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

Certain statements contained in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions, or the negative of such words or phrases, are intended to identify “forward-looking statements.” We have based these forward-looking statements on our current expectations and projections about future events. Because such statements include risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include those below and elsewhere in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission, or SEC, particularly in Part II – Item 1A, “Risk Factors”. Statements made herein are as of the date of the filing of this Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and we specifically disclaim, any obligation to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and related notes that appear in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes for the year ended December 31, 2018 appearing in our Annual Report on Form 10-K filed with the SEC on March 15, 2019.

Overview

We are a late-stage clinical biopharmaceutical company developing first-in-class pharmacological therapies to restore and preserve vision for people with serious eye diseases. Our current product candidates focus on diseases affecting two major components of the eye: the retina, which is the tissue that lines the inside of the eye and is primarily responsible for vision; and the choroid, which is the layer adjacent to the retina that supplies the retina with blood, oxygen and nourishment.

Our suprachoroidal injection platform is a novel, patented non-surgical approach for delivering pharmacotherapy to the back of the eye in the anatomic structure known as the suprachoroidal space, or SCS. The elasticity of the SCS allows for migration when fluid is injected between the choroid and sclera and allows the fluid to spread spherically toward the posterior regions of the eye where it is absorbed into adjacent tissue. We are able to precisely administer drugs into the SCS with our proprietary microinjector that utilizes a needle that is approximately 1 millimeter in length.

Our suprachoroidal injection technology is used in conjunction with our proprietary formulations of existing drugs and novel therapies to create a therapeutic platform of product candidates to treat several serious eye diseases. Our lead product candidate, XIPERE, formerly known as CLS-TA, is a proprietary, preservative-free suspension of the corticosteroid triamcinolone acetonide formulated for administration via suprachoroidal injection. Based in part on the positive results from our Phase 3 PEACHTREE clinical trial, in December 2018, we submitted a New Drug Application, or NDA, to the U.S. Food and Drug Administration, or FDA, for XIPERE for the treatment of macular edema associated with uveitis. On February 19, 2019 we received notification from the FDA that it had accepted the XIPERE NDA for review and had determined that the application was sufficiently complete to permit a substantive review. The Prescription Drug User Fee Act, or PDUFA, goal date has been assigned for October 19, 2019. If approved, we anticipate launching XIPERE in the first quarter of 2020.

In May 2018, we completed a Phase 2 clinical trial, which we refer to as TYBEE, evaluating the safety and efficacy of administering XIPERE in combination with intravitreal EYLEA ^® (aflibercept), an anti-VEGF agent, in patients with diabetic macular edema, or DME. Based upon a review of our Phase 2 TYBEE clinical trial data, we have decided to cease clinical development of XIPERE in combination with an anti-VEGF therapy for the treatment of DME. We believe there is a path forward with XIPERE in DME and are evaluating options for clinical trials that can demonstrate the potential benefit from XIPERE as a monotherapy. We intend to discuss this strategy with appropriate regulatory authorities and, subject to the availability of additional funding, to pursue the development of XIPERE as monotherapy in DME and other potential indications outside of uveitis. We are also evaluating the potential to develop therapeutic candidates based on the administration of gene therapy and novel small molecules through the SCS using our SCS Microinjector.

If XIPERE or any of our other product candidates are approved, we currently plan to commercialize them with a specialty team of approximately 20 sales and medical marketing professionals to target the approximately 1,900 uveitis and retina specialists in the United States. If we commercialize any of our product candidates ourselves, we will require significant additional funding. We may pursue collaborations with third parties to commercialize any of our drugs approved for marketing, including XIPERE, in the United States. We do not expect to commercialize any products approved outside the United States ourselves, but instead would likely seek third-party collaborations for commercialization internationally.

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We have incurred net losses since our inception in May 2011. Our operations to date have been limited to organizing and staffing our company, raising capital, undertaking preclinical studies and other research and development initiatives, conducting clinical trials of our most advanced product candidates and preparing to commercialize XIPERE for the treatment of macular edema associated with uveitis if approved by the FDA. To date, we have not generated any revenue, other than license and collaboration revenue, and we have primarily financed our operations through public offerings and private placements of our equity securities, issuances of convertible promissory notes and loan agreements. As of March 31, 2019, we had an accumulated deficit of $ 222 . 3 million. We recorded net losses of $ 15.4 million and $16 .6 million for the three months ended March 31, 2019 and 2018, respectively. We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the necessary clinical development of, and ob taining regulatory approval and preparing for potential commercialization of, our product candidates, including commercializing XIPERE for the treatment of macular edema associated with uveitis, if approved, either on our own or in collaboration with third parties.

We expect to continue to incur significant operating losses at least for the next several years. We do not expect to generate product revenue unless and until we successfully complete necessary development of, and obtain regulatory approval for, one or more of our product candidates. Our net losses may fluctuate significantly from quarter to quarter and year to year, depending on the timing of our clinical trials and our expenditures on other research and development activities. We anticipate that our clinical trial expenses will decrease over the near term as we have discontinued late-stage clinical trials of XIPERE for indications other than uveitis. However, we will continue our efforts to seek to discover, research and develop additional product candidates and seek regulatory approvals for XIPERE for the treatment of macular edema associated with uveitis and other developmental efforts necessary to seek such approvals. We anticipate that our general and administrative expenses will increase substantially as we:

Based on our current plans and forecasted expenses we expect that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2020.

Components of Operating Results

Revenue

We have not generated any revenue from the sale of any drugs, and we do not expect to generate any revenue unless or until we obtain regulatory approval of and commercialize our product candidates.

We have periodically entered into short-term collaboration agreements, generally with performance obligations of one to two months, to evaluate the potential use of our proprietary SCS Microinjector with third-party product candidates for the treatment of various diseases. Funds received from these collaboration agreements are recognized as revenue over the term of the agreement.

We may enter into additional collaboration agreements to evaluate the potential use of our proprietary SCS Microinjector with third-party product candidates for the treatment of various eye diseases.

Research and Development

Since our inception, we have focused on our development programs. Research and development expenses consist primarily of costs incurred for the research and development of our preclinical and clinical product candidates, which include:

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We expense research and development costs to operations as incurred. The costs for some of our development activities, such as clinical trials, are recognized based on the terms of underlying agreements, as well as an evaluation of the progress to completion of specific tasks using data such as patient enrollment, clinical site activations and additional information provided to us by our vendors about their actual costs occurred.

Expenses related to activities, such as manufacturing and stability and toxicology studies, that are supportive of a product candidate itself, are classified as direct preclinical costs. Expenses related to clinical trials and similar activities, including costs associated with CROs, are classified as direct clinical costs. Expenses related to activities that support more than one development program or activity, such as salaries, share-based compensation and depreciation, are not classified as direct clinical costs or preclinical costs and are separately classified as unallocated.

For the three months ended March 31, 2019 and 2018, substantially all of our research and development expenses were related to the clinical development of our product candidates.

The following table shows our research and development expenses by program, including those that have been discontinued, for the three months ended March 31, 2019 and 2018 (in thousands).

Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended under contracts with research institutions, consultants and CROs that conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity according to the protocol. If future timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we would modify our estimates of accrued expenses accordingly on a prospective basis. Historically, any such modifications have not been material.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. It is difficult to determine with certainty the duration and completion costs of our current or future preclinical programs and clinical trials of our product candidates, or if, when or to what extent we will generate revenues from the commercialization and sale of any of our product candidates that obtain regulatory approval. We may never succeed in achieving regulatory approval for any of our product candidates.

The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors that include the following:

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In addition, the probability of success for each product candidate will depend on numerous factors, including competition, manufacturing capability and commercial viability. We will determine which programs to pursue and how much to fund each program in response to the scientific and clinical success of each product candidate, as well as an assessment of each product candidate’s commercial potential.

General and Administrative

General and administrative expenses consist primarily of salaries and other related costs, including share-based compensation, for personnel in executive, finance and administrative functions. General and administrative costs include facility related costs not otherwise included in research and development expenses, professional fees for legal, patent, consulting, and accounting and audit services.

We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities and the potential commercialization of our product candidates. Additionally, we anticipate increased costs related to services associated with maintaining compliance with Nasdaq listing rules and SEC requirements, including compliance with the Sarbanes-Oxley Act, director and officer insurance, and investor and public relations costs.

Other Income (Expense)

Other income consists of interest income earned on our cash and cash equivalents and short-term investments. Interest income is not considered significant to our financial statements.

Other expense primarily consists of interest expense under our loan agreements for the three months ended March 31, 2019 and 2018.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of expenses during the reporting periods. In accordance with U.S. GAAP, we evaluate our estimates and judgments on an ongoing basis. Significant estimates include assumptions used in the determination of share-based compensation and some of our research and development expenses. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We define our critical accounting policies as those accounting principles generally accepted in the United States of America that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. During the three months ended March 31, 2019, there were no significant changes to our critical accounting policies disclosed in our audited financial statements for the year ended December 31, 2018, which are included in our Annual Report on Form 10-K, as filed with the SEC on March 15, 2019, other than our adoption of ASU 2016-02, Leases , as described in Note 2 to our financial statements included in this report .

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Revenue . In the three months ended March 31, 2019, we recognized $45,000 of revenue associated with collaboration agreements to evaluate the potential use of our proprietary SCS Microinjector with third-party product candidates for the treatment of various diseases.

Research and development . Research and development expense decreased by $2.4 million, from $13.4 million for the three months ended March 31, 2018 to $11.0 million for the three months ended March 31, 2019. This was primarily attributable to a $1.4 million decrease due the completion of the PEACHTREE trial during the first quarter of 2018, a $1.2 million decrease in costs related to our DME program, as the TYBEE trial was completed in the second quarter of 2018, and a $0.6 million decrease due to closing down two late-stage clinical trials, SAPPHIRE and TOPAZ. These decreases were partially offset by a $0.8 million increase in employee-related costs and a $0.5 million increase in manufacturing costs for XIPERE.

General and administrative . General and administrative expenses increased by $1.3 million, from $3.1 million for the three months ended March 31, 2018 to $4.4 million for the three months ended March 31, 2019. The increase was primarily attributable to a $0.6 million increase in employee-related costs and an increase of $0.6 million in marketing-related expenses as we prepare for potential commercialization of XIPERE.

Other expense, net . Other expense, net for each of the three months ended March 31, 2019 and 2018 primarily consisted of interest on long-term debt, the amortization of financing costs, the accretion of warrants and the final payment related to our loan agreements, offset in part by interest income from our short-term investments.

Liquidity and Capital Resources

Sources of Liquidity

We have funded our operations primarily through the proceeds of public offerings of our common stock, sales of convertible preferred stock and the issuance of long-term debt. As of March 31, 2019, we had cash, cash equivalents and short-term investments of $34.9 million. We invest any cash in excess of our immediate requirements primarily with a view to liquidity and capital preservation. As of March 31, 2019, our funds were held in cash, money market funds and commercial paper.

On June 30, 2017, we entered into an at-the-market sales agreement, or the ATM agreement, with Cowen and Company LLC, or Cowen, under which we may offer and sell, from time to time at our sole discretion, shares of our common stock having an aggregate offering price of up to $50.0 million through Cowen acting as our sales agent. As of March 31, 2019, we have sold 4.7 million shares of our common stock for net proceeds of $6.6 million under the ATM agreement. Our registration statement on Form S-3 contemplated under the ATM agreement was declared effective by the SEC on  July 13, 2017. The registration statement on Form S- 3 includes a prospectus supplement covering the offering up to  $18.5 million of shares of common stock over the 12 months ending March 15, 2020 in accordance with the ATM agreement.

On September 28, 2016, we entered into an amended and restated loan and security agreement with Silicon Valley Bank, or SVB, and entities affiliated with MidCap Financial Services, which we refer to collectively with SVB as the Lenders. The amended and restated loan and security agreement provided for new term loans of up to $15.0 million, with a floating interest rate equal to 7% plus the greater of (i) the 30-day U.S. LIBOR, as reported in the Wall Street Journal on the last business day of the month that immediately preceded the month in which the interest was to accrue, or (ii) 0.50%. We borrowed an initial tranche of $8.0 million on September 28, 2016, of which $5.3 million was used to repay all amounts outstanding under our prior loan agreement with SVB. The

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draw period for the remaining $7.0 million available under the amended and restated loan and security agreement expired on March 31, 2018 . In connection with the amended and restated loan and security agreement , we issued warrants to the Lenders to purchase up to 29,796 shares of common stock at a price per share of $10.74. The warrants expire in September 2026, or earlier upon the occurrence of specified mergers or acquisitions of our company, and are immediately exercisable.

On May 14, 2018, we entered into a second amended and restated loan and security agreement with the Lenders, or the Loan Agreement, which amended and restated in its entirety the prior amended and restated loan and security agreement with the Lenders. The Loan Agreement provides for new term loans of up to $20.0 million, with a floating interest rate equal to 6.5% plus the greater of (i) the 30-day U.S. LIBOR, as reported in the Wall Street Journal on the last business day of the month that immediately precedes the month in which the interest will accrue or (ii) 1.89%.

We borrowed an initial tranche of $10.0 million on May 14, 2018, of which $7.0 million was used to repay all amounts outstanding under the amended and restated loan and security agreement, including the fees payable in connection with the final payment. The prepayment fees were waived. Of the remaining $10.0 million, $5.0 million became available but we elected not to draw it, and the other $5.0 million did not become available for draw.

We are required to pay accrued interest only on the $10.0 million outstanding balance through October 31, 2019, followed by consecutive equal monthly payments of principal and interest in arrears continuing through the maturity date of October 1, 2022 . We have the option to prepay the outstanding balance in full, subject to a prepayment fee of 3% of the original principal amount for any prepayment prior to May 14, 2019 or 2% of the original principal amount for any prepayment on or after May 14, 2019 but prior to October 1, 2022 . A final payment of 5.50% of the aggregate borrowed amount is due at maturity of the loan on October 1, 2022, or upon the prepayment of the facility or the acceleration of amounts due under the facility as a result of an event of default.

The amounts due under the Loan Agreement are secured by substantially all of our assets, except that the collateral does not include any of our intellectual property. However, pursuant to the terms of a negative pledge arrangement, we have agreed not to encumber any of our intellectual property.

Funding Requirements

Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, costs related to our NDA submission, preparation for XIPERE’s anticipated commercial launch in the first quarter of 2020, legal and other regulatory expenses and general overhead costs.

The successful development of our product candidates is highly uncertain. As such, at this time, we cannot reasonably estimate or know the nature, timing and estimated costs of the efforts that will be necessary to complete the remainder of the development of XIPERE or any future product candidates. We are also unable to predict when, if ever, material net cash inflows will commence from product sales. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:

A change in the outcome of any of these variables with respect to the development of any of our product candidates would significantly change the costs and timing associated with the development of that candidate.

Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings and potential collaboration, license and development agreements. We do not currently have any committed external source of funds, and, as described above, we may also be able to sell our common stock under the ATM agreement with Cowen subject to the terms of that agreement and depending on market conditions. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

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If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to o ur technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our drug development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

We also incur costs as a public company, including increased costs and expenses for fees to members of our board of directors, increased personnel costs, increased directors and officers insurance premiums, audit and legal fees, investor relations fees and expenses for compliance with reporting requirements under the Exchange Act and rules implemented by the SEC and Nasdaq.

Outlook

We have suffered recurring losses and negative cash flows from operations since inception and anticipate incurring additional losses until such time, if ever, that we can obtain FDA approval to market, and then generate significant sales of XIPERE. We will need additional financing to fund our operations and commercialize XIPERE.

Based on our current research and development plans, including the discontinuation of clinical development of XIPERE together with an anti-VEGF agent for the treatment of retinal vein occlusion, or RVO, our plans to reduce certain administrative expenses and our timing expectations related to the approval of our NDA submission, we expect that our existing cash, cash equivalents and short-term investments will enable us to fund our operating expenses and capital expenditure requirements into the first quarter of 2020. Accordingly, we have plans to mitigate this going concern risk, which primarily consist of raising additional capital, potentially in a combination of equity or debt financings, or entering into potential collaborations, partnerships and other strategic arrangements. We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date of this report.

Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result should we be unable to continue as a going concern.

During the three months ended March 31, 2019 and 2018, our operating activities used net cash of $12.7 million and $15.7 million, respectively. The use of cash in each period primarily resulted from our net losses. The decrease in net loss for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018 was primarily attributable to the lower research and development expenses as a result of the completion of the PEACHTREE and TYBEE trials in the prior year and the shut-down of the SAPPHIRE and TOPAZ trials, partially offset by commercialization activities described above.

During the three months ended March 31, 2019 and 2018, our net cash provided by investing activities was $30.9 million and $12.2 million, respectively. In each period, cash flows from investing activities were related primarily to maturities of short-term, available-for-sale investments.

During the three months ended March 31, 2019 and 2018, our net cash provided by financing activities was $6.6 million and $79.0 million, respectively. The net cash provided by financing activities for the three months ended March 31, 2019 was comprised of net proceeds from the sales of shares of common stock under the ATM agreement. The net cash provided by financing activities for the three months ended March 31, 2018 was comprised of the net proceeds of $79.6 million received from our March 2018 public

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offering of common stock, the net proceeds of $10.0 million from the second amended and restated loan and security agreement, offset by $8.3 million paid to satisfy our obligations under the prior loan agreement, and $0.4 million of proceeds from the exerc ise of stock options.

Contractual Obligations  

As of March 31, 2019, there were no significant changes to our contractual obligations from those presented as of December 31, 2018 in our Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

Recent Accounting Pronouncements

See Item 1, “Financial Statements – Note 2, Significant Accounting Policies” for a discussion of recent accounting pronouncements and their effect on us.

JOBS Act

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Section 107(b) of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.