March 31, 2018 and 2017, respectively, and $524,000 and $325,000 for the nine months ended March 31, 2018 and 2017, respectively. In addition to patent fee reimbursements in both periods, the Company earned (i) $378,000 of sales-based royalties for the nine months ended March 31, 2018 attributable to the first and second quarters of fiscal 2018 (recorded as royalty income under the Amended Alimera Agreement) and (ii) $50,000 of net profits in the three months ended September 30, 2017 attributable to the fourth quarter of fiscal 2017 (recorded as collaborative research and development revenue under the Prior Alimera Agreement).

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Pfizer

In June 2011, the Company and Pfizer, Inc. (“Pfizer”) entered into an Amended and Restated Collaborative Research and License Agreement (the “Restated Pfizer Agreement”) to focus solely on the development of a sustained-release bioerodible micro-insert injected into the subconjunctiva designed to deliver latanoprost for human ophthalmic disease or conditions other than uveitis (the “Latanoprost Product”). Pfizer made an upfront payment of $2.3 million and the Company agreed to provide Pfizer options under various circumstances for an exclusive, worldwide license to develop and commercialize the Latanoprost Product.

The estimated selling price of the combined deliverables under the Restated Pfizer Agreement of $6.7 million was partially recognized as collaborative research and development revenue over the estimated performance period using the proportional performance method with costs associated with developing the Latanoprost Product reflected in operating expenses in the period in which they have been incurred. No collaborative research and development revenue was recorded during the three months ended September 30, 2016.

On October 25, 2016, the Company notified Pfizer that it had discontinued development of the Latanoprost Product, which provided Pfizer a 60-day option to acquire a worldwide license in return for a $10.0 million payment and potential sales-based royalties and development, regulatory and sales performance milestone payments. Pfizer did not exercise its option and the Restated Pfizer Agreement automatically terminated on December 26, 2016. The remaining deferred revenue balance of $5.6 million was recognized as revenue in the three-month period ended December 31, 2016.

Bausch & Lomb

Pursuant to a licensing and development agreement, as amended, Bausch & Lomb has a worldwide exclusive license to make and sell Retisert in return for royalties based on sales. Royalty income totaled $221,000 and $218,000 for the three months ended March 31, 2018 and 2017, respectively, and $742,000 and $730,000 for the nine months ended March 31, 2018 and 2017, respectively. Accounts receivable from Bausch & Lomb totaled $223,000 at March 31, 2018 and $246,000 at June 30, 2017.

OncoSil Medical

The Company entered into an exclusive, worldwide royalty-bearing license agreement in December 2012, amended and restated in March 2013, with OncoSil Medical UK Limited (f/k/a Enigma Therapeutics Limited), a wholly owned subsidiary of OncoSil Medical Ltd (“OncoSil”) for the development of BrachySil, the Company’s BioSilicon product candidate for the treatment of pancreatic and other types of cancer. The Company received an upfront fee of $100,000 and is entitled to 8% sales-based royalties, 20% of sublicense consideration and milestone payments based on aggregate product sales. OncoSil is obligated to pay an annual license maintenance fee of $100,000 by the end of each calendar year, the most recent of which was received in December 2017. For each calendar year commencing with 2014, the Company is entitled to receive reimbursement of any patent maintenance costs, sales-based royalties and sub-licensee sales-based royalties earned, but only to the extent such amounts, in the aggregate, exceed the $100,000 annual license maintenance fee. As of March 31, 2018, OncoSil has not received regulatory approval in any jurisdiction, although an application for CE Mark approval in Europe is pending. The Company has no consequential performance obligations under the OncoSil license agreement and, accordingly, any amounts to which the Company is entitled under the agreement are recognized as revenue on the earlier of receipt or when collectability is reasonably assured. Revenue related to the OncoSil agreement totaled $100,000 for the three and nine-month periods ended March 31, 2018 and 2017, respectively. As of March 31, 2018, no deferred revenue was recorded for this agreement.

Evaluation Agreements

The Company from time to time enters into funded agreements to evaluate the potential use of its technology systems for sustained release of third party drug candidates in the treatment of various diseases. Consideration received is generally recognized by the Company as revenue over the term of the feasibility study agreement. Revenue recognition for consideration, if any, related to a license option right is assessed based on the terms of any such future license agreement or is otherwise recognized at the completion of the evaluation agreement. Revenues under evaluation agreements totaled $470,000 and $80,000 for the three months ended March 31, 2018 and 2017, respectively, and $875,000 and $91,000 for the nine months ended March 31, 2018 and 2017, respectively. Deferred revenue for these agreements totaled $240,000 and $50,000 at March 31, 2018 and June 30, 2017, respectively.

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The reconciliation of intangible assets for the nine months ended March 31, 2018 and for the year ended June 30, 2017 was as follows (in thousands):

The Company historically amortized its intangible assets with finite lives on a straight-line basis over their respective estimated useful lives. Amortization of intangible assets totaled $0 and $180,000 for the three months ended March 31, 2018 and 2017, respectively, and $366,000 and $542,000 for the nine months ended March 31, 2018 and 2017, respectively. At March 31, 2018, the carrying value of each of the Durasert and Tethadur intangible assets was amortized to zero.

In connection with the Icon Acquisition (see Note 3), the initial purchase price of $32.0 million was attributed to the DEXYCU product intangible asset. This finite-lived intangible asset will be amortized proportionate to projected DEXYCU product revenues over its expected useful life. No amortization expense was recorded related to DEXYCU for the three months ended March 31, 2018 and no amortization is expected for the remainder of fiscal year 2018 or until such time as the commercial sales of the product are commenced.

Accrued expenses consisted of the following at March 31, 2018 and June 30, 2017 (in thousands):

In January 2017, the Company entered into retention bonus agreements with five employees. Under these agreements (a) cash payments totaling $319,000 were made on December 22, 2017 and (b) subject to continuing employment, a total of 305,616 restricted stock units (“RSUs”) of an equal value were granted at that date based on a closing share price of $1.045 per share with a one-year vesting period. Included in personnel costs in the above table were $0 and $160,000 at March 31, 2018 and June 30, 2017, respectively, representing pro rata accrual of the cash bonus component.

At March 31, 2018, approximately $858,000 of accrued professional fees were directly attributable to services rendered in the Icon Acquisition, the Equity Transactions (as defined in Note 9) and the transactions contemplated by the Credit Agreement (as defined in Note 8).

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In July 2016, the Company announced its plan to consolidate its research and development activities in its U.S. facility. Following employee consultations under local U.K. law, the Company determined to close its U.K. research facility and terminated the employment of its U.K. employees. The U.K. facility lease, set to expire on August 31, 2016, was extended through November 30, 2016 to facilitate an orderly transition and the required restoration of the premises. A summary reconciliation of the restructuring costs for the nine months ended March 31, 2017 is as follows (in thousands):

The Company recorded approximately $472,000 of restructuring costs during the nine months ended March 31, 2017. These costs consisted of (i) $273,000 of additional employee severance for discretionary termination benefits upon notification of the affected employees in accordance with ASC 420, Exit or Disposal Cost Obligations; and (ii) $199,000 of professional fees, travel and lease extension costs.

In addition, for the three months ended September 30, 2016, the Company recorded $99,000 of non-cash stock-based compensation expense in connection with the extension of the exercise period through June 30, 2017 for all vested stock options held by the U.K. employees at July 31, 2016 and a $133,000 credit to stock-based compensation expense to account for forfeitures of all non-vested stock options at that date.

The Company paid all of the restructuring costs associated with the plan of consolidation as of March 31, 2017.

On March 28, 2018 (the “Closing Date”), the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, as borrower, SWK Funding LLC, as agent (the “Agent”), and the lenders party thereto from time to time (the “Lenders”), providing for a senior secured term loan of up to $20 million (the “Loan”). On the Closing Date, $15 million of the Loan was advanced (the “Initial Advance”). The remaining $5 million of the Loan may be advanced between the Closing Date and December 31, 2018, subject to satisfying the Minimum Capital Raise (the “Additional Advance”). The Loan may be increased by $10 million upon the request of the Company, subject to obtaining additional loan commitments and satisfaction of certain conditions in the Credit Agreement.

The Loan is due and payable on March 27, 2023 (the “Maturity Date”). The Loan bears interest at a per annum rate of the three-month LIBOR rate (subject to a 1.5% floor) plus 10.50%. The Credit Agreement permits the Company to pay interest only on the principal amount for the first eight payments (payments are due on a quarterly basis commencing May 15, 2018). Following the interest-only period, the Company will be required to make quarterly payments of interest, plus repayments of the principal in an aggregate amount of up to $1,250,000 per quarter (the “Quarterly Principal Repayment Cap”). Subject to the Quarterly Principal Repayment Cap, the amount of any quarterly principal payments during any fiscal year of the Company is based on (x) a percentage of the year-to-date net revenue of the Company through the end of such quarter less (y) any prior quarterly principal and interest payments made during such fiscal year. In addition, the Company paid an upfront fee of 1.5% of the aggregate principal amount of the Loan. The Company is required to pay an exit fee equal to 6% of the aggregate principal amount advanced under the Credit Agreement (the “Exit Fee”). The portion of the Exit Fee on the Initial Advance, which is included in other long-term liabilities in the accompanying condensed consolidated balance sheet, is being accrued as interest expense over the term of the Loan using the effective interest method.

Upon the occurrence of a bankruptcy-related event of default, all amounts outstanding with respect to the Loan become due and payable immediately and upon the occurrence of any other Event of Default (as defined in the Credit Agreement), all or any amounts

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outstanding with respect to the Loan may become due and payable upon request of the Agent or majority Lenders. Additionally, subject to certain exceptions, the Company is required to make mandatory prepayments of the Loan with the proceeds of assets sales and insurance proceeds. The Company may make a voluntary prepayment of the Loan, in whole, but not in part, at any time on or after the first anniversary of the Closing Date. All mandatory and voluntary prepayments of the Loan are subject to the payment of prepayment premiums as follows: (i) in the case of mandatory prepayments, if prepayment occurs prior to the first anniversary of the Closing Date, a customary make-whole amount equal to the amount of interest that would have accrued on the principal amount so prepaid had it remained outstanding through the first anniversary of the Closing Date, (ii) if prepayment occurs on or after the first anniversary of the Closing Date, but prior to the second anniversary of the Closing Date, 6% of the aggregate amount of the principal prepaid and (iii) if prepayment occurs on or after the second anniversary of the Closing Date, but prior to the third anniversary of the Closing Date, an amount equal to 1% of the principal prepaid. No prepayment premium is due on any principal prepaid on or after the third anniversary of the Closing Date.

In connection with the Loan, the Company issued a warrant (the “SWK Warrant”) to the Agent to purchase (a) 409,091 shares of Company common stock (the “Initial Advance Warrant Shares”) at an exercise price equal to $1.10 and (b) an aggregate number of shares of the Company’s common stock determined by multiplying the Additional Advance by 3% and then dividing such number by the consolidated closing bid price of a share of the Company’s common stock on Nasdaq immediately preceding the closing of the Additional Advance (the “Additional Advance Warrant Shares”). The exercise price for the Additional Advance Warrant Shares shall be equal to the consolidated closing bid price of the Company’s common stock on Nasdaq immediately preceding the closing of the Additional Advance. The SWK Warrant is exercisable (i) with respect to the Initial Advance Warrant Shares, any time on or after the Closing Date until the close of business on the 7-year anniversary of the Initial Advance and (ii) with respect to the Additional Advance Warrant Shares, any time on or after the closing of the Additional Advance until the close of business on the 7-year anniversary of the Additional Advance. The Agent may exercise the SWK Warrant on a cashless basis at any time. In the event the Agent exercises the SWK Warrant on a cashless basis the Company will not receive any proceeds.

The Additional Advance Warrant Shares is recorded as a liability on the Company’s Condensed Consolidated Balance Sheet and will be remeasured at fair value at each reporting period. The aggregate fair value of the Additional Advance Warrant Shares at the issuance date was $69,000. The Initial Advance warrants were recorded as equity on the Company’s balance sheet at their relative fair value of $284,000. The remaining $14.6 million of the proceeds received were allocated to the Initial Advance term loan.

In addition to the discount created from the allocation of proceeds and the 1.5% upfront fee, the Company incurred legal and other transaction costs in connection with obtaining the Loan. The upfront fee, the Exit Fee and the legal costs, for an aggregate of $2.1 million, were ratably allocated to each of the two tranches of the Loan based upon the total principal amount available to the Company under each tranche. Total debt discount at the issuance date of $1.8 million related to the Initial Advance consists of the fair value of the Initial Advance Warrant Shares, plus the upfront fee, Exit Fee and legal costs allocated to the Initial Advance. This amount is being amortized as additional interest expense over the term of the Loan using the effective interest method. Total debt discount on the issuance date of $299,000 related to the Additional Advance consists of the fair value of the Additional Advance Warrant Shares, plus the fair value of the embedded derivative, the upfront fee, and legal costs allocated to the Additional Advance. This amount was recorded as a prepaid expense and is being amortized ratably from the Closing Date through December 31, 2018. Upon a drawdown of the Additional Advance, the remaining unamortized costs will be reclassified to debt discount and will be amortized over the remaining life of the Additional Advance term loan using the effective interest method.

2018 Equity Financing

On the Closing Date, the Company entered into a Securities Purchase Agreement (the “First Tranche Securities Purchase Agreement”) with EW Healthcare Partners, L.P. and EW Healthcare Partners-A, L.P. (collectively, the “First Tranche Investors”), pursuant to which the Company offered and sold to the First Tranche Investors an aggregate of 8,606,324 shares of the Company’s common stock at a purchase price of $1.10 per share (the “First Tranche Purchase Price”) for aggregate gross proceeds of approximately $9.5 million (the “First Tranche Transaction”).

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On the Closing Date, the Company entered into a Second Securities Purchase Agreement (the “Second Tranche Securities Purchase Agreement” and together with the First Tranche Securities Purchase Agreement, the “Securities Purchase Agreements”) with the First Tranche Investors and another accredited investor (collectively, the “Second Tranche Investors”), pursuant to which the Company will, subject to the approval of the Company’s stockholders, offer and sell to the Second Tranche Investors an aggregate of approximately $25.5 million of Units, subject to a maximum of 27,250,000 units, with each Unit consisting of (a) one share of the Company’s common stock and (b) one warrant to purchase a share of the Company’s common stock (the “Second Tranche Transaction” and together with the First Tranche Transaction, the “Equity Transactions”). The First Tranche Investors have the option at any time prior to the closing of the Second Tranche Transaction to allocate the purchase of up to 50% of the Units being issued and sold to them in the Second Tranche Transaction to one or more accredited investors, subject to certain conditions set forth in the Second Securities Purchase Agreement.

The purchase price for each share of the Company’s common stock to be issued in the Second Tranche Transaction will be an amount equal to the lower of (a) $1.265 (which is a 15% premium to the First Tranche Purchase Price) and (b) a 20% discount to the volume weighted average price (“VWAP”) of the shares of the Company’s common stock on Nasdaq for the 20 trading days immediately prior to the closing of the Second Tranche Transaction; provided, however, that the purchase price cannot be lower than $0.88, which is a 20% discount to the First Tranche Purchase Price.

The warrants to be issued in the Second Tranche Transaction (each a “Second Tranche Warrant,” and collectively, the “Second Tranche Warrants”) will be exercisable any time on or after the closing of the Second Tranche Transaction until on or prior to the close of business on the 15th business day following the date on which the holders of the Second Tranche Warrants receive written notice from the Company that the Centers for Medicare & Medicaid Services (“Medicare”) has announced that a new C-Code has been established for DEXYCU and will be effective at the start of the first calendar quarter after such notice. The exercise price of each Second Tranche Warrant to be issued in the Second Tranche Transaction will be an amount equal to the lower of (a) $1.43 (a 30% premium to the First Tranche Purchase Price) and (b) a 20% discount to the VWAP of the shares of the Company’s common stock on Nasdaq for the 20 trading days immediately prior to the exercise of a Second Tranche Warrant; provided, however, that the exercise price cannot be lower than $0.88, which is a 20% discount to the First Tranche Purchase Price.

The aggregate gross proceeds from the Second Tranche Transaction are expected to be approximately $25.5 million, not including any proceeds from the exercise of the Second Tranche Warrants.

The Company has determined that the Company’s common stock issued in the First Tranche Transaction and the future obligation to issue Units in the Second Tranche Transaction are freestanding instruments. The Company’s common stock issued in the First Tranche Transaction is recorded to equity on the Company’s Balance Sheet and will not be measured at fair value at each reporting period. The future obligation to issue Units in the Second Tranche Transaction is recorded as a liability on the Company’s Balance Sheet and will be remeasured at fair value at each reporting period.

The Company has determined that the First Tranche Transaction and the Second Tranche Transaction should be accounted for as a single transaction. Accordingly, the total consideration received on the issuance date of $9.5 million was first allocated to the future obligation to issue Units in the Second Tranche Transaction at fair value as of the issuance date, with the residual amount allocated to the Company’s common stock issued in the First Tranche Transaction. Further, issuance costs of $343,000 were allocated to each of the freestanding instruments on the basis of relative fair value. A net amount of approximately $4.6 million was allocated to the Company’s common stock issued in the First Tranche Transaction and the future obligation to issue Units in the Second Tranche Transaction, respectively, as of the issuance date. As of March 31, 2018, the fair value of the Second Tranche Transaction liability was approximately $6.9 million and the Company recorded the $2.2 million change in fair value in the Consolidated Statement of Comprehensive Loss.

ATM Facility

In February 2017, the Company entered into an ATM program pursuant to which, under its Form S-3 shelf registration statement, the Company may, at its option, offer and sell shares of its common stock from time to time for an aggregate offering price of up to $20.0 million. The Company will pay the sales agent a commission of up to 3.0% of the gross proceeds from the sale of such shares. The Company’s ability to sell shares under the ATM program was subject to the listing rules of the Australian Securities Exchange (“ASX”) prior to the Company’s removal from the official list of the ASX on May 7, 2018 (“ASX Delisting”), which limited the number of shares the Company may issue in any 12-month period without stockholder approval, as well as other applicable rules and regulations of Nasdaq. During the three months ended March 31, 2017, the Company incurred $223,000 of legal, accounting and other costs to establish and activate the ATM program.

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During the nine months ended March 31, 2018, the Company sold 5,900,000 shares of its common stock under the ATM program at a weighted average price of $1.23 per share for gross proceeds of approximately $7.3 million. Share issue costs, including sales agent commissions, totaled $239,000 for the nine months ended March 31, 2018. The Company did not sell any shares of its common stock pursuant to the ATM program during the three months ended March 31, 2018. During the three and nine months ended March 31, 2017, the Company sold 1,411,686 shares of its common stock under the ATM program at a weighted price of $1.74 for gross proceeds of $2.45 million. Share issue costs, including sales agent commissions, totaled $76,000.

Warrants to Purchase Common Shares

The following table provides a reconciliation of warrants to purchase shares of the Company’s common stock for the nine months ended March 31, 2018 and 2017:

In connection with the Loan (see Note 8), the Company (i) issued a warrant to purchase 409,091 shares of the Company’s common stock at an exercise price of $1.10 per share with a seven-year term and (ii) has contingently issuable warrants that are issuable in the event the Company draws down the additional tranche of debt. This contingently issuable warrant has been classified as a liability as the settlement amount is predominantly based upon a fixed dollar amount with a variable number of shares.

Equity Incentive Plans

The 2016 Long-Term Incentive Plan (the “2016 Plan”), approved by the Company’s stockholders on December 12, 2016 (the “Adoption Date”), provides for the issuance of up to 3,000,000 shares of the Company’s common stock reserved for issuance under the 2016 Plan plus any additional shares of the Company’s common stock that were available for grant under the 2008 Incentive Plan (the “2008 Plan”) at the Adoption Date or would otherwise become available for grant under the 2008 Plan as a result of subsequent termination or forfeiture of awards under the 2008 Plan. At March 31, 2018, a total of 5,483,977 shares of the Company’s common stock were authorized for issuance under the 2016 Plan, which included 1,380,530 stock options and 200,000 restricted stock units that were forfeited under the 2008 Plan during the nine months ended March 31, 2018. At March 31, 2018, a total of 3,575,361 shares were available for new awards.

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Stock Options

The following table provides a reconciliation of stock option activity under the Company’s equity incentive plans for the nine months ended March 31, 2018:

During the nine months ended March 31, 2018, the Company granted 290,000 options to employees with ratable annual vesting over 3 years, 100,000 options to non-executive directors with 1-year cliff vesting, 40,000 options to a newly appointed non-executive director with ratable annual vesting over 3 years and 100,000 options to an external consultant with 6.5 months cliff vesting at June 30, 2018. In accordance with ASX Listing Rules, all equity awards authorized by the Compensation Committee of the Board to the Company’s executive and non-executive directors were subject to stockholder approval prior to ASX Delisting, with the grant date fair value measured at the stockholder approval date and vesting measured from the Compensation Committee authorization date. All option grants have a 10-year term. The weighted-average grant date fair value of these options was $0.56 per share. In determining the grant date fair value of option awards under the 2016 Plan during the nine months ended March 31, 2018, the Company applied the Black-Scholes option pricing model based on the following key assumptions:

Options to purchase a total of 645,942 shares of the Company’s common stock vested during the nine months ended March 31, 2018.

Time-Vested Restricted Stock Units

Time-vested restricted stock unit awards (“RSUs”) issued to date under the 2016 Plan generally vest on a ratable annual basis over 3 years. The related stock-based compensation expense is recorded over the requisite service period, which is the vesting period. The fair value of all time-vested RSUs is based on the closing share price of the Company’s common stock on the date of grant.

In connection with retention bonus agreements entered into in January 2017 (see Note 6), a total of 305,616 RSUs were issued on December 22, 2017 subject to one-year cliff vesting.

The following table provides a reconciliation of RSU activity under the 2016 Plan for the nine months ended March 31, 2018:

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At March 31, 2018, the weighted average remaining vesting term of the RSUs was one year.

Performance-Based Stock Units

Performance Stock Units (“PSUs”) have been awarded to certain employees. The performance conditions associated with the PSU awards are as follows: (a) for one third of the PSUs, upon an FDA acceptance of the Company’s NDA submission of YUTIQ for review on or before March 31, 2018 and (b) for two-thirds of the PSUs, upon an FDA approval of YUTIQ on or before March 31, 2019. For each performance criteria that is achieved, 50% of the PSUs that are associated with that performance condition will vest at the achievement date and 50% will vest on the first anniversary of such date, in each case subject to continued employment through such date. As a result of the achievement of the first performance condition on March 19, 2018, 48,332 PSUs vested at that date and the other 48,332 PSUs became subject to a service-based condition with a vesting date of March 19, 2019. As of March 31, 2018, the second performance condition associated with the PSUs was not yet deemed probable of achievement and, accordingly, stock-based compensation has not been recorded for that portion of the PSUs during the nine months ended March 31, 2018.

The following table provides a reconciliation of PSU activity under the 2016 Plan for the nine months ended March 31, 2018:

The weighted average remaining vesting term of the PSUs associated with the first performance condition was approximately 11.6 months.

Deferred Stock Units

A total of 67,500 deferred stock units (“DSUs”) were issued to incumbent non-executive directors and ratified at the December 15, 2017 annual meeting of stockholders. The DSUs vest on June 27, 2018. Subsequent to vesting, the DSUs will be settled in shares of the Company’s common stock upon the earliest to occur of (i) each director’s termination of service on the Company’s Board of Directors and (ii) the occurrence of a change of control as defined in the award agreement. Upon Dr. Barry’s termination of service on the Company’s board of directors on May 7, 2018, all of Dr. Barry’s DSUs (12,500) vested in full.

The weighted average grant date fair value of the DSUs was $1.13. At March 31, 2018, the weighted average remaining vesting term of the DSUs was approximately 3 months.

Inducement Option Grant

At June 30, 2017 and March 31, 2018, there were 850,000 stock options outstanding that were issued as an inducement award to the Company’s President and CEO in September 2016. The options have an exercise price of $3.63 per share, a 10-year term and are subject to pro rata annual vesting over 4 years. Although the stock options were not awarded under the 2008 Plan, the stock options are subject to and governed by the terms and conditions of the 2008 Plan. A total of 212,500 of these options vested during the nine months ended March 31, 2018.

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Market-Based Restricted Stock Units

The following table provides a reconciliation of market-based restricted stock units for the nine months ended March 31, 2018:

At June 30, 2017, there were 700,000 market-based Restricted Stock Units (“market-based RSUs”) outstanding, which included 500,000 issued as an inducement award to the Company’s President and CEO and 200,000 issued to another employee under the 2008 Plan. At March 31, 2018, there were 500,000 market-based RSUs outstanding due to a forfeiture of 200,000 market-based RSUs upon an employee’s resignation. Subject to a service condition, the number of shares underlying the one remaining market-based RSU that vests will be based upon a relative percentile rank of the 3-year change in the closing price of the Company’s common stock compared to that of the companies that make up the Nasdaq Biotechnology Index. The Company estimated the fair value of the market-based RSUs using a Monte Carlo valuation model on the respective dates of grant.

Stock-Based Compensation Expense

The Company’s consolidated statements of comprehensive loss included total compensation expense from stock-based payment awards for the three and nine months ended March 31, 2018 and 2017, as follows (in thousands):

In connection with termination benefits provided to the Company’s former Chief Executive Officer, the vesting of certain options was accelerated in accordance with the terms of the options, the exercise period for all vested options was extended through September 14, 2017, and all remaining non-vested options were forfeited. Additionally, in connection with the U.K. restructuring, the exercise period of all vested options held by the former U.K. employees was extended through June 30, 2017 and all non-vested options were forfeited. These option modifications and forfeitures were accounted for in the quarter ended September 30, 2016, the net effect of which resulted in an approximate $274,000 increase of stock-based compensation expense included in general and administrative expense and an approximate $35,000 reduction of stock-based compensation expense included in research and development expense for the nine months ended March 31, 2017 in the table above.

In connection with termination benefits provided to the Company’s former Vice President, Corporate Affairs and General Counsel, the vesting of certain non-vested options was accelerated in accordance with the terms of the options, the exercise period for all vested options was extended through June 26, 2018 and all remaining non-vested options were forfeited. The option modification and forfeitures were accounted for in the quarter ended December 31, 2016, the net effect of which resulted in an approximate $117,000 reduction of stock-based compensation expense included in general and administrative expense for the nine months ended March 31, 2017 in the table above.

At March 31, 2018, there was approximately $2.4 million of unrecognized compensation expense related to outstanding equity awards under the 2016 Plan, the 2008 Plan and the inducement awards to the Company’s President and CEO that is expected to be recognized as expense over a weighted-average period of approximately 1.42 years.

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The following tables summarize the Company’s assets and liabilities carried at fair value measured on a recurring basis at March 31, 2018 and June 30, 2017 by valuation hierarchy (in thousands):

Financial instruments that potentially subject the Company to concentrations of credit risk have historically consisted principally of cash and cash equivalents. At March 31, 2018 and June 30, 2017, substantially all of the Company’s interest-bearing cash equivalent balances were concentrated in one U.S. Government money market fund that has investments consisting primarily of U.S. Government Agency debt, U.S. Treasury Repurchase Agreements and U.S. Government Agency Repurchase Agreements. These deposits may be redeemed upon demand and, therefore, generally have minimal risk. The Company’s cash equivalents are classified within Level 1 on the basis of valuations using quoted market prices.

The Second Tranche Transaction was determined to be liability classified (see Note 9), which requires that the liability be measured at fair value each period with changes in fair value being recorded as component of net income (loss) in the statement of operations. This valuation was determined to be a level 3 valuation because it includes unobservable inputs. The Second Tranche Transaction liability was valued using a Monte Carlo simulation valuation model. This model incorporated several inputs, including the Company’s common stock price on the date of valuation, the historical volatility of the price of the Company’s common stock, the risk-free interest rate and management’s assessment of the probability and timing of the issuance of the units occurring. A significant fluctuation in the Company’s stock price or the Company’s estimate of the number of units to be issued could result

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in a material increase or decrease in the fair value of the Second Tranche liability. Significant assumptions used to value this liability are as follows:

The Additional Advance Warrants were determined to be liability classified (see Note 8), which requires that the liability be measured at fair value each period with changes in fair value being recorded as a component of net income (loss) in the condensed consolidated statement of comprehensive income (loss). This valuation was determined to be a level 3 valuation because it includes unobservable inputs. The Additional Advance Warrant liability was valued using a Monte Carlo simulation valuation model. This model incorporated several inputs including the Company’s common stock price on the date of valuation, the historical volatility of the price of the Company’s common stock, the risk-free interest rate and management’s assessments of the probability of the Additional Advance being drawn upon. Significant assumptions used to value this liability are as follows:

The following table sets forth a summary of changes in the fair value of the Company’s derivative liability for which fair value is determined by Level 3 inputs (in thousands):

The Company recognizes deferred tax assets and liabilities for estimated future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established if, based on management’s review of both positive and negative evidence, it is more likely than not that all or a portion of the deferred tax assets will not be realized. Because of its historical losses from operations, the Company established a valuation allowance for the net deferred tax assets. The Company did not record any income tax expense or benefit for the three and nine months ended March 31, 2018 and 2017.

For the three and nine months ended March 31, 2018 and 2017, the Company had no significant unrecognized tax benefits. At March 31, 2018 and June 30, 2017, the Company had no accrued penalties or interest related to uncertain tax positions.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted which, amongst other corporate and individual tax law changes, lowered the federal corporate income tax rate to 21% effective January 1, 2018. Because the Company provides a full valuation allowance for all of its net deferred tax assets, there is no effect of the Tax Act on the Company’s consolidated financial statements as of and for the three and nine months ended March 31, 2018.

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Operating Leases

The Company leases approximately 13,650 square feet of combined office and laboratory space in Watertown, Massachusetts under a lease with a term from March 2014 through April 2019, with a five-year renewal option at market rates. The Company provided a cash-collateralized $150,000 irrevocable standby letter of credit as security for the Company’s obligations under the lease. In addition to base rent, the Company is obligated to pay its proportionate share of building operating expenses and real estate taxes in excess of base year amounts.

Commencing July 1, 2017, the Company leases approximately 3,000 square feet of office space in Liberty Corner, New Jersey under a lease term extending through June 2022, with two five-year renewal options at 95% of the then-prevailing market rates. In addition to base rent, the Company is obligated to pay its proportionate share of building operating expenses and real estate taxes in excess of base year amounts.

Legal Proceedings

The Company is subject to various other routine legal proceedings and claims incidental to its business, which management believes will not have a material effect on the Company’s financial position, results of operations or cash flows.

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period. For periods in which the Company reports net income, diluted net income per share is determined by adding to the basic weighted average number of common shares outstanding the total number of dilutive common equivalent shares using the treasury stock method, unless the effect is anti-dilutive. Potentially dilutive shares were not included in the calculation of diluted net loss per share for each of the three and nine months ended March 31, 2018 and 2017 as their inclusion would be anti-dilutive.

Potential common stock equivalents excluded from the calculation of diluted earnings per share because the effect would have been anti-dilutive were as follows:

On April 26, 2018, the Company filed a preliminary proxy statement with the Securities and Exchange Commission in connection with a special meeting of stockholders to be held on June 22, 2018. The purpose of the special meeting will be to seek (i) stockholder approval of the issuance of a maximum of 27,250,000 Units pursuant to the Second Tranche Securities Purchase Agreement (see Note 9) and (ii) stockholder approval of an amendment of the Company’s Certificate of Incorporation, as amended, to increase the number of authorized shares of the Company’s common stock from 120,000,000 shares to 150,000,000 shares.

The Company was removed from the official list of ASX at the close of trading on May 7, 2018.

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Note Regarding Forward-Looking Statements

Various statements made in this Quarterly Report on Form 10-Q are forward-looking and involve risks and uncertainties. All statements that address activities, events or developments that we intend, expect or believe may occur in the future are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements give our current expectations or forecasts of future events and are not statements of historical or current facts. These statements include, among others, statements about:

Forward-looking statements also include statements other than statements of current or historical fact, including, without limitation, all statements related to any expectations of revenues, expenses, cash flows, earnings or losses from operations, cash required to maintain current and planned operations, capital or other financial items; any statements of the plans, strategies and objectives of management for future operations; any plans or expectations with respect to product research, development and commercialization, including regulatory approvals; any other statements of expectations, plans, intentions or beliefs; and any statements of assumptions underlying any of the foregoing. We often, although not always, identify forward-looking statements by using words or phrases such as “likely”, “expect”, “intend”, “anticipate”, “believe”, “estimate”, “plan”, “project”, “forecast” and “outlook”.

The following are some of the factors that could cause actual results to differ materially from the anticipated results or other expectations expressed, anticipated or implied in our forward-looking statements: uncertainties with respect to: our ability to achieve profitable operations and access to needed capital; fluctuations in our operating results; successful commercialization of, and receipt of revenues from, ILUVIEN for DME, which depends on Alimera’s ability to continue as a going concern; Alimera’s ability to obtain additional marketing approvals and the effect of pricing and reimbursement decisions on sales of ILUVIEN; the number of clinical trials and data required for marketing approval for YUTIQ in the U.S.; our ability to use data in promotion for YUTIQ which includes clinical trials outside the U.S.; our ability to successfully commercialize DEXYCU in the U.S.; our ability to obtain stockholder

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approval for portions of the EW Healthcare Partners investment; our ability to successfully build a commercial infrastructure and enter into commercial agreements for the launch of DEXYCU and YUTIQ, if approved; our ability to successfully commercialize YUTIQ, if approved, in the U.S.; potential off-label sales of ILUVIEN for uveitis; consequences of FA side effects; the development of our next-generation Durasert shorter-duration treatment for uveitis; potential declines in Retisert^® royalties; our ability to market and sell products; the success of current and future license agreements, including our agreement with Alimera; termination or breach of current license agreements, including our agreement with Alimera; our dependence on contract research organizations, vendors and investigators; effects of competition and other developments affecting sales of products; market acceptance of products; effects of guidelines, recommendations and studies; protection of intellectual property and avoiding intellectual property infringement; retention of key personnel; product liability; industry consolidation; compliance with environmental laws; manufacturing risks; risks and costs of international business operations; effects of the potential U.K. exit from the EU; legislative or regulatory changes; volatility of stock price; possible dilution; absence of dividends; and other factors described in our filings with the Securities and Exchange Commission. We cannot guarantee that the results and other expectations expressed, anticipated or implied in any forward-looking statement will be realized. The risks set forth under Item 1A of this Form 10-Q for the quarterly period ended March 31, 2018 describe major risks to our business, and you should read and interpret any forward-looking statements together with these risks. A variety of factors, including these risks, could cause our actual results and other expectations to differ materially from the anticipated results or other expectations expressed, anticipated or implied in our forward-looking statements. Should known or unknown risks materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected in the forward-looking statements. You should bear this in mind as you consider any forward-looking statements.

Our forward-looking statements speak only as of the dates on which they are made. We do not undertake any obligation to publicly update or revise our forward-looking statements even if experience or future changes makes it clear that any projected results expressed or implied in such statements will not be realized.

Our Business

We are a specialty biopharmaceutical company committed to developing and commercializing innovative ophthalmic products for the treatment of eye diseases. Our lead product, DEXYCU™ (dexamethasone intraocular suspension) 9%, was approved by the U.S. Food and Drug Administration (“FDA”) in February 2018 for the treatment of post-operative inflammation. DEXYCU is administered as a single dose at the end of ocular surgery and is the first long-acting intraocular product approved by the FDA for the treatment of post-operative inflammation. DEXYCU utilizes our proprietary Verisome^® drug-delivery platform, which allows for a single injection that releases drug over time. There are over four million cataract surgeries performed annually in the United States (“U.S.”) and we plan to launch DEXYCU in the U.S. in the first half of 2019 with a primary focus on its use following cataract surgery. Our lead product candidate is YUTIQ™ for the treatment of non-infectious uveitis affecting the posterior segment of the eye (“three-year uveitis”). Injected into the eye in an office visit, YUTIQ is a tiny micro-insert that delivers a micro-dose of a corticosteroid to the back of the eye on a sustained constant (zero order release) basis for approximately three years. On March 19, 2018, the FDA accepted our New Drug Application (“NDA”) for YUTIQ and it has set an FDA Prescription Drug User Fee Act (“PDUFA”) action date of November 5, 2018. YUTIQ is based on our proprietary Durasert™ sustained-release drug delivery technology platform, which can deliver drugs for predetermined periods of time ranging from months to years. Posterior segment uveitis is the third leading cause of blindness in the U.S. and affects between 55,000 to 120,000 people. If approved in November 2018, we expect to launch YUTIQ in the U.S. in the first half of 2019.

Both Phase 3 clinical trials investigating YUTIQ met their primary efficacy endpoint of prevention of recurrence of disease through six months with statistical significance (p < 0.001, intent to treat analysis) and with safety data consistent with the known effects of ocular corticosteroid use. Statistical significance for efficacy and encouraging safety results were maintained through 12 months of follow-up in both Phase 3 clinical trials. In Europe, we filed a marketing authorization application (“MAA”) in June 2017 and subsequently withdrew the application after out-licensing the European rights for YUTIQ to Alimera. In January 2018, Alimera received validation of a Type II variation submitted in all seventeen European countries in which it previously received regulatory approval for ILUVIEN for DME. If the variation is approved, Alimera plans to commercialize the uveitis indication under its ILUVIEN trademark.

ILUVIEN is an injectable, sustained-release micro-insert that provides three years of treatment of DME from a single injection. ILUVIEN and YUTIQ are based on the same technology and deliver the same corticosteroid, FA. ILUVIEN was developed in collaboration with, and is licensed to and sold by Alimera. Pursuant to a collaboration agreement with Alimera, as amended in March 2008 (the “Prior Alimera Agreement”), ILUVIEN has been sold directly in the United Kingdom (“U.K.”) and Germany since 2013, in the U.S. and Portugal since 2015 and in Austria and Ireland beginning in 2017. ILUVIEN also has marketing approvals in 12 other European countries.

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Alimera has sublicensed distribution, regulatory and reimbursement matters for ILUVIEN in Australia and New Zealand, Canada, Italy, Spain, France and numerous countries in in the Middle East. In July 2017, we entered into a further amended and restated collaboration agreement (the “Amended Alimera Agreement”), pursuant to which we (i) licensed our Durasert three-year uveitis product candidate (called YUTIQ in the U.S. and planned to be called ILUVIEN in the EMEA) to Alimera for the EMEA and (ii) converted the net profit share arrangement for each licensed product (including ILUVIEN) under the Prior Alimera Agreement to a sales-based royalty on a calendar quarter basis commencing July 1, 2017, with payments from Alimera due 60 days following the end of each quarter.

Our development programs are focused primarily on developing sustained release drug products using our proven Durasert technology platform to deliver small molecule drugs to treat uveitis, wet age-related macular degeneration, glaucoma and other diseases.

DEXYCU™, YUTIQ™ and Durasert™ are our trademarks. Retisert^® is Bausch & Lomb’s trademark. ILUVIEN^® is Alimera’s trademark. Information with respect to ILUVIEN, including regulatory and marketing information, and Alimera’s plans and intentions, reflects information publicly disclosed by Alimera.

Quarterly Overview

The three months ended March 31, 2018 were highlighted by the following events:

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Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with GAAP requires that we make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates, judgments and assumptions on historical experience, anticipated results and trends, and on various other factors that we believe are reasonable under the circumstances at the time. By their nature, these estimates, judgments and assumptions are subject to an inherent degree of uncertainty. Actual results may differ from our estimates under different assumptions or conditions. In our Annual Report on Form 10-K for the fiscal year ended June 30, 2017 (the “2017 Annual Report”), we set forth our critical accounting policies and estimates, which included revenue recognition and recognition of expense in outsourced clinical trial agreements. There have been no material changes to our critical accounting policies from the information provided in our 2017 Annual Report.

Derivative Liabilities

Derivative financial liabilities on initial recognition are recorded at fair value. They are subsequently held at fair value, with gains and losses arising from changes in fair value recognized in the condensed consolidated statement of comprehensive income (loss).

The rights contained in the Second Tranche Transactions were determined to be a freestanding financial instrument, which is liability classified and requires that the liability be measured at fair value each period with changes in fair value recorded as a component of net income (loss) in the condensed consolidated statement of comprehensive income (loss). The Second Tranche Transaction liability was valued using a Monte Carlo simulation valuation model. This model incorporated several inputs, including our common stock price on the date of valuation, the historical volatility of the price of our common stock, the risk-free interest rate and our assessment of the probability and timing of the issuance of the Units occurring. A significant fluctuation in our stock price or our estimate of the number of Units to be issued could result in a material increase or decrease in the fair value of the Second Tranche Transaction liability.

We have recorded the SWK Warrant issuable for shares of our common stock issued in connection with the Debt Financing as derivative financial liabilities. The SWK Warrant is initially recorded at fair value with gains and losses arising from changes in fair value recognized in the condensed consolidated statements of comprehensive income (loss) at each period end while such instruments are outstanding. The derivative liability was valued using a Monte Carlo simulation valuation model. This model incorporated several inputs, including our common stock price on the date of valuation, the historical volatility of the price of our common stock, the risk-free interest rate and our assessments of the probability of the Additional Advance being drawn upon.

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Results of Operations

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017:

Revenues

Collaborative research and development revenues totaled $524,000 for the three months ended March 31, 2018 compared to $372,000 for the three months ended March 31, 2017. This increase was attributable primarily to a $390,000 increase in revenues recognized from feasibility study agreements, partially offset by $252,000 of net profits received in the prior year period under the Prior Alimera Agreement.

In July 2017, we restructured the Alimera collaboration agreement to (a) license our Durasert three-year uveitis product candidate (called YUTIQ in the U.S and planned to be called ILUVIEN in the EMEA) in the EMEA to Alimera and (b) convert the net profit share arrangement to a sales-based royalty for all ILUVIEN licensed indications. We expect this conversion to result in increased revenues from Alimera over time, as well as better predictability and consistency of revenues to be recognized from Alimera. Based on 60-day payment terms from Alimera following the end of each calendar quarter, we expect that sales-based royalties earned from Alimera will be recognized as revenues one quarter in arrears. Starting in the three months ended December 31, 2017, these sales-based royalties earned from Alimera are being recorded as royalty income, whereas amounts previously earned pursuant to the net profit share arrangement were classified as collaborative research and development revenue.

Royalty income for the three months ended March 31, 2018 increased by $186,000, or 85%, to $404,000 compared to $218,000 for the three months ended March 31, 2017, attributable to $183,000 of sales-based royalties earned from Alimera. Retisert royalty income was flat on a year-over-basis and we do not expect Retisert royalty income to increase significantly, and it may decline.

Research and Development

Research and development expenses totaled $3.3 million for each of the three-month periods ended March 31, 2018 and 2017. Increases of $168,000 in clinical, regulatory and medical affairs professional services associated with our YUTIQ Phase 3 development and $230,000 of U.S. personnel and benefit costs, including stock-based compensation, were substantially offset by decreases of $270,000 in clinical and pre-clinical trial costs and $180,000 of amortization of intangible assets that were fully amortized at December 31, 2017. We expect total fiscal 2018 research and development expense to increase by approximately 10 - 15% compared to fiscal 2017, due primarily to pre-commercialization headcount and other costs for DEXYCU and YUTIQ manufacturing, quality assurance and medical affairs and ongoing regulatory professional services related to our recent NDA filing and ongoing FDA review of YUTIQ.

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General and Administrative

General and administrative expenses decreased by $145,000, or 6%, to $2.3 million for the three months ended March 31, 2018 from $2.4 million for the same period in the prior year, attributable primarily to a $250,000 decrease of stock-based compensation, due primarily to equity award forfeitures that resulted from the March 2018 resignation of our EVP of Corporate and Commercial Development and a $134,000 net decrease in professional fees, partially offset by a $122,000 increase in personnel and benefit costs and $85,000 of legal and consulting costs related to our removal from the official list of the Australian Securities Exchange (“ASX”). We expect general and administrative expense to increase in our fiscal fourth quarter compared to the current period as a result of (i) professional fees incurred in connection with accounting for the Icon Acquisition, the Equity Transactions and the Credit Agreement; (ii) planned headcount increases in finance and human resources as part of our planned commercialization efforts; and (iii) the ongoing legal, consulting and transfer agent costs for the ASX delisting process.

Change in Fair Value of Derivative Liability

The future obligation to issue Units in the Second Tranche Transaction was measured at fair value and recorded as a derivative liability on our balance sheet upon consummation of the First Tranche Transaction and is remeasured at fair value at each balance sheet date. At March 31, 2018, the fair value re-measurement resulted in a $2.3 million change in fair value of derivative liability that was recorded as a component of non-operating expense for the three months ended March 31, 2018.

Nine Months Ended March 31, 2018 Compared to Nine Months Ended March 31, 2017:

Revenues

Collaborative research and development revenues totaled $1.1 million for the nine months ended March 31, 2018 compared to $6.1 million for the nine months ended March 31, 2017. This decrease was predominantly attributable to $5.6 million of revenue recognized in the prior year period upon the termination of the Amended and Restated Collaborative Research and License Agreement with Pfizer, Inc. In addition, revenues earned from feasibility study agreements increased by $784,000 and net profits received from Alimera under the Prior Alimera Agreement decreased by $202,000 for the nine months ended March 31, 2018 compared to the prior year period.

Royalty income for the nine months ended March 31, 2018 increased by $391,000, or 54%, to $1.1 million compared to $730,000 for the nine months ended March 31, 2017, attributable predominantly to $379,000 of sales-based royalties earned from Alimera under the Amended Alimera Agreement.

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Research and Development

Research and development expenses increased by $746,000, or 7%, to approximately $11.4 million for the nine months ended March 31, 2018 from approximately $10.7 million for the nine months ended March 31, 2017, attributable primarily to a $1.7 million increase in professional services associated primarily with our YUTIQ three-year uveitis Phase 3 clinical development program and regulatory filings and $628,000 of U.S. personnel and benefit costs, including stock-based compensation, partially offset by decreases of $903,000 of CRO costs for our YUTIQ three-year uveitis clinical development and $690,000 of prior year personnel and legal costs associated with the U.K. restructuring.

General and Administrative

General and administrative expenses decreased by $1.3 million, or 15%, to approximately $7.3 million for the nine months ended March 31, 2018 from approximately $8.6 million for the same period in the prior year, attributable primarily to (i) $876,000 of personnel and related costs, of which $1.2 million represented prior year severance compensation to our former CEO and our former Vice President, Corporate Affairs and General Counsel, (ii) $571,000 of professional fees, substantially related to the prior year management change and Alimera arbitration proceedings and (iii) $149,000 of stock-based compensation, of which $266,000 was due to equity award forfeitures that resulted from the March 2018 resignation of our EVP of Corporate and Commercial Development, partially offset by increases of (i) $98,000 for facility and related costs, including our New Jersey office lease that commenced July 1, 2017 and (ii) a $103,000 increase in stockholder meeting and stock exchange costs, which included an initial $85,000 of costs incurred related to our ASX Delisting.

Change in Fair Value of Derivative Liability

The future obligation to issue Units in the Second Tranche Transaction was measured at fair value and recorded as a derivative liability on our balance sheet upon consummation of the First Tranche Transaction and is remeasured at fair value at each balance sheet date. At March 31, 2018, the fair value re-measurement resulted in a $2.3 million change in fair value of derivative liability that was recorded as a component of non-operating expense for the nine months ended March 31, 2018.

Liquidity and Capital Resources

Our fiscal 2018 year-to-date operations were financed primarily from existing capital resources at June 30, 2017, gross proceeds of $7.3 million from sales of 5,900,000 shares of common stock under our existing at-the-market (“ATM”) program and the First Tranche Transaction and Debt Financing that resulted in gross proceeds of $24.5 million, $15.0 million of which was used to fund the closing payment to acquire Icon and $1.1 million was used to pay certain financing and transaction costs. At March 31, 2018, our principal sources of liquidity were cash and cash equivalents that totaled $16.3 million. Upon an approval by our stockholders of the Second Tranche Transaction, we will receive additional net proceeds of approximately $25.5 million from the sale of the Units pursuant to the Second Tranche Securities Purchase Agreement.

As of March 31, 2018, our debt consists of $15 million, which amount represents the amount outstanding under the Loan pursuant to the Credit Agreement. The Loan is due and payable on March 27, 2023 (the “Maturity Date”). The Loan bears interest at a per annum rate of the three-month London Interbank Offered Rate (“LIBOR”), subject to a 1.5% floor, plus 10.50%. The Credit Agreement permits us to pay interest only on the principal amount loaned thereunder for the first eight payments (payments are due on a quarterly basis). Following the interest-only period, we will be required to make quarterly payments of interest, plus repayments of the principal amount loaned under the Credit Agreement in an aggregate amount of up to $1,250,000 per quarter (the “Quarterly Principal Repayment Cap”). Subject to the Quarterly Principal Repayment Cap, the amount of any quarterly principal payments during any fiscal year is based on (x) a percentage of our year-to-date net revenue through the end of such quarter less (y) any prior quarterly principal and interest payments made during such fiscal year. In addition, we paid an upfront fee of 1.5% of the aggregate principal amount of the Loan. We are also required to pay an exit fee equal to 6% of the aggregate principal amount advanced under the Credit Agreement.

Subject to certain exceptions, we are required to make mandatory prepayments of the Loan with the proceeds of assets sales and insurance proceeds. In addition, we may make a voluntary prepayment of the Loan, in whole, but not in part, at any time on or after the first anniversary of March 28, 2018. All mandatory and voluntary prepayments of the Loan are subject to the payment of prepayment premiums as follows: (i) in the case of mandatory prepayments, if prepayment occurs prior to the first anniversary of March 28, 2018, a customary make-whole amount equal to the amount of interest that would have accrued on the principal amount so prepaid had it remained outstanding through the first anniversary of March 28, 2018, (ii) if prepayment occurs on or after the first anniversary of March 28, 2018 but prior to the second anniversary of March 28, 2018, 6% of the aggregate amount of the principal prepaid and (iii) if prepayment occurs on or after the second anniversary of March 28, 2018 but prior to the third anniversary of March 28, 2018, an amount equal to 1% of the principal prepaid. No prepayment premium is due on any principal prepaid on or after the third anniversary of March 28, 2018.

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With the exception of net income for the fiscal year ended June 30, 2015 resulting from our receipt of the $25.0 million ILUVIEN FDA-approval milestone, we have predominantly incurred operating losses since inception, and at March 31, 2018 we had a total accumulated deficit of $329.6 million. We do not currently have any significant assured sources of future revenue, and our anticipated recurring use of cash to fund operations in combination with no probable source of additional capital raises substantial doubt about our ability to continue as a going concern for one year from the issuance of our financial statements included in this Quarterly Report on Form 10-Q. We have historically financed our operations primarily from the proceeds of sales of our equity securities and receipt of license fees, milestone payments, research and development funding and royalty income from our collaboration partners. We believe that our cash and cash equivalents of $16.3 million at March 31, 2018 and expected cash inflows under existing collaboration agreements will enable us to fund our current and planned operations (including continuation of our two Phase 3 clinical trials for YUTIQ and plans for commercial launch of DEXYCU and, if approved, YUTIQ) through approximately the third quarter of calendar year 2018. In order to extend our ability to fund our operations beyond then, including our planned U.S. commercial launch of DEXYCU and, if approved, YUTIQ, we have filed a preliminary proxy statement for a special meeting of stockholders to be held on June 22, 2018 for the purpose of approving, among other things, the issuance of up to approximately $25.5 million of Units, with each Unit consisting of (a) one share of the Company’s common stock and (b) one warrant to purchase one share of our common stock. We may also draw down an additional $5.0 million pursuant to a Credit Agreement among the Company, as borrower, SWK Funding LLC, as agent, and the lenders party thereto from time to time, subject to a minimum capital raise of at least $20 million of net cash proceeds from an additional equity offering, which would be satisfied by the Second Tranche Transaction, or permitted subordinated debt financing (“Minimum Capital Raise”). There is no assurance that we will receive significant revenues from the planned commercialization of DEXYCU or, if approved, YUTIQ, or from license revenues from ILUVIEN^® or be able to obtain financing from any other sources.

The additional capital we will require will be influenced by many factors, including, but not limited to:

We do not know if additional capital will be available when needed or on terms favorable to us or our stockholders. Collaboration, licensing or other agreements may not be available on favorable terms, or at all. We do

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not know if our stockholders will approve the Second Tranche Transaction. We do not know the extent to which we will be able to establish commercial and other capabilities to successfully launch DEXYCU or, if approved, YUTIQ. Although we expect that our restructured Alimera collaboration agreement will provide a more consistent flow of royalty income, we do not know the extent to which Alimera will achieve increasing revenues from its commercialization of ILUVIEN for DME and, if approved in the EMEA, for posterior segment uveitis. If we seek to sell shares under our ATM program or in another offering, we do not know whether and to what extent we will be able to do so, or on what terms. Further, the rules and regulations of the Nasdaq Global Market require us to obtain stockholder approval for sales of our equity securities under certain circumstances, which could delay or prevent us from raising additional capital from such sales. Also, the state of the economy and financial and credit markets at the time or times we seek any additional financing may make it more difficult or expensive to obtain. If available, additional equity financing may be dilutive to stockholders, debt financing may involve restrictive covenants or other unfavorable terms and dilute our existing stockholders’ equity, and funding through collaboration agreements may be on unfavorable terms, including requiring us to relinquish rights to certain of our technologies or products. If adequate financing is not available if and when needed, we may delay, reduce the scope of, or eliminate research or development programs, potential independent commercialization of DEXYCU and, if approved, YUTIQ or other new products, if any, and postpone or cancel the pursuit of product candidates, including pre-clinical and clinical trials and new business opportunities, reduce staff and operating costs, or otherwise significantly curtail our operations to reduce our cash requirements and extend our capital.

Our consolidated statements of historical cash flows are summarized as follows (in thousands):

For the nine months ended March 31, 2018, net cash used in operating activities decreased by $212,000 compared to the nine months ended March 31, 2017, due primarily to a combination of higher operating cash inflows partially offset by higher operating cash outflows. Increases in operating cash inflows of approximately $820,000 consisted of $665,000 of proceeds from new feasibility study agreements and an increase of $189,000 of cash inflows from Alimera, related primarily to $379,000 of royalty income attributable to the July 2017 restructuring of our collaboration agreement with Alimera. Increases in operating cash outflows of approximately $608,000 consisted primarily of approximately $1.4 million of consulting services, related primarily to our YUTIQ NDA filing and clinical development program and $132,000 of third-party research and development costs, partially offset by (i) a $484,000 decrease in personnel and related costs, due primarily to severance compensation paid in the prior year to our former CEO, our former Vice President, Corporate Affairs and General Counsel and our former U.K. employees, partially offset by higher year over year incentive compensation payments, the December 2017 payment of the cash portion of certain retention bonus agreements and headcount increases; (ii) $285,000 of patent legal fees and (ii) $208,000 of CRO payments associated with our YUTIQ clinical development.

Net cash used in investing activities during the nine months ended March 31, 2018 consisted primarily of a $14.9 million closing payment for the Icon Acquisition plus $237,000 of transaction costs paid, net of $38,000 of cash acquired. Net cash provided by investing activities during the nine months ended March 31, 2017 consisted predominantly of $11.2 million of maturities of marketable securities, net of purchases. There were no purchases or maturities of marketable securities during the nine months ended March 31, 2018.

Net cash provided by financing activities for the nine months ended March 31, 2018 consisted of the following:

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For the nine months ended March 31, 2017, net cash provided by financing activities consisted of $2.3 million of proceeds, net of program and share issue costs, from sales of 1,411,686 shares of common stock under our ATM program and $99,000 from the exercise of stock options.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of March 31, 2018 that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that would be material to investors.

We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates, such as interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes and do not believe we are exposed to material market risk with respect to our cash and cash equivalents.

As of March 31, 2018, we had cash and cash equivalents of $16.3 million. We do not engage in any hedging activities against changes in interest rates. Because of the short-term maturities of our cash and cash equivalents, we do not believe that an immediate 10% increase in interest rates would have a significant impact on the realized value of our investments.

The interest rate on our Loan under the Credit Agreement is variable based on the three-month LIBOR, subject to a 1.5% floor, plus 10.50%. Accordingly, such interest rate is affected by changes in market interest rates. As of March 31, 2018, we had $15.0 million of aggregate principal amount outstanding under the Credit Agreement. As of March 31, 2018, the three-month LIBOR was 2.31%. A hypothetical 1% increase in the three-month LIBOR would result in $150,000 in incremental annual interest expense under the Loan.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2018. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their desired objectives, and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2018, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2018, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

The risk factors set forth below amend and restate the risk factors contained in our Annual Report on Form 10-K for the annual period ended June 30, 2017, which was filed with the SEC on September 13, 2017 and amended on October 30, 2017. The occurrence of any one or more of these risks could materially harm our business, operating results, financial condition and prospects. These risks and uncertainties could also cause actual results to differ materially and adversely from those expressed or implied by forward-looking statements that we make from time to time. Please see “Note Regarding Forward-Looking Statements” appearing at the beginning of Item 2 of this Form 10-Q.

RISKS RELATED TO OUR BUSINESS, FINANCIAL POSITION AND OUR CAPITAL RESOURCES

We will need additional capital to fund our operations and continue as a going concern. If we are unable to obtain sufficient capital, we will need to curtail and reduce our operations and costs, and modify our business strategy.

Our operations have consumed substantial amounts of cash. To date, we have financed our operations primarily through the sale and issuance of capital stock and debt and the receipt of license fees, milestone payments, research and development funding and royalty payments from our collaboration partners. As of March 31, 2018, our cash and cash equivalents were $16.3 million. We believe that our existing capital resources, together with expected payments from existing collaborations, should enable us to fund our operations as currently planned through approximately the third quarter of calendar year 2018. However, changing circumstances may cause us to consume capital faster than we currently anticipate, and we may need to spend more money than currently expected because of such circumstances. Our ability to fund our planned operations beyond that time, including obtaining regulatory approval for YUTIQ, commercializing DEXYCU and, if approved, YUTIQ, and continuing our research and development program for our other product candidates, will require additional capital. In addition, our current plan to commercialize DEXYCU and YUTIQ ourselves in the United States will require significant operating cost investment related to product manufacturing, marketing, sales, distribution and other commercialization costs.

To meet our capital needs, we are considering multiple alternatives, including but not limited to, equity financings, debt financings, corporate collaborations, partnerships and other strategic transactions and funding opportunities. For instance, in order to address a portion of our capital needs, we are seeking approval of our stockholders at a special meeting to be held on June 22, 2018 to issue up to approximately $25.5 million of units, with each unit consisting of (i) one share of our common stock and (ii) one warrant to purchase one share of our common stock (the “Second Tranche Transaction”). In addition, we may also draw down an additional $5.0 million from our existing lender if the Second Tranche Transaction is approved and consummated. However, there can be no assurance that we will be able to receive such stockholder approval and complete the Second Tranche Transaction and such additional debt draw down or complete any one or more of such other transactions on acceptable terms or otherwise. These factors raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm has included an explanatory paragraph in its report on our financial statements for the year ended June 30, 2017 related to our ability to continue as a going concern.

If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we will need to curtail and reduce our operations and costs, and modify our business strategy which may require us to, among other things:

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We have incurred significant losses since our inception and anticipate that we will continue to incur losses for the foreseeable future.

We have incurred significant losses since our inception, have not generated significant revenue from commercial sales of our products and, with exception of fiscal year 2010 and fiscal year 2015, we have never been profitable. Investment in drug development is highly speculative because it entails substantial upfront operating expenses and significant risk that a product candidate will fail to successfully complete clinical trials, gain regulatory approval or become commercially viable. We continue to incur significant research, development and other expenses related to our ongoing operations, including development of YUTIQ and other early stage and/or potential product candidates and commercialization of DEXYCU. For the nine months ended March 31, 2018, we had a net loss of $18.7 million, and we had a total accumulated deficit of $329.6 million at March 31, 2018.

We expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate that our expenses will continue to be significant if, and as, we:

The net losses we incur may fluctuate significantly from quarter to quarter and year to year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance. In any particular quarter or quarters, our operating results could be below the expectations of securities analysts or investors, which could cause our stock price to decline.

We may never achieve profitability from future operations.

Our ability to generate revenue and achieve profitability depends on our ability, alone or with strategic collaboration partners, to successfully complete the development of, and obtain the regulatory approvals necessary for, the manufacture and commercialization of our products and product candidates. Our operations have consumed substantial amounts of cash. To date, we have financed our operations primarily through the sale and issuance of capital stock and debt and the receipt of license fees, milestone payments, research and development funding and

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royalty income from our collaboration partners. To become and remain profitable, we and/or our licensees must succeed in developing and commercializing products that generate significant revenue. This will require us or our licensees to be successful in a range of challenging activities, including completing pre-clinical testing and clinical trials of our product candidates, discovering additional product candidates, obtaining regulatory approval for these product candidates, manufacturing, marketing and selling any products for which we or our licensees may obtain regulatory approval, satisfying any post-marketing requirements and obtaining reimbursement for our products from private insurance or government payors. To date, none of our approved licensed products, including Vitrasert, Retisert and ILUVIEN, has generated significant revenues to us from sales. We have not yet commercialized DEXYCU and YUTIQ has not yet obtained regulatory approval. We do not know when DEXYCU or, if approved, YUTIQ, or any of our other product candidates, if approved, will generate revenue for us, if at all. We may never succeed in these activities and, even if we do, we may never generate revenues significant enough to achieve profitability. Because of the numerous risks and uncertainties associated with pharmaceutical product development and commercialization, we are unable to accurately project when or if we will be able to achieve profitability from operations. Even if we do so, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would depress the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations. Our ability to generate revenue from our current or future products and product candidates will depend on a number of factors, including:

We will need to raise additional funds in the future, which may not be available on favorable terms and may be dilutive to stockholders or impose operational restrictions.

We will need to raise additional capital in the future to help fund our commercialization of DEXYCU and, if approved, YUTIQ, and for the development and commercialization of our product candidates. The amount of additional capital we will require will be influenced by many factors, including, but not limited to: