oyst-20210930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File Number: 001-39112

OYSTER POINT PHARMA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware81-1030955
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
202 Carnegie Center, Suite 109 Princeton, New Jersey
08540
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (609) 382-9032

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

Trading
Symbol(s)

Name of each exchange on which registered
Common stock, par value $0.001

OYST

The Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   Accelerated filer 
Non-accelerated filer   Smaller reporting company 
Emerging growth company





If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  
As of October 29, 2021, the registrant had 26,163,861 shares of common stock, $0.001 par value per share, outstanding.





SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Any statements contained in this Form 10-Q that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, such forward-looking statements are identified by terminology such as “aim,” “anticipate,” “assume,” “believe,” “contemplate,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
the likelihood of the Company's clinical trials demonstrating safety and efficacy of its product candidates, and other positive results;
the timing of initiation of the Company's future clinical trials, and the reporting of data from completed, current and future clinical trials and preclinical studies;
plans relating to the clinical development of the Company's product candidates, including the size, number and disease areas to be evaluated;
the size of the market opportunity and prevalence of dry eye disease for the Company's product candidates;
plans relating to commercializing the Company's product candidates, if approved by regulatory agencies, including the geographic areas of focus and sales strategy;
the success of competing therapies that are or may become available;
the Company's estimates of the number of patients in the United States who suffer from dry eye disease, and the number of patients that will enroll in its clinical trials;
the beneficial characteristics, safety, efficacy and therapeutic effects of the Company's product candidates;
the timing, likelihood or scope of regulatory filings and approval for its product candidates;
the Company's ability to obtain and maintain regulatory approval of its product candidates;
the Company's plans relating to the further development and manufacturing of its product candidates, including additional indications for which it may pursue;
the expected potential benefits of strategic collaborations with third parties and the Company's ability to attract collaborators with development, regulatory and commercialization expertise;
existing regulations and regulatory developments in the United States and other jurisdictions;
the Company's plans and ability to obtain or protect intellectual property rights, including extensions of existing patent terms where available;
continued reliance on third parties to conduct additional clinical trials of the Company's product candidates, and for the manufacture and supply of product candidates, components for preclinical studies and clinical trials and potentially for commercial supply;
the Company’s ability to recruit and retain key personnel needed to develop and commercialize the Company’s product candidates, if approved, and to grow the Company;
the potential effects of the novel strain coronavirus, or SARS-CoV-2 virus pandemic, including the resurgence of cases relating to the spread of the Delta variant, on business, operations and clinical development timelines and plans;
i


the accuracy of estimates regarding expenses, future revenue, capital requirements and needs for additional financing;
the Company's financial performance;
the sufficiency of existing capital resources to fund future operating expenses and capital expenditure requirements;
expectations regarding the period during which the Company will qualify as an emerging growth company under the JOBS Act; and
the Company's anticipated use of its existing resources and proceeds from the initial and follow-on public offerings.
The Company has based these forward-looking statements largely on its current expectations and projections about its business, the industry in which it operates and financial trends that may affect business, financial condition, results of operations and growth prospects, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, as well as Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 and the Company's Quarterly Reports on Form 10-Q for the periods ended March 31, 2021 and June 30, 2021. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, they should not be relied on as predictions of future events. The events and circumstances reflected in these forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, the Company does not plan to publicly update or revise any forward-looking statements after the date of this Quarterly Report on Form 10-Q, whether as a result of any new information, future events or otherwise.
In addition, statements that “the Company believes” and similar statements reflect the Company's beliefs and opinions on the relevant subject. These statements are based upon information available to the Company as of the date of this Quarterly Report on Form 10-Q, and while the Company believes such information forms a reasonable basis for such statements, such information may be limited or incomplete, and the Company's statements should not be read to indicate that it has conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and should not be unduly relied upon.

ii


TABLE OF CONTENTS
Page
ITEM 1
ITEM 2
ITEM 3
ITEM 4
PART II – OTHER INFORMATION
ITEM 1
ITEM 1A
ITEM 2
ITEM 3
ITEM 4
ITEM 5
ITEM 6
SIGNATURES

iii


PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
OYSTER POINT PHARMA, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)

September 30, 2021December 31, 2020
ASSETS
Current Assets
Cash and cash equivalents$184,166 $192,585 
Other receivable - related party2,500  
Prepaid expenses and other current assets3,020 3,782 
Total current assets189,686 196,367 
Property and equipment, net1,976 804 
Restricted cash61 61 
Other assets2,635  
Right-of-use assets, net651 678 
Total Assets$195,009 $197,910 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable$3,506 $2,279 
Accrued expenses and other current liabilities11,174 8,285 
Lease liabilities481 418 
Total current liabilities15,161 10,982 
Lease liabilities, non-current179 269 
Long-term debt, net 41,919  
Other long-term liabilities238  
Total long-term liabilities42,336 269 
Total Liabilities57,497 11,251 
Commitments and Contingencies
Stockholders’ Equity
Preferred stock, $0.001 par value per share; 5,000,000 shares authorized; none outstanding
  
Common stock, $0.001 par value per share; 1,000,000,000 shares authorized, 26,094,253 and 25,890,490 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively
26 26 
Additional paid-in capital350,832 341,384 
Accumulated deficit(213,346)(154,751)
Total Stockholders’ Equity137,512 186,659 
Total Liabilities and Stockholders’ Equity
$195,009 $197,910 
The accompanying notes are an integral part of these condensed financial statements.
1


OYSTER POINT PHARMA, INC.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Revenue:
License revenue - related party $17,943 $ $17,943 $ 
Total revenue17,943  17,943  
Operating expenses:
Research and development$6,214 $8,210 $18,772 $28,104 
Selling, general and administrative28,497 8,112 56,885 20,641 
Total operating expenses34,711 16,322 75,657 48,745 
Loss from operations(16,768)(16,322)(57,714)(48,745)
Other income (expense):
Other income, net 222 17 243 457 
Interest expense(1,124) (1,124) 
Total other income (expense), net    (902)17 (881)457 
Net loss and comprehensive loss$(17,670)$(16,305)$(58,595)$(48,288)
Net loss per share, basic and diluted$(0.68)$(0.63)$(2.25)$(2.05)
Weighted average shares outstanding, basic and diluted26,037,975 25,797,282 25,984,412 23,544,035 

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


OYSTER POINT PHARMA, INC.
CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
Common StockAdditional Paid-In CapitalAccumulated DeficitTotal Stockholders’ Equity
SharesAmount
Balance at January 1, 202125,890,490 $26 $341,384 $(154,751)$186,659 
Net loss— — — (18,909)(18,909)
Issuance of common stock upon exercise of stock options55,046 — 218 — 218 
Issuance of common stock upon vesting of restricted stock units15,252 — — — — 
 Stock-based compensation expense— — 2,680 — 2,680 
Balance at March 31, 202125,960,788 $26 $344,282 $(173,660)$170,648 
Net loss— — — (22,016)(22,016)
Issuance of common stock upon exercise of stock options28,748 — 104 — 104 
Issuance of common stock upon vesting of restricted stock units16,901 — — — — 
Stock-based compensation expense— — 3,048 — 3,048 
Balance at June 30, 202126,006,437 $26 $347,434 $(195,676)$151,784 
Net loss— — (17,670)(17,670)
Issuance of common stock upon exercise of stock options 87,816 — 283 — 283 
Stock-based compensation expense— — 3,115 — 3,115 
Balance at September 30, 202126,094,253 $26 $350,832 $(213,346)$137,512 


Common Stock
Additional Paid-In Capital
Accumulated Deficit
Total Stockholders’ Equity
SharesAmount
Balance at January 1, 202021,366,950 $21 $221,508 $(84,231)

$137,298 
 Net loss— — — (16,519)

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

1,180 
Balance at March 31, 202021,370,480 $21 $222,692 $(100,750)$121,963 
Net loss— — — (15,464)(15,464)
Issuance of common stock upon secondary equity offering, net of issuance costs of 8,125
4,312,500 5 112,620 — 112,625 
Issuance of common stock upon exercise of stock options60,425 — 82 — 82 
Stock-based compensation expense— — 1,609 — 1,609 
Balance at June 30, 202025,743,405 $26 $337,003 $(116,214)$220,815 
Net loss— — — (16,305)(16,305)
Issuance of common stock upon exercise of stock options 87,755 — 173 — 173 
Issuance of common stock upon vesting of restricted stock units13,601 — — — — 
Stock-based compensation expense— — 1,990 — 1,990 
Balance at September 30, 202025,844,761 $26 $339,166 $(132,519)$206,673 

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


OYSTER POINT PHARMA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30,
20212020
Cash flows from operating activities
Net loss$(58,595)$(48,288)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense8,843 4,779 
Depreciation 91 57 
Amortization and accretion of long-term debt related costs 508  
Reduction in the carrying amount of the right-of-use assets371 285 
Non-cash consideration for license revenue - related party (443) 
Change in fair value of net embedded derivative liability(212) 
Changes in assets and liabilities:
Other receivable - related party(2,500) 
Prepaid expenses and other current assets395 2,172 
Accounts payable1,215 1,784 
Lease liabilities(371)(283)
Accrued expenses and other current liabilities2,921 2,146 
Other assets(118) 
Net cash used in operating activities(47,895)(37,348)
Cash flows from investing activities
Purchases of property and equipment(1,250)(342)
Net cash used in investing activities(1,250)(342)
Cash flows from financing activities
Payment of deferred equity offering costs (30) 
Proceeds from follow-on equity offering, net of issuance costs  112,625 
Net proceeds from long-term debt 40,151  
Proceeds from the exercise of stock options605 259 
Net cash provided by financing activities40,726 112,884 
Net (decrease) increase in cash, cash equivalents and restricted cash(8,419)75,194 
Cash, cash equivalents and restricted cash at the beginning of the period192,646 139,198 
Cash, cash equivalents and restricted cash at the end of the period$184,227 $214,392 
Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents$184,166 $214,331 
Restricted cash61 61 
Cash, cash equivalents and restricted cash$184,227 $214,392 
Supplemental Cash Flow Information
Cash paid during the period for:
Interest $617 $ 
Non-cash investing and financing activities:
Right-of-use assets acquired through leases344 $320 
The accompanying notes are an integral part of these condensed financial statements.
4


OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements

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

Description of the Business

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

Liquidity

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

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

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

5

OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
The Company incurred net losses of $58.6 million and $48.3 million for the nine months ended September 30, 2021 and 2020, respectively, and had an accumulated deficit of $213.3 million as of September 30, 2021. The Company has been incurring higher expenses due to the Company's preparation for the commercialization of TYRVAYA Nasal Spray, including to establish commercial scale manufacturing arrangements and to provide for the marketing, commercial operations and distribution of the product. The Company expended and will continue to expend funds to complete the research, development and clinical testing of its product candidates. The Company will require additional funds as it commercializes TYRVAYA Nasal Spray and to commercialize any future products. The Company is unable to entirely fund these efforts with its current financial resources and there can be no assurance that it will be able to secure such additional financing on a timely basis, if at all, that will be sufficient to meet these needs. If adequate funds are unavailable on a timely basis from operations or additional sources of financing, the Company may have to delay, reduce and or eliminate certain commercial related expenses, included in selling, general and administrative expenses, as well as delay, reduce or eliminate the scope of one or more of its research or development programs, which would materially and adversely affect its business, financial condition and operations.

The Company had cash and cash equivalents of $184.2 million as of September 30, 2021. Management believes that the Company’s current cash and cash equivalents will be sufficient to fund its planned operations for at least 12 months from the date of issuance of these financial statements.

SARS-CoV-2 Update

The Company continues to be subject to risks and uncertainties as a result of the SARS-CoV-2 virus pandemic. The pandemic and related public health developments, have adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. With the surge of the Delta variant of the virus across the United States (U.S.) during the second half of 2021, the Company delayed its plans for a voluntary return to the office for its employees until at least December 2021. However, the Company will continue monitoring SARS-CoV-2 infection rates and make practical decisions about voluntary reopening in compliance with Centers for Disease Control and Prevention (CDC), federal, state and local guidelines. As of September 30, 2021, the Company has not been materially affected by the adverse results of the pandemic, however, it is not possible to predict the duration or magnitude of the adverse results of the pandemic or the full extent of its effects on the Company's financial condition, liquidity or results of operations. The extent to which the global pandemic will impact the Company’s business beyond September 2021 will depend on future developments that are highly uncertain and cannot be predicted.

Basis of Presentation

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

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of expenses in the condensed financial statements and accompanying notes. Significant items subject to such estimates and assumptions include stock-based compensation, net embedded derivative liability bifurcated from the Credit Agreement and certain research and development accruals. Actual results could differ from these estimates, and such differences could be material to the Company’s financial position and results of operations.

Significant Accounting Policies Update

The Company’s significant accounting policies are disclosed in Note 1, Nature of Business, Basis of Presentation and Significant Accounting Policies in the Annual Report on Form 10-K for the year ended December 31, 2020. The Company
6

OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
adopted new accounting policies, as described below, as a result of the events and transactions that took place during the nine months ended September 30 2021.

Stock-Based Compensation
Effective April 1, 2021, the Company established its first offering period under the Company's 2019 Employee Stock Purchase Plan (the ESPP), as described in Note 4, Stockholders' Equity. Stock-based compensation expense related to purchase rights issued under the ESPP, is based on the Black-Scholes option-pricing model fair value of the estimated number of awards as of the beginning of the offering period. Stock-based compensation expense is recognized using the straight-line method over the offering period.
The determination of the grant date fair value of shares purchased under the ESPP is affected by the estimated fair value of the Company's common stock as well as other assumptions and judgments, which are estimated as follows:
Expected term. The expected term for the ESPP is the beginning of the offering period to the end of each purchase period.
Expected volatility. As the Company has a limited trading history of its common stock, the expected volatility is estimated based on the third quartile of the range of the observed volatilities for comparable publicly traded biotechnology and pharmaceutical related companies over a period equal to length of the offering period. The comparable companies are chosen based on industry, stage of development, size and financial leverage of potential comparable companies.
Risk-free interest rate. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of the offering period.
Expected dividend rate. The Company has not paid and does not anticipate paying any dividends in the near future. Accordingly, the Company has estimated the dividend yield to be zero.

Revenue

The Company entered into the License Agreement with Ji Xing during the three months ended September 30, 2021, as further described in Note 8, License and Collaboration Agreements. The License Agreement provides for Ji Xing to develop and commercialize certain Company products in exchange for payments by the licensee that include a non-refundable, up-front license fee, development and sales-based milestone payments, as well as royalties on net sales of licensed products. In connection with the License Agreement, the Company adopted revenue policies under the guidance of ASC 606, Revenue from Contracts with Customers, to recognize revenue based on the transfer of control of promised goods or services in an amount that reflects the consideration to which the Company expects to receive in exchange for those goods and services. Revenue is recognized when the Company transfers control of a good or service to the customer in an amount that reflects the transaction price allocated to the distinct goods or services. U.S. GAAP provides a five-step model for recognizing revenue from contracts with customers:

1.Identify the contract with the customer
2.Identify the performance obligations within the contract
3.Determine the transaction price
4.Allocate the transaction price to the performance obligations
5.Recognize revenue when (or as) the performance obligations are satisfied

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

Royalty Revenue —The Company recognizes royalty revenue from licensees based on third-party sales of licensed products and is recorded when the related third-party product sale occurs.

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

Loan Commitment Fees, Debt Issuance and Discount Costs

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

OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
obtaining access to capital under its term loan credit facility. Loan commitment fees related to undrawn tranches are recorded in other assets on the Company's condensed balance sheet and are amortized using a straight-line method over the term of the loan commitment. Debt issuance and discount costs that are attributable to the specific tranches drawn on the term loan credit facility are recorded as a reduction of the carrying amount of the debt liability incurred and are amortized to interest expense using the effective interest method over the repayment term. If the Company draws down on the term loan credit facility, it will reclassify the capitalized loan commitment fees on a pro-rata basis to debt issuance and discount costs that reduce the carrying amount of the debt liability.

Non-Marketable Equity Investment

In connection with the License Agreement described in Note 8, License and Collaboration Agreements, the Company received 397,562 senior common shares from Ji Xing valued at $0.4 million as of September 30, 2021 (the Investment). The Investment was recorded at fair value and will be subject to impairment analysis on a periodic basis. The impairment analysis would involve an assessment of both qualitative and quantitative factors, which may include regulatory approval of the investee's product or technology, as well as the investee’s financial metrics, such as subsequent rounds of financing that may indicate the Investment is impaired. If the Investment is considered impaired, the Company will recognize an impairment through other income (expense), net in the statements of operations and establish a new carrying value for the Investment.

Net Embedded Derivative Asset or Liability

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

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the FASB) under its accounting standards codifications (ASC) or other standard setting bodies and are adopted by the Company as of the specified effective date, unless otherwise discussed below.

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

ASU 2016-13 — In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard introduced the expected credit loss methodology for the measurement of credit losses on financial assets measured at amortized cost basis, replacing the previous incurred loss methodology. The amendment in ASU 2016-13 also modified the accounting for available-for-sale debt securities, which must be individually assessed for credit losses when fair value is less than the amortized costs basis. The guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those years, for public business entities. The Company adopted ASU 2016-13 on January 1, 2021 and its adoption did not have a material effect on the Company's financial statements and related disclosures.

2.    Fair Value Measurements

The Company assesses the fair value of financial instruments as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering
8

OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As further discussed in Note 7, Long-term Debt, the Company is required to make quarterly payments to OrbiMed in the form of a revenue sharing fee, which was evaluated under ASC 815-40, Derivatives and Hedging, and determined to be an embedded derivative liability. In addition, the Company has the right to optionally prepay, in whole or in part, the outstanding principal amount of the term loan in an amount equal to the outstanding principal, accrued and unpaid interest, together with other fees and payments required under the term loan. This prepayment option has been determined to qualify as an embedded derivative asset under ASC 815-40, Derivatives and Hedging. The embedded derivative asset and liability have been netted to result in a net embedded derivative liability and is classified as a Level 3 financial liability in the fair value hierarchy as of September 30, 2021. The valuation method for both embedded derivatives includes certain unobservable Level 3 inputs including revenue projections, probability and timing of future cash flows, probability of regulatory approval, discounts rates and risk-free rates of interest. The change in fair value due to the remeasurement of the net embedded derivative liability is recorded as other income, net in the Company’s condensed statement of operations and comprehensive loss.

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

9

OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
Three months ended September 30,Nine months ended September 30,
20212021
Beginning balance:$ $ 
Net embedded derivative liability450 450 
Change in fair value of the net embedded derivative liability(212)(212)
Ending balance $238 $238 

As of September 30, 2021, financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
Fair Value Measurements at September 30, 2021
Quoted Price in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total
Assets:
Money market funds183,166   183,166 
Total assets$183,166 $ $ $183,166 
Liabilities:
Net embedded derivative liability  238 238 
Total liabilities$ $ $238 $238 



As of December 31, 2020, financial assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):
Fair Value Measurements at December 31, 2020
Quoted Price in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Total
Assets:
Money market funds191,585   191,585 
Total assets$191,585 $ $ $191,585 
Liabilities:
Net embedded derivative liability    
Total liabilities$ $ $ $ 

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

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

10

OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Investment in Ji Xing Senior Common Shares - Related Party

In connection with entering into the License Agreement with Ji Xing, as described in Note 8, License and Collaboration Agreements, the Company received 397,562 senior common shares of Ji Xing on August 5, 2021 (Investment), which were accounted for as a non-marketable equity investment and valued as of August 5, 2021. The Investment is classified within Level 3 in the fair value hierarchy because the fair value was determined based on a market approach in which one or more significant inputs to the valuation model are unobservable. The Investment is subject to non-recurring fair value measurements for the evaluation of potential impairment losses and observable price changes in orderly transactions for an identical or similar investment of Ji Xing.

The following table represents significant unobservable inputs used in determining the estimated fair value of the Investment as of August 5, 2021 (in thousands):

Valuation Technique
Unobservable Inputs
Value
Asset
InvestmentMarket Approach - Backsolve methodEquity values of recent rounds of financing by the issuer $443 


Concentration of Credit Risk

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

3.    Accrued Expenses and Other Current Liabilities

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

OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
4.    Stockholders' Equity

Common Stock

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

The Company reserved common stock for future issuance as follows:
September 30, 2021
December 31, 2020
Outstanding options under the 2016 Equity Incentive Plan2,370,2562,567,566
Outstanding options under the 2019 Equity Incentive Plan2,031,932918,145
Outstanding options under the 2021 Inducement Plan270,600
Equity awards available for grant under the 2019 Equity Incentive Plan (1)
1,588,1051,790,106
Equity awards available for grant under the 2021 Inducement Plan379,400
Unvested restricted stock units (RSUs) 178,59561,215
Shares reserved for purchase under the Employee Stock Purchase Plan (the ESPP) 270,000270,000
Total7,088,8885,607,032
(1) — Effective January 1, 2021, in connection with the evergreen provision under the 2019 Equity Incentive Plan (the 2019 Plan) 1,035,619 shares were added to the 2019 Plan.

2021 Inducement Plan

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

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

12

OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
The weighted average fair value of options granted during the nine months ended September 30, 2021 was $10.88 per share. As of September 30, 2021, the total unrecognized stock-based compensation expense for stock options was $28.8 million, which is expected to be recognized over a weighted average period of 2.9 years.
Restricted Stock Units
Restricted stock units (the RSUs) are granted to the Company's directors and certain employees. The value of an RSU award is based on the Company's stock price on the date of the grant. The shares underlying the RSUs are not issued until the RSUs vest. Upon vesting, each RSU converts into one share of the Company's common stock.
Activity with respect to the Company's restricted stock units during the nine months ended September 30, 2021 was as follows (in thousands, except share, contractual term, and per share data):
Outstanding RSUs
Number of Shares Underlying Outstanding Awards
Weighted Average Grant Date Fair Value per Share
Weighted Average Remaining Contractual Term (Years)Aggregate Intrinsic Value
Outstanding at January 1, 202161,215 $23.83 1.4$1,152 
Restricted stock units granted154,431 18.26 2,820 
Restricted stock units vested (32,153)27.15 648 
Restricted units forfeited (4,898)18.77 87 
Balance, September 30, 2021178,595 18.56 2.52,116 
Unvested and expected to vest as of September 30, 2021178,595 $18.56 2.5$2,116 
As of September 30, 2021, the total unrecognized stock-based compensation expense for RSUs was $2.6 million, which is expected to be recognized over a weighted average period of 2.6 years.
2019 Employee Stock Purchase Plan

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

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

13

OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
5.    Net Loss Per Share

The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share and per share data):
Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Numerator:
Net loss$(17,670)$(16,305)$(58,595)$(48,288)
Denominator:
Weighted average shares outstanding, basic and diluted26,037,975 25,797,282 25,984,412 23,544,035 
Net loss per share, basic and diluted
$(0.68)$(0.63)$(2.25)$(2.05)

The following outstanding shares of potentially dilutive securities were excluded from the computation of diluted net loss per share for the periods presented because including them would have been antidilutive:
As of September 30,
20212020
Options to purchase common stock4,672,788 3,205,831 
Unvested restricted stock units178,595 63,929 
Shares committed under the ESPP 30,170  
Total
4,881,553 3,269,760 

14

OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
6.    Leases
The Company is party to several operating and finance lease agreements related to office and laboratory space and office equipment.
In February 2021, the Company entered into a lease agreement for laboratory and office space in New Jersey for a three-year term beginning on March 1, 2021 and ending on February 29, 2024. Total future minimum lease payments under the Company's operating lease agreements are $0.7 million as of September 30, 2021. Total lease payments required over the life of the Company's operating leases are $1.6 million. Rent expense was $0.4 million and $0.3 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. The remaining lease terms were between 0.8 and 2.4 years as of September 30, 2021.
Supplemental balance sheet information for the Company's leases is as follows (in thousands):
September 30, 2021December 31, 2020
Operating lease right-of-use assets$629 $644 
Finance lease right-of-use assets2234
Total right-of-use assets$651 $678 
Operating lease liabilities$464 $400 
Finance lease liabilities1718
Total lease liabilities$481 $418 
Operating lease liabilities, non-current$172 $250 
Finance lease liabilities, non-current719
Total lease liabilities, non-current$179 $269 

The maturities of the lease liabilities under non-cancelable operating and finance leases are as follows (in thousands):
As of September 30, 2021Finance LeasesOperating LeasesTotal
2021 (remainder)$5 $138 $143 
202216 376 392 
20234 126 130 
2024 21 21 
Total undiscounted cash flows25 661 686 
Less: imputed interest(1)(25)(26)
Total lease liabilities24 636 660 
Less: current portion(17)(464)(481)
Lease liabilities$7 $172 $179 
In August 2021, the Company entered into a lease agreement for office space in Boston, Massachusetts for a five-year term beginning on December 1, 2021 and ending on November 30, 2026. The lease will be classified as an operating lease in accordance with Accounting Standards Codification Topic 842, Leases. Total future minimum lease payments under this agreement are $2.7 million as of September 30, 2021 with the first lease payment due on December 1, 2021.

7.    Long-term Debt

Credit Facility with OrbiMed

On August 5, 2021, the Company entered into a $125 million term loan credit facility (the Credit Agreement) with OrbiMed Royalty & Credit Opportunities III, LP, as administrative agent and initial lender (OrbiMed). The Credit Agreement provides for loans to be funded in three separate tranches: the first $45 million tranche was funded on August 10, 2021, the
15

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

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

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

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

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

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OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
The value of the net embedded derivative liability as of August 5, 2021 and September 30, 2021 was $0.4 million and $0.2 million, respectively, with the change in fair value of $0.2 million recorded in other income, net in the condensed statement of operations for the three and nine months ended September 30, 2021.

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


September 30, 2021
Loan commitment fees$1,981 
Accumulated amortization of loan commitment fees(271)
Loan commitment fees, net $1,710 

In connection with entering into the Credit Agreement, and as shown in the table below, the Company incurred debt issuance costs, which were capitalized and recorded as a contra-liability on the Company's condensed balance sheet as of September 30, 2021. The debt issuance and discount costs are being accreted over the life of the tranche drawn by the Company using the effective interest method, which currently include the $2.7 million exit fee which will be paid upon maturity of the first tranche, the $9.0 million Revenue Sharing Fee, as well as the net embedded derivative liability recorded in connection with the Revenue Sharing Fee. The balances of the long-term debt, debt issuance and discount costs, net embedded derivative liability, and accumulated accretion recorded on the Company's condensed balance sheet were as follows:
September 30, 2021
Long-term debt $45,000 
Debt issuance and discount costs (2,868)
Net embedded derivative liability(450)
Accumulated accretion of long-term debt related costs 237 
Long-term debt, net $41,919 

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

The following table identifies the Company's obligations under the Credit Agreement as of September 30, 2021 (in thousands):
Less than a year 1-3 years 3-5 years More than 5 years Total
Debt Principal $ $ $ $45,000 $45,000 
Exit Fee   2,700 2,700 
Contractual Interest on debt3,878 7,767 7,756 3,283 22,684 
Revenue Sharing Cap (a)
   9,000 9,000 
Total obligations $3,878 $7,767 $7,756 $59,983 $79,384 

(a) — The Revenue Sharing Fee is capped at $9 million and timing of payments will vary based on the Company's net sales of OC-01.
    The Company’s obligations under the Credit Agreement are secured by all or substantially all of its assets and property, subject to customary exceptions. Any material subsidiaries that the Company (other than certain immaterial subsidiaries) forms or acquires after closing are required to provide a guarantee of the Company’s obligations under the Credit Agreement and provide a pledge of their assets.
17

OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)

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

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

8.    License and Collaboration Agreements

Ji Xing Pharmaceuticals Limited - Related Party

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

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

As provided for in the License Agreement, the Company is entitled to receive an additional 397,561 senior common shares of Ji Xing, which occurred on October 28, 2021, and $5.0 million in development milestone payments upon the FDA approval of TYRVAYA Nasal Spray, which occurred on October 15, 2021. Per the License Agreement the Company is eligible to receive up to $204.8 million in aggregate development and sales-based milestone payments and royalty payments that are tiered on future net sales of OC-01 and OC-02 and are based on royalty rates between 10% and 20%. The License Agreement will remain in effect, unless terminated earlier, until the expiration of all royalty terms for all licensed products in the Territory under the License Agreement. Ji Xing may terminate the License Agreement for convenience by providing at least 180 days written notice. Each party has the right to terminate the License Agreement for the other party’s uncured material breach or insolvency. The Company may also terminate the License Agreement if Ji Xing, its affiliates or sublicensees challenges the enforceability, validity or scope of certain patents owned by the Company, subject to customary exceptions set forth in the License Agreement. Upon termination, any license granted by the Company to Ji Xing will terminate, and all sublicenses granted by Ji Xing shall also terminate.

18

OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
Adaptive Phage Therapeutics

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

Pfizer Inc.

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

9.    Commitments and Contingencies

Commitments

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

Purchase Commitment

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

Contingencies

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

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OYSTER POINT PHARMA, INC.
Notes to Unaudited Interim Condensed Financial Statements (continued)
10.    Subsequent events


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

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

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

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

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

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

Executive summary, including a description of the business and recent events that are important to understanding the results of operations and financial condition;
Results of operations, including an explanation of significant differences between the periods in the specific line items of the condensed statements of operations;
Financial condition addressing the Company's sources of liquidity, future funding requirements, cash flow, sources and uses of cash, updates to contractual obligations and commitments, and off-balance sheet arrangements; and
Critical accounting policies, significant judgements and estimates, which are most important to both the portrayal of the Company's results of operations and financial condition.

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

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Executive Summary

Introduction and Overview

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

The Company expects to continue to finance its operations through private and public equity, debt financing, collaborative or other arrangements with corporate sources or through other sources of financing. The Company’s net losses were $58.6 million and $48.3 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, the Company had an accumulated deficit of $213.3 million. The Company expects that its selling, general and administrative expenses will continue to increase as the Company commercializes TYRVAYA Nasal Spray following its recent approval by the FDA. Additionally, operating expenses will increase as the Company advances its other product candidates through preclinical and clinical development, seeks regulatory approval, and prepares for and, if approved, proceeds to commercialization; acquires, discovers, validates and develops additional product candidates; obtains, maintains, protects and enforces its intellectual property portfolio; and hires additional personnel.

Recent Events

FDA Approval of TYRVAYA Nasal Spray

On October 15, 2021, TYRVAYA Nasal Spray was approved by the FDA for the treatment of the signs and symptoms of dry eye disease. TYRVAYA Nasal Spray is the first and only nasal spray approved for the treatment of dry eye disease. TYRVAYA Nasal Spray is believed to bind to cholinergic receptors to activate the trigeminal parasympathetic pathway resulting in increased production of basal tear film as a treatment for dry eye disease. TYRVAYA Nasal Spray is a highly selective cholinergic agonist delivered twice daily as a multi-dose, aqueous nasal spray into each nostril to activate basal tear production. Nasal spray administration provides a new way to treat dry eye disease without administering medication onto an already irritated ocular surface.

Credit Facility with OrbiMed

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

On October 19, 2021, the Company entered into a waiver and amendment (the Amendment) to the Credit Agreement to waive certain labeling requirements required for, and to permit the availability of, the second $50 million tranche of funding under the Credit Agreement (among other customary funding provisions) and make certain other amendments thereto, subject to the terms and conditions contained therein. The Amendment also increased the amount of principal that is required to be repaid if the Company does not meet certain minimum recurring revenue thresholds from the sale and/or licensing of TYRVAYA Nasal Spray on a quarterly basis for the most recently ended four fiscal quarter period, from $5 million to $10 million if (i) the company does not meet such minimum recurring revenue thresholds from the sale and/or licensing of TYRVAYA Nasal Spray in the last four quarters and (ii) an improper promotional event has occurred. The Company delivered notice to OrbiMed on October 19, 2021 that it intended to borrow the second tranche and the Company received the second tranche funding on November 4, 2021.

Ji Xing License and Collaboration Agreement

On August 5, 2021, the Company entered into a license and collaboration agreement (the License Agreement) with Ji Xing Pharmaceuticals Limited (Ji Xing), a biotechnology company headquartered in Shanghai, China and backed by RTW
22


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

Commercial Launch Agreements

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

23