Alimera Sciences Annual Report 2016

Plain-text annual report

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K(Mark One)xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2016or¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Commission file number: 001-34703 Alimera Sciences, Inc.(Exact name of registrant as specified in its charter) Delaware 20-0028718(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification Number)6120 Windward Parkway, Suite 290Alpharetta, GA 30005(Address of principal executive offices) (Zip Code)(678) 990-5740(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Common Stock, $0.01 par value per share The NASDAQ Stock Market LLC(Title of each class) (Name of each exchange on which registered)Securities registered pursuant to Section 12(g) of the Act:None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 1934during 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 filingrequirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorterperiod that the registrant was required to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, andwill not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filero Accelerated filero Non-accelerated filero(Do not check if a smaller reporting company)Smaller reporting companyxIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No xAs of June 30, 2016, the last business day of the registrant’s last completed second quarter, the aggregate market value of the Common Stock held bynon-affiliates of the registrant was approximately $45,721,956 based on the closing price of the registrant’s Common Stock, on June 30, 2016, as reported bythe NASDAQ Global Market. For the purposes of this disclosure, shares of Common Stock held by each executive officer, director and stockholder known bythe registrant to be affiliated with such individuals based on public filings and other information known to the registrant have been excluded since suchpersons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.As of March 1, 2017 there were 64,862,904 shares of the registrant’s Common Stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCESpecified portions of the registrant’s proxy statement with respect to the registrant’s 2016 Annual Meeting of Stockholders, which is to be filedpursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2016, are incorporated by reference into Part IIIof this annual report on Form 10-K.Table of ContentsAlimera Sciences, Inc.Form 10-KTable of Contents Page Part I Special Note Regarding Forward-Looking Statements and Projections3Item 1.Business4Item 1A.Risk Factors15Item 1B.Unresolved Staff Comments42Item 2.Properties42Item 3.Legal Proceedings42Item 4.Mine Safety Disclosures42 Part II Item 5.Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities43Item 6.Selected Consolidated Financial Data43Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations44Item 7A.Qualitative and Quantitative Disclosures about Market Risk60Item 8.Financial Statements and Supplementary Data60Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure60Item 9A.Controls and Procedures60Item 9B.Other Information61 Part III Item 10.Directors, Executive Officers and Corporate Governance62Item 11.Executive Compensation62Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters62Item 13.Certain Relationships and Related Transactions and Director Independence63Item 14.Principal Accountant Fees and Services63 Part IV Item 15.Exhibits and Financial Statements Schedules64Item 16.Form 10-K Summary64Signatures 65Index to Financial Statements 66Exhibit Index 104The term “ILUVIEN” is our registered trademark. All other trademarks, trade names and service marks appearing in this annual report on Form 10-K are theproperty of their respective owners.2Table of ContentsPART ISPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND PROJECTIONSVarious statements in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this report regardingAlimera Sciences, Inc.’s (we, our, Alimera or the Company) strategy, future operations, future financial position, future revenues, projected costs, prospects,plans and objectives of management are forward-looking statements. These statements are subject to risks and uncertainties and are based on informationcurrently available to our management. Words such as, but not limited to, “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,”“contemplates,” “predict,” “project,” “target,” “likely,” “potential,” “continue,” “ongoing,” “will,” “would,” “should,” “could,” or the negative of theseterms and similar expressions or words, identify forward-looking statements. The events and circumstances reflected in our forward-looking statements maynot occur and actual results could differ materially from those projected in our forward-looking statements. Meaningful factors which could cause actualresults to differ include, but are not limited to:•uncertainty as to our ability to achieve profitability and positive cash flow through the commercialization of ILUVIEN® in the EuropeanEconomic Area (EEA), the United States (U.S.) and other regions of the world where we sell ILUVIEN;•our ability to operate our business in compliance with the covenants and restrictions that we are subject to under our credit facility;•dependence on third-party manufacturers to manufacture ILUVIEN or any future products or product candidates in sufficient quantities andquality;•uncertainty as to the pricing and reimbursement guidelines for ILUVIEN or any future products or product candidates, including ILUVIEN innew markets;•our ability to successfully commercialize ILUVIEN following regulatory approval in additional markets;•delay in or failure to obtain regulatory approval of ILUVIEN in additional countries or any future products or product candidates;•the extent of government regulations; and•our need to raise additional financing.All written and verbal forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by thecautionary statements contained or referred to in this section. We caution investors not to rely too heavily on the forward-looking statements we make or thatare made on our behalf. We undertake no obligation and specifically decline any obligation, to update or revise publicly any forward-looking statements,whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects inany annual, quarterly or current reports that we may file with the Securities and Exchange Commission.We encourage you to read the discussion and analysis of our financial condition and our consolidated financial statements contained in this annualreport on Form 10-K. We also encourage you to read Item 1A of Part 1 of this annual report on Form 10-K, entitled “Risk Factors,” which contains a morecomplete discussion of the risks and uncertainties associated with our business. In addition to the risks described above and in Item 1A of this report, otherunknown or unpredictable factors also could affect our results. There can be no assurance that the actual results or developments anticipated by us will berealized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Therefore, no assurance can be given that theoutcomes stated in such forward-looking statements and estimates will be achieved.3Table of ContentsITEM 1. BUSINESSOverviewAlimera Sciences, Inc., and its subsidiaries (we, Alimera or the Company), is a pharmaceutical company that specializes in the commercialization,research and development of prescription ophthalmic pharmaceuticals. We are presently focused on diseases affecting the back of the eye, or retina, becausewe believe these diseases are not well treated with current therapies and represent a significant market opportunity.Our only commercial product is ILUVIEN®, which has been developed to treat diabetic macular edema (DME). DME is a disease of the retina thataffects individuals with diabetes and can lead to severe vision loss and blindness. ILUVIEN has received marketing authorization in the United States (U.S.),Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain,Sweden and the United Kingdom. In the U.S., ILUVIEN is indicated for the treatment of DME in patients who have been previously treated with a course ofcorticosteroids and did not have a clinically significant rise in intraocular pressure (IOP). In the European Economic Area (EEA) countries in which ILUVIENhas received marketing authorization, it is indicated for the treatment of vision impairment associated with DME considered insufficiently responsive toavailable therapies. As part of the approval process in Europe, we committed to conduct a five-year, post-authorization, open label registry study in 800patients treated with ILUVIEN. In the fourth quarter of 2016, we requested approval to modify our protocol to cap enrollment in the study due to our postmarket safety surveillance not showing any unexpected safety signals. Although we have not received formal regulatory approval, the Medicines &Healthcare products Regulatory Agency (MHRA) has agreed to allow us to suspend enrollment, pending approval of our protocol amendment. As ofDecember 31, 2016, 548 patients were enrolled in this study.We launched ILUVIEN in Germany and the United Kingdom in the second quarter of 2013 and in the U.S. and Portugal in the first quarter of 2015.In addition, we have entered into various agreements under which distributors will provide regulatory, reimbursement or sales and marketing supportfor future commercialization of ILUVIEN in numerous countries in the Middle East, Italy, Australia, New Zealand and Canada. In the third quarter of 2016,our Middle East distributor launched ILUVIEN and initiated named patient sales in the Middle East.ILUVIEN is an intravitreal implant that treats patients by delivering a continuous microdose of the non-proprietary corticosteroid fluocinoloneacetonide (FAc) in the eye, which lasts for up to 36 months. We believe that corticosteroids provide the best option in the treatment of DME because of theinflammatory aspects of the disease. Further, we believe that ILUVIEN’s continuous microdose makes it the only approved drug therapy that can deliverconsistent daily therapeutic levels and mitigate the typical corticosteroid related side effects. ILUVIEN, which is non-bioerodable, provides consistentdelivery as a result of its constant surface area. This provides a sustained therapeutic effect on DME, and an adverse event profile that is predictable andmanageable by a retinal physician. Other corticosteroid options for DME provide a higher initial daily dose but then rapidly decline, requiring frequentreinjection by the physician to maintain or reestablish the therapeutic effect. ILUVIEN is inserted into the back of the patient’s eye in a non-surgicalprocedure employing a device with a 25-gauge needle, which allows for a self-sealing wound.Our strategy is to establish ILUVIEN as a leading therapy for vision loss in DME patients and subsequently for other indications for which ILUVIEN isproven safe and effective. We are led by an executive team with extensive development and commercialization expertise with ophthalmic products. Weintend to capitalize on our management’s experience and expertise to market ILUVIEN, and other potential eye care products, when, where and if such drugsreceive regulatory approval.Business StrategyWe are presently focused on diseases affecting the back of the eye, or retina, because we believe these diseases are not well treated with currenttherapies and represent a significant market opportunity. Our business strategy is to: •Maximize the Commercial Success of ILUVIEN. We launched ILUVIEN in Germany and the United Kingdom in the second quarter of 2013 and inthe U.S. and Portugal in the first quarter of 2015. We have approval in 14 additional countries in the EEA and we are pursuing opportunities to sellILUVIEN in some of these countries, including Austria and Ireland. In Italy, our distributor plans to launch ILUVIEN in 2017. In addition, outsidethe EEA, our distributor launched in the Middle East and began selling ILUVIEN in the United Arab Emirates in the second half of 2016.•Pursue Approval in Additional Countries. We plan to pursue regulatory approval for ILUVIEN, directly or with a partner, in other countries. Inaddition to the distribution agreements for the Middle East and Italy, we entered into agreements to distribute ILUVIEN in Australia, New Zealandand Canada. Pursuant to these agreements, our distributors will assist us in obtaining approval or seek approval with our oversight in thosecountries. In addition,4Table of Contentsunder a Mutual Recognition Procedure (MRP) available in the EEA, we can submit ILUVIEN for approval in any or all of the remaining 12European Union (EU) countries where we do not have marketing approval.•Assess the Effectiveness of ILUVIEN for Additional Retinal Diseases. We believe that ILUVIEN has the potential to address additional retinaldiseases including, among others, Non-Proliferative Diabetic Retinopathy (NPDR), retinal vein occlusion (RVO), dry aged-related maculardegeneration (AMD) and wet AMD.•Expand Our Ophthalmic Product Pipeline. We believe there are further unmet medical needs in the treatment of ophthalmic diseases. Toward thatend, we intend to evaluate in-licensing and acquisition opportunities for compounds and technologies with potential treatment applications fordiseases affecting the eye.Disease Overview and Market OpportunityDiabetes and Diabetic RetinopathyDiabetes mellitus, with its systemic and ophthalmic complications, represents a global public health threat. The estimated prevalence of diabetesworldwide in 2015 increased to 415 million people and is expected to increase to 642 million people by 2040 according to the U.S. Centers for DiseaseControl and Prevention (CDC).According to the CDC, the number of Americans diagnosed with diabetes was approximately 22.0 million people in 2014 and continues to increaseeach year. In addition to diagnosed cases, the CDC most recently estimated in 2012 that an additional 8.1 million Americans with diabetes are undiagnosedand are therefore not being monitored and treated to control their disease and prevent systemic and ophthalmic complications. In the EEA countries in whichILUVIEN has received marketing authorizations, according to the International Diabetes Foundation, Diabetes Atlas, Seventh Edition, 2015 Update, there areapproximately 17.2 million diagnosed diabetics and 10.5 million diabetics that remain undiagnosed.All patients with diabetes are at risk of developing some form of diabetic retinopathy, an ophthalmic complication of diabetes with symptomsincluding the swelling and leakage of blood vessels within the retina or the abnormal growth of new blood vessels on the surface of the retina. According tothe CDC, diabetic retinopathy causes approximately 12,000 to 24,000 new cases of blindness in the U.S. each year; making diabetes the leading cause of newcases of blindness in adults aged 20 to 74. Diabetic retinopathy can be divided into either non-proliferative or proliferative retinopathy. Non-proliferativeretinopathy (also called background retinopathy) develops first and causes increased capillary permeability, micro aneurysms, hemorrhages, exudates (whenfluid leaks into spaces between vessels), macular ischemia (lack of oxygen) and macular edema (thickening of the retina caused by fluid leakage fromcapillaries). Proliferative retinopathy is an advanced stage of diabetic retinopathy which, in addition to characteristics of non-proliferative retinopathy,results in the growth of new blood vessels. These new blood vessels are abnormal and fragile, growing along the retina and along the surface of the clear,vitreous gel that fills the inside of the eye. By themselves, these blood vessels do not cause symptoms or vision loss. However, these blood vessels have thin,fragile walls that are prone to leakage and hemorrhage.Diabetic Macular EdemaDME, the primary cause of vision loss associated with diabetic retinopathy, is a disease affecting the macula, the part of the retina responsible forcentral vision. When the blood vessel leakage of diabetic retinopathy causes swelling in the macula, the condition is called DME. The onset of DME ispainless and may go undetected by the patient until it manifests with the blurring of central vision or acute vision loss. The severity of this blurring mayrange from mild to profound loss of vision.DME has been demonstrated to be mediated by multiple cytokines in various studies where cytokine levels are measured inside the eye. Of thecurrently approved pharmacotherapies to treat DME, only corticosteroids, including the corticosteroid in ILUVIEN, affect multiple cytokines.As the incidence of diabetes continues to increase worldwide, the incidence of DME and other complications is predicted to rise as well. A majority ofpatients who suffer from diabetes do not meet glycemic (glucose or blood sugar) targets, resulting in hyperglycemia (elevated levels of glucose in the blood).This, in turn, leads to the development of micro-vascular complications, which manifest in the eye as diabetic retinopathy.Current Treatments for DMEAnti-vascular endothelial growth factor (VEGF) therapies are the current standard of care for the treatment of DME. Lucentis and Eylea are the onlyapproved anti-VEGF therapies marketed for the treatment of vision loss associated with DME in the EEA and for the treatment of DME in the U.S. havingbeen proven efficacious in patients suffering from DME. Off-label injections and anti-VEGF oncology therapy are also used to treat DME. However, anti-VEGF therapies are limited by a need for multiple and frequent injections to maintain a therapeutic effect. Further, many patients either do not achieve aresponse or5Table of Contentsachieve an insufficient response from these anti-VEGF therapies. In addition, these therapies have safety profiles which include an increased risk ofendophthalmitis, a serious eye infection that must be treated with high doses of antibiotics.Intravitreal corticosteroid therapies are also used to treat DME. Ozurdex, a short acting corticosteroid, is marketed for the treatment of vision lossassociated with DME in the EEA and for the treatment of DME in the U.S. Intravitreal injections of triamcinolone, an off label corticosteroid, and Avastin arealso used to treat DME via intravitreal injections. Corticosteroids have historically been associated with significant increases in IOP, which may increase therisk of glaucoma and the acceleration of cataract formation. Like anti-VEGF antibody therapy, these shorter duration corticosteroids are limited by a need formultiple and frequent injections to maintain a therapeutic effect.Because of the bolus nature of anti-VEGF and shorter duration corticosteroid injections, the daily drug therapy delivered to the eye is ofteninconsistent.Laser photocoagulation is a retinal procedure in which a laser is used to apply a burn, or a pattern of burns, to cauterize leaky blood vessels to reduceedema. Visual acuity gains are less frequently seen with this therapy, however, its primary benefit is to prevent or slow vision loss. Further, this is adestructive procedure that has undesirable side effects including partial loss of peripheral and night vision.ILUVIENOverviewOur only commercial product is ILUVIEN, a sustained release corticosteroid intravitreal implant for the treatment of DME. "Intravitreal" refers to thespace inside the eye behind the lens that contains the jelly-like substance called vitreous. DME is a disease of the retina which affects individuals withdiabetes and can lead to severe vision loss and blindness. ILUVIEN consists of a tiny non-bioerodable polyimide tube with a permeable membrane cap onone end and an impermeable silicone cap on the other end that is filled with 190mg of FAc in a polyvinyl alcohol matrix. Both polyimide and the polyvinylalcohol matrix have been demonstrated to be biocompatible with ocular tissues and have histories of safe use within the eye. ILUVIEN, which is non-bioerodable, provides consistent delivery as a result of its constant surface area which allows it to deliver a continuous microdose of FAc over 36 months.ILUVIEN is inserted in the back of the patient’s eye in a non-surgical procedure using a sterile preloaded applicator (the ILUVIEN applicator) employing a25-gauge needle, which allows for a self-sealing wound. This procedure is similar to that commonly employed by retinal specialists in the administration ofother intravitreal therapies.Based on data from our FAME Study (described below), our current post-market study in Europe and our real world experience with ILUVIEN, webelieve ILUVIEN is a unique therapeutic option for DME that improves vision while mitigating side effects associated with the continuous, multi-year,intravitreal delivery of corticosteroids, especially elevated IOP. We believe that the uniqueness of this therapeutic option rests on the following reasons: •ILUVIEN delivers FAc. The active pharmaceutical ingredient in ILUVIEN is FAc, which has demonstrated efficacy in the treatment of DME inclinician’s real world experience and in the two completed Phase 3 pivotal clinical trials, collectively referred to as our FAME Study, overmultiple years.•ILUVIEN delivers a continuous daily microdose of steroid to the eye. The delivery mechanism of ILUVIEN provides lower daily andaggregate exposure to corticosteroids than other intraocular dosage forms currently available. ILUVIEN has shown to provide sustained sub-microgram levels of FAc through in vitro release kinetics and in vivo over time. The results of our FAME Study demonstrated that ILUVIENprovides a sustained, therapeutic effect in the treatment of DME patients for up to 36 months.Fluocinolone AcetonideFAc, a non-proprietary corticosteroid, is the active compound in ILUVIEN and a member of the class of steroids known as corticosteroids.Corticosteroids have demonstrated a range of pharmacological actions, including inhibition of inflammation, inhibition of leukostasis, up regulation ofoccludin, inhibition of the release of certain inflammatory cytokines and suppression of VEGF secretion. Leukostasis refers to the accumulation of whiteblood cells at a particular site which leads to further tissue damage. Occludin is an important protein in maintaining and reinforcing the tight junctionsbetween cells. These pharmacological actions have the potential to treat various ocular conditions, including DME, NPDR, RVO, dry AMD and wet AMD.However, FAc shares many of the same side effects as other corticosteroids currently available for intraocular use, including increased IOP, which mayincrease the risk of glaucoma, and the acceleration of cataract formation.6Table of ContentsILUVIEN for Other Diseases of the EyeWe believe that ILUVIEN has the potential to address other ophthalmic diseases such as RVO, NPDR, dry AMD and wet AMD. Details regarding therationale for these other indications are as follows: •Macular edema associated with RVO. According to GlobalData, a provider of global business intelligence, there are 16 million adultsaffected with RVO around the world. In September 2009, Allergan, Inc. (Allergan) introduced Ozurdex (a short duration corticosteroid) asthe first approved product for macular edema following branch or RVO. The U.S. Food and Drug Administration’s (FDA) approval ofOzurdex provides additional evidence that corticosteroids work effectively to treat RVO.•Moderately severe to severe NPDR progression to proliferative diabetic retinopathy (PDR). NPDR is the most at-risk stage of diabeticretinopathy for risk of progression to PDR. Prevention of progression to PDR is clinically important as the risk of severe vision loss,blindness and retinal detachment increase when diabetic retinopathy progresses from NPDR to PDR.•Dry AMD. Dry AMD patients account for 90% of AMD patients, with the greatest unmet need among these patients being a treatment forgeographic atrophy (GA) for which there are currently no treatments available. Pre-clinical studies in two established rat models of retinaldegeneration reported at the Association for Research in Vision and Ophthalmology meetings in 2006, 2007 and 2008, described theefficacious effects of a miniaturized version of ILUVIEN in retinal degeneration. While there are no standard preclinical models of GA, webelieve these results support the exploration of ILUVIEN to treat this condition.•Wet AMD. The size of the wet AMD market was $2 billion in 2008 according to VisionGain, an independent competitive intelligenceorganization. According to American Academy of Ophthalmology, more than 11 million people in America are affected by AMD and arenow benefiting from advanced treatment options such as anti-VEGF agents and photodynamic therapy (PDT). Anti-VEGF antibodiesrequire persistent dosing to maintain a therapeutic effect which is a burden on both the patient and the physician. Estimates as of March2015 of the global cost of visual impairment due to AMD is $343 billion, including $255 billion in direct health care costs according toBrightFocus Foundation. We believe ILUVIEN has the potential to be synergistic with the market leading anti-VEGF antibody therapies inthe treatment of wet AMD given that corticosteroids have been shown to suppress the production of VEGF.ILUVIEN Regulatory StatusILUVIEN has received marketing authorization in the U.S., Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy,Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden and the United Kingdom. In the U.S., ILUVIEN is indicated for the treatment of DMEin patients who have been previously treated with a course of corticosteroids and did not have a clinically significant rise in IOP. In the EEA countries inwhich ILUVIEN has received marketing authorization, it is indicated for the treatment of vision impairment associated with DME considered insufficientlyresponsive to available therapies. As part of the approval in Europe, we committed to conduct a five-year, post-authorization, open label registry study in 800patients treated with ILUVIEN. In the fourth quarter of 2016, we requested approval to modify our protocol to cap enrollment in the study due to our postmarket safety surveillance not showing any unexpected safety signals. Although we have not received formal regulatory approval, the MHRA has agreed toallow us to suspend enrollment, pending approval of our protocol amendment. As of December 31, 2016, 548 patients were enrolled in this study.We or our distributors are currently pursuing regulatory approval in certain Middle East countries, Australia, New Zealand and Canada.CommercializationILUVIEN is the only intraocular therapy to treat DME designed to deliver a continuous microdose of FAc over 36 months enabling the physician totreat DME consistently and continuously every day. Our commercialization strategy is to establish ILUVIEN as a leading therapy for the treatment of DMEand subsequently for other indications for which ILUVIEN may prove safe and effective. We launched ILUVIEN in Germany and the United Kingdom in thesecond quarter of 2013 and in the U.S. and Portugal in the first quarter of 2015. We plan to launch ILUVIEN in Austria and Ireland in 2017. Our distributor inthe Middle East launched ILUVIEN in the United Arab Emirates in the fourth quarter of 2016. In Italy, our distributor plans to launch ILUVIEN in 2017. Wealso plan to commercialize ILUVIEN, directly or with a partner, in other EEA and non-EEA countries pending the receipt of reimbursement and futureapplicable regulatory approvals. Although we anticipate ILUVIEN being administered as a standalone therapy, we do not foresee the use of ILUVIEN asprecluding the administration of other7Table of Contentstherapies in conjunction with ILUVIEN. Our commercialization strategy in any geography is subject to and dependent upon the regulatory approval ofILUVIEN in any jurisdiction.Sales and MarketingWe began building our U.S. commercial infrastructure in the fourth quarter of 2014 following the FDA approval of ILUVIEN with the addition of salesmanagement, field sales representatives, payor relations specialists, reimbursement support specialists and other positions. As of December 31, 2016, we had aU.S. field force of approximately 45 persons, including sales personnel, reimbursement specialists, and payor relations directors.In late 2012 and early 2013 we established a core management team for our European operations based in the United Kingdom. In November 2012, weentered into a master services agreement with Quintiles Commercial Europe Limited. Under the agreement, Quintiles Commercial Europe Limited and itsaffiliates (collectively, Quintiles Commercial) provided certain services to us in relation to the commercialization of ILUVIEN, in France, Germany and theUnited Kingdom. In December 2013 and January 2014, respectively, we transitioned our German and United Kingdom country manager positions in-house.In April 2015, we terminated the project orders associated with France and Germany and transitioned the covered positions employed by QuintilesCommercial to our payroll. In July 2015, we terminated the remaining project orders associated with the United Kingdom and transitioned the coveredpositions employed by Quintiles Commercial to our payroll. As of December 31, 2015 all of the agreements with Quintiles Commercial had been terminated.In the fourth quarter of 2016, after unsuccessfully negotiating with the French government to obtain an appropriate price, we decided to closeoperations in France. We expect the closing of operations to be completed in early 2017. We are continuing to evaluate our options to enter the Frenchmarket, including potential distributor relationships.As of December 31, 2016, we had a European management team, local management teams and commercial personnel in France, Germany, Portugal andthe United Kingdom totaling 31 persons, three of which are consultants.We are developing our medical marketing, promotion and communication materials to ensure that influential retinal specialists are presenting ourILUVIEN data, clinician’s real world data and messages at key retina meetings in the U.S. and EEA.In addition, we have entered into various agreements under which distributors will provide regulatory, reimbursement or sales and marketing supportfor future commercialization of ILUVIEN in numerous countries in the Middle East, Italy, Australia, New Zealand and Canada, Pursuant to these agreements,our distributors will assist us in obtaining approval or seek approval with our oversight in those countries. In Italy, our distributor plans to launch ILUVIENin 2017. Our distributor in the Middle East began sales in the United Arab Emirates in the fourth quarter of 2016, although these sales were not significant.We expect that our distributors may be able to sell ILUVIEN in the future in the other territories which we have distribution agreements.ManufacturingWe do not have an in-house manufacturing capability for our products and as a result we will continue to depend exclusively on third-party contractmanufacturers to produce and package ILUVIEN. We manage the quality of our product produced by these manufacturers through quality agreements and theimplementation of our quality system to ensure that they produce active pharmaceutical ingredients (APIs) and finished drug products in accordance withcurrent Good Manufacturing Practices (cGMPs) and all other applicable laws and regulations. We maintain agreements with potential and existingmanufacturers that include confidentiality and intellectual property provisions to protect our proprietary rights related to ILUVIEN.Third party manufacturers are responsible for the commercial-scale production of ILUVIEN and the ILUVIEN applicator. We have agreements with themanufacturer of FAc, the API in ILUVIEN (FARMABIOS SpA/Byron Chemical Company Inc.), the manufacturer of the components of the ILUVIENapplicator (FlexMedical or an affiliate of Flextronics International, Ltd. (Flextronics)), the manufacturer of ILUVIEN (Alliance Medical Products Inc., aSiegfried Company (Alliance)) and the manufacturer for the quality release testing of ILUVIEN in the EEA (AndersonBrecon Limited trading as PackagingCoordinators, Inc.). Although we may seek alternative providers in the future, we do not currently have alternate providers for any of these activities. Themanufacturing process for ILUVIEN consists of filling the polyimide tube with a paste consisting of 190mg of FAc and polyvinyl alcohol, cutting the tubes,capping the tubes with a permeable membrane cap on one end and an impermeable silicone cap on the other end, curing at high temperature, loadingILUVIEN inside the ILUVIEN applicator, packaging and sterilizing the product. This process has been validated at Alliance, one of the third-party contractmanufacturers of ILUVIEN.8Table of ContentsIn February 2010, we entered into a commercial manufacturing agreement with Alliance whereby Alliance agreed to manufacture and packageILUVIEN for us at its Irvine, California facility. The agreement was amended and restated in February 2016. Certain equipment at Alliance’s facility waspurchased by us and is used solely for the purpose of allowing Alliance to manufacture and package ILUVIEN for us. Under the amended and restatedagreement, we are also responsible for supplying Alliance with the ILUVIEN applicator and the API. We have agreed to order from Alliance at least 80% ofour total requirements for new units of ILUVIEN in the U.S., Canada and Europe in a calendar year; provided that Alliance is able to fulfill our supplyrequirements and is not in breach of its agreements or obligations to us. Unless terminated earlier in accordance with the provisions thereof, the agreement, asamended, has a remaining term of five years through February 2021 and will automatically renew for successive terms of one year unless either party deliverswritten notice of non-renewal to the other at least 12 months prior to the end of the then current term.In February 2012, we entered into a commercial manufacturing agreement with Flextronics whereby Flextronics agreed to manufacture the componentsof the ILUVIEN applicator for us at its Tijuana, Mexico facility. Certain equipment at Flextronics’ facility was purchased by us and is used solely for thepurpose of allowing Flextronics to manufacture the components of the ILUVIEN applicator for us. Unless terminated earlier in accordance with the provisionsthereof, our agreement with Flextronics had an initial term of three years and automatically renews for successive terms of one year unless either partydelivers written notice of non-renewal to the other at least 18 months prior to the end of the then current term.Business SegmentsOur business is aligned in two segments: U.S. and International. Financial information about our business segments can be found in the section entitled“Results of Operations - Segment Review” of Item 7 of Part I of this annual report on Form 10-K and Note 18 of the accompanying consolidated financialstatements in this annual report on Form 10-K.CustomersOur revenues for the fiscal years ended December 31, 2015 and 2016 were generated from product sales primarily in the U.S., Germany, Portugal and theUnited Kingdom. Because we sell to only two large pharmaceutical distributors in the U.S., they accounted for 75% and 68% of our consolidated revenues forthe years ended December 31, 2016 and 2015, respectively.CompetitionThe development and commercialization of new drugs and drug delivery technologies is highly competitive. We face competition with respect toILUVIEN and any products or product candidates we may develop or commercialize in the future from major pharmaceutical companies, specialtypharmaceutical companies and biotechnology companies worldwide, many of whom have substantially greater financial and other resources than we do. Inthe countries in which ILUVIEN has received or been recommended for marketing authorization, or becomes approved for use in the treatment of DME, itcompetes or will compete against the use of anti-VEGF antibodies, short duration corticosteroids and laser photocoagulation or other therapies that may beapproved in the future. There are other companies working to develop other drug therapies and sustained delivery platforms for DME and other indications.We believe that the following companies provide competition to ILUVIEN: •Roche’s products Lucentis (ranibizumab injection) and Avastin (bevacizumab) are both antibodies that inhibit VEGF signaling pathways.Lucentis is marketed in the EEA by Novartis. Lucentis is currently approved for the treatment of DME, the treatment of diabetic retinopathyin patients with DME, the treatment of neovascular wet AMD and the treatment of macular edema following RVO in the U.S. In the EEA, theindications are similar except for the indication to treat diabetic retinopathy in patients with DME. Avastin, an oncology product, is used byretinal specialists in both the U.S. and in certain countries of the EEA in the treatment of numerous retinal diseases off label but is notformulated or approved for any ophthalmic use.•Regeneron’s Eylea (aflibercept), an anti-VEGF inhibitor, is approved for the treatment of DME, the treatment of diabetic retinopathy inpatients with DME, neovascular wet AMD and RVO in the U.S. As with Lucentis, in the EEA, the indication does not include diabeticretinopathy. Eylea is marketed in the EEA by Bayer.•Allergan’s product Ozurdex (dexamethasone intravitreal implant), is a short duration biodegradable implant that delivers the corticosteroiddexamethasone. Ozurdex is approved for the treatment of DME, macular edema following branch or central RVO and non-infectious uveitisaffecting the posterior segment of the eye in the U.S. In the EEA, the indication for DME is for visual impairment due to diabetic macularoedema who are pseudophakic or who are considered insufficiently responsive to, or unsuitable for non-corticosteroid therapy.In addition, there are a number of other companies, including Ampio Pharmaceuticals, Aerpio, Allegro and pSivida, which are developing drugtherapies or sustained delivery platforms for the treatment of DME.9Table of ContentsWe believe we will be less likely to face a generic competitor for ILUVIEN for the treatment of DME because of the bioequivalency requirements of ageneric form of ILUVIEN. A generic pharmaceutical competitor to ILUVIEN would need to establish bioequivalency through the demonstration of anequivalent pharmacodynamic endpoint in a clinical trial. We believe conducting such a clinical trial would be cost prohibitive and time consuming.The licensing and acquisition of pharmaceutical products, which is part of our strategy, is a highly competitive area. A number of more establishedcompanies are also pursuing strategies to license or acquire products. These established companies may have a competitive advantage over us due to, amongother factors, their size, cash flow and institutional experience.Licenses and AgreementspSivida US, Inc.We entered into an agreement with pSivida in February 2005, and a subsequent amendment in March 2008, to obtain a worldwide exclusive license todevelop and sell ILUVIEN for delivery to the back of the eye for the treatment and prevention of eye diseases in humans (other than uveitis). This agreementalso provides us with a worldwide non-exclusive license to develop and sell pSivida’s proprietary delivery device to deliver other corticosteroids to the backof the eye for the treatment and prevention of eye diseases in humans (other than uveitis) or to treat DME by delivering a compound to the back of the eyethrough a direct delivery method through an incision required for a 25-gauge or larger needle. We do not have the right to develop and sell pSivida’sproprietary delivery device in connection with indications for diseases outside of the eye or for the treatment of uveitis.Our license rights to pSivida’s proprietary delivery device could revert to pSivida if we were to (i) fail twice to cure our breach of an obligation to makecertain payments to pSivida following receipt of written notice thereof; (ii) fail to cure other breaches of material terms of our agreement with pSivida within30 days after notice of such breaches or such longer period (up to 90 days) as may be reasonably necessary if the breach cannot be cured within such 30-dayperiod; (iii) file for protection under the bankruptcy laws, make an assignment for the benefit of creditors, appoint or suffer appointment of a receiver ortrustee over our property, file a petition under any bankruptcy or insolvency act or have any such petition filed against us and such proceeding remainsundismissed or unstayed for a period of more than 60 days; or (iv) we notify pSivida in writing of our decision to abandon our license with respect to a certainproduct using pSivida’s proprietary delivery device. We were not in breach of our agreement with pSivida as of December 31, 2016.The agreement provides that after commercialization of ILUVIEN, pSivida will be entitled to 20% of the net profits and 33% of any lump summilestone payments received from a sub-licensee of ILUVIEN as defined in the amended and restated agreement. In connection with this arrangement we areentitled to recover 20% of commercialization costs of ILUVIEN, as defined in the agreement, incurred prior to product profitability out of pSivida’s share ofnet profits. As of December 31, 2016 and 2015, pSivida owed us $25.8 million and $21.6 million, respectively, in commercialization costs. Due to theuncertainty of future net profits from ILUVIEN, we have fully reserved these amounts in the accompanying consolidated financial statements. As of December31, 2016 we owed pSivida approximately $240,000 for their portion of net profits on a cash basis, as defined in the amended and restated agreement, from thefourth quarter of 2016.In the second quarter of 2016, pSivida disputed portions of our claimed commercialization costs for the year ended December 31, 2014. As part of thisdispute, pSivida notified us that it disagreed with approximately $1.3 million of the $13.0 million in commercialization costs receivable that we had reportedas of December 31, 2014 and claimed incremental profit sharing payments of $136,000 for the year ended December 31, 2014. We are disputing pSivida’sassertions using the alternative dispute resolution mechanism under the pSivida Agreement. If pSivida’s assertions were to prevail in the alternative disputeresolution mechanism and their assertions were then applied to the commercialization cost calculations for the year ended December 31, 2015 and the yearended December 31, 2016, then we believe the commercialization costs receivable from pSivida would be reduced from $21.6 million to $18.5 million as ofDecember 31, 2015 and from $25.8 million to $21.2 million as of December 31, 2016. If pSivida’s assertions were to prevail in the alternative disputeresolution mechanism, the impact on our statements of operations for the year ended December 31, 2015 and the year ended December 31, 2016 would beimmaterial.As a result of the FDA’s approval of ILUVIEN in September 2014, we paid pSivida a milestone payment of $25.0 million (the pSivida MilestonePayment) in October 2014.10Table of ContentsGovernment RegulationGeneral OverviewGovernment authorities in the U.S. and other countries extensively regulate among other things the research, development, testing, quality, efficacy,safety (pre- and post-marketing), manufacturing, labeling, storage, record-keeping, advertising, promotion, export, import, marketing and distribution ofpharmaceutical products.U.S.In the U.S., the FDA, under the Federal Food, Drug, and Cosmetic Act (FD&C Act) and other federal and local statutes and regulations, subjectspharmaceutical products to review. If we do not comply with applicable regulations, the government may refuse to approve or place our clinical studies onclinical hold, refuse to approve our marketing applications, refuse to allow us to manufacture or market our products, seize our products, impose injunctionsand monetary fines on us, and prosecute us for criminal offenses.To obtain approval of a new product from the FDA, we must, among other requirements, submit data supporting the safety and efficacy as well asdetailed information on the manufacture and composition of the product and proposed labeling.The testing and collection of data and the preparation of the necessary applications are expensive and time consuming. The FDA may not act quicklyor favorably in reviewing these applications, and we may encounter significant difficulties or costs in our efforts to obtain FDA approval that could delay orpreclude us from marketing additional products. Once approved by the FDA, a drug requires an annual product and establishment fee which is currentlyprojected to be $585,000.Post-Marketing Requirements.There are post-marketing safety surveillance requirements that are required to be met to continue marketing an approved product. Adverse experienceswith the product must be reported to the FDA and could result in imposition of market restrictions through labeling changes or in product removal. Productapprovals may be withdrawn if compliance with regulatory requirements is not maintained or if problems concerning safety and/or efficacy of the productoccur following approval. The FDA may also, at its discretion, require post-marketing testing and surveillance to monitor the effects of approved products orplace conditions on any approvals that could restrict the commercial applications of these products. The FDA did not require any post-marketing testing aspart of its approval of ILUVIEN.With respect to product advertising and promotion of marketed products, the FDA imposes a number of complex regulations which include, amongothers, standards for direct-to-consumer advertising, off-label promotions, industry-sponsored scientific and educational activities and Internet promotionalactivities. The FDA has very broad enforcement authority under the FD&C Act, and failure to abide by these regulations can result in penalties, including theissuance of warning letters directing the sponsor to correct deviations from FDA standards, a requirement that future advertising and promotional materialsare pre-cleared by the FDA, and state and federal civil and criminal investigations and prosecutions.The manufacturing facility that produces our product must maintain compliance with cGMP and is subject to periodic inspections by the FDA. Failureto comply with statutory and regulatory requirements subjects a manufacturer to possible legal and regulatory action, including Warning Letters, seizure orrecall of products, injunctions, consent decrees placing significant restrictions on or suspending manufacturing operations and civil and criminal penalties.Foreign RegulationsForeign regulatory systems, although varying from country to country, include risks similar to those associated with FDA regulations in the U.S.Under the EU regulatory system, applications for drug approval may be submitted either in a centralized or decentralized procedure. Under thecentralized procedure, a single application to the European Medicines Evaluation Agency, if approved, would permit marketing of the product throughoutthe EU (currently 27 member states). We chose to pursue the decentralized procedure in Austria, France, Germany, Italy, Portugal, Spain and the UnitedKingdom due to our limited resources. The decentralized procedure provides for applications to be submitted for marketing authorization in a select numberof EU countries. The process is managed by a Reference Member State (RMS) that coordinates the review process with the Concerned Member States.A mutual recognition procedure of nationally approved decisions is available to pursue marketing authorizations for a product in the remaining EUcountries. Under the mutual recognition procedure, the holders of national marketing authorization in one of the countries within the EU may submit furtherapplications to other countries within the EU, who will11Table of Contentsbe requested to recognize the original authorization. Pursuant to this procedure, we obtained marketing authorizations in Belgium, the Czech Republic,Denmark, Finland, Ireland, Luxembourg, the Netherlands, Norway, Poland and Sweden.Third-party reimbursement and pricing controlsIn the EU, U.S. and elsewhere, sales of pharmaceutical products depend in significant part on the availability of reimbursement to the consumer fromthird-party payers, such as government and private insurance plans. Third-party payers are increasingly challenging the prices charged for medical productsand services.The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (together, thePPACA), is expected to significantly change the way healthcare is financed by both governmental and private insurers. The provisions of the PPACA becameeffective beginning in 2010, although the new presidential administration and Congress is actively working to repeal it and replace it with a different healthcare law. While we cannot predict what impact on federal reimbursement policies this law or any replacement law will have in general or specifically on anyproduct we commercialize, the PPACA or any replacement may result in downward pressure on pharmaceutical reimbursement, which could negatively affectmarket acceptance of new products. Any rebates, discounts, taxes costs or regulatory or systematic changes on healthcare resulting from the PPACA or itsreplacement may have a significant effect on our profitability in the future. We cannot predict whether the PPACA will continue or what other laws orproposals will be made or adopted, or what impact these efforts may have on us.In addition, other legislative changes have been proposed and adopted in the U.S. since the PPACA was enacted. On August 2, 2011, the BudgetControl Act of 2011 among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked withrecommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering thelegislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% perfiscal year, starting in 2013, which will remain in effect until 2024 unless additional congressional action is taken. On January 2, 2013, the AmericanTaxpayer Relief Act of 2012 was signed into law, which, among other things, increased the statute of limitations period for the government to recoveroverpayment to providers from three to five years. We expect that additional federal healthcare reform measures will be adopted in the future, any of whichcould limit the amounts that federal and state governments will pay for healthcare products and services, and in turn could significantly reduce the projectedvalue of certain development projects and reduce our profitability.More recently, the new presidential administration and the U.S. Congress have indicated they may seek to replace the PPACA and related legislationwith new healthcare legislation. There is uncertainty with respect to the impact these potential changes may have, if any, and any changes will likely taketime to unfold, and could have an impact on coverage and reimbursement for healthcare items and services covered by plans that were authorized by thePPACA. However, we cannot predict the ultimate content, timing or effect of any healthcare reform legislation or the impact of potential legislation on us.In many foreign markets, including the countries in the EEA, pricing of pharmaceutical products is subject to governmental control. In the U.S., therehave been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental pricing control. While wecannot predict whether such legislative or regulatory proposals will be adopted, the adoption of such proposals could have a material adverse effect on ourbusiness, financial condition and profitability.Patents and Proprietary RightsOur success depends in part on our ability to obtain and maintain proprietary protection for ILUVIEN or any future products or product candidates,technology and know-how, to operate without infringing on the proprietary rights of others and to prevent others from infringing our proprietary rights.Because certain intellectual property relating to ILUVIEN is licensed to us by third-party collaborators, we are dependent on our collaborators’ ability toobtain and maintain such protection. Where we have conducted our own research, our policy is to seek to protect our proprietary position by, among othermethods, filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to thedevelopment of our business. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop andmaintain our proprietary position.As of December 31, 2016, we owned or had licensed six U.S. utility patents, one U.S. design patent and two U.S. patent applications as well asnumerous foreign counterparts to many of these patents and patent applications relating to ILUVIEN or the ILUVIEN applicator. We licensed two Europeanpatents from pSivida directed to our low-dose device and have an application pending directed to our applicator system for ILUVIEN. We licensed our patentrights relating to ILUVIEN from pSivida. Pursuant to our agreement with pSivida, our ILUVIEN-related patent rights are only for diseases of the human eye(other than uveitis). Our licensed patent portfolio includes U.S. patents (with no currently pending or issued corresponding European applications or patents)with claims directed to methods for administering a corticosteroid with an implantable12Table of Contentssustained delivery device to deliver the corticosteroid to the vitreous of the eye wherein aqueous corticosteroid concentration is less than vitreouscorticosteroid concentration during release.U.S. utility patents generally have a term of 20 years from the date of filing. The utility patent rights relating to ILUVIEN licensed to us from pSividainclude six U.S. patents that expire between March 2019 and August 2027 and counterpart filings to these patents in a number of other jurisdictions. TwoEuropean patents are licensed to us from pSivida directed to our low-dose device that expire in April of 2021 and October 2024. No patent term extension orsupplementary protection certificate will be available for any of these U.S. or European patents or applications.The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain andsolidify our proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We donot know whether any of our patent applications or those patent applications that we license will result in the issuance of any patents. Our issued patents andthose that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, which could limit our ability to stop competitorsfrom marketing related products or the length of term of patent protection that we may have for our products. In addition, the rights granted under any issuedpatents may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitorsmay independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required for development,testing and regulatory review of a potential product, it is possible that, before such product can be commercialized, any related patent may expire or remain inforce for only a short period following commercialization, thereby reducing any advantage of the patent.We may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We seek to protect ourproprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors and other contractors. Theseagreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or beindependently discovered by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in theirwork for us, disputes may arise as to the rights in related or resulting know-how and inventions.Research and DevelopmentWe have built a research and development organization that includes extensive expertise with ophthalmic product development. We operate cross-functionally and are led by an experienced research and development management team. We also access relevant market information and key opinion leadersin creating target product profiles and, when appropriate, as we advance our programs to commercialization. We engage third parties to conduct our clinicaland preclinical research as we do not have research laboratories in house. In addition, we utilize multiple clinical sites to conduct our clinical trials; however,we are not substantially dependent upon any one of these sites for our clinical trials nor do any of them conduct a major portion of our clinical trials.We invested $2.1 million and $2.4 million in research and development during the years ended December 31, 2016 and 2015, respectively.EmployeesAs of December 31, 2016, we had 125 employees with 28 of these employees engaged in research, development, regulatory and medical affairsactivities, 24 of these employees engaged in administrative support, finance, legal and information technology and 73 of these employees engaged in salesand marketing activities.Corporate InformationWe are a Delaware corporation incorporated on June 4, 2003. Our principal executive office is located at 6120 Windward Parkway, Suite 290,Alpharetta, Georgia 30005 and our telephone number is (678) 990-5740. Our website address is www.alimerasciences.com. The information contained in, orthat can be accessed through, our website is not part of this report and should not be considered part of this report.Available InformationWe file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under theSecurities Exchange Act of 1934, as amended (the Exchange Act). The public may read and copy any materials that we file with the SEC at the SEC’s PublicReference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by callingthe SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other informationregarding issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov.13Table of ContentsCopies of each of our filings with the SEC on Form 10-K, Form 10-Q and Form 8-K and all amendments to those reports, can be viewed anddownloaded free of charge at our website, www.alimerasciences.com as soon as reasonably practicable after the reports and amendments are electronicallyfiled with or furnished to the SEC.Our code of ethics, other corporate policies and procedures, and the charters of our Audit Committee, Compensation Committee andNominating/Corporate Governance Committee are available through our website at www.alimerasciences.com.14Table of ContentsITEM 1A. RISK FACTORSInvesting in our common stock involves risk. You should carefully consider the risks described below as well as all the other information in this report,including the consolidated financial statements and the related notes appearing at the end of this annual report on Form 10-K, before making aninvestment decision. The risks and uncertainties described below are not the only risks and uncertainties we face. Additional risks and uncertainties notpresently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, ourbusiness, results of operations and financial condition could suffer. In that event the trading price of our common stock could decline, and you may lose allor part of your investment. The risks discussed below also include forward-looking statements and our actual results may differ substantially from thosediscussed in these forward-looking statements.Risks Related to Our Dependence on ILUVIEN and Our BusinessWe are dependent on the commercial success of our lead product, ILUVIEN, which in the near term will depend almost entirely on our ability tosuccessfully commercialize ILUVIEN on our own in the U.S., Germany, Portugal and the United Kingdom, and on our distributors ability to generaterevenues in other countries, which may not be significant or may never occur.We are a pharmaceutical company with only one product available for commercial sale in a limited number of markets. We launched ILUVIEN inGermany and the United Kingdom in the second quarter of 2013 and the U.S. and Portugal in the first quarter of 2015. We anticipate that our distributors inItaly and the Middle East may generate some revenues for us in 2017 if they are able to successfully commercialize ILUVIEN in those territories. We alsoanticipate launching ILUVIEN directly in Austria and Ireland in 2017.In the fourth quarter of 2016, through our Middle Eastern distributor, we received from the Health Authority in Abu Dhabi (HAAD) a reimbursementcode for ILUVIEN to allow for reimbursement in the Emirate of Abu Dhabi. As a result, our distributor in the Middle East has begun limited named patientsales in the United Arab Emirates in late 2016. In February of 2017, we announced that the Italian government had published a change in the reimbursementstatus of ILUVIEN, allowing ILUVIEN to be hospital-administered and that ILUVIEN should be fully reimbursed for pseudophakic patients. The timing of thecommercial launch of ILUVIEN in any country is dependent upon each specific country’s pricing and reimbursement timelines. Because we do not currentlyhave any products or product candidates available for sale or in clinical development other than ILUVIEN, our future success is dependent upon oursuccessful and our distributors successful commercialization of ILUVIEN for the treatment of DME.If we or our distributors do not successfully commercialize ILUVIEN in these countries our ability to generate revenue may be jeopardized and,consequently, our business may be seriously harmed. We and our distributors may not be able to commercialize ILUVIEN successfully, which would have amaterial adverse effect on our business and prospects. In the near term, we may experience delays and unforeseen difficulties in the commercialization ofILUVIEN, including obtaining unfavorable pricing and/or reimbursement which could negatively affect our ability to increase revenues.We incurred and expect to continue to incur significant expenses and to use a substantial portion of our cash resources for the continued commerciallaunch of ILUVIEN in the U.S., Germany, Portugal and the United Kingdom, continue to pursue the approval of and reimbursement for ILUVIEN in othercountries and continue to grow our operational capabilities. This represents a significant investment in the commercial and regulatory success of ILUVIEN,which is uncertain.ILUVIEN may not be commercially successful.Market acceptance of and demand for ILUVIEN will depend on many factors, including, but not limited to:•cost of treatment;•pricing and availability of alternative products;•our ability to obtain third-party coverage or reimbursement for ILUVIEN at appropriate levels;•perceived prevalence and severity of adverse side effects associated with treatment;•perceived efficacy relative to other available therapies;15Table of Contents•relative convenience and ease of administration; and•shifts in the medical community to new treatment paradigms or standards of care.We have limited experience and information with regard to the market acceptance of ILUVIEN in the EEA or elsewhere. As a result, we may have torevise our estimates regarding the acceptance of ILUVIEN under our pricing structure, reevaluate and/or change the pricing for ILUVIEN.Additionally, we may encounter unexpected or unforeseen delays in expanding our commercial launch in one or more countries in which ILUVIENreceived or was recommended for marketing authorization. These delays may increase the cost of and the resources required for successful commercializationof ILUVIEN.We may need alternative financing or additional capital to maintain our covenants under our $35.0 million debt facility, which we may be unable toobtain or which may be expensive or dilutive.We may need to raise alternative or additional financing to maintain compliance with our debt covenants under our loan and security agreement withHercules Technology Growth Capital, Inc. (Hercules), which Alimera Sciences Limited (Limited), our subsidiary, entered into in April 2014, and amended inNovember 2015, March 2016, May 2016 and October 2016 (the Term Loan Agreement). Under the Term Loan Agreement, Limited obtained a term loan in anaggregate principal amount of $35.0 million, with up to $10 million in additional financing upon our achievement of certain revenue milestones (TermLoan).The Term Loan Agreement contains customary affirmative and negative covenants, including without limitation, covenants of minimum liquidity,minimum trailing six-month net revenue and adjusted EBITDA, and events of default in connection with these covenants.Under the Term Loan Agreement, if we maintain $35.0 million in liquidity, including cash and eligible accounts receivable, and we have not been andare not in breach of the Term Loan Agreement at the end of a month, the six-month trailing revenue covenant is waived for such month. As of December 31,2016, our liquidity as defined under the Term Loan Agreement was $40.9 million, which consisted of $31.0 million in cash and cash equivalents, and 80% ofour $12.4 million in eligible U.S. accounts receivable.To secure the performance of our obligations under the Term Loan Agreement, Limited pledged all of its assets to Hercules. Our or Limited’s failure tocomply with the covenants under the Term Loan Agreement could result in an event of default, the acceleration of our debt and the loss of our assets. We andcertain of our subsidiaries are guarantors of the obligations of Limited to the lender under the Term Loan Agreement (Guaranties). Pursuant to the Guaranties,we and these subsidiaries granted the lender a first priority security interest in substantially all of our respective assets.In the event that we are unable to meet the liquidity requirement under the Term Loan Agreement and we are not in a position to meet the trailing six-month revenue requirement, we may determine that we need alternative financing, which may not be available or may be very expensive or we may need toraise funds on terms not favorable to us or our stockholders in order to meet the liquidity requirement.Any declaration of an event of default could significantly harm our business and prospects and could cause our stock price to decline significantly andmay cause us to raise funds on terms not favorable to us or our stockholders. Insufficient funds may require us to delay, scale back or eliminate some or all ofour activities, and if we are unable to obtain additional funding, there may be substantial doubt about our ability to continue as a going concern, which couldcause significant reputational damage and impact our ability to sell ILUVIEN.In an event of default, Hercules may call the Term Loan, which could require us to pay back the entire amount owed and pay an early termination fee, orif they do not call the Term Loan, we may have to pay an increased rate of interest, pay additional monetary amounts in exchange for a waiver ormodification of the Term Loan, or grant additional equity or warrant coverage and agree to further restrictions on our operations that could hinder us in thefuture. For example, in January of 2016 we did not meet the revenue requirement and in June of 2016 we did not meet the liquidity requirements under thethen existing terms of the Term Loan Agreement. While these violations were waived by Hercules, we were required to pay additional monies to Hercules andmodify the terms of a warrant previously issued to Hercules. In conjunction with the first waiver, we paid an amendment fee of $350,000 and agreed toincrease the payment that will be made when the Term Loan ends to $1.4 million. In conjunction with the second waiver, we agreed to pay a fee of $350,000and paid a weekly ticking fee of 0.05% multiplied by the outstanding principal amount of the Term Loan, in addition to the normal interest payments wewere making, until we raised $15.0 million in equity,16Table of Contentswhich we did in August of 2016. The warrant was modified in conjunction with the first and second waiver to increase the number of shares that may bepurchased under the warrant and reduce the exercise price. Although Hercules waived each of these defaults, there can be no assurance that it will do so withrespect to any future default.We rely on a single manufacturer for ILUVIEN, a single manufacturer for the ILUVIEN applicator and a single active pharmaceutical ingredientmanufacturer for ILUVIEN’s active pharmaceutical ingredient. Our business would be seriously harmed if any of these third-parties are not able to satisfyour demand and alternative sources are not available.We do not have, nor currently intend to have, in-house manufacturing capability and depend completely on a single third-party manufacturer for themanufacture of the ILUVIEN implant (Alliance Medical Products, Inc., a Siegfried Company (Alliance)), a single third-party manufacturer for the manufactureof the ILUVIEN applicator (FlexMedical or an affiliate of Flextronics International, Ltd. (Flextronics)), a single third-party manufacturer for the manufactureof ILUVIEN’s active pharmaceutical ingredient (FARMABIOS SpA./Byron Chemical Company Inc. (FARMABIOS)) and a single third-party manufacturer forthe quality release testing of ILUVIEN in the EEA (AndersonBrecon Limited trading as Packaging Coordinators, Inc. (PCI)). Although we have agreementsfor the manufacture of the ILUVIEN implant (with Alliance), the manufacture of the ILUVIEN applicator (with Flextronics), for the supply of ILUVIEN’sactive pharmaceutical ingredient (with FARMABIOS) and for the quality release testing of ILUVIEN in the EEA (with PCI), if any of the third-partymanufacturers breach their agreements or are unable to meet their contractual or quality requirements or unwilling to perform for any reason, we may not beable to locate alternative acceptable manufacturers, enter into favorable agreements with them or get them approved by the applicable regulatory authorities,such as the U.S. Food and Drug Administration (FDA), in a timely manner. Further, all of our manufacturers rely on additional third-parties for themanufacture of component parts. For example, in the third quarter of 2016, we did not have ILUVIEN that was labeled for the German and Portuguesemarkets. We were able to sell the United Kingdom labeled ILUVIEN in Germany and Portugal during this period and the effect was not material on ouroperations. Any inability to acquire sufficient quantities of ILUVIEN implants, the ILUVIEN applicator or the active pharmaceutical ingredient in a timelymanner from these third-parties could delay commercial production of, and impact our ability to fulfill demand for ILUVIEN, which may be material in thefuture and affect our revenue, operations and cash flow.Materials necessary to manufacture ILUVIEN may not be available on commercially reasonable terms, or at all, which may delay the development,regulatory approval and commercialization of ILUVIEN.We rely on our manufacturers to purchase materials from third-party suppliers necessary to produce ILUVIEN. Suppliers may not sell these materials toour manufacturers at the times we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisitionof these materials by our manufacturers. If our manufacturers are unable to obtain these materials in sufficient amounts, the commercialization of ILUVIENwould be hampered or there would be a shortage in supply, which would materially affect our ability to generate revenues from the sale of ILUVIEN.Moreover, although we have entered into agreements for the commercial production of the ILUVIEN implant, the commercial production of the ILUVIENapplicator, and the supply of the active pharmaceutical ingredient in ILUVIEN, the suppliers may be unable to meet their contractual or quality requirementsor choose not to supply us in a timely manner or in the minimum guaranteed quantities. If we are unable to obtain these supplies, our ability to manufactureILUVIEN for commercial sale would be delayed, significantly impacting our ability to generate revenue from the sale of ILUVIEN.The terms of our Term Loan Agreement require us to meet certain operating covenants and place restrictions on our operating and financialflexibility.The Term Loan Agreement contains certain operating covenants and restricts our operating and financial flexibility. The Term Loan is secured by a liencovering all of our assets, other than our intellectual property. The Term Loan Agreement contains customary affirmative and negative covenants and eventsof default. Affirmative covenants include, among others, covenants requiring us to meet certain six-month trailing revenue requirements, satisfy certainfinancial covenants, including maintaining at least $35.0 million in a combination of cash and eligible accounts receivable and certain adjusted EBITDA,maintaining our legal existence and governmental approvals, delivering certain financial reports and maintain insurance coverage. Negative covenantsinclude, among others, restrictions on transferring any part of our business or property, changing our business, incurring additional indebtedness, engaging inmergers or acquisitions, paying dividends or making other distributions, making investments and creating other liens on our assets and other financialcovenants, in each case subject to customary exceptions.In order to maintain compliance with these covenants, we must ensure that our activities will not violate the terms of the affirmative or negativecovenants, which may cause us to delay expenditures or reduce costs, all of which may reduce our future revenue growth. In an event of default under ourTerm Loan Agreement, including failure to satisfy our operating covenants, Hercules may accelerate all of our repayment obligations and take control of ourpledged assets, potentially requiring us to raise additional financing, renegotiate the Term Loan Agreement on terms less favorable to us or to immediatelycease operations. Any17Table of Contentsdeclaration by Hercules of an event of default could cause adverse publicity, could significantly harm our business and prospects and could cause the price ofour common stock to decline significantly. Further, if we are liquidated, Hercules’ right to repayment would be senior to the rights of our stockholders.We may need to raise additional capital to fund our operations and support our growth, and if we do not do so, we may be unable to successfullycommercialize ILUVIEN.We do not expect to have positive cash flow from operations until later in 2017, if at all. As of December 31, 2016, we had approximately $31.0 millionin cash and cash equivalents. We may need to raise additional funds to fund our operations and support our growth. The actual amount of funds that we mayneed to raise, if any, will be determined by many factors, some of which are beyond our control, and we may need monies to fund our operations and supportour growth sooner than we might anticipate. These factors include but are not limited to:•the level of success of the commercialization of ILUVIEN in the U.S., Germany, Portugal, the United Kingdom and any other territories wemay launch in,•expenses relating to the commercialization of ILUVIEN;•the level of success of the commercialization of ILUVIEN by our distributors in Italy and the Middle East;•the timing of approvals, if any, of ILUVIEN in additional jurisdictions;•the extent to which we enter into, maintain, and derive revenues from licensing agreements, including agreements to out-license ILUVIEN,research and other collaborations, joint ventures and other business arrangements;•the amount of our research, development and medical affairs, marketing and general and administrative expenses;•the need and cost of conducting additional clinical trials for ILUVIEN;•the extent to which we acquire, and our success in integrating, technologies or companies;•regulatory changes and technological developments in our markets; and•the extent to which we can manage the use of cash in our business operations.If we need additional capital to fund our operations and support our growth and we are unable to do so, we may not be able to commercialize ILUVIENsuccessfully. If we are unable to obtain additional funds on a timely basis or on terms favorable to us, we may be required to cease or reduce furthercommercialization of ILUVIEN,If we seek to raise additional capital it may be difficult to obtain on commercially reasonable terms, may further restrict our operations and couldresult in additional dilution to our stockholders.We do not expect to have positive cash flow from operations until later in 2017, if at all. As of December 31, 2016, we had approximately $31.0 millionin cash and cash equivalents. We may need to raise alternative or additional financing to maintain compliance with our debt covenants under the Term LoanAgreement, as discussed above in these risk factors. We may need to raise alternative or additional financing to fund our operations and support growth, asdiscussed above in these risk factors. General market conditions or the market price of our common stock may not support capital raising transactions such asan additional public or private offering of our common stock or other securities. In addition, our ability to raise additional capital may be dependent uponour stock being quoted on the NASDAQ Global Market or upon obtaining stockholder approval. There can be no assurance that we will be able to satisfy thecriteria for continued listing on NASDAQ or that we will be able to obtain stockholder approval if it is necessary. In the event additional financing is neededor advisable, we may seek to fund our operations through the sale of equity securities, additional debt financing and strategic collaboration agreements. Wecannot be sure that additional financing from any of these sources will be available when needed or that, if available, the additional financing will beobtained on terms favorable to us or our stockholders. If we raise additional funds by selling shares of our capital stock, the ownership interest of our currentstockholders will be diluted. If we attempt to raise additional funds through strategic collaboration agreements, we may not be successful in obtainingcollaboration agreements, or in receiving milestone or royalty payments under those agreements, or the terms of the debt may involve significant cashpayment obligations as well as covenants and specific financial ratios that may restrict our ability to commercialize ILUVIEN or any future products orproduct candidates or operate our business. For example, under our Term Loan Agreement, we and certain of our subsidiaries are subject to a variety ofaffirmative and negative18Table of Contentscovenants, including revenue requirements, adjusted EBITDA requirements, liquidity requirements, limitations on the disposition of assets, limitations onincurring additional debt, required financial reporting, and other requirements.ILUVIEN and any future products or product candidates may not be commercially viable if we fail to obtain or maintain an adequate level ofreimbursement for these products from any of the following: governments, private insurers, the Medicare program or other third-party payers. The marketfor our products may also be limited by the indications for which their use or frequency of administration may be reimbursed.Our revenue from sales of ILUVIEN in the countries in which ILUVIEN has received or been recommended for marketing authorization is dependentupon the pricing and reimbursement guidelines adopted in each of such countries, which levels may fall well below our current expectations. The same couldalso occur for any future products or product candidates we may develop that receive approval, if any.We have established list pricing or developed estimates of anticipated pricing in countries in which ILUVIEN has received or been recommended formarketing authorization. These estimates are our expectations, which are based upon the burden of DME, the lack of any approved therapies for DME, ourperception of the overall cost to benefit ratio of ILUVIEN and the current pricing of therapies to treat DME and other retinal diseases such as age relatedmacular degeneration and retinal vein occlusion. However, due to numerous factors beyond our control, including efforts to provide for containment ofhealth care costs, one or more countries may not support our estimated level of governmental pricing and reimbursement for ILUVIEN, particularly in light ofthe ongoing budget crises faced by a number of countries, which would negatively impact anticipated revenue from ILUVIEN.The availability and levels of reimbursement by governmental and other third-party payers affect the market for products such as ILUVIEN and othersthat we may develop. These third-party payers continually attempt to contain or reduce the costs of health care by challenging the prices charged for medicalproducts and services.In many countries, the pricing of prescription pharmaceuticals is subject to governmental control. In the U.S., we obtained approvals for payment forILUVIEN from private insurers, including managed care organizations, and from the Medicare and Medicaid programs, but the payment amount for ILUVIENcould be modified in the future, and the types of patients for which ILUVIEN is reimbursed could be reduced to a smaller subset of patients. In recent years,through legislative and regulatory actions, the federal government has made substantial changes to various payment systems under the Medicare program.Comprehensive reforms to the U.S. healthcare system were recently enacted, including changes to the methods for, and amounts of, Medicare reimbursement.The new presidential administration and Congress have indicated they may further reform the Medicare program and the U.S. healthcare system, but have notmade any definitive proposals which allow us to gauge the impact of such potential reforms, if any, on our business and operations. These reforms couldsignificantly reduce payments from Medicare and Medicaid over the next ten years. Reforms or other changes to these payment systems, includingmodifications to the conditions on qualification for payment, bundling of payments or the imposition of enrollment limitations on new providers, maychange the availability, methods and rates of reimbursements from Medicare, private insurers and other third-party payers for ILUVIEN and our future productcandidates. Some of these changes and proposed changes could result in reduced reimbursement rates for ILUVIEN and our future product candidates, whichwould adversely affect our business strategy, operations and financial results. Our business also could be adversely affected if retinal specialists are notreimbursed for the cost of the procedure in which they administer ILUVIEN on a basis satisfactory to the administering retinal specialists.We expect that private insurers will consider the efficacy, cost effectiveness and safety of ILUVIEN in determining whether to maintain approval forreimbursement for ILUVIEN in the U.S. and at what level. Maintaining these approvals can be a time consuming and expensive process. Our business wouldbe materially adversely affected if we do not maintain approval for reimbursement of ILUVIEN from private insurers on a timely or satisfactory basis.Limitations on coverage could also be imposed at the local Medicare carrier level or by fiscal intermediaries. Our business could be materially adverselyaffected if the Medicare program, local Medicare carriers or fiscal intermediaries were to make such a determination and deny or limit the reimbursement ofILUVIEN. Our business also could be adversely affected if retinal specialists are not reimbursed by Medicare for the cost of the procedure in which theyadminister ILUVIEN on a basis satisfactory to the administering retinal specialists. If the local contractors that administer the Medicare program are slow toreimburse retinal specialists for ILUVIEN, the retinal specialists may pay us more slowly, which would adversely affect our working capital requirements.In the EEA, each country has a different reviewing body that evaluates reimbursement dossiers submitted by marketing authorization holders of newdrugs and then makes recommendations as to whether or not the drug should be reimbursed. In these countries, pricing negotiations with governmentalauthorities can take 12 months or longer after the receipt of regulatory approval. For example, in February of 2017, we announced that the Italian governmenthad published a change in the reimbursement status of ILUVIEN, allowing ILUVIEN to be hospital-administered and that ILUVIEN should be fullyreimbursed for pseudophakic19Table of Contentspatients. The negotiation for this reimbursement change took more than 15 months. To obtain reimbursement or pricing approval at a level that we feel isappropriate in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of ILUVIEN to other available therapies.Limitations on reimbursement could be imposed at the national, regional or local level or by fiscal intermediaries in each country either through the initialauthorization process or at some point in the future. For example, in November 2016, we began a review process with The National Institute for Health andCare Excellence (NICE) in the United Kingdom. This review could result in beneficial or detrimental changes to the limitations on the use of ILUVIEN inEngland and Wales. Our business could be materially adversely affected if such limitations are imposed.In addition, due to price referencing within the EEA and certain other countries, existing pricing in our current markets could be negatively impactedby a change in pricing in a country where we currently have reimbursement or by a new price in a country where we obtain reimbursement in the future. Forexample, if we were to obtain pricing in France that is lower than our current established price in Portugal, the Portuguese government may choose to revisitthe current level of reimbursement.Our business could also be adversely affected if governments, private insurers, the Medicare program or other reimbursing bodies or payers limit theindications for reimbursement to a smaller subset than we believe ILUVIEN is effective in treating or establish a limit on the frequency with which ILUVIENmay be administered that is less often than we believe would be effective.We expect to experience pricing pressures in connection with the sale of ILUVIEN and any future products or product candidates due to the potentialhealthcare reforms discussed above, as well as the trend toward programs aimed at reducing health care costs, the increasing influence of health maintenanceorganizations and additional legislative proposals, and the economic health of companies. If reimbursement for our products is unavailable, limited in scopeor amount, or if pricing is set at unsatisfactory levels, our business could be materially harmed.The manufacture and packaging of pharmaceutical products such as ILUVIEN are subject to the requirements of the FDA and similar foreignregulatory entities. If we or our third-party manufacturers fail to satisfy these requirements, our product development and commercialization efforts maybe materially harmed.The manufacture and packaging of pharmaceutical products such as ILUVIEN and any future product candidates are regulated by the FDA and similarforeign regulatory agencies and must be conducted in accordance with the FDA’s current Good Manufacturing Practice (cGMP) and comparable requirementsof foreign regulatory agencies. There are a limited number of manufacturers that operate under these cGMP regulations which are both capable ofmanufacturing ILUVIEN and willing to do so. Failure by us or our third-party manufacturers to comply with applicable regulations, requirements, orguidelines could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketingapproval of ILUVIEN or any future products or product candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls ofproduct, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business. Failure of our manufacturers tomaintain compliance could interrupt the production of ILUVIEN, resulting in delays and additional costs which could significantly and adversely affect ourbusiness. Any significant delays in the manufacture of ILUVIEN or the quality of the product could materially harm our business and prospects.Changes in certain aspects of the manufacturing process or procedure will require prior FDA review and/or approval of the manufacturing process andprocedures in accordance with the FDA’s cGMP regulations. There are comparable foreign requirements as well. This review may be costly and timeconsuming and could delay or prevent the launch of a product. If we elect to manufacture products in our own facility or at the facility of another third-party,we would need to ensure that the new facility and the manufacturing process are in compliance with cGMP and comparable foreign regulations. Any suchnew facility will also be subject to inspection. In addition, we have to demonstrate that the product made at any such new facility is equivalent to the productmade at the former facility by physical and chemical methods, which are costly and time consuming. It is also possible that the FDA or a foreign regulatoryagency may require clinical testing as a way to prove equivalency of the product manufactured at any new facility as compared to the old facility, whichwould result in additional costs and delay.Furthermore, we need to complete testing on both the active pharmaceutical ingredient and on the finished product in the packaging that we proposefor commercial sales. This includes testing of stability, identification of impurities and testing of other product specifications by validated test methods. Inaddition, we will be required to consistently produce in commercial quantities and of specified quality in a reproducible manner and document our ability todo so. This requirement is referred to as process validation. The FDA and similar foreign regulatory agencies may also implement new standards, or changetheir interpretation and enforcement of existing standards and requirements, for the manufacture, packaging, or testing of products at any time.Failure to comply with government regulations regarding the sale and marketing of our products could harm our business.20Table of ContentsOur and our partners’ activities, including the sale and marketing of our products, are subject to extensive government regulation and oversight,including regulation under the federal Food, Drug and Cosmetic Act and other federal and state statutes, along with requirements in Europe, such as theMedicines Act of 1968 in the United Kingdom. We are also subject to the provisions of the Federal Anti-Kickback Statute, the Federal False Claims Act andseveral similar state laws, which prohibit payments intended to induce physicians or others either to purchase or arrange for or recommend the purchase ofhealthcare products or services. While the federal law applies only to products or services for which payment may be made by a federal healthcare program,state laws may apply regardless of whether federal funds may be involved. These laws constrain the sales, marketing and other promotional activities ofmanufacturers of drugs and biologicals, such as us, by limiting the kinds of financial arrangements, including sales programs, with hospitals, physicians, andother potential purchasers of drugs and biologicals. Other federal and state laws generally prohibit individuals or entities from knowingly presenting, orcausing to be presented, claims for payment from Medicare, Medicaid, or other third party payors that are false or fraudulent, or are for items or services thatwere not provided as claimed. Anti-kickback and false claims laws prescribe civil and criminal penalties for noncompliance that can be substantial, includingthe possibility of exclusion from federal healthcare programs (including Medicare and Medicaid).Pharmaceutical and biotechnology companies have been the target of lawsuits and investigations alleging violations of government regulation,including claims asserting antitrust violations, violations of the Federal False Claim Act, the Anti-Kickback Statute, the Prescription Drug Marketing Act andother violations in connection with off-label promotion of products and Medicare and/or Medicaid reimbursement and claims under state laws, includingstate anti-kickback and fraud laws. In Europe, each country has different regulations that govern the promotional claims and activities of pharmaceutical andbiotechnology companies. The violation and enforcement of these regulations by each country may result in heavy fines, further legal action, publicreprimand, injunction and may include the loss of market authorization.While we have put in place a Compliance Program to assist with monitoring and complying with these activities and we continually strive to complywith these complex requirements, interpretations of the applicability of these laws to marketing practices are ever evolving. If any such actions are institutedagainst us or our partners and we or they are not successful in defending such actions or asserting our rights, those actions could have a significant andmaterial adverse impact on our business, including the imposition of significant fines or other sanctions. Even an unsuccessful challenge could cause adversepublicity and be costly to respond to, and thus could have a material adverse effect on our business, results of operations and financial condition.Failure to successfully manage our international operations could harm our business, operating results and financial condition.Our international operations require significant management attention and financial resources. In addition, there are many risks inherent ininternational business activities including, but not limited to:•extended collection timelines for accounts receivable and greater working capital requirements;•multiple legal systems and unexpected changes in legal requirements;•tariffs, export restrictions, trade barriers and other regulatory or contractual limitations on our ability to sell or develop our products in certainforeign markets;•trade laws and business practices favoring local competition;•potential tax issues, including restrictions on repatriating earnings, multiple and conflicting and complex tax laws and regulations;•weaker intellectual property protection in some countries;•political instability, including war and terrorism or the threat of war and terrorism; and•adverse economic conditions, including the stability and solvency of business financial markets, financial institutions and sovereign nations.In addition, compliance with foreign and U.S. laws and regulations that are applicable to our international operations is complex and may increase ourcost of doing business in international jurisdictions, and our international operations could expose21Table of Contentsus to fines and penalties if we fail to comply with these regulations. These laws and regulations include import and export requirements, U.S. laws such as theForeign Corrupt Practices Act, and local laws prohibiting corrupt payments to governmental officials. Although we have implemented policies andprocedures designed to help ensure compliance with these laws, there can be no assurance that our employees, partners and other persons with whom we dobusiness will not take actions in violation of our policies or these laws. Any violations of these laws could subject us to civil or criminal penalties, includingsubstantial fines or prohibitions on our ability to offer our products in one or more countries, and could also materially and adversely harm our business andfinancial condition.Maintaining our commercial infrastructure is a significant undertaking that requires substantial financial and managerial resources, and we maynot be successful in our efforts or we may experience difficulties with these efforts. We may also encounter unexpected or unforeseen challenges, whichmay negatively impact our commercial efforts for ILUVIEN.We anticipate that in the near term our ability to generate revenues will depend almost entirely on our ability to successfully commercialize ILUVIENon our own in the U.S., Germany, Portugal and the United Kingdom. We launched ILUVIEN in Germany and the United Kingdom in the second quarter of2013, and the U.S. and Portugal in the first quarter of 2015. A commercial launch of this size is a significant undertaking that requires substantial financialand managerial resources. We anticipate that our distributors in Italy and the Middle East may generate some revenues for us in 2017, if they are able tosuccessfully commercialize ILUVIEN in those territories, but the amount of that revenue will be minimal compared to the revenue generated in geographiclocations where we sell ILUVIEN directly.As of December 31, 2016, we had 125 employees, 77 of whom were located in the U.S. and 48 of whom were located in the United Kingdom, Germany,Portugal and France. We began building our U.S. commercial infrastructure in the fourth quarter of 2014 following the FDA approval of ILUVIEN in the thirdquarter of 2014 with the addition of sales management, field sales representatives, payor relations specialists, reimbursement support specialists and otherpositions. As of December 31, 2016, our commercial U.S. organization included 45 employees. As our development and commercialization plans andstrategies evolve beyond our initial planned EEA launches, we will need to further expand the size of our organization by recruiting additional managerial,operational, sales, marketing, financial and other personnel.We may not be able to maintain and expand our commercial operation in a cost-effective manner or realize a positive return on this investment. Inaddition, we have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain sales and marketing personnel. Factorsthat may inhibit our efforts to commercialize our products include:•our inability to recruit and retain adequate numbers of effective personnel;•the inability of sales personnel to obtain access to or persuade adequate numbers of ophthalmologists to prescribe our products;•the lack of complementary products or additional labeled indications for ILUVIEN to be offered by sales personnel, which may put us at acompetitive disadvantage relative to companies with more extensive product lines;•the inability of market access personnel to obtain sufficient levels of pricing and reimbursement in each jurisdiction; and•unforeseen costs and expenses associated with creating a commercial organization.If we are not successful in recruiting and retaining sales and marketing personnel or in maintaining our sales and marketing infrastructure or if we donot successfully enter into additional collaboration arrangements with third-parties, we will have difficulty commercializing ILUVIEN or any future productsor product candidates, which would adversely affect our business, operating results and financial condition.We may not be successful in maintaining and expanding our commercial operations for numerous reasons, including, but not limited to, the failure toattract, retain and motivate the necessary skilled personnel and failing to develop a successful marketing strategy. Failure to maintain and expand ourcommercial operations will have a negative outcome on our ability to commercialize ILUVIEN and generate revenue.Additionally, we may encounter unexpected or unforeseen delays in expanding our commercial operations that delay the commercial launch in one ormore countries in which ILUVIEN has received or been recommended for marketing authorization. These delays may increase the cost of and the resourcesrequired for successful commercialization of ILUVIEN. We do not have experience in a commercial operation of this size. Further, a delay in the commerciallaunch of ILUVIEN could result in the22Table of Contentswithdrawal of our marketing or regulatory authorization for ILUVIEN in certain jurisdictions, including certain EU member states where ILUVIEN has alreadyreceived marketing authorization.In addition, there are many pharmaceutical companies, biotechnology companies, public and private universities, government agencies and researchorganizations actively engaged in research and development of products, some of which may target the same indications as ILUVIEN or any future productsor product candidates. Our competitors include larger, more established, fully integrated pharmaceutical companies and biotechnology companies that havesubstantially greater capital resources, existing competitive products, larger research and development staffs and facilities, greater experience in drugdevelopment and in obtaining regulatory approvals and greater marketing capabilities than we do.The regulatory approval of ILUVIEN in any additional countries is uncertain and our regulatory approval in certain countries is contingent on ourability to sell ILUVIEN in an appropriate time frame. Failure to obtain regulatory approval in additional foreign jurisdictions or maintain regulatoryapproval in jurisdiction where we have received regulatory approval but not yet sold ILUVIEN would prevent us from marketing and commercializingILUVIEN in additional markets, which may have an adverse effect on our business and results of operations.ILUVIEN has received marketing authorization in the U.S. and in the following countries of the EEA: Austria, Belgium, the Czech Republic, Denmark,Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden and the United Kingdom. We havelaunched ILUVIEN in the U.S., Portugal, Germany and the United Kingdom. We plan to sell ILUVIEN in Austria and Ireland in 2017. Our distributor plans tolaunch ILUVIEN in Italy in 2017. When we received marketing authorization in the remaining countries in the EEA, those marketing authorizations requiredthat we sell at least one ILUVIEN in those countries within three years or our license in those countries could be revoked unless we negotiate to extend thedeadline. We intend to either sell one ILUVIEN in each of those countries or negotiate to extend the deadline, but we may not be able to make such a sale orextend the deadline in which case our license in that country may be revoked. If our license in any of these countries is revoked, we will need to pursuemarketing authorization for any of these countries. We intend to continue to pursue market authorizations for ILUVIEN internationally in additionaljurisdictions. In order to market our products in foreign jurisdictions, we will be required to obtain separate regulatory approvals and comply with numerousand varying regulatory requirements.The research, testing, manufacturing and marketing of drug products are subject to extensive regulation by U.S. federal, state and local governmentauthorities, including the FDA and similar entities in other countries. The approval procedure varies among countries and jurisdictions and can involveadditional testing, and the time required to obtain approval may differ from that required to obtain FDA approval or approval in the seventeen EEA countriesin which ILUVIEN has received marketing authorization. To obtain regulatory approval of a product, we must demonstrate to the satisfaction of theregulatory agencies that, among other things, the product is safe and effective for its intended use. In addition, we must show that the manufacturing facilitiesused to produce the products are in compliance with cGMP regulations or their equivalent in the jurisdiction in which we are seeking approval.The process of obtaining regulatory approvals and clearances in jurisdictions where ILUVIEN is not approved will require us to expend substantial timeand capital. Despite the time and expense incurred, regulatory approval is never guaranteed. The number of preclinical and clinical tests that will be requiredfor regulatory approval varies depending on the drug candidate, the disease or condition for which the drug candidate is in development, the jurisdiction inwhich we are seeking approval and the regulations applicable to that particular drug candidate. Regulatory agencies, where drugs are regulated, can delay,limit or deny approval of a drug candidate for many reasons, including that:•regulatory agencies may interpret data from preclinical and clinical testing in different ways from those which we do;•they may not approve of our manufacturing processes;•a drug candidate may not be safe or effective;•they may conclude that the drug candidate does not meet quality standards for stability, quality, purity and potency; and•they may change their approval policies or adopt new regulations.The applicable regulatory authorities may make requests or suggestions regarding conduct of our clinical trials, resulting in an increased risk ofdifficulties or delays in obtaining regulatory approval. For example, the regulatory authorities may not approve23Table of Contentsof certain of our methods for analyzing our trial data, including how we evaluate the relationship between risk and benefit. Additionally, the foreignregulatory approval process may include all of the risks associated with obtaining FDA approval. For all of these reasons, we may not obtain additionalforeign regulatory approvals on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries orjurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or jurisdictionsor by the FDA.We may not be able to file for regulatory approvals, may not receive necessary approvals to commercialize ILUVIEN in any additional market or wemay be unable to maintain regulatory approvals in certain EEA countries. The failure to obtain these approvals or maintain regulatory approvals in certainEEA countries if they are revoked, could harm our business materially. Further, a delay in the commercial launch of ILUVIEN could result in the withdrawalof our marketing or regulatory authorization for ILUVIEN in certain jurisdictions, including certain EEA member states where ILUVIEN has already receivedmarketing authorization. The withdrawal of an approval could harm our business materially.Even if we do receive additional regulatory approvals for ILUVIEN, regulatory agencies may impose limitations on the indicated uses for whichILUVIEN may be marketed, subsequently withdraw approval or take other actions against us or ILUVIEN that would be adverse to our business,including withdrawal of approval if we are unable to commercialize ILUVIEN within certain time periods.Regulatory agencies generally approve products for particular indications. If any such regulatory agency approves ILUVIEN for a limited indication,the size of our potential market for ILUVIEN will be reduced. ILUVIEN has received marketing authorization in Austria, Belgium, the Czech Republic,Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden and the United Kingdom for thetreatment of vision impairment associated with chronic DME considered insufficiently responsive to available therapies. In the U.S., the indication forILUVIEN is different, as ILUVIEN is indicated for the treatment of DME in patients who have been previously treated with a course of corticosteroids and didnot have a clinically significant rise in IOP. Either of these indications may limit the use of ILUVIEN to a segment of the DME population. Product approvals,once granted, may be withdrawn if problems occur after initial marketing. Further, a delay in the commercial launch of ILUVIEN could result in thewithdrawal of our marketing or regulatory authorization for ILUVIEN in certain jurisdictions, including certain EEA member states where ILUVIEN hasalready received marketing authorization. The marketing, distribution and manufacture of ILUVIEN will be subject to regulation. We will need to complywith facility registration and product listing requirements of the FDA and similar entities in other countries and adhere to the FDA’s Quality SystemRegulations. Noncompliance with applicable FDA and similar entities’ requirements can result in warning letters, fines, injunctions, civil penalties, recall orseizure of ILUVIEN, total or partial suspension of production, refusal of regulatory agencies to grant approvals, withdrawal of approvals by regulatoryagencies or criminal prosecution. We would also need to maintain compliance with federal, state and foreign laws regarding sales incentives, referrals andother programs.If we fail to comply with our obligations in the agreements under which we license development or commercialization rights to products ortechnology from third-parties, we could lose license rights that are material to our business.Our licenses are material to our business, and we may enter into additional licenses in the future. We hold a license from pSivida to intellectual propertyrelating to ILUVIEN. Our ability to pursue the development and commercialization of ILUVIEN depends upon the continuation of our license from pSivida.This license imposes various commercialization, milestone payment, profit sharing, insurance and other obligations on us, including the right by pSivida toaudit the commercialization costs of ILUVIEN incurred by us. If we fail to comply with these obligations, pSivida may have the right to terminate the license.Our license rights to pSivida’s proprietary delivery device could revert to pSivida if we (i) fail twice to cure our breach of an obligation to make certainpayments to pSivida following receipt of written notice thereof; (ii) fail to cure other breaches of material terms of our agreement with pSivida within 30 daysafter notice of such breaches or such longer period (up to 90 days) as may be reasonably necessary if the breach cannot be cured within such 30-day period;(iii) file for protection under the bankruptcy laws, make an assignment for the benefit of creditors, appoint or suffer appointment of a receiver or trustee overour property, file a petition under any bankruptcy or insolvency act or have any such petition filed against us and such proceeding remains undismissed orunstayed for a period of more than 60 days; or (iv) notify pSivida in writing of our decision to abandon our license with respect to a certain product usingpSivida’s proprietary delivery device. If the license with pSivida, or any other current or future material license agreement were terminated, we would not beable to market the applicable products, such as ILUVIEN, that may be covered by such license, which would materially and adversely affect our business,results of operations and future prospects.Regulatory approval for any approved product is limited by the regulatory authorities to those specific indications and conditions for which clinicalsafety and efficacy have been demonstrated.Any regulatory approval is limited to those specific diseases and indications for which a product is deemed to be safe and effective by the applicableregulatory authorities, including the FDA in the U.S. and by various regulatory authorities in24Table of ContentsEuropean. In addition to approval required for new formulations, any new indication for an approved product also requires regulatory approval. If we are notable to obtain regulatory approval for any desired future indications for our products, including ILUVIEN, our ability to effectively market and sell ourproducts, including ILUVIEN, may be reduced and our business may be adversely affected.While physicians may choose to prescribe drugs for uses that are not described in the product’s labeling and for uses that differ from those tested inclinical studies and approved by the regulatory authorities, our ability to promote the products is limited to those indications that are specifically approvedby regulatory authority. These “off-label” uses are common across medical specialties and may constitute an appropriate treatment for some patients in variedcircumstances. Regulatory authorities generally do not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however,restrict communications by pharmaceutical companies on the subject of off-label use. If our promotional activities fail to comply with these regulations orguidelines, we may be subject to warnings from, or enforcement action by, these authorities. In addition, our failure to follow regulatory authority rules andguidelines relating to promotion and advertising may cause the regulatory authority to suspend or withdraw an approved product from the market in theapplicable country, require a recall or payment of fines, or could result in disgorgement of money, operating restrictions, injunctions or criminal prosecution,any of which could harm our business.If we fail to maintain proper and effective internal control over financial reporting or if the interpretations, estimates or judgments utilized inpreparing our financial statements prove to be incorrect, our operating results and our ability to operate our business could be harmed.The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls andprocedures. In particular, pursuant to Section 404 of the Sarbanes-Oxley Act (Section 404), we are required to perform system and process evaluation andtesting of our internal controls over financial reporting. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemedto be material weaknesses. Our compliance with Section 404 would require us to continue to incur substantial accounting expense and expend significantmanagement efforts. We currently do not have an internal audit group, and we may need to hire additional accounting and financial staff. Moreover, if we arenot able to comply with the requirements of Section 404 in a timely manner or if we identify deficiencies in our internal controls over financial reporting thatare deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by NASDAQ, theSecurities and Exchange Commission (SEC) or other regulatory authorities, which would require additional financial and management resources.We are also subject to complex tax laws, regulations, accounting principles and interpretations thereof. The preparation of our financial statementsrequires us to interpret accounting principles and guidance and make estimates and judgments that affect the reported amounts of assets and liabilities andthe disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurredduring the reporting periods. Our interpretations, estimates and judgments are based on our historical experience and on various other factors that we believeare reasonable under the circumstances, the results of which form the basis for the preparation of our financial statements. Generally accepted accountingprinciples presentation is subject to interpretation by the SEC, the Financial Accounting Standards Board and various other bodies formed to interpret andcreate appropriate accounting principles and guidance. In the event that one of these bodies disagrees with our accounting recognition, measurement ordisclosure or any of our accounting interpretations, estimates or assumptions, it may have a significant effect on our reported results and may retroactivelyaffect previously reported results. The need to restate our financial results could, among other potential adverse effects, result in us incurring substantial costs,affect our ability to timely file our periodic reports until such restatement is completed, divert the attention of our management and employees frommanaging our business, result in material changes to our historical and future financial results, result in investors losing confidence in our operating results,subject us to securities class action litigation, and cause our stock price to decline.We have incurred operating losses in each year since our inception and may continue to incur substantial and increasing losses.We launched ILUVIEN in Germany and the United Kingdom in the second quarter of 2013, and the U.S. and Portugal in the first quarter of 2015. Weare not currently generating revenues that cover our expenses or would cover our anticipated expenses. ILUVIEN is our only product currently approved forcommercial sale. As a result of these factors, we are uncertain when or if we will achieve profitability and, if so, whether we will be able to sustain it. As ofDecember 31, 2016, we had accumulated a deficit of $377.1 million. Our ability to generate significant revenue and achieve profitability is dependent on ourability to successfully market and sell ILUVIEN and expand the geographic areas where we or our distributors can sell ILUVIEN, and to complete thedevelopment of any future products or product candidates and obtain necessary regulatory approvals of any future products or product candidates. Althoughwe believe we may be cash flow positive in late 2017, we cannot assure you that we will be profitable, or cash flow positive, even if we successfullycommercialize ILUVIEN or future products or product candidates. Failure to become25Table of Contentsand remain profitable may adversely affect the market price of our common stock and our ability to raise capital and continue operations.Our quarterly operating results and cash flows may fluctuate significantly.We expect our operating results and cash flows to continue to be subject to quarterly fluctuations. The revenues we generate and our operating resultswill be affected by numerous factors, including:•the commercial success of ILUVIEN;•timing and ordering patterns from our distributors;•our ability to obtain regulatory approval of ILUVIEN in additional jurisdictions;•sales, marketing and medical affairs expenses;•manufacturing or supply issues;•seasonality caused by insurance renewals for patients in the U.S., and by doctor and or patient absences due to holidays and vacations;•regulatory developments affecting ILUVIEN, our future product candidates or our competitors’ products;•the emergence of products that compete with ILUVIEN;•cost of product sales;•variations in the level of expenses related to our products or future development programs;•the timing and amount of royalties, milestone payments, or product purchases by our distributors;•the status of our preclinical and clinical development programs;•our execution of collaborative, licensing or other arrangements, and the timing of payments we may make or receive under thesearrangements;•any intellectual property infringement or other lawsuit in which we may become involved; and•the timing and recognition of stock-based compensation expense.If our operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially.Furthermore, any fluctuations in our operating results or cash flows may, in turn, cause significant volatility in the price of our stock. We believe thatcomparisons of our quarterly financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.ILUVIEN utilizes fluocinolone acetonide (FAc), a corticosteroid that has demonstrated undesirable side effects in the eye; therefore, the success ofILUVIEN will be dependent upon our ability to convince physicians that the benefits of its efficacy are greater than the risks of its side-effect profile.The use of corticosteroids in the eye has been associated with undesirable side effects, including increased incidence of cataract formation and elevatedIOP, which may increase the risk of glaucoma. We have 36 months of clinical data from our two completed Phase 3 pivotal clinical trials (collectively, ourFAME Study), but the extent of ILUVIEN’s long-term side-effect profile beyond month 36 is not yet known. As part of the approval process in Europe, wecommitted to conduct a five-year, post-authorization, open label registry study in 800 patients treated with ILUVIEN. In the fourth quarter of 2016, werequested approval to modify our protocol to cap enrollment in the study due to our post market safety surveillance not showing any unexpected safetysignals. Although we have not received formal regulatory approval, the Medicines & Healthcare products Regulatory Agency (MHRA) has agreed to allow usto suspend enrollment, pending approval of our protocol amendment. As of December 31, 2016, 548 patients were enrolled in this study. Although unlikely,data accumulated from the five-year post-authorization study, or other commercial experience, could result in the withdrawal of ILUVIEN approval in one ormore jurisdictions. In addition, if we are26Table of Contentsnot able to convince physicians that the benefits of ILUVIEN’s efficacy are greater than the risks of its side-effect profile it could impact our revenues andrevenue growth in our current markets where we sell ILUVIEN or in future markets where we may attempt to sell ILUVIEN.Although we have received approval to temporarily suspend enrollment in our post authorization European registry study for ILUVIEN, we areawaiting formal and final approval from the MHRA of the change in our protocol to cap enrollment at our current level. Because final approval has notyet occurred, and if it were not approved, the cost to continue enrollment to the originally submitted protocol level of 800 patients would adversely impactour operating results, profitability and cash flow.As part of the approval process in Europe, we committed to conduct a five-year, post-authorization, open label registry study in 800 patients treatedwith ILUVIEN. In the fourth quarter of 2016, we requested approval to modify our protocol to cap enrollment in the study due to our post market safetysurveillance not showing any unexpected safety signals. Although we have not received formal regulatory approval, the MHRA has agreed to allow us tosuspend enrollment, pending approval of our protocol amendment. As of December 31, 2016, 548 patients were enrolled in this study. If the MHRA were tonot give formal regulatory approval to cease enrollment and we had to reach the full enrollment in the study, the additional costs of the additional patients inthe study would adversely affect our cash flows and profitability in 2017 and 2018.pSivida plans to file and obtain regulatory approval in both the EU and the U.S. for a drug to treat uveitis with FAc that uses the same inserttechnology as ILUVIEN, although with a different delivery device. The obtaining of regulatory approval and the subsequent commercialization of thisdrug either by pSivida or by another party that licenses the technology may create confusion in the marketplace and may disrupt our reimbursementagreements with governmental agencies.Our license agreement with pSivida permits them to develop a drug to treat posterior segment uveitis using the technology of the polyimide insert, butnot the ILUVIEN inserter. pSivida has conducted clinical trials with such a drug for the treatment of posterior segment uveitis and has announced that theyplan to file a European Market Authorization in the second quarter of 2017 and a NDA in the U.S. for this drug in the second half of calendar year 2017(Uveitis Drug). If they receive approval for the posterior segment uveitis and they or another party commercializes the Uveitis Drug in either the EU or theU.S., similarities of the Uveitis Drug to ILUVIEN may create confusion in the market place. In addition, pSivida may seek or receive pricing or reimbursementthat is lower than ILUVIEN which may impact the reimbursement of ILUVIEN in certain countries. This potential market place confusion or any impact to ourreimbursement for ILUVIEN could have a material adverse impact on our revenues, business and operations.Legislative or regulatory reform of the health care system in the U.S. and foreign jurisdictions may adversely impact our business, operations orfinancial results.Our industry is highly regulated and changes in law may adversely impact our business, operations or financial results. In particular, in March 2010, thePatient Protection and Affordable Care Act (the PPACA), and a related reconciliation bill were signed into law. This legislation changes the current system ofhealthcare insurance and benefits intended to broaden coverage and control costs. The law also contains provisions that will affect companies in thepharmaceutical industry and other healthcare related industries by imposing additional costs and changes to business practices. The new presidentialadministration and Congress have indicated that they will repeal and replace the PPACA and the president in January of 2017 signed an executive order(Executive Order) that mandated that all executive agencies to the maximum extent of the law waive, defer, grant exemptions from, or delay implementationof any provision or requirement of the PPACA. Provisions affecting pharmaceutical companies in the PPACA include for pharmaceutical companies changesin the mandatory rebates required for Medicaid for drugs, certain requirements for discounts to certain hospitals and entities, discounts for patients inMedicare Part D coverage gap and non-tax deductible fees to the federal government based on the pharmaceutical companies market share.The PPACA has not been fully implemented and the affects if fully implemented are not known. In addition, the effect of any "repeal and replace" ofthis healthcare reform legislation or the Executive Order cannot be known at this time. The financial impact of the U.S. healthcare reform legislation and thecurrent attempt to "repeal and replace" this healthcare legislation over the next few years will depend on a number of factors.The Physician Payment Sunshine Act also imposes reporting and disclosure requirements on device and drug manufacturers for any “transfer of value”made or distributed to prescribers and other healthcare providers. In addition, device and drug manufacturers will also be required to report and disclose anyinvestment interests held by physicians and their immediate family members during the preceding calendar year. Failure to submit required information mayresult in significant civil monetary penalties and potential government action. Similar laws requiring reporting of "transfer of value" have been passed inEurope, with potential penalties and government action for failure to comply.27Table of ContentsIn addition, in September 2007, the Food and Drug Administration Amendments Act of 2007 was enacted giving the FDA enhanced post-marketingauthority including the authority to require post-marketing studies and clinical trials, labeling changes based on new safety information and compliance withrisk evaluations and mitigation strategies approved by the FDA. The FDA’s exercise of this authority could result in delays or increased costs during productdevelopment, clinical trials and regulatory review, increased costs to ensure compliance with post-approval regulatory requirements and potential restrictionson the sale and/or distribution of approved products.Further, in some foreign countries the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricingnegotiations with governmental authorities can take 12 months or longer after the receipt of regulatory approval and product launch. For example, in thefourth quarter of 2016, after unsuccessfully negotiating with the French government to obtain an appropriate price, we decided to close operations in France.We expect the closing of operations to be completed in early 2017. To obtain reimbursement or pricing approval in some countries, we may be required toconduct a clinical trial that compares the cost-effectiveness of our product candidate to other available therapies. Our business could be materially harmed ifreimbursement of our products is unavailable or limited in scope or amount or if pricing is set at unsatisfactory levels.Moreover, we cannot predict what healthcare reform initiatives may be adopted in the future. Further federal and state legislative and regulatorydevelopments are likely, and we expect ongoing initiatives in the U.S. to increase pressure on drug pricing. Such reforms could have an adverse effect onanticipated revenues from ILUVIEN or any future products or product candidates that we may successfully develop and for which we may obtain regulatoryapproval and may affect our overall financial condition and ability to develop drug candidates.Significant developments arising from the new U.S. presidential administration and congress or the United Kingdom’s vote on leaving the EU couldhave a material adverse effect on us.In January of 2017, a new presidential administration and congress took power in the U.S. The new president has expressed antipathy towards existingtrade agreements, such as the North American Free Trade Agreement, greater restrictions on free trade generally and significant increases on tariffs on goodsimported into the U.S., particularly from China and Mexico. Changes in U.S. social, political, regulatory and economic conditions or in laws and policiesgoverning foreign trade, manufacturing, development and investment in the territories and countries where we currently manufacture certain components ofour products, such as Mexico and in countries where we sell products, and any negative sentiments towards the United States as a result of such changes,could adversely affect our business.On June 23, 2016, the United Kingdom held a referendum and voted in favor of leaving the EU. This result has created political and economicuncertainty, particularly in the United Kingdom and the EU, and this uncertainty may last for years. Our business in the United Kingdom, the EU, andworldwide could be affected during this period of uncertainty, and perhaps longer, by the United Kingdom’s referendum decision. There are many ways inwhich our business could be affected, only some of which we can identify.The forthcoming withdrawal of the United Kingdom from the EU has caused and, along with events that could occur in the future as a consequence ofthe United Kingdom’s withdrawal, may continue to cause significant volatility in global financial markets, including in global currency and debt markets.This volatility could cause a slowdown in economic activity in the United Kingdom, Europe or globally, which could adversely affect our operating resultsand growth prospects. In addition, our business could be negatively affected by new trade agreements between the United Kingdom and other countries,including the U.S., and by the possible imposition of trade or other regulatory barriers in the United Kingdom. Furthermore, we currently operate in Europethrough a subsidiary based in the United Kingdom, which currently provides us with certain operational and other benefits. The United Kingdom’swithdrawal from the EU could adversely affect our ability to realize those benefits and we may incur costs and suffer disruptions in our European operationsas a result, including changing our base of operations from the United Kingdom to another country in the EU. These possible negative impacts, and othersresulting from the United Kingdom’s actual or threatened withdrawal from the EU, may adversely affect our operating results and growth prospects.We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully thanwe do.The development and commercialization of new drugs is highly competitive and the commercial success of ILUVIEN or any of our future products orproduct candidates will depend on several factors, including, but not limited to, our ability to differentiate ILUVIEN or any of our future products or productcandidates from our competitors’ current or future products. We will face competition from major pharmaceutical companies, specialty pharmaceuticalcompanies and biotechnology companies28Table of Contentsworldwide with respect to ILUVIEN and to any future products or product candidates that we may develop or commercialize in the future.Our commercial opportunities for ILUVIEN will be reduced or eliminated if our competitors develop or market products that:•are more effective;•receive better reimbursement terms;•are more accepted by physicians;•have fewer or less severe adverse side effects;•are better tolerated;•are more adaptable to various modes of dosing;•have better distribution channels;•are easier to administer; or•are less expensive, including but not limited to a generic version of ILUVIEN.We believe that ILUVIEN competes with other products that have been or are being developed for the treatment of DME. Currently, DME is treated withbiological anti-vascular endothelial growth factor (VEGF) agents, corticosteroids and laser photocoagulation.There are three biological anti-VEGF agents used to treat DME. Lucentis is currently approved for the treatment of DME, the treatment of diabeticretinopathy in patients with DME, the treatment of neovascular wet age-related macular degeneration (AMD) and the treatment of macular edema followingretinal vein occlusion (RVO) in the U.S. In the EEA, the approval does not include diabetic retinopathy in patients with DME. Lucentis is marketed in theU.S. by Genentech and in the EEA by Novartis. Eylea is currently approved for the treatment of DME, the treatment of diabetic retinopathy in patients withDME, the treatment of neovascular wet AMD and the treatment of macular edema following RVO in the U.S. In the EEA, the approval does not includediabetic retinopathy in patients with DME. Eylea is marketed in the U.S. by Regeneron and in the EEA by Bayer. Avastin, an oncology product marketed bythe Roche Group, is used off label by retinal specialists in both the U.S. and in certain countries of the EEA in the treatment of numerous retinal diseases,including DME, but is not formulated or approved for any ophthalmic use.Within the corticosteroid class, Ozurdex is currently approved in the U.S. for the treatment of DME and in the EEA for visual impairment due to DME inpatients who are pseudophakic or who are considered insufficiently responsive to, or unsuitable for non-corticosteroid therapy. Ozurdex is also indicated formacular edema resulting from RVO and for uveitis in the U.S. and the EEA. Ozurdex is marketed in the U.S. and EEA by Allergan. Intravitreal triamcinoloneis utilized by some physicians for the treatment of DME although it is not approved for DME.Retinal specialists are currently using laser photocoagulation for the treatment of DME, and may continue to use these therapies in competition withILUVIEN. Other laser, surgical or pharmaceutical treatments for DME may also compete against ILUVIEN. These competitive therapies may result in pricingpressure even if ILUVIEN is otherwise viewed as a preferable therapy.In addition, the active pharmaceutical ingredient in ILUVIEN is FAc, which is not patent protected. As a result, our competitors could develop analternative formulation or delivery mechanisms to treat diseases of the eye with FAc. We do not have the right to develop and sell pSivida’s proprietarydelivery device for indications for diseases outside of the eye or for the treatment of uveitis, which are retained by pSivida. Further, our agreement withpSivida permits pSivida to grant to any other party the right to use its intellectual property (i) to treat DME through an incision smaller than that required fora 25-gauge needle, unless using a corticosteroid delivered to the back of the eye, (ii) to deliver any compound outside the back of the eye unless it is to treatDME through an incision required for a 25-gauge or larger needle, or (iii) to deliver non-corticosteroids to the back of the eye, unless it is to treat DMEthrough an incision required for a 25-gauge or larger needle.29Table of ContentsThere are many pharmaceutical companies, biotechnology companies, public and private universities, government agencies and research organizationsactively engaged in research and development of products, some of which may target the same indications as ILUVIEN or any future products or productcandidates. Our competitors include larger, more established, fully integrated pharmaceutical companies and biotechnology companies that havesubstantially greater capital resources, existing competitive products, larger research and development staffs and facilities, greater experience in drugdevelopment and in obtaining regulatory approvals and greater marketing capabilities than we do.Exchange rate fluctuations of foreign currencies relative to the U.S. Dollar could materially, adversely affect our business.A substantial majority of our international revenues and expenses are denominated in British Pounds and Euros, and as such are sensitive to changes inexchange rates. We also have balances, such as cash, accounts receivable, accounts payable and accruals that are denominated in foreign currencies. Theseforeign currency transactions and balances are sensitive to changes in exchange rates. Fluctuations in exchange rates of the British Pound and Euro inrelation to the U.S. Dollar could materially reduce our future revenues as compared to prior periods. We do not seek to mitigate this exchange rate effectthrough the use of derivative financial instruments. To the extent we are unable to match revenues received in foreign currencies with costs paid in the samecurrency, exchange rate fluctuations in that currency could have a material adverse effect on our business and results of operations.Although we currently do not have any material collaboration agreements with third-parties, other than our license with pSivida, we expect todepend on collaborations to develop and commercialize our products. If we are unable to identify or enter into an agreement with any material third-partycollaborator, if our collaborations with any such third-party are not scientifically or commercially successful or if our agreement with any such third-partyis terminated or allowed to expire, we could be adversely affected financially or our business reputation could be harmed.Our business strategy includes entering into collaborations with corporate and academic collaborators for the commercialization, research anddevelopment of ILUVIEN and any future products or product candidates. Although we currently do not have any material collaboration agreements withthird-parties other than our license with pSivida, we have entered into various agreements under which distributors will provide regulatory, reimbursement orsales and marketing support for future commercialization of ILUVIEN in numerous countries in the Middle East, Australia, New Zealand and Canada. Inaddition, we have an agreement with a distributor in Italy to provide regulatory, reimbursement and sales and marketing support for future commercializationof ILUVIEN in Italy. We expect that these distributors may be able to sell ILUVIEN in the future in these territories. As of December 31, 2016 there have beensales of ILUVIEN by our distributor in the Middle East, which were not significant, and there have been no other sales in any of these remaining territories inwhich we have distribution agreements. These arrangements may not be commercially successful. In the future we may potentially enter into third-partycollaboration arrangements including joint sales and marketing arrangements for sales and marketing of ILUVIEN in certain EEA countries and elsewhereoutside of North America, and future product development arrangements. If we are unable to identify or enter into an agreement with any material third-partycollaborator we could be adversely affected financially or our business reputation could be harmed. Any of these arrangements that we enter into in the futuremay not be scientifically or commercially successful. The termination of any of these arrangements whether currently in existence or entered into in the futuremight adversely affect our ability to develop, commercialize and market our products.The success of our collaboration arrangements depends heavily on the efforts and activities of our collaborators. Our collaborators have significantdiscretion in determining the efforts and resources that they will apply to these collaborations. We expect that the risks which we face in connection withthese future collaborations will include the following:•our collaboration agreements are expected to be for fixed terms and subject to termination under various circumstances, including, in manycases, on short notice without cause;•our collaborators may not promote and market our drugs in the manner we would or as well as we would if we had the resources to do so intheir countries;•our collaborators may change the focus of their development and commercialization efforts. In recent years there have been a significantnumber of mergers and consolidations in the pharmaceutical and biotechnology industries, some of which have resulted in the participantcompanies reevaluating and shifting the focus of their business following the completion of these transactions. The ability of our products toreach their potential could be limited if any of our future collaborators decreases or fails to increase spending relating to such products•our collaboration agreements will likely require us to not conduct specified types of research and development in the field that is the subjectof the collaboration. These agreements may have the effect of limiting the areas of research and development that we may pursue, either aloneor in cooperation with third-parties;30Table of Contents•our collaborators may develop and commercialize, either alone or with others, products and services that are similar to or competitive with ourproducts which are the subject of their collaboration with us.Collaborations with pharmaceutical companies and other third-parties often are terminated or allowed to expire by the other party. With respect to ourfuture collaborations, any such termination or expiration could adversely affect us financially as well as harm our business reputation.If we lose key management personnel, or if we fail to recruit additional highly skilled personnel, it will impair our ability to identify, develop andcommercialize ILUVIEN and any future products or product candidates.We are highly dependent upon the principal members of our management team, including C. Daniel Myers, our Chief Executive Officer, RichardEiswirth, our President and Chief Financial Officer, Philip Ashman, Ph.D., our EEA Senior Vice President and EEA Managing Director, Dave Holland, ourSenior Vice President of Sales and Marketing and Kenneth Green, Ph.D., our Senior Vice President, Chief Scientific Officer and Global Head of Research andDevelopment. These executives have significant ophthalmic, regulatory industry, sales and marketing, operational, and/or corporate finance experience. Theloss of any such executives or any other principal member of our management team may impair our ability to identify, develop and market ILUVIEN and anyfuture products or product candidates.In addition, our growth will require us to hire a significant number of qualified technical, commercial and administrative personnel. There is intensecompetition from other companies and research and academic institutions for qualified personnel in the areas of our activities. If we cannot continue to attractand retain, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may not be able to sustain ouroperations or grow.Our ability to use our net operating loss carry-forwards may be limited.As of December 31, 2016, we had U.S. federal and state net operating loss (NOL) carry-forwards of approximately $104.9 million and $83.3 million,respectively, which expire at various dates beginning in 2020 through 2035. Section 382 of the Internal Revenue Code (Section 382) limits the annualutilization of NOL carry-forwards and tax credit carry-forwards following an ownership change in our company. NOL carry-forwards may be subject to annuallimitations under Section 382 (or comparable provisions of state law) in the event that certain changes in ownership of our company were to occur. In general,an ownership change occurs for purposes of Section 382 if there is a more than 50% change in ownership of a company over a 3-year testing period. We havedetermined that a Section 382 change in ownership occurred in late 2015. Therefore, the annual utilization of our NOLs is subject to certain limitations underSection 382 and other limitations under state tax laws. We are currently in the process of calculating these limitations. Any reduction to our NOL deferred taxasset due to the annual Section 382 limitation and the NOL carryforward period would result in an offsetting reduction in valuation allowance recordedagainst the NOL deferred tax asset. Therefore, any limitation would not have an impact on the statements of operations for the periods presented. The resultsof the analysis on the impact to our NOLs will be disclosed at a later date. Any future changes in our ownership or sale of our stock could further limit the useof our NOLs in the future. If we need to obtain alternative or additional financing to meet our liquidity requirements under our Term Loan Agreement and weraise such funds by selling additional equity, this could further limit the use of our NOLs in the future.We may not be successful in our efforts to expand our portfolio of products.In the future, we may choose to commercialize a portfolio of new ophthalmic drugs in addition to ILUVIEN. We may seek to do so through our internalresearch programs and through licensing or otherwise acquiring the rights to potential new products and future product candidates for the treatment ofophthalmic disease.A significant portion of the research that we may choose to conduct may involve new and unproven technologies. Research programs to identify newdisease targets and product candidates require substantial technical, financial and human resources whether or not we ultimately identify any candidates. Anyfuture research programs may initially show promise in identifying potential products or product candidates, yet fail to yield products or product candidatesfor clinical development for a number of reasons, including:•the research methodology used may not be successful in identifying potential products or product candidates; or•potential products or product candidates may on further study be shown to have harmful side effects or other characteristics that indicate theyare unlikely to be effective drugs.31Table of ContentsWe may be unable to license or acquire suitable products or product candidates or products from third-parties for a number of reasons. In particular, thelicensing and acquisition of pharmaceutical products is a competitive area. Several more established companies are also pursuing strategies to license oracquire products in the ophthalmic field. These established companies may have a competitive advantage over us due to their size, cash resources and greaterdevelopment and commercialization capabilities. Other factors that may prevent us from licensing or otherwise acquiring suitable products or productcandidates include the following:•we may be unable to license or acquire the relevant technology on terms that would allow us to make an appropriate return from the product;•companies that perceive us to be their competitors may be unwilling to assign or license their product rights to us; or•we may be unable to identify suitable products or product candidates within our areas of expertise.Additionally, it may take greater human and financial resources to develop suitable potential products or product candidates through internal researchprograms or by obtaining rights than we will possess, thereby limiting our ability to develop a diverse product portfolio.If we are unable to develop suitable potential product candidates through internal research programs or by obtaining rights to novel therapeutics fromthird-parties, our business may suffer.Any failure or delay in completing clinical trials for any future products or product candidates could harm our business.Preclinical studies and clinical trials required to demonstrate the safety and efficacy of any product or future product candidates will be time consumingand expensive and together will take several years to complete. The completion of clinical trials for any product candidates may be delayed by many factors,including:•our inability to manufacture or obtain from third-parties materials sufficient for use in preclinical studies and clinical trials;•delays in patient enrollment and variability in the number and types of patients available for clinical trials;•difficulty in maintaining contact with patients after treatment, resulting in incomplete data;•poor effectiveness of product candidates during clinical trials;•unforeseen safety issues or side effects; and•governmental or regulatory delays and changes in regulatory requirements and guidelines.If we fail to successfully complete any future clinical trials for any products or future product candidates, we may not receive the regulatory approvalsneeded to market those product candidates. Therefore, any failure or delay in commencing or completing such clinical trials would harm our businessmaterially.In addition, a clinical trial may be suspended or terminated by us, the FDA or other regulatory authorities due to a number of factors, including:•failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;•inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;•unforeseen safety issues or any determination that a trial presents unacceptable health risks; and•lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements toconduct additional trials and studies and increased expenses associated with the services of our contract research organizations, and otherthird parties.32Table of ContentsIf we are required to conduct additional clinical trials or other studies with respect to any products or future product candidates beyond those that weinitially contemplated, if we are unable to successfully complete our clinical trials or other studies or if the results of these trials or studies are not positive orare only modestly positive, we may be delayed in obtaining marketing approval for those products or future product candidates, we may not be able to obtainmarketing approval or we may obtain approval for indications that are not as broad as intended. Our product development costs will also increase if weexperience delays in testing or approvals. Significant clinical trial delays could allow our competitors to bring products to market before we do and impairour ability to commercialize our products or future product candidates. If any of this occurs, our business will be materially harmed.If our contract research organizations (CROs), third-party vendors and investigators do not successfully carry out their duties or if we lose ourrelationships with them, our development efforts with respect to any future product candidates could be delayed.We expect to be dependent on CROs, third-party vendors and investigators for preclinical testing and clinical trials related to our discovery anddevelopment efforts with respect to any products or future product candidates. These parties are not our employees and we cannot control the amount ortiming of resources that they devote to our programs. If they fail to devote sufficient time and resources to our development programs with respect to ourproduct candidates or if their performance is substandard, it will delay the development and commercialization of our product candidates. The parties withwhich we contract for execution of clinical trials play a significant role in the conduct of the trials and the subsequent collection and analysis of data. Theirfailure to meet their obligations could adversely affect clinical development of our products or product candidates. Moreover, these parties may also haverelationships with other commercial entities, some of which may compete with us. If they assist our competitors, it could harm our competitive position.If we lose our relationship with any one or more of these parties, we could experience a significant delay in identifying another comparable providerand contracting for its services. We may be unable to retain an alternative provider on reasonable terms, if at all. Even if we locate an alternative provider, thisprovider may need additional time to respond to our needs and may not provide the same type or level of service as the original provider. In addition, anyprovider that we retain will be subject to current Good Laboratory Practices (cGLP) and similar foreign standards, and we do not have control overcompliance with these regulations by these providers. Consequently, if these practices and standards are not adhered to by these providers, the developmentand commercialization of ILUVIEN or any future product candidates could be delayed.We may acquire additional businesses or form strategic alliances in the future, and we may not realize the benefits of such acquisitions or alliances.We may acquire additional businesses or products, form strategic alliances or create joint ventures with third-parties that we believe will complement oraugment our existing business. If we acquire businesses with promising markets or technologies, we may not be able to realize the benefit of acquiring suchbusinesses if we are unable to successfully integrate them with our existing operations and company culture. We may have difficulty in developing,manufacturing and marketing the products of a newly acquired company that enhances the performance of our combined businesses or product lines torealize value from expected synergies. We cannot assure that, following an acquisition, we will achieve the revenues or specific net income that justifies theacquisition.We incur significant increased costs as a result of operating as a public company, and our management is required to devote substantial time to newcompliance initiatives.As a public company, we incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002, as well as rules subsequentlyimplemented by the SEC and NASDAQ, has imposed various requirements on public companies, including requiring establishment and maintenance ofeffective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel are required to devote asubstantial amount of time to these new compliance initiatives. Moreover, these rules and regulations have substantially increased our legal and financialcompliance costs and have made some activities more time consuming and costly. These rules and regulations may make it more difficult and moreexpensive for us to maintain our existing director and officer liability insurance or to obtain similar coverage from an alternative provider.Prolonged economic uncertainties or downturns, as well as unstable market, credit and financial conditions, may exacerbate certain risks affectingour business and have serious adverse consequences on our business.Economic conditions, and uncertainty as to the general direction of the macroeconomic environment, are beyond our control. Sales of our products willbe dependent, in large part, on reimbursement from government health administration authorities, private health insurers, distribution partners and otherorganizations in the U.S., Germany, Portugal and the United Kingdom and other countries. If there were to be negative trends in the general economy in anyof the jurisdictions in which we may do business,33Table of Contentsthese organizations may be unable to satisfy their reimbursement obligations or may delay payment. In addition, health authorities in some jurisdictions mayreduce reimbursements, and private insurers may increase their scrutiny of claims. A reduction in the availability or extent of reimbursement could negativelyaffect our product sales and revenue. For example, a global economic downturn and subsequent market instability such as the one occurred in 2008 and 2009made the business climate more volatile and costly.In addition, we rely on third parties for several important aspects of our business. During challenging and uncertain economic times and in tight creditmarkets, there may be a disruption or delay in the performance of our third party contractors, suppliers or partners. If such third parties are unable to satisfytheir commitments to us, our business and results of operations would be adversely affected. Because we sell to only two large pharmaceutical distributors inthe U.S., they accounted for 75% and 68% of our consolidated revenues for the years ended December 31, 2016 and 2015, respectively.Risks Related to Intellectual Property and Other Legal MattersIf we or our licensors are unable to obtain and maintain protection for the intellectual property incorporated into our products, the value of ourtechnology and products will be adversely affected.Our success will depend in large part on our ability or the ability of our licensors to obtain and maintain protection in the U.S. and other countries forthe intellectual property incorporated into our products. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertainand involves complex legal and scientific questions. We or our licensors may not be able to obtain additional issued patents relating to our technology. Oursuccess will depend in part on the ability of our licensors to obtain, maintain (including making periodic filings and payments) and enforce patent protectionfor their intellectual property, in particular, those patents to which we have secured exclusive rights. Under our license with pSivida, pSivida controls thefiling, prosecution and maintenance of all patents. Our licensors may not successfully prosecute or continue to prosecute the patent applications to which weare licensed. Even if patents are issued in respect of these patent applications, we or our licensors may fail to maintain these patents, may determine not topursue litigation against entities that are infringing upon these patents, or may pursue such litigation less aggressively than we ordinarily would. Withoutprotection for the intellectual property that we own or license, other companies might be able to offer substantially identical products for sale, which couldadversely affect our competitive business position and harm our business prospects. Moreover, FAc is an off-patent active ingredient that is commerciallyavailable in several forms including the extended release ocular implant Retisert.Even if issued, patents may be challenged, narrowed, invalidated, or circumvented, which could limit our ability to stop competitors from marketingsimilar products or limit the length of term of patent protection that we may have for our products. In addition, our patents and our licensors’ patents may notafford us protection against competitors with similar technology.Litigation or third-party claims of intellectual property infringement would require us to divert resources and may prevent or delay ourcommercialization of ILUVIEN or the development, regulatory approval of other product candidates.ILUVIEN or any future products or product candidates may infringe upon other parties’ intellectual property rights that are protected by patents orpatent applications. Third-parties may now or in the future own or control these patents and patent applications in the U.S. and abroad. These third-partiescould bring claims against us or our collaborators that would cause us to incur substantial expenses or divert substantial employee resources from ourbusiness and, if successful, could cause us to pay substantial damages or prevent us from developing any future product candidates. Further, if a patentinfringement suit were brought against us or our collaborators, we or they could be forced to stop or delay manufacturing, sales, research or development, ofthe product or product candidate that is the subject of the suit.Several issued and pending U.S. patents claiming methods and devices for the treatment of eye diseases, including through the use of steroids, implantsand injections into the eye, purport to cover aspects of ILUVIEN. For example, one of our potential competitors holds issued and pending U.S. patents and apending European patent application with claims covering injecting an ocular implant into a patient’s eye similar to the ILUVIEN applicator. There is also anissued U.S. patent with claims covering implanting a steroidal anti-inflammatory agent to treat an inflammation-mediated condition of the eye. If these or anyother patents were held by a court of competent jurisdiction to be valid and to cover aspects of ILUVIEN, then the owners of such patents would be able toblock our ability to commercialize ILUVIEN unless and until we obtain a license under such patents (which license might require us to pay royalties or granta cross-license to one or more patents that we own), until such patents expire or unless we are able to redesign our product to avoid any such valid patents.As a result of patent infringement claims, or in order to avoid potential claims, we or our collaborators may choose to seek, or be required to seek, alicense from the third-party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptableterms, or at all. Even if we or our collaborators were able to obtain a license,34Table of Contentsthe rights may be nonexclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be forced to cease someaspect of our business operations, or be prevented from commercializing a product or if, as a result of actual or threatened patent infringement claims, we orour collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly.There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical andbiotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, includinginterference proceedings declared by the U.S. Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectualproperty rights with respect to our products and technology. The cost to us of any litigation or other proceeding, regardless of its merit, even if resolved in ourfavor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can becauseof their substantially greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings couldhave a material adverse effect on our ability to compete in the marketplace. Intellectual property litigation and other proceedings may, regardless of theirmerit, also absorb significant management time and employee resources.If our efforts to protect the proprietary nature of the intellectual property related to our products are not adequate, we may not be able to competeeffectively in our markets.The strength of our patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. Inaddition to the rights we have licensed from pSivida relating to ILUVIEN, we rely upon intellectual property we own, including patents, patent applicationsand trade secrets. Our patent applications may be challenged or fail to result in issued patents and our existing or future patents may be too narrow to preventthird-parties from developing or designing around these patents. As of December 31, 2016, the patent rights relating to ILUVIEN licensed to us from pSividaincluded six U.S. patents that expire between March 2019 and August 2027, two European patents expiring in April of 2021 and October of 2024, andcounterpart filings to these patents in a number of other jurisdictions. No patent term extension will be available for any of these U.S. patents, Europeanpatent or any of our licensed U.S. or European pending patent applications. After these patents expire in August 2027 in the U.S. and October of 2024 inEurope, we will not be able to block others from marketing FAc in an implant similar to ILUVIEN. Moreover, it is possible that a third-party couldsuccessfully challenge the scope (i.e., whether a patent is infringed), validity and enforceability of our licensed patents prior to patent expiration and obtainapproval to market a competitive product.Further, the patent applications that we license or have filed may fail to result in issued patents. Some claims in pending patent applications filed orlicensed by us have been rejected by patent examiners. These claims may need to be amended. Even after amendment, a patent may not be permitted to issue.Further, the existing or future patents to which we have rights based on our agreement with pSivida may be too narrow to prevent third-parties fromdeveloping or designing around these patents. Additionally, we may lose our rights to the patents and patent applications we license in the event of a breachor termination of the license agreement. Manufacturers may also seek to obtain approval to sell a generic version of ILUVIEN prior to the expiration of therelevant licensed patents. If the sufficiency of the breadth or strength of protection provided by the patents we license with respect to ILUVIEN or the patentswe pursue related to ILUVIEN or any future product candidate is threatened, it could dissuade companies from collaborating with us to develop, and threatenour ability to commercialize ILUVIEN and any future product candidates. Further, if we encounter delays in our clinical trials for any future productcandidate, the period of time during which we could market such product candidates under patent protection would be reduced. We rely on trade secretprotection and confidentiality agreements to protect certain proprietary know-how that is not patentable, for processes for which patents are difficult toenforce and for any other elements of our development processes with respect to ILUVIEN that involve proprietary know-how, information and technologythat is not covered by patent applications. While we require all of our employees, consultants, advisors and any third-parties who have access to ourproprietary know-how, information and technology to enter into confidentiality agreements, we cannot be certain that this know-how, information andtechnology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalentinformation and techniques. Further, the laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the U.S. As a result,we may encounter significant problems in protecting and defending our intellectual property both in the U.S. and abroad. If we are unable to protect ordefend the intellectual property related to our technologies, we will not be able to establish or maintain a competitive advantage in our market.Third-party claims of intellectual property infringement may prevent or delay our commercialization efforts with respect to ILUVIEN and ourdiscovery, development or commercialization efforts with respect to any future product candidates.Our commercial success depends in part on avoiding infringement of the patents and proprietary rights of third-parties. Third-parties may assert that weare employing their proprietary technology without authorization. In addition, at least several35Table of Contentsissued and pending U.S. patents claiming methods and devices for the treatment of eye diseases, including through the use of steroids, implants andinjections into the eye, purport to cover aspects of ILUVIEN.Although we are not currently aware of any litigation or other proceedings or third-party claims of intellectual property infringement related toILUVIEN, the pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may inthe future allege that our activities infringe their patents or that we are employing their proprietary technology without authorization. We may not haveidentified all the patents, patent applications or published literature that affect our business either by blocking our ability to commercialize our products orproduct candidates, by preventing the patentability of one or more aspects of our products or those of our licensors or by covering the same or similartechnologies that may affect our ability to market our product. We cannot predict whether we would be able to obtain a license on commercially reasonableterms, if at all. Any inability to obtain such a license under the applicable patents on commercially reasonable terms, or at all, may have a material adverseeffect on our ability to commercialize ILUVIEN or any future products or product candidates until such patents expire.In addition, third-parties may obtain patents in the future and claim that use of ILUVIEN, our technologies or future products or product candidatesinfringes upon these patents. Furthermore, parties making claims against us may obtain injunctive or other equitable relief, which could effectively block ourability to further commercialize ILUVIEN or develop and commercialize any future product candidates. Defense of these claims, regardless of their merit,would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claimof infringement against us, we may have to pay substantial damages, obtain one or more licenses from third-parties or pay royalties, or we may be enjoinedfrom further commercializing ILUVIEN or developing and commercializing any future product candidates or technologies. In addition, even in the absenceof litigation, we may need to obtain licenses from third-parties to advance our research or allow commercialization of ILUVIEN or any future productcandidate, and we have done so from time to time. We may fail to obtain future licenses at a reasonable cost or on reasonable terms, if at all. In that event, wemay be unable to further commercialize ILUVIEN or develop and commercialize any future product candidates, which could harm our business significantly.We may become involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time consuming andunsuccessful.Competitors may infringe our patents or the patents of our licensors. To counter infringement or unauthorized use, we may be required to fileinfringement claims, which can be expensive and time consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours or ourlicensors is not valid or is unenforceable, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not coverthe technology in question. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being invalidated orinterpreted narrowly and could put our patent applications at risk of not issuing.Interference proceedings brought by the U.S. Patent and Trademark Office may be necessary to determine the priority of inventions with respect to ourpatents and patent applications or those of our collaborators or licensors. An unfavorable outcome could require us to cease using the technology or toattempt to license rights to it from the prevailing party. Our business could be harmed if a prevailing party does not offer us a license on terms that areacceptable to us. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction of our managementand other employees. We may not be able to prevent, alone or with our licensors, misappropriation of our proprietary rights, particularly in countries wherethe laws may not protect those rights as fully as in the U.S.Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of ourconfidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the resultsof hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have asubstantial adverse effect on the price of our common stock.Product liability lawsuits could divert our resources, reduce the commercial potential of our products, and result in substantial liabilities, which mayor not be covered by insurance.Our business exposes us to the risk of product liability claims, which is inherent in the manufacturing, testing and marketing of drugs and relatedproducts. We face an increased risk of product liability as we further commercialize ILUVIEN, especially in the U.S. If the use of ILUVIEN or one or more ofour future products harms people, we may be subject to costly and damaging product liability claims. We believe that we may be at a greater risk of productliability claims relative to other pharmaceutical companies because ILUVIEN is inserted into the eye, and it is possible that we may be held liable for eyeinjuries of patients who receive ILUVIEN. These lawsuits may divert our management from pursuing our business strategy and may be costly to defend.36Table of ContentsIn addition, if we are held liable in any of these lawsuits, we may incur substantial liabilities and may be forced to limit or forego further commercialization ofILUVIEN or one or more of our future products. Even if we are not held liable, product liability lawsuits could cause adverse publicity and decrease thedemand for ILUVIEN, which could have a material adverse effect on our business, results or operations and financial condition. Although we maintainproduct liability insurance covering our clinical trial activities and our product sales, our aggregate coverage limit under these insurance policies is limitedto $10.0 million in most jurisdictions, and while we believe this amount of insurance is sufficient to cover our product liability exposure, these limits maynot be high enough to fully cover potential liabilities. The insurance provides worldwide coverage where allowed by law. As product revenue is generated innew countries, we intend to obtain compulsory coverage in those countries that require it. However, we may not be able to obtain or maintain sufficientinsurance coverage at an acceptable cost or otherwise to protect against potential product liability claims. If we are unable to obtain insurance at acceptablecost or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may materially and adversely affect ourbusiness and financial position. These liabilities could prevent or interfere with our product development and commercialization efforts.If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could beadversely affected.In addition to patented technology, we rely upon unpatented proprietary technology, processes, trade secrets and know-how. Any involuntarydisclosure or misappropriation by third-parties of our confidential or proprietary information could enable competitors to quickly duplicate or surpass ourtechnological achievements, thus eroding our competitive position in our market. We seek to protect confidential or proprietary information in part byconfidentiality agreements with our employees, consultants and third-parties. While we require all of our employees, consultants, advisors and any third-parties who have access to our proprietary know-how, information and technology to enter into confidentiality agreements, we cannot be certain that thisknow-how, information and technology will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently developsubstantially equivalent information and techniques. These agreements may be terminated or breached, and we may not have adequate remedies for any suchtermination or breach. Furthermore, these agreements may not provide meaningful protection for our trade secrets and know-how in the event of unauthorizeduse or disclosure. To the extent that any of our staff were previously employed by other pharmaceutical or biotechnology companies, those employers mayallege violations of trade secrets and other similar claims in relation to their drug development activities for us.If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.Our research and development activities may involve the controlled use of potentially hazardous substances, including chemical and biologicalmaterials. In addition, our operations may produce hazardous waste products. Federal, state and local laws and regulations in the U.S. govern the use,manufacture, storage, handling and disposal of hazardous materials. Although we believe that our procedures for use, handling, storing and disposing of thesematerials comply with legally prescribed standards, we may incur significant additional costs to comply with applicable laws in the future. Also, even if weare in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials and we mayincur liability as a result of any such contamination or injury. In the event of an accident, we could be held liable for damages or penalized with fines, and theliability could exceed our resources. We do not have any insurance for liabilities arising from hazardous materials. Compliance with applicableenvironmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development and productionefforts, which could harm our business, operating results and financial condition.Risks Related to the Ownership of Our Common StockOur stock price has been and may continue to be volatile, and the value of an investment in our common stock may decline.We completed our Initial Public Offering (IPO) in April 2010 at a price of $11.00 per share. Subsequently, our common stock has traded as low as $1.01per share. The realization of any of the risks described in these risk factors or other unforeseen risks could have a dramatic and adverse effect on the marketprice of our common stock. The trading price of our common stock is likely to continue to be highly volatile and could be subject to wide fluctuations inresponse to various factors, some of which are beyond our control. These factors include:•our ability to successfully commercialize ILUVIEN in the U.S., Germany, Portugal and the United Kingdom;•the ability of ILUVIEN to be approved in any additional jurisdiction;37Table of Contents•the ability of ILUVIEN or any future products or product candidates, if approved in additional jurisdictions, to achieve and maintaincommercial success;•FDA or international regulatory actions, including failure to receive or maintain regulatory approval for ILUVIEN or any future products orproduct candidates;•quarterly variations in our results of operations or those of our competitors;•announcements by us or our competitors of acquisitions, regulatory approvals, clinical milestones, new products, significant contracts,commercial relationships or capital commitments;•third-party coverage and reimbursement policies;•our ability to meet our repayment and other obligations under our loan agreements;•additions or departures of key personnel;•commencement of, or our involvement in, litigation;•changes in governmental regulations or in the status of our regulatory approvals;•changes in earnings estimates or recommendations by securities analysts;•any major change in our board of directors or management;•results from our clinical trial programs;•our ability to develop and market new and enhanced products or product candidates on a timely basis;•general economic conditions and slow or negative growth of our markets; and•political instability, natural disasters, war and/or events of terrorism.From time to time, we estimate the timing of the accomplishment of various regulatory, scientific, clinical and other product development goals ormilestones. These milestones may include the submission of regulatory filings, the notification of the results of regulatory filings and the anticipatedcommercial launch of ILUVIEN in various new jurisdictions or for new or expanded indications, or any future products or product candidates and thecommencement or completion of scientific studies and clinical trials. Also, from time to time, we expect that we will publicly announce the anticipatedtiming of some of these milestones. All of these milestones are based on a variety of assumptions. The actual timing of these milestones can vary dramaticallycompared to our estimates, in some cases for reasons beyond our control. If we do not meet these milestones as publicly announced, our stock price maydecline and the further commercialization of ILUVIEN or any future products or product candidates may be delayed.In addition, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to theoperating performance of publicly traded companies. Broad market and industry factors may seriously affect the market price of companies’ stock, includingours, regardless of actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock. In addition, in thepast, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has oftenbeen initiated against these companies. This litigation, if brought against us, could result in substantial costs and a diversion of our management’s attentionand resources.Certain of our stockholders have the ability to control the outcome of matters submitted for stockholder approval and may have interests that differfrom those of our other stockholders.Investors that participated in our Series A Convertible Preferred Stock financing, certain of our large shareholders and our executive officers, keyemployees, directors and their affiliates beneficially own, in the aggregate, a majority of the outstanding voting power of our common stock, assuming theexercise of the outstanding warrants to purchase shares of our Series A Convertible Preferred Stock. As a result, these stockholders, if acting together, may beable to exercise significant influence over all matters requiring stockholder approval, including the election of directors and the approval of significantcorporate transactions, and this38Table of Contentsconcentration of voting power may have the effect of delaying or impeding actions that could be beneficial to you, including actions that may be supportedby our Board of Directors.In addition, the terms of the Series A Convertible Preferred Stock provide that certain corporate actions require the prior consent of the holders of atleast 70% of the then outstanding shares of Series A Convertible Preferred Stock.Significant sales of our common stock could depress or reduce the market price of our common stock, or cause our shares of common stock to tradebelow the prices at which they would otherwise trade, or impede our ability to raise future capital.A small number of institutional investors and private equity funds hold a significant number of shares of our common stock and all of our shares ofSeries A Convertible Preferred Stock, Series A Convertible Preferred Stock Warrants and Series B Convertible Preferred Stock. Sales by these stockholders ofa substantial number of shares, or the expectation of such sales, could cause a significant reduction in the market price of our common stock. Additionally, asmall number of investors have rights, subject to certain conditions, to require us to file registration statements to permit the resale of their shares in thepublic market or to include their shares in registration statements that we may file for ourselves or other stockholders.We also have the right to sell shares of our common stock through an at-the-market offering. For example, in 2016, we sold a total of 662,779 shares ofcommon stock at a weighted average price of $1.83 per share pursuant to our at-the-market offering through Cowen and Company, LLC (Cowen). Pursuant toour sales agreement with Cowen, we could sell additional shares of common stock in the future if we determined it was appropriate or necessary to do so,which could cause a significant reduction in the market price of our common stock.In addition to our outstanding common stock, as of December 31, 2016, there were a total of 10,804,412 shares of common stock that we haveregistered and that we are obligated to issue upon the exercise of currently outstanding options granted under our equity incentive plans. Upon the exerciseof these options, in accordance with their respective terms, these shares may be resold freely, subject to restrictions imposed on our affiliates under the SEC’sRule 144. If significant sales of these shares occur in short periods of time, these sales could reduce the market price of our common stock. Any reduction inthe trading price of our common stock could impede our ability to raise capital on attractive terms.Actual or perceived significant sales of our common stock could depress or reduce the market price of our common stock, cause our shares of commonstock to trade below the prices at which they would otherwise trade or impede our ability to raise future capital.Future sales and issuances of our equity securities or rights to purchase our equity securities, including pursuant to our equity incentive plans, wouldresult in dilution of the percentage ownership of our stockholders and could cause our stock price to fall.To the extent we raise additional capital by issuing equity securities; our stockholders may experience substantial dilution. We may sell commonstock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. For example, inAugust, 2016, we sold an aggregate of 18,900,000 shares of our common stock at a price of $1.40 each, resulting in gross proceeds of approximately $26.5million, before deducting underwriting fees, commissions and offering expenses. If we sell common stock, convertible securities or other equity securities inmore than one transaction, investors may be diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and newinvestors could gain rights superior to existing stockholders. In addition, the Series A Convertible Preferred Stock is entitled to price-based anti-dilutionprotection in connection with certain financings, which has the potential to further dilute our other stockholders.Pursuant to our 2010 Equity Incentive Plan, our Board of Directors is authorized to grant stock options to our employees, directors and consultants. Thenumber of shares available for future grant under our 2010 Equity Incentive Plan increases each year by an amount equal to the lesser of 4% of all shares ofour capital stock outstanding as of January 1st of each year, 2,000,000 shares, or such lesser number as determined by our Board of Directors. On January 1,2017, an additional 2,000,000 shares became available for future issuance under our 2010 Equity Incentive Plan in accordance with the annual increase. Inaddition, as of December 31, 2016 we have reserved 411,662 shares of our common stock for issuance under our 2010 Employee Stock Purchase Plan. Thenumber of shares eligible for purchase is replenished as of January 1st of each year in an amount equal to the shares purchased under the plan in the precedingyear. As such, on January 1, 2017, an additional 82,760 shares became available for future issuance under our 2010 Employee Stock Purchase Plan.The Series A Convertible Preferred Stock contains covenants that may limit our business flexibility.39Table of ContentsFor so long as at least 37.5% of the shares of Series A Convertible Preferred Stock originally issued to the investors at the closing of our Series AConvertible Preferred Stock financing in October 2012 are held by the initial investors or their affiliates, we may not, without first obtaining the approval ofthe holders of at least 70% of the then outstanding shares of Series A Convertible Preferred Stock:•increase or decrease the authorized number of shares of Series A Convertible Preferred Stock;•authorize, create, issue or obligate us to issue (by reclassification, merger or otherwise) any security (or any class or series thereof) or anyindebtedness, in each case that has any rights, preferences or privileges senior to, or on a parity with, the Series A Convertible Preferred Stock,or any security convertible into or exercisable for any such security or indebtedness, subject to limited exceptions for certain debttransactions;•amend our certificate of incorporation or the certificate of designation of the Series A Convertible Preferred Stock, in each case in a mannerthat adversely affects the rights, preference or privileges of the Series A Convertible Preferred Stock;•redeem, purchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any shares of common stock or preferredstock; provided, however, that this restriction shall not apply to (A) the redemption of rights issued pursuant to any “poison pill” rights planor similar plan adopted by us after the closing of the Series A Convertible Preferred Stock financing or (B) the repurchases of stock fromformer employees, officers, directors or consultants who performed services for us in connection with the cessation of such employment orservice pursuant to the terms of existing agreements with such individuals;•declare or pay any dividend or distribution on any shares of capital stock; provided, however, that this restriction shall not apply to(A) dividends payable to holders of common stock that consist solely of shares of common stock for which adjustment to the conversion priceof the Series A Convertible Preferred Stock is made pursuant to the certificate of designation or (B) dividends or distributions issued pro ratato all holders of capital stock (on an as-converted basis) in connection with the implementation of a “poison pill” rights plan or similar planby us;•authorize or approve any increase to the number of aggregate shares of capital stock reserved for issuance pursuant to stock option, stockpurchase plans or other equity incentive plans such that the total aggregate number of shares issued under such plans and reserved forissuance under such plans (on an as-converted basis) exceeds the number of shares issued and reserved for issuance under such plans (on anas-converted basis) on the date of the closing of the Series A Convertible Preferred Stock financing by more than 20% (as adjusted for stocksplits, combinations, stock dividends, recapitalizations and the like), provided that any increases resulting solely from the annual increasesresulting from the “evergreen” provisions of equity incentive plans in effect on the date of the closing of the Series A Convertible PreferredStock financing shall not be subject to this restriction and shall not be included for purposes of determining whether such 20% increase hasoccurred; or•issue stock or other equity securities of any subsidiary (other than to us or another of our wholly-owned subsidiaries or declare or pay anydividend or other distribution of cash, shares or other assets or redemption or repurchase of shares of any subsidiary; or (viii) incur any securedindebtedness other than certain limited debt transactions. There is no guarantee that the holders of the Series A Convertible Preferred Stockwould approve any such restricted action, even where such an action would be in the best interests of our stockholders. Any failure to obtainsuch approval could harm our business and result in a decrease in the value of our common stock.Anti-takeover provisions in our charter and bylaws and in Delaware law could prevent or delay acquisition bids for us that might be consideredfavorable and could entrench current management.We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may deter, delay or prevent a change incontrol by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes aninterested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation andbylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our restated certificate ofincorporation and bylaws:•authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to thwart a takeover attempt;40Table of Contents•do not provide for cumulative voting in the election of directors, which would allow holders of less than a majority of our outstandingcommon stock to elect some directors;•establish a classified Board of Directors, as a result of which the successors to the directors whose terms have expired will be elected to servefrom the time of election and qualification until the third annual meeting following their election;•require that directors only be removed from office for cause;•provide that vacancies on the Board of Directors, including newly created directorships, may be filled only by a majority vote of directorsthen in office;•contain certain protective provisions in favor of the holders of Series A Convertible Preferred Stock;•limit who may call special meetings of stockholders;•prohibit common stockholder action by written consent, requiring all actions of the holders of common stock to be taken at a meeting of thestockholders; and•establish advance notice requirements for nominating candidates for election to the Board of Directors or for proposing matters that can beacted upon by stockholders at stockholder meetings.If securities or industry analysts do not publish research or reports or publish unfavorable research or reports about our business, our stock price andtrading volume could decline.The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us, our business,our market or our competitors. If one or more of the analysts who covers us downgrades our stock, our stock price would likely decline. If one or more of theseanalysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volumeto decline.41Table of ContentsITEM 1B. UNRESOLVED STAFF COMMENTSNot applicable.ITEM 2. PROPERTIESOur U.S. headquarters are located in Alpharetta, Georgia, consisting of approximately 18,000 square feet of office space. Our lease for this facilityexpires in September 2021. Our EEA headquarters are located in Aldershot, United Kingdom, consisting of approximately 6,100 square feet of office space.Our lease for this facility expires in December 2024, however is cancelable without penalty in December 2019. We also lease office space located in Berlin,Germany, and Lisbon, Portugal, each consisting of less than 1,000 square feet of office space. Our leases for these facilities in Germany and Portugal expire inJune 2018 and March 2020, respectively. We anticipate that following the expiration of the leases, additional or alternative space will be available atcommercially reasonable terms. We also lease office space in France, consisting of less than 1,000 square feet. As part of our decision in 2016 to closeoperations in France, which will not be completed until early 2017, we gave notice to the leasing company that we would not be renewing the lease afterApril 2017.ITEM 3. LEGAL PROCEEDINGSOn December 22, 2016, Cantor Fitzgerald & Co. (Cantor Fitzgerald) filed a complaint in the Supreme Court of the State of New York, County of NewYork against us. This complaint mirrored a complaint that Cantor Fitzgerald filed against us in November 2016 in the United States District Court for theSouthern District of New York and then voluntarily dismissed.In the operative complaint, Cantor Fitzgerald alleges breach of a letter agreement pursuant to which we had engaged Cantor Fitzgerald to assist us inobtaining bank or loan financing. Cantor Fitzgerald alleges that our agreement in October 2016 with Hercules Capital, Inc. (Hercules) to restructure andamend our existing $35 million debt facility with Hercules and to secure an additional $10 million in debt financing requires the payment to CantorFitzgerald of an advisory fee of 2% of $45 million, or $900,000, plus expenses of $24,890. Cantor Fitzgerald seeks compensatory and punitive damages, pre-and post-judgment interest, plus attorneys’ fees and costs.On January 12, 2017, we filed a counterclaim against Cantor Fitzgerald for breach of contract. We allege in the counterclaim, among other things, thatCantor Fitzgerald failed to meet its obligations to provide services to us as required under the letter agreement. We seek compensatory and other damages,arising from, among other things, our additional out-of-pocket costs incurred as a result of Cantor Fitzgerald’s breach.Both parties have answered each other’s complaint and counterclaims and denied liability. This lawsuit is in its earliest stages, no date has been set fortrial and we are not able to predict the outcome.ITEM 4. MINE SAFETY DISCLOSURESNot applicable.42Table of ContentsPART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESOur common stock has been trading on The NASDAQ Global Market (NASDAQ) under the symbol “ALIM” since our IPO on April 22, 2010. Prior tothat time, there was no established public trading market for our common stock. The following table sets forth, for the periods indicated, the range of high andlow sale prices of our common stock as reported by NASDAQ.Year Ended December 31, 2016High LowFirst quarter 2016$2.75 $1.49Second quarter 2016$5.15 $1.21Third quarter 2016$2.40 $1.01Fourth quarter 2016$1.54 $1.03 Year Ended December 31, 2015High LowFirst quarter 2015$5.92 $4.12Second quarter 2015$5.18 $3.98Third quarter 2015$5.03 $1.94Fourth quarter 2015$3.45 $2.00HoldersAs of March 1, 2017 there were 31 holders of record of our common stock.DividendsWe have not declared or paid any cash dividends on our common stock since our inception. We do not plan to pay dividends in the foreseeable future.Further, the rights and preferences of our Series A Convertible Preferred Stock also place limitations on our ability to declare or pay any dividend ordistribution on any shares of capital stock. We currently intend to retain earnings, if any, to finance our growth. Consequently, stockholders will need to sellshares of our common stock to realize a return on their investment, if any.Recent Sales of Unregistered SecuritiesNone.ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAAs a smaller reporting company, we are not required to provide this information.43Table of ContentsITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following discussion and analysis should be read in conjunction with our audited annual consolidated financial statements and the related notesthat appear elsewhere in this annual report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations thatinvolve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors,including those set forth in the section entitled “Risk Factors” and elsewhere in this annual report on Form 10-K. For further information regardingforward-looking statements, please refer to the “Special Note Regarding Forward-Looking Statements and Projections” at the beginning of Part I of thisannual report on Form 10-K.OverviewAlimera Sciences, Inc., and its subsidiaries (we, Alimera or the Company) is a pharmaceutical company that specializes in the commercialization,research and development of prescription ophthalmic pharmaceuticals. We are presently focused on diseases affecting the back of the eye, or retina, becausewe believe these diseases are not well treated with current therapies and represent a significant market opportunity.Our only commercial product is ILUVIEN®, which has been developed to treat diabetic macular edema (DME). DME is a disease of the retina thataffects individuals with diabetes and can lead to severe vision loss and blindness. ILUVIEN has received marketing authorization in the United States (U.S.),Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain,Sweden, and the United Kingdom. In the U.S., ILUVIEN is indicated for the treatment of DME in patients who have been previously treated with a course ofcorticosteroids and did not have a clinically significant rise in intraocular pressure (IOP). In the European Economic Area (EEA) countries in which ILUVIENhas received marketing authorization, it is indicated for the treatment of vision impairment associated with DME considered insufficiently responsive toavailable therapies. As part of the approval process in Europe, we committed to conduct a five-year, post-authorization, open label registry study in 800patients treated with ILUVIEN. In the fourth quarter of 2016, we requested approval to modify our protocol to cap enrollment in the study due to our postmarket safety surveillance not showing any unexpected safety signals. Although we have not received formal regulatory approval, the Medicines &Healthcare products Regulatory Agency (MHRA) has agreed to allow us to suspend enrollment, pending approval of our protocol amendment. As ofDecember 31, 2016, 548 patients were enrolled in this study.We launched ILUVIEN in Germany and the United Kingdom in the second quarter of 2013 and in the U.S. and Portugal in the first quarter of 2015.In addition, we have entered into various agreements under which distributors will provide regulatory, reimbursement or sales and marketing supportfor future commercialization of ILUVIEN in numerous countries in the Middle East, Italy, Australia, New Zealand and Canada.We commenced operations in June 2003. Since our inception we have incurred significant losses. As of December 31, 2016, we had accumulated adeficit of $377.1 million. We expect to incur substantial losses through the continued commercialization of ILUVIEN as we:•continue the commercialization of ILUVIEN in the U.S. and EEA and through our distributor, in the Middle East;•continue to seek regulatory approval of ILUVIEN in other jurisdictions;•evaluate the use of ILUVIEN for the treatment of other diseases; and•advance the clinical development of any future products or product candidates either currently in our pipeline, or that we may license oracquire in the future.As of December 31, 2016, we had approximately $31.0 million in cash and cash equivalents.We launched ILUVIEN in Germany and the United Kingdom, in the second quarter of 2013 and in the U.S. and Portugal in the first quarter of 2015. Ourdistributor in the Middle East launched ILUVIEN in the United Arab Emirates in the fourth quarter of 2016. In Italy, our distributor plans to launch ILUVIENin 2017. We do not expect to have positive cash flow from operations until 2017, if at all. Due to the limited revenue generated by ILUVIEN to date, we mayhave to raise additional capital to fund the continued commercialization of ILUVIEN. If we are unable to raise additional financing, we will need to adjustour commercial plans so that we can continue to operate with our existing cash resources or there may be substantial doubt about our ability to continue as agoing concern.44Table of ContentsIn October 2016, we entered into the Fourth Loan Amendment (as defined below) with Hercules Capital, Inc. (Hercules) in order to modify certain termsof the Term Loan Agreement (as defined below) and obtained additional loan amounts. If there is an event of default, all amounts may become due under theTerm Loan Agreement and there would continue to be substantial doubt about our ability to continue as a going concern.Our Agreement with pSivida US, Inc.We entered into an agreement with pSivida US, Inc. (pSivida) for the use of fluocinolone acetonide (FAc) in pSivida’s proprietary delivery device inFebruary 2005, which was subsequently amended and restated in 2008. pSivida is a global drug delivery company committed to the biomedical sector andthe development of drug delivery products. Our agreement with pSivida provides us with a worldwide exclusive license to develop and sell ILUVIEN, whichconsists of a tiny polyimide tube with a permeable membrane cap on one end and an impermeable silicone cap on the other end that is filled with FAc in apolyvinyl alcohol matrix for delivery to the back of the eye for the treatment and prevention of eye diseases in humans (other than uveitis). This agreementalso provides us with a worldwide non-exclusive license to develop and sell pSivida’s proprietary delivery device to deliver other corticosteroids to the backof the eye for the treatment and prevention of eye diseases in humans (other than uveitis) or to treat DME by delivering a compound to the back of the eyethrough a direct delivery method through an incision required for a 25-gauge or larger needle. We do not have the right to develop and sell pSivida’sproprietary delivery device in connection with indications for diseases outside of the eye or for the treatment of uveitis. Further, our agreement with pSividapermits pSivida to grant to any other party the right to use its intellectual property (i) to treat DME through an incision smaller than that required for a 25-gauge needle, unless using a corticosteroid delivered to the back of the eye, (ii) to deliver any compound outside the back of the eye unless it is to treat DMEthrough an incision required for a 25-gauge or larger needle, or (iii) to deliver non-corticosteroids to the back of the eye, unless it is to treat DME through anincision required for a 25-gauge or larger needle. We were not in breach of our agreement with pSivida as of December 31, 2016.The agreement provides that after commercialization of ILUVIEN, pSivida will be entitled to 20% of the net profits and 33% of any lump sum milestonepayments received from a sub-licensee of ILUVIEN, as defined in the amended and restated agreement. In connection with this arrangement we are entitled torecover 20% of commercialization costs of ILUVIEN, as defined in the agreement, incurred prior to product profitability out of pSivida’s share of net profits.As of December 31, 2016 and 2015, we could offset future royalty payments to pSivida in the amounts of $25.8 million and $21.6 million, respectively, dueto the accumulation of commercialization costs. Due to the uncertainty of future profits from ILUVIEN, we have fully reserved these amounts in theaccompanying consolidated financial statements. As of December 31, 2016 we owed pSivida approximately $240,000 for their portion of net profits on acash basis, as defined in the amended and restated agreement, from the fourth quarter of 2016.As a result of the Food and Drug Administration’s (FDA) approval of ILUVIEN in September 2014, we paid pSivida a milestone payment of $25.0million (the pSivida Milestone Payment) in October 2014.In the second quarter of 2016, pSivida disputed portions of our claimed commercialization costs for the year ended December 31, 2014. As part of thisdispute, pSivida notified us that it disagreed with $1.3 million of the $13.0 million in commercialization costs receivable that we had reported as ofDecember 31, 2014 and claimed incremental profit sharing payments of $136,000 for the year ended December 31, 2014. We are disputing pSivida’sassertions using the alternative dispute resolution mechanism under the pSivida Agreement. If pSivida’s assertions were to prevail in the alternative disputeresolution mechanism and their assertions were then applied to the commercialization cost calculations for the years ended December 31, 2016 and 2015,then we believe the commercialization costs receivable from pSivida would be reduced from $25.8 million to $21.2 million as of December 31, 2016 andfrom $21.6 million to $18.5 million as of December 31, 2015. If pSivida’s assertions were to prevail in the alternative dispute resolution mechanism, theimpact on the statements of operations for the years ended December 31, 2016 and 2015 would be immaterial.Our Credit FacilityHercules Loan Agreement2014 Loan AgreementIn April 2014, Alimera Sciences Limited (Limited), a subsidiary of ours, entered into a loan and security agreement (2014 Loan Agreement) withHercules Capital, Inc. (Hercules) providing for a term loan of up to $35.0 million (2014 Term Loan), which Limited and Hercules amended in November 2015(the First Loan Amendment), March 2016 (the Second Loan Amendment), May 2016 (the Third Loan Amendment) and October 2016 (the Fourth LoanAmendment and, collectively with the 2014 Loan Agreement, the First Loan Amendment, the Second Loan Amendment and the Third Loan Amendment, theTerm Loan Agreement). Under the 2014 Loan Agreement, Hercules made an advance in the initial principal amount of $10.0 million to Limited at closing toprovide Limited with additional working capital for general corporate purposes and to repay a 2013 term loan with Silicon Valley Bank. Hercules made anadditional advance of $25.0 million to Limited in September 2014,45Table of Contentsfollowing the approval of ILUVIEN by the FDA to fund the pSivida Milestone Payment. The 2014 Loan Agreement provided for interest only paymentsthrough November 2015. Interest on the 2014 Term Loan accrued at a floating per annum rate equal to the greater of (i) 10.90%, or (ii) the sum of (A) 7.65%,plus (B) the prime rate. Following the interest only period the 2014 Term Loan was due and payable to Hercules in equal monthly payments of principal andinterest through May 1, 2018. The interest rate on the Term Loan Agreement was 11.25% as of December 31, 2016.First Loan AmendmentIn November 2015, Limited and Hercules amended the 2014 Loan Agreement to extend the interest only payments through May 2017. In connectionwith the First Loan Amendment, Limited paid to Hercules an amendment fee of $262,500 and agreed to make an additional payment of $1,050,000, equal to3% of the 2014 Term Loan at the time of the final payment on May 1, 2018 (End of Term Payment).We and Limited, on a consolidated basis with our other subsidiaries (the Consolidated Group), agreed to customary affirmative and negative covenantsand events of default in connection with these arrangements. The occurrence of an event of default could result in the acceleration of Limited’s obligationsunder the Term Loan Agreement and an increase to the applicable interest rate and would permit Hercules to exercise remedies with respect to the collateralunder the Term Loan Agreement. In connection with the First Loan Amendment, Limited agreed to covenants regarding certain revenue thresholds and aliquidity threshold.Second Loan AmendmentIn January 2016, the revenue threshold covenant was not met by the Consolidated Group and as a result, in March 2016, Limited and Hercules enteredinto the Second Loan Amendment, which further amended certain terms of the 2014 Loan Agreement. In conjunction with the Second Loan Amendment,Hercules waived this covenant violation.The Second Loan Amendment adjusted the revenue covenant to a rolling three-month calculation, first measured for the three months ended May 31,2016. In addition, the Second Loan Amendment increased the liquidity covenant. Upon execution of the Second Loan Amendment, Limited paid Hercules anamendment fee of $350,000 and agreed to increase the End of Term Payment to $1,400,000 from $1,050,000, which was payable on the date that the 2014Term Loan was to be paid in full.We concluded that the Second Loan Amendment resulted in a substantial modification of the terms of debt when considered with the First LoanAmendment in accordance with the guidance in Accounting Standard Codification (ASC) 470-50, Debt. As a result, we accounted for the Second LoanAmendment as an extinguishment and recognized a loss on early extinguishment of debt of approximately $2,564,000 within the consolidated statement ofoperations for the year ended December 31, 2016. The loss on early extinguishment consisted primarily of the unamortized debt discount associated with thewarrant and debt issuance costs incurred prior to the Second Loan Amendment, the incremental fair value of the warrant as a result of modifying the terms ofthe warrant and the debt issuance costs of $360,000 paid to Hercules for the Second Loan Amendment.Third Loan Amendment and July 2016 WaiverIn May 2016, Limited and Hercules entered into the Third Loan Amendment to expand the definition of liquidity to allow for the inclusion of cash ofup to $2.0 million in bank accounts outside of the U.S. and the United Kingdom.In July 2016, Limited obtained a waiver of the requirements of the liquidity covenant (the Waiver) because the Consolidated Group was not incompliance with the liquidity covenant as of June 30, 2016. The Waiver cured the default of the liquidity covenant then existing under the Term LoanAgreement and decreased the liquidity requirement. In addition, the Waiver modified the three-month revenue covenant so that it was not measured at July31, 2016 and reduced the three-month revenue target to be measured at August 31, 2016. Following execution of the Waiver, Limited incurred a weeklyticking fee equal to 0.05% multiplied by the outstanding principal amount through the closing of our public offering in August 2016 (see Note 12 CommonStock), totaling $65,000. Further, Limited paid Hercules a fee of $350,000 associated with the Waiver.Fourth Loan AmendmentIn October 2016, Limited entered into the Fourth Loan Amendment with Hercules, which further amended certain terms of the Term Loan Agreement.Pursuant to the terms of the Fourth Loan Amendment, Hercules agreed to provide up to an additional $10.0 million to Limited with (i) the first $5.0 millionavailable at Limited’s option through June 30, 2017 subject to (A) the Consolidated Group’s achievement of $12.0 million in trailing three month netproduct revenue and (B) no event of default having occurred since October 20, 2016 (the Effective Date) and (ii) the second $5.0 million available atLimited’s option through December 31, 2017 subject to (A) the Consolidated Group’s achievement of $15.0 million in trailing three month net productrevenue, (B) no event of default having occurred since the Effective Date and (C) the prior $5.0 million having been advanced to Limited (the AdditionalAdvances and, together with the 2014 Term Loan, the Term Loan). The46Table of ContentsFourth Loan Amendment provides for interest only payments through November 30, 2018 (the Interest-Only Period). Pursuant to the Fourth LoanAmendment, interest on the Term Loan accrues at a floating per annum rate equal to the greater of (i) 11.0% and (ii) the sum of (A) 11.0% plus (B) the primerate as reported in The Wall Street Journal, or if not reported, the prime rate most recently reported in The Wall Street Journal, minus 3.5%. In addition to theinterest described above, the principal balance of the Term Loan will bear “payment-in kind” interest at the rate of 1.0% (PIK Interest), which PIK Interest willbe added to the outstanding principal balance of the Term Loan so as to increase the outstanding principal balance of the Term Loan on each payment datefor the Term Loan and which amount will be payable when the aggregate outstanding principal amount of the Term Loan is payable. The Term Loan will bedue and payable to Hercules in 24 equal monthly payments of principal and interest following the Interest-Only Period beginning on December 1, 2018 andmatures in full on November 1, 2020.Limited paid Hercules a facility charge of $337,500 and reimbursed Hercules for legal and diligence fees incurred in connection with the Fourth LoanAmendment. If Limited prepays the Term Loan, it will pay Hercules a prepayment penalty (i) if such amounts are prepaid in any of the first 12 monthsfollowing the Effective Date, equal to 3.0% of the principal amount of the Term Loan being repaid, (ii) if such amounts are prepaid after 12 months but priorto 24 months following the Effective Date, equal to 2.0% of the principal amount of the Term Loan being repaid, and (iii) if such amounts are prepaid at anytime thereafter, equal to 1.0% of the principal amount of the Term Loan being repaid.The Consolidated Group also agreed to customary affirmative and negative covenants, including, without limitation, covenants relating to minimumliquidity, minimum trailing six-month net revenue and adjusted EBITDA, and events of default in connection with these arrangements. The occurrence of anevent of default could result in the acceleration of Limited’s obligations under the Term Loan Agreement, as amended by the Fourth Loan Amendment andan increase to the applicable interest rate, and would permit Hercules to exercise remedies with respect to the collateral under the Term Loan Agreement, asamended by the Fourth Loan Amendment. In the event that we maintain $35.0 million in liquidity, including cash and eligible accounts receivable, at theend of the month and have not been and are not in breach of the amended debt facility, the six-month trailing revenue covenant is effectively waived for suchmonth. As of December 31, 2016, our liquidity as defined under the Term Loan Agreement was $40.9 million, which consisted of $31.0 million in cash andcash equivalents and 80% of our $12.4 million in eligible U.S. accounts receivable.General Discussion of the Term Loan AgreementPursuant to the Term Loan Agreement, Limited’s obligations to Hercules are secured by a first-priority security interest in substantially all of Limited’sassets, excluding intellectual property. Hercules does, however, maintain a negative pledge on Limited’s intellectual property requiring Hercules’ consentprior to the sale of such intellectual property. The Company and certain of the Company’s other subsidiaries are guarantors of the obligations of Limited toHercules under the Term Loan Agreement pursuant to separate guaranty agreements between Hercules and each of Limited and such subsidiaries (Guaranties).Pursuant to the Guaranties, the Company and these subsidiaries granted Hercules a first-priority security interest in substantially all of their respective assetsexcluding intellectual property. The Term Loan Agreement also places limitations on our ability to declare or pay any dividend or distribution on any sharesof capital stock.2014 WarrantIn connection with Limited entering into the 2014 Loan Agreement, we issued a warrant to Hercules to purchase up to 285,016 shares of our commonstock at an exercise price of $6.14 per share (the 2014 Warrant). Sixty percent of the 2014 Warrant was exercisable at the closing in April 2014 and theremaining forty percent became exercisable upon the funding of the additional $25.0 million to Limited in September 2014.We agreed to amend the 2014 Warrant in connection with the First Loan Amendment to increase the number of shares issuable upon exercise to660,377 and decrease the exercise price to $2.65 per share. Upon entering into the Second Loan Amendment, we agreed to further amend the 2014 Warrant toincrease the number of shares issuable upon exercise to 862,069 and decrease the exercise price to $2.03 per share. In connection with the July 2016 Waiver,we agreed to further amend the 2014 Warrant to increase the number of shares issuable upon exercise to 1,258,993 and decrease the exercise price to $1.39per share.2016 WarrantIn connection with Limited entering into the Fourth Loan Amendment, we agreed to issue a new warrant to Hercules (the 2016 Warrant) to purchase upto 458,716 shares of our common stock at an exercise price of $1.09 per share which was equal to $500,000 divided by the lowest volume-weighted averagesale price for a share of our common stock reported over any ten consecutive trading days during the period commencing on and including September 23,2016 and ending on the earlier to occur of (i) December 30, 2016 (inclusive of such date), and (ii) the second trading day immediately preceding the date ofclosing of a merger event (as defined in the 2016 Warrant).47Table of ContentsFair Value of DebtThe weighted average interest rates of our notes payable approximate the rate at which we could obtain alternative financing and the fair value of thewarrants that were issued in connection with our notes payable are immaterial. Therefore, the carrying amount of the notes approximated their fair value atDecember 31, 2016 and 2015.Financial Operations OverviewWe began generating revenue from ILUVIEN in the second quarter of 2013, but do not expect positive cash flow from operations until late 2017, if atall. In addition to generating revenue from product sales, we intend to seek to generate revenue from other sources such as upfront fees, milestone paymentsin connection with collaborative or strategic relationships, and royalties resulting from the licensing of ILUVIEN or any future product candidates and otherintellectual property. We expect any revenue we generate will fluctuate from quarter to quarter as a result of the nature, timing and amount of any milestonepayments we may receive from potential collaborative and strategic relationships, as well as revenue we may receive upon the sale of our products to theextent any are successfully commercialized.Research, Development and Medical Affairs ExpensesSubstantially all of our research, development and medical affairs expenses incurred to date related to our continuing operations have been related tothe development of ILUVIEN. We anticipate that we will incur additional research, development and medical affairs expenses in the future as we evaluate andpossibly pursue the regulatory approval of ILUVIEN in additional jurisdictions, the development of ILUVIEN for additional indications, or developadditional products or product candidates. We recognize research, development and medical affairs expenses as they are incurred. Our research, developmentand medical affairs expenses consist primarily of: •salaries and related expenses for personnel, including medical sales liaisons;•costs related to the provision of medical affairs support, including symposia development for physician education;•costs related to compliance with FDA, EEA or other regulatory requirements;•fees paid to consultants and contract research organizations (CRO) in conjunction with independently monitoring clinical trials andacquiring and evaluating data in conjunction with clinical trials, including all related fees such as investigator grants, patient screening, labwork and data compilation and statistical analysis;•costs incurred with third parties related to the establishment of a commercially viable manufacturing process for products or productcandidates;•costs related to production of clinical materials, including fees paid to contract manufacturers;•costs related to post marketing authorization studies;•consulting fees paid to third-parties involved in research and development activities; and•costs related to stock options or other stock-based compensation granted to personnel in development functions.We expense both internal and external development costs as they are incurred.We expect that a large percentage of our research, development and medical affairs expenses in the future will be incurred in support of our current andfuture technical, preclinical and clinical development programs. These expenditures are subject to numerous uncertainties in terms of both their timing andtotal cost to completion. We expect to continue to develop stable formulations of ILUVIEN or any future products or product candidates, test suchformulations in preclinical studies for toxicology, safety and efficacy and to conduct clinical trials for each future product candidate. We anticipate fundingclinical trials ourselves, but we may engage collaboration partners at certain stages of clinical development. As we obtain results from clinical trials, we mayelect to discontinue or delay clinical trials for certain products or product candidates or programs in order to focus our resources on more promising productsor product candidates or programs. Completion of clinical trials by us or our future collaborators may take several years or more, the length of time generallyvarying with the type, complexity, novelty and intended use of a product candidate.Our only commercial product is ILUVIEN, which has received marketing authorization in the U.S., Austria, Belgium, the Czech Republic, Denmark,Finland, Germany, France, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden and the United Kingdom. In the U.S.,ILUVIEN is indicated for the treatment of DME in patients who have been previously treated with a course of corticosteroids and did not have a clinicallysignificant rise in IOP. In the EEA countries in which ILUVIEN has received marketing authorization, it is indicated for the treatment of vision impairment48Table of Contentsassociated with chronic DME considered insufficiently responsive to available therapies. ILUVIEN has not been approved in any jurisdiction other than asset forth above. In order to grant marketing approval, a health authority such as the FDA or foreign regulatory agencies must conclude that clinical andpreclinical data establish the safety and efficacy of ILUVIEN or any future products or product candidates with an appropriate benefit to risk profile relevantto a particular indication and that the product can be manufactured under current Good Manufacturing Practice (cGMP) in a reproducible manner to deliverthe product’s intended performance in terms of its stability, quality, purity and potency. Until our submissions are reviewed by health authorities, there is noway to predict the outcome of their review. Even if the clinical studies meet their predetermined primary endpoints and a registration dossier is accepted forfiling, a health authority could still determine that an appropriate benefit to risk relationship does not exist for the indication that we are seeking. We cannotforecast with any degree of certainty whether ILUVIEN or any future products or product candidates will be subject to future collaborations or how sucharrangements would affect our development plan or capital requirements. As a result of the uncertainties discussed above, we are unable to determine theduration and completion costs of our development projects or when and to what extent we will receive cash inflows from the commercialization and sale ofan approved product candidate.General and Administrative ExpensesGeneral and administrative expenses consist primarily of compensation for employees in executive and administrative functions, including finance,accounting, information technology and human resources. Other significant costs include facilities costs and professional fees for accounting and legalservices, including legal services associated with obtaining and maintaining patents. We expect to continue to incur significant costs to comply with thecorporate governance, internal control and similar requirements applicable to public companies.Sales and Marketing ExpensesSales and marketing expenses consist primarily of professional fees and compensation for employees for the commercial promotion, the assessment ofthe commercial opportunity of, the development of market awareness for, the pursuit of market reimbursement and the execution of launch plans forILUVIEN. Other costs include professional fees associated with developing plans for ILUVIEN or any future products or product candidates and maintainingpublic relations.We launched ILUVIEN in Germany and the United Kingdom, in the second quarter of 2013 and the U.S. and Portugal in the first quarter of 2015. Weexpect significant increases in our sales and marketing expenses as we continue the commercialization of ILUVIEN in these countries.In November 2012, we entered into a master services agreement with Quintiles Commercial Europe Limited. Under the agreement, QuintilesCommercial Europe Limited and its affiliates (collectively, Quintiles Commercial) provided certain services to us in relation to the commercialization ofILUVIEN, in France, Germany and the United Kingdom. In December 2013 and January 2014, respectively, we transitioned our German and United Kingdomcountry manager positions in-house. In April 2015, we terminated the project orders associated with France and Germany and transitioned the personsemployed by Quintiles Commercial to our payroll. In July 2015, we terminated the remaining project orders associated with the United Kingdom andtransitioned the covered positions employed by Quintiles Commercial to our payroll. As of December 31, 2015 the master services agreement with QuintilesCommercial had been terminated.As of December 31, 2016, we had a European management team, local management teams and commercial personnel in France, Germany, Portugal andthe United Kingdom totaling 31 persons, of which three are consultants. In the fourth quarter of 2016, after unsuccessfully negotiating with the French government to obtain an appropriate price, we decided to closeoperations in France. We expect the closing of operations to be completed in early 2017. We are continuing to evaluate our options to enter the Frenchmarket, including potential distributor relationships.In the fourth quarter of 2014, following the FDA approval of ILUVIEN in the U.S., we began establishing the infrastructure to support the anticipatedcommercial launch of ILUVIEN in the U.S. in the first quarter of 2015 with the addition of regional sales directors, reimbursement specialists and payorrelations directors. We hired additional sales and marketing personnel through the first quarter of 2015 for the launch of ILUVIEN and as of December 31,2016, had a field force of approximately 45 people, including sales personnel, reimbursement specialists and payor relations directors.Interest Expense and OtherInterest expense consists primarily of interest and amortization of deferred financing costs and debt discounts associated with our Term LoanAgreement. Interest income consists primarily of interest earned on our cash, cash equivalents and investments.49Table of ContentsChange in Fair Value of Derivative Warrant LiabilityWarrants to purchase our Series A Convertible Preferred Stock or common stock that do not meet the requirements for classification as equity, inaccordance with the Derivatives and Hedging Topic of the Financial Accounting Standards Board (FASB) ASC, are classified as liabilities. We record thesederivative financial instruments as liabilities in our balance sheet measured at their fair value. We record the changes in fair value of such instruments as non-cash gains or losses in the consolidated statements of operations.Basic and Diluted Net Loss Applicable to Common Stockholders per Share of Common StockWe calculated net loss per share in accordance with ASC 260, Earning Per Share. We had a net loss for all periods presented; accordingly, theinclusion of common stock options and warrants would be anti-dilutive. Dilutive common stock equivalents would include the dilutive effect of convertiblesecurities, common stock options, warrants for convertible securities and warrants for common stock equivalents. Common stock equivalent securities thatwould potentially dilute basic EPS in the future, but were not included in the computation of diluted EPS because to do so would have been anti-dilutive,totaled approximately 34,550,161 and 32,164,307 for the years ended December 31, 2016 and 2015, respectively. Potentially dilutive common stockequivalents were excluded from the diluted earnings per share denominator for all periods of net loss because of their anti-dilutive effect. Therefore, for theyears ended December 31, 2016 and 2015, the weighted average shares used to calculate both basic and diluted loss per share are the same.Critical Accounting Policies and EstimatesOur discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements which have beenprepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate these estimates and judgments,including those described below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under thecircumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readilyapparent from other sources. Actual results and experiences may differ materially from these estimates. We believe that the following accounting policies arethe most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates thatwe use in the preparation of our consolidated financial statements.Revenue Recognition - U.S. Product SalesProduct sales consist of U.S. sales of ILUVIEN. In the U.S., we sell ILUVIEN to a limited number of pharmaceutical distributors who in turn sell theproduct downstream to pharmacies and physician practices. Revenue from product sales is recognized when persuasive evidence of an arrangement exists,title to product and associated risk of loss have passed to the customer, the price is fixed or determinable, collection from the customer is reasonably assured,we have no further performance obligations and returns can be reasonably estimated. We record revenue from product sales upon delivery to ourpharmaceutical distributors.Revenue from U.S. product sales is recorded net of applicable provisions for rebates and chargebacks under governmental programs, such as Medicaidand Veterans’ Administration (VA), distribution-related fees and other sales-related deductions. We estimate reductions to product sales based upon contractswith customers and government agencies, statutorily-defined discounts applicable to government-funded programs, estimated payer mix, inventory levels,shelf life of the product and other relevant factors. Calculating these provisions involves management’s estimates and judgments. We review our estimates ofrebates, chargebacks and other applicable provisions each period and record any necessary adjustments in the current period’s net product sales.We estimate reductions to product sales for Medicaid and VA programs and for certain other qualifying federal and state government programs. Basedupon our contracts with government agencies, statutorily-defined discounts applicable to government-funded programs, historical experience and estimatedpayer mix, we estimate and record an allowance for rebates and chargebacks. Our liability for Medicaid rebates consists of estimates for claims that a state willmake for a current quarter, claims for prior quarters that have been estimated for which an invoice has not been received and invoices received for claims fromprior quarters that have not been paid. Our reserves related to discounted pricing to VA, Public Health Services and other institutions (collectively qualifiedhealthcare providers) represent our estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at priceslower than the list prices we charge to our customers (i.e., pharmaceutical distributors). Our customers charge us for the difference between what they pay forthe products and the ultimate selling price to the qualified healthcare providers. Our reserve for this discounted pricing is based on expected sales to qualifiedhealthcare providers and the chargebacks that customers have already claimed.50Table of ContentsWe have written contracts with our customers that include terms for distribution-related fees. We estimate and record distribution and related fees due toits customers based on gross sales.Consistent with industry practice, we offer our customers a limited right to return product purchased directly from us, which is principally based uponthe product’s expiration date. We will accept returns for three months prior to and up to nine months after the product expiration date. Depending on thecircumstances, we may provide replacement products or cash credit for returns. Product returned is generally not resalable given the nature of our productsand method of administration. We develop estimates for product returns based upon historical experience, inventory levels, shelf life of the product and otherrelevant factors. We monitor product supply levels in the distribution channel, as well as sales by its customers to healthcare providers using product-specificdata provided by its customers. If necessary, our estimates of product returns may be adjusted in the future based on actual returns experience, known orexpected changes in the marketplace, or other factors.Research and Development CostsResearch and development expenditures are expensed as incurred, pursuant to ASC 730, Research and Development. Costs to license technology to beused in our research and development that have not reached technological feasibility, defined as regulatory approval for ILUVIEN or any future products orproduct candidates, and have no alternative future use are expensed when incurred. Payments to licensors that relate to the achievement of preapprovaldevelopment milestones are recorded as research and development expense when incurred.Clinical Trial Prepaid and Accrued ExpensesWe record prepaid assets and accrued liabilities related to clinical trials associated with CROs, clinical trial investigators and other vendors based uponamounts paid and the estimated amount of work completed on each clinical trial. The financial terms of agreements vary from vendor to vendor and mayresult in uneven payment flows. As such, if we have advanced funds exceeding our estimate of the work completed, we record a prepaid asset. If our estimateof the work completed exceeds the amount paid, an accrued liability is recorded. All such costs are charged to research and development expenses based onthese estimates. Our estimates may or may not match the actual services performed by the organizations as determined by patient enrollment levels andrelated activities. We monitor patient enrollment levels and related activities to the extent possible through internal reviews, correspondence and discussionswith our CROs and review of contractual terms. However, if we have incomplete or inaccurate information, we may underestimate or overestimate activitylevels associated with various clinical trials at a given point in time. In this event, we could record significant research and development expenses in futureperiods when the actual level of activities becomes known. To date, we have not experienced material changes in these estimates. Additionally, we do notexpect material adjustments to research and development expenses to result from changes in the nature and level of clinical trial activity and related expensesthat are currently subject to estimation. In the future, as we expand our clinical trial activities, we expect to have increased levels of research anddevelopment costs that will be subject to estimation.Stock-Based CompensationWe have stock option plans which provide for grants of stock options to employees, directors and consultants or other service providers to purchaseshares of our common stock at exercise prices generally equal to the fair values of such stock at the dates of grant. Compensation cost is recognized for allstock-based awards based on the grant date fair value in accordance with the provisions of ASC 718, Compensation — Stock Compensation. We recognizethe grant date fair value as compensation cost of employee stock-based awards using the straight-line method over the actual vesting period, adjusted for ourestimates of forfeiture. Typically, we grant stock options with a requisite service period of four years from the grant date. We have elected to use the Black-Scholes option pricing model to determine the fair value of stock-based awards.We concluded that this was the most appropriate method by which to value our share-based payment arrangements, but if any share-based paymentinstruments should be granted for which the Black-Scholes method does not meet the measurement objective as stated within ASC 718, we will utilize a moreappropriate method for valuing that instrument. However, we do not believe that any instruments granted to date and accounted for under ASC 718 wouldrequire a method other than the Black-Scholes method.Our determination of the fair market value of share-based payment awards on the grant date using option valuation models requires the input of highlysubjective assumptions, including the expected price volatility and option life. Changes in these input variables would affect the amount of expenseassociated with equity-based compensation. Expected volatility is based on the historical volatility of our common stock over the expected term of the stockoption grant. To estimate the expected term, we utilize the “simplified” method for “plain vanilla” options as discussed within the Securities and ExchangeCommission’s (SEC) Statement of Accounting Bulletin (SAB) 107. We believe that all factors listed within SAB 107 as pre-requisites for utilizing thesimplified method are true for us and for our share-based payment arrangements. We intend to utilize the simplified method for the foreseeable future untilmore detailed information about exercise behavior will be more widely51Table of Contentsavailable. The risk-free interest rate is based on U.S. Treasury Daily Treasury Yield Curve Rates corresponding to the expected life assumed at the date ofgrant. Dividend yield is zero as there are no payments of dividends made or expected.Income TaxesWe recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets andliabilities in accordance with ASC 740, Income Taxes. We evaluate the positive and negative evidence bearing upon the realizability of our deferred taxassets on an annual basis. Significant management judgment is involved in determining the provision for income taxes, deferred tax assets and liabilities, andany valuation allowance recorded against net deferred tax assets. Due to uncertainties with respect to the realization of our U.S. deferred tax assets due to ourhistory of operating losses, a valuation allowance has been established against our U.S. deferred tax asset balances to reduce the net carrying value to anamount that is more likely than not to be realized. As a result, we have fully reserved against the U.S. deferred tax asset balances. The valuation allowancesare based on our estimates of taxable income in the jurisdictions in which we operate and the period over which deferred tax assets will be recoverable. In theevent that actual results differ from these estimates or we adjust these estimates in future periods, a change in the valuation allowance may be needed, whichcould materially impact our financial position and results of operations. Our deferred tax assets primarily consist of net operating loss (NOL) carry-forwards.As of December 31, 2016 we had federal NOL carry-forwards of approximately $104.9 million and state NOL carry-forwards of approximately $83.3 million,respectively, that are available to reduce future income otherwise taxable. If not utilized, the federal NOL carry-forwards will expire at various dates between2029 and 2035 and the state NOL carry-forwards will expire at various dates between 2020 and 2035. We periodically evaluate our NOL carry-forwards andwhether certain changes in ownership have occurred that would limit our ability to utilize a portion of our NOL carry-forwards. If it is determined thatsignificant ownership changes have occurred since these NOLs were generated, we would be subject to annual limitations on the use of these NOLs underSection 382 (or comparable provisions of state law). We have determined that a Section 382 change in ownership occurred in late 2015. Therefore, the annualutilization of our NOLs is subject to certain limitations under Section 382 and other limitations under state tax laws. We are currently in the process ofcalculating these limitations. Any reduction to our NOL deferred tax asset due to the annual Section 382 limitation and the NOL carryforward period wouldresult in an offsetting reduction in valuation allowance recorded against the NOL deferred tax asset. Therefore, any limitation would not have an impact onthe statements of operations for the periods presented. The results of the analysis on the impact to our NOLs will be disclosed at a later date.In the event that we were to determine that we are able to realize any of our net deferred tax assets in the future, an adjustment to the valuationallowance would increase net income in the period such determination was made. We believe that the most significant uncertainty that will impact thedetermination of our valuation allowance will be our estimation of the extent and timing of future net income, if any.We considered our income tax positions for uncertainty in accordance with ASC 740. The balance of unrecognized tax benefits as of December 31,2016 and December 31, 2015 are approximately $59,000 and $46,000, respectively. Both balances relate to research and development tax credits. Inaccordance with ASC 740-10, such attributes are reduced the amount that is expected to be recognized in the future. We do not accrue interest or penalties asthere is no risk of additional tax liability due to significant NOLs available. We do not expect any decreases to the unrecognized tax benefits within the nexttwelve months due to any lapses in statute of limitations. Tax years from 2012 to 2015 remain subject to examination in California, Georgia, Kentucky,Tennessee, Texas and on the federal level, with the exception of the assessment of NOL carry-forwards available for utilization which can be examined for allyears since 2003. The statute of limitations on these years will close when the NOLs expire or when the statute closes on the years in which the NOLs areutilized.Foreign Currency TranslationThe U.S. dollar is the functional currency of Alimera Sciences, Inc. The Euro is the functional currency for the majority of our subsidiaries operatingoutside of the U.S.Our foreign currency assets and liabilities are remeasured into U.S. dollars at end-of-period exchange rates, except for nonmonetary balance sheetaccounts, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effect during each period,except for those expenses related to the non-monetary balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreigncurrency remeasurement are included in income.The financial statements of the foreign subsidiaries whose functional currency is not the U.S. dollar have been translated into U.S. Dollars in accordancewith ASC 830-30, Translation of Financial Statements. For the subsidiaries operating outside of the U.S. that are denominated in the Euro, assets andliabilities are translated at end-of-period rates while revenues and expenses are translated at average rates in effect during the period in which the activitytook place. Equity is translated at52Table of Contentshistorical rates and the resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income.53Table of ContentsResults of Operations - Segment ReviewThe following selected unaudited financial and operating data are derived from our consolidated financial statements and should be read inconjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements. Theresults and discussions that follow are reflective of how executive management monitors the performance of our reporting segments.Certain operating expenses are allocated between our reporting segments based on activity-based costing methods. These activity-based costingmethods require us to make estimates that impact the amount of each expense category that is attributed to each segment. Changes in these estimates willdirectly impact the amount of expense allocated to each segment and therefore the operating profit of each reporting segment. There were no significantchanges in our expense allocation methodology during 2016 or 2015. However, in 2015, as a result of the FDA approval of ILUVIEN in the U.S. in late 2014,there was a shift in allocation of research, development and medical affairs costs between segments to more accurately reflect the benefit of those costs onfuture revenue streams. In addition, there was a shift in sales and marketing and general and administrative activity between segments in late 2014 and 2015in anticipation and as a result of the commercial launch of ILUVIEN in the U.S.U.S. Segment Years EndedDecember 31, 2016 2015 (In thousands)NET REVENUE$25,765 $15,170COST OF GOODS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION(1,694) (792)GROSS PROFIT24,071 14,378 RESEARCH, DEVELOPMENT AND MEDICAL AFFAIRS EXPENSES7,875 9,712GENERAL AND ADMINISTRATIVE EXPENSES9,316 8,244SALES AND MARKETING EXPENSES22,134 19,777DEPRECIATION AND AMORTIZATION2,678 2,491OPERATING EXPENSES42,003 40,224NET LOSS FROM OPERATIONS$(17,932) $(25,846)Year ended December 31, 2016 compared to the year ended December 31, 2015Net Revenue. Net revenue increased by approximately $10.6 million, or 70%, to approximately $25.8 million for the year ended December 31, 2016,compared to approximately $15.2 million for the year ended December 31, 2015. The growth was primarily attributable to increases in both the number ofend user accounts and the order frequency from our existing accounts, as well as we continued to recognize gains in market acceptance. We also benefitedfrom ILUVIEN being available for sale for the full year ending December 31, 2016. During the year ended December 31, 2015 ILUVIEN was only availablefollowing our launch in March of 2015.Cost of goods sold, excluding depreciation and amortization. Cost of goods sold, excluding depreciation and amortization increased by approximately$910,000, or 115%, to approximately $1.7 million for the year ended December 31, 2016 compared to approximately $790,000 for the year ended December31, 2015. The increase was primarily attributable to our increase in sales volume.Research, development and medical affairs expenses. Research, development and medical affairs expenses decreased by approximately $1.8 million, or19%, to approximately $7.9 million for the year ended December 31, 2016, compared to approximately $9.7 million for the year ended December 31, 2015.The decrease was primarily attributable to decreases of approximately $1.1 million in costs with third parties related to potential product enhancementsincurred during 2015, $480,000 in medical affairs and scientific communication costs associated with the U.S. launch in 2015 and $220,000 in U.S.compliance reporting costs. These costs were offset by increases of approximately $310,000 in costs associated with maintaining the registration of ILUVIENin the U.S., and $210,000 in pharmacovigilance costs.54Table of ContentsGeneral and administrative expenses. General and administrative expenses increased by approximately $1.1 million, or 13%, to approximately $9.3million for the year ended December 31, 2016, compared to approximately $8.2 million for the year ended December 31, 2015. The increase was primarilyattributable to increases of $960,000 for certain one-time costs associated with pursuing alternative debt options, including contingent advisory fees, and$270,000 in costs incurred with our third party manufactures of ILUVIEN.Sales and marketing expenses. Sales and marketing expenses increased by approximately $2.3 million, or 12%, to approximately $22.1 million for theyear ended December 31, 2016, compared to approximately $19.8 million for the year ended December 31, 2015. The increase was primarily attributable toincreases of approximately $880,000 in additional costs incurred in 2016 for the commercial team hired for the launch of ILUVIEN in the U.S., $750,000 foradditional commissions paid to our U.S. sales force due to increased sales in 2016 and $480,000 in additional marketing costs including professional fees forthe promotion of ILUVIEN incurred during 2016, medical marketing and an increased presence at certain regional and national meetings.Depreciation and amortization. Depreciation and amortization increased by approximately $200,000, or 8%, to approximately $2.7 million for theyear ended December 31, 2016, compared to approximately $2.5 million for the year ended December 31, 2015. The increase was primarily attributable todepreciation expense associated with capital leases entered into in March 2015 for automobiles for the U.S. commercial team.International Segment Years EndedDecember 31, 2016 2015 (In thousands)NET REVENUE$8,568 $7,268COST OF GOODS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION(650) (970)GROSS PROFIT7,918 6,298 RESEARCH, DEVELOPMENT AND MEDICAL AFFAIRS EXPENSES4,500 5,128GENERAL AND ADMINISTRATIVE EXPENSES5,947 5,946SALES AND MARKETING EXPENSES7,297 8,313DEPRECIATION AND AMORTIZATION89 64OPERATING EXPENSES17,833 19,451NET LOSS FROM OPERATIONS$(9,915) $(13,153)Year ended December 31, 2016 compared to the year ended December 31, 2015Net Revenue. Net revenue increased by approximately $1.3 million, or 18%, to approximately $8.6 million for the year ended December 31, 2016,compared to approximately $7.3 million for the year ended December 31, 2015. The increase was primarily attributable to higher sales volumes in Portugaland Germany offset by decreases in sales volume in the United Kingdom. Revenue was further reduced by the change in the value of the British poundsterling and the Euro which impacted reported revenue by $210,000 for the year ended December 31, 2016 compared to the year ended December 31, 2015.Cost of goods sold, excluding depreciation and amortization. Cost of goods sold, excluding depreciation and amortization decreased byapproximately $320,000, or 33%, to approximately $650,000 for the year ended December 31, 2016, compared to approximately $970,000 for the yearended December 31, 2015. The decrease was primarily attributable to a decrease of $450,000 in charges for expiring inventory, offset by increased salesvolume and increases in our supplier costs.Research, development and medical affairs expenses. Research, development and medical affairs expenses decreased by approximately $600,000, or12%, to approximately $4.5 million for the year ended December 31, 2016, compared to approximately $5.1 million for the year ended December 31, 2015.The decrease was primarily attributable to decreases of approximately $320,000 in ongoing medical affairs costs and $320,000 scientific communicationcosts.General and administrative expenses. General and administrative expenses were approximately $5.9 million for both the years ended December 31,2016 and 2015.55Table of ContentsSales and marketing expenses. Sales and marketing expenses decreased by approximately $1.0 million, or 12%, to approximately $7.3 million for theyear ended December 31, 2016, compared to approximately $8.3 million for the year ended December 31, 2015. The decrease was primarily attributable to adecrease of approximately $1.5 million in marketing costs including reductions of $820,000 in trade show costs, $470,000 in medical communication costsand $180,000 in market research costs. These decreases were offset by an increase of approximately $530,000 in market access costs as we pursue expandedreimbursement in the United Kingdom and other European countries.Consolidated other income and expenseThe following selected unaudited financial and operating data are derived from our consolidated financial statements and should be read inconjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements. Years Ended December 31, 2016 2015 (In thousands)NET LOSS FROM OPERATIONS$(27,847) $(38,999) INTEREST EXPENSE AND OTHER(5,178) (4,693)UNREALIZED FOREIGN CURRENCY LOSS, NET(40) (106)LOSS ON EARLY EXTINGUISHMENT OF DEBT(2,564) —CHANGE IN FAIR VALUE OF DERIVATIVE WARRANT LIABILITY2,627 13,283NET LOSS BEFORE TAXES(33,002) (30,515)PROVISION FOR TAXES(172) (130)NET LOSS$(33,174) $(30,645)Year ended December 31, 2016 compared to the year ended December 31, 2015Interest expense and other. Interest expense and other increased by approximately $500,000, or 11%, to approximately $5.2 million for the year endedDecember 31, 2016, compared to approximately $4.7 million for the year ended December 31, 2015. The increase was primarily attributable to costsassociated with the amendments to our Term Loan Agreement.Unrealized foreign currency loss, net. Unrealized foreign currency (loss) gain, net was a loss of approximately $40,000 for the year ended December 31,2016, compared to a loss of approximately $106,000 for the year ended December 31, 2015. The 2016 and 2015 unrealized foreign currency losses wereprimarily attributable to the weakening of the Euro during the period and the revaluation of Limited’s U.S. dollar denominated net liabilities.Loss on early extinguishment of debt. We recorded a loss on early extinguishment of debt of approximately $2.6 million for the year ended December31, 2016, as a result of the Second Loan Amendment to our Term Loan Agreement.Change in fair value of derivative warrant liability. During the years ended December 31, 2016 and 2015, we recognized gains of approximately $2.6million and $13.3 million, respectively, related to decreases in the fair value of our derivative warrant liability. The change in fair value was due to decreasesin the fair market value of our underlying common stock during the years ended December 31, 2016 and 2015 and the time remaining to exercise thewarrants.56Table of ContentsLiquidity and Capital ResourcesSince inception, we have incurred recurring losses, negative cash flow from operations and have accumulated a deficit of $377.1 million from ourinception through December 31, 2016. We have funded our operations through the public and private placement of common stock, convertible preferredstock, warrants, the sale of certain assets of the non-prescription business in which we were previously engaged and certain debt facilities.In September 2014, we entered into a sales agreement with Cowen and Company, LLC (Cowen) to offer shares of our common stock, $0.01 par valueper share, from time to time through Cowen, as our sales agent for the offer and sale of the shares up to an aggregate offering price of $35.0 million. We paid acommission equal to 3% of the gross proceeds from the sales of shares of our common stock under the sales agreement. We intended to use the net proceedsfrom this offering for general corporate purposes, including capital expenditures, debt repayments and working capital. In 2016, we sold a total of 662,779shares of our common stock at a weighted average price of $1.83 per share through our at-the-market offering, for total gross proceeds of approximately $1.2million, reduced by approximately $60,000 of related commissions, issuance costs and placement agent fees. In 2015, we sold a total of 268,978 shares of ourcommon stock at a weighted average price of $3.07 per share through our at-the-market offering, for total gross proceeds of approximately $825,000, furtherreduced by approximately $100,000 of related commissions, issuance costs and placement agent fees.In August 2016, we closed an underwritten public offering pursuant to which we sold and issued 18,900,000 shares of our common stock at a price tothe public of $1.40 per share, resulting in gross proceeds of $26,460,000, offset by payments of approximately $1.3 million of related issuance costs.In October 2016, Limited entered into the Fourth Loan Amendment. Under the Fourth Loan Amendment, Hercules agreed to provide up to anadditional $10.0 million to Limited with (i) the first $5.0 million available at Limited’s option through June 30, 2017 subject to (A) the achievement of $12.0million in trailing three month net product revenue and (B) no event of default having occurred since the Effective Date and (ii) the second $5.0 millionavailable at Limited’s option through December 31, 2017 subject to (A) the achievement of $15.0 million in trailing three month net product revenue, (B) noevent of default having occurred since the Effective Date and (C) the prior $5.0 million having been advanced to Limited. If there is an event of default, allamounts may become due under the Term Loan Agreement and there would be substantial doubt about our ability to continue as a going concern.As of December 31, 2016, we had approximately $31.0 million in cash and cash equivalents. We launched ILUVIEN in Germany and the UnitedKingdom in the second quarter of 2013 and in the U.S. and Portugal in the first quarter of 2015. Due to the limited revenue generated by ILUVIEN to date, wemay have to raise additional capital to fund the continued commercialization of ILUVIEN. If we are unable to raise additional financing, we will need toadjust our commercial plans so that we can continue to operate with our existing cash resources. The actual amount of funds that we will need will bedetermined by many factors, some of which are beyond our control and we may need funds sooner than currently anticipated.We cannot be sure that additional financing would be available when needed or that, if available, the additional financing would be obtained on termsfavorable to us or our stockholders. If we were to raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likelyresult and the terms of any new equity securities may have a preference over our common stock. If we were to attempt to raise additional funds throughstrategic collaboration agreements we may not be successful in obtaining collaboration agreements, or in receiving milestone or royalty payments underthose agreements. If we were to attempt to raise additional funds through debt financing the terms of the debt may involve significant cash paymentobligations as well as covenants and specific financial ratios that may restrict our ability to commercialize ILUVIEN or any future products or productcandidates or operate our business.For the twelve months ended December 31, 2016, cash used in our operations of $25.1 million was primarily due to our net loss of $33.2 million, whichis subject to further adjustment for non-cash items. These items included approximately $2.6 million for a non-cash gain for the change in the value of ourderivative warrant liability, charges of approximately $4.9 million for stock compensation expense, $2.8 million of depreciation and amortization expenseand $1.0 million of amortization costs associated with our debt discount. Further reducing cash from operations was an increase in accounts receivable of$4.1 million. This reduction was offset by an increase in accounts payable, accrued expenses and other current liabilities of $2.1 million and a decrease ininventory of $1.0 million. Accounts receivable increased primarily due to an increase in U.S. sales volume as ILUVIEN continued to gain market acceptanceduring the year ended December 31, 2016. Accounts payable, accrued expenses and other current liabilities increased primarily due to increases of $600,000in amounts payable for one-time fees associated with pursuing alternative debt options, including contingent advisory fees, $540,000 in accrued costsassociated with closing operations in France, $390,000 in amounts payable to the investigators and CROs in our ongoing clinical studies and $220,000 inaccrued compensation expenses including commissions earned, but not paid, in the three months ended December 31, 2016 to our sales force.57Table of ContentsFor the twelve months ended December 31, 2015, cash used in our operations of $45.4 million was primarily due to our net loss of $30.6 million, whichis subject to further adjustment for non-cash items. These items included approximately $13.3 million for a non-cash gain for the change in the value of ourderivative warrant liability, charges of approximately $5.0 million for stock compensation expense, $2.6 million of depreciation and amortization expense,$840,000 of amortization of our debt discount, $450,000 in inventory reserves and $110,000 for unrealized foreign currency transactions losses. Furtherimpacting cash from operations was an increase in accounts receivable of $8.9 million, decrease in accounts payable, accrued expenses and other currentliabilities of $1.9 million and increase in inventory of $390,000. Accounts receivable increased primarily due to the U.S. launch of ILUVIEN during the firstquarter of 2015. Accounts payable, accrued expenses and other current liabilities decreased primarily due to the milestone payment of $2.0 million paid to aconsultant that was engaged to assist with the pursuit of approval of ILUVIEN in the U.S. and a decrease of $1.2 million in amounts payable to QuintilesCommercial, offset by increases of $460,000 in accruals associated with accrued rebate, chargeback and other revenue reserves, $450,000 in clinical studiesaccruals and $300,000 in commissions payable to our U.S. sales force.For the year ended December 31, 2016, net cash used in our investing activities was approximately $190,000, which was primarily due to the purchaseof property and equipment, primarily the purchase of accounts payable software and leasehold improvements.For the year ended December 31, 2015, net cash used in our investing activities was approximately $450,000, which was primarily due to the purchaseof drug safety management software.For the year ended December 31, 2016, net cash provided by our financing activities was approximately $25.4 million. In August 2016, we closed anunderwritten public offering pursuant to which we sold and issued 18,900,000 shares of our common stock at a price to the public of $1.40 per share,resulting in gross proceeds of $26,460,000. In June and July 2016, we sold a total of 662,779 shares of our common stock through our at-the-market offering,resulting in total gross proceeds of $1.2 million. Offsetting these increases were payments of approximately $1.3 million relating to common stock issuancecosts, $1.1 million associated with the amendments of our Term Loan Agreement and $230,000 in payments on capital leases.For the year ended December 31, 2015, net cash provided by our financing activities was approximately $630,000. During the fourth quarter of 2015we sold 268,978 shares of common stock at a weighted average price of $3.07 per share for proceeds of approximately $800,000 excluding approximately$79,000 of related issuance costs and placement agent fees. Further increasing cash from our financing activities was $570,000 from the proceeds fromexercises of stock options. These increases were offset by decreases due to the payment of issuance costs of approximately $330,000 in January 2015associated with the sale of our Series B Convertible Preferred Stock in December 2014, $290,000 in payments on capital leases and $260,000 in fees tomodify our Term Loan Agreement.Off-Balance Sheet ArrangementsWe do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or specialpurpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements (as that term is defined in Item 303(a)(4)(ii)of Regulation S-K) or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that couldarise if we had engaged in those types of relationships. We enter into guarantees in the ordinary course of business related to the guarantee of our ownperformance and the performance of our subsidiaries.New Accounting PronouncementsFrom time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB), or other standard setting bodiesthat are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yeteffective will not have a material impact on our financial position or results of operations upon adoption.Adoption of New Accounting StandardsIn June 2014, the FASB issued Accounting Standards Update (ASU) 2014-12, Compensation Stock - Compensation (Topic 718). ASU 2014-12 appliesto all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vestingcould be achieved after the requisite service period. It requires that a performance target that affects vesting and that could be achieved after the requisiteservice period be treated as a performance condition and follows existing accounting guidance for the treatment of performance conditions. The standard willbe effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, with early adoption permitted. Theadoption of this guidance did not have a material impact on our financial statements.In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15requires management to perform interim and annual assessments of an entity’s ability to58continue as a going concern within one year of the date the financial statements are issued and provides guidance on determining when and how to disclosegoing concern uncertainties in the financial statements. ASU 2014-15 applies to all entities and is effective for annual and interim reporting periods endingafter December 15, 2016, with early adoption permitted. The adoption of this guidance did not have a material impact on our financial statements.In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.ASU 2015-03 is intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debtliability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Therecognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The new standard is effective for fiscal years,and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted and the standard is to be retrospectivelyapplied to all periods presented upon adoption. We elected to early adopt ASU 2015-03 effective December 31, 2015, and as a result reclassified $629,000from deferred financing costs to note payable, net of discount in our Consolidated Balance Sheet as of December 31, 2015.In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferredincome taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. We elected to earlyadopt ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of our net current deferred taxasset to the net non-current deferred tax asset in our Consolidated Balance Sheet as of December 31, 2015.Accounting Standards Issued but Not Yet EffectiveIn May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a single, comprehensiverevenue recognition model for all contracts with customers. The revenue guidance contains principles that an entity will apply to determine the measurementof revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services tocustomers at an amount that the entity expects to be entitled to in exchange for those goods or services. The standard will be effective for the first interimperiod within annual reporting periods beginning after December 15, 2017 for public entities, with early adoption permitted in the annual reporting periodbeginning after December 15, 2016. We have begun our evaluation of the new guidance on our business and, at this time, do not believe there will be amaterial impact on our current direct product sales in international markets. For the U.S. business, we continue to evaluate the variable considerationprovisions of the new guidance and the impact it will have specifically on our gross to net revenue adjustments, including chargebacks and rebates. Weanticipate adopting the new revenue standard using the modified retrospective transition method.In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern. ASU 2014-15 provides guidance aroundmanagement’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide relatedfootnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubtabout a company’s ability to continue as a going concern within one year from the date the financial statements are issued. The new standard is effective forfiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. We do not expect there to be amaterial impact upon adopting this guidance in our financial statements.In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This update requires entities tomeasure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, lessreasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or theretail inventory method. This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those years. We donot expect the impact of the adoption to have a material effect on its financial statements.In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires all leases with durations greater than twelve months tobe recognized on the balance sheet and is effective for interim and annual reporting periods beginning after December 15, 2018, although early adoption ispermitted. We are currently in the process of evaluating the impact of the adoption on its financial statements.In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718). This standard makes several modifications toTopic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excesstax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard iseffective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. We do not expect the impact ofthe adoption to have a material effect on its financial statements.Table of ContentsITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKLiquiditySee the “Liquidity and Capital Resources” section of this annual report on Form 10-K for additional discussion of liquidity and related risks.Interest Rate RiskOur earnings and cash flows are subject to fluctuations due to changes in interest rates, principally in connection with our loan agreement withHercules. We do not believe we are materially exposed to changes in interest rates. We do not currently use interest rate derivative instruments to manageexposure to interest rate changes. We estimate that a 100 basis point, or 1%, unfavorable change in interest rates would have resulted in approximately a$356,000 increase in interest expense for the year ended December 31, 2016.Credit Quality RiskWe are subject to credit risk in connection with accounts receivable from our product sales of ILUVIEN. We have contractual payment terms with eachof our customers, and we monitor our customers’ financial performance and credit worthiness so that we can properly assess and respond to any changes intheir credit profile. During the years ended December 31, 2016 and 2015 we did not recognize any charges for write-offs of accounts receivable. As ofDecember 31, 2016 and 2015, our only two U.S. customers, which are large pharmaceutical distributors, accounted for 90% and 88%, respectively, of ouraccounts receivable balances.Foreign Exchange RiskAs discussed further above, we market ILUVIEN outside the U.S. Therefore, significant changes in foreign exchange rates of the countries outside theU.S. where our product is sold can impact our operating results and financial condition. As sales outside the U.S. continue to grow, and as we expand ourinternational operations, we will continue to assess potential steps, including foreign currency hedging and other strategies, to mitigate our foreign exchangerisk.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe consolidated financial statements and related consolidated financial statement schedules required to be filed are indexed on page 67 and areincorporated herein.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosurecontrols and procedures as of December 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under theExchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in thereports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rulesand forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to bedisclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management,including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Managementrecognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectivesand management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation ofour disclosure controls and procedures as of December 31, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, ourdisclosure controls and procedures were effective at the reasonable assurance level.60Table of ContentsManagement’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financialreporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our principal executiveand principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples and includes those policies and procedures that: •pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations ofour management and directors; and•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that couldhave a material effect on our financial statements.Under the supervision and with the participation of management, including our principal executive and financial officers, we assessed our internalcontrol over financial reporting as of December 31, 2016, based on criteria for effective internal control over financial reporting established in the 2013Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Based on this assessment, our management concluded that we maintained effective internal control over financial reporting as of December 31, 2016based on the specified criteria.Changes in Internal Control over Financial ReportingThere has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during thefourth quarter of 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Limitations on the Effectiveness of ControlsControl systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that theobjectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in any control system, misstatementsdue to error or fraud may occur and not be detected.ITEM 9B. OTHER INFORMATIONNone.61Table of ContentsPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information required by this item regarding our directors, including the audit committee and audit committee financial experts, and executiveofficers corporate governance, our code of conduct and compliance with Section 16(a) of the Exchange Act will be included in our Proxy Statement for the2017 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of fiscal year ended December 31, 2016(2017 Proxy Statement) and is incorporated herein by reference.ITEM 11. EXECUTIVE COMPENSATIONThe information required by this item regarding executive compensation will be included in our 2017 Proxy Statement and is incorporated herein byreference, except that information required by Item 407(e)(5) of Regulation S-K will be deemed furnished in this Form 10-K and will not be deemedincorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by referenceinto such filing.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSThe information required by this item regarding security ownership and certain beneficial owners and management will be included in our 2017 ProxyStatement and is incorporated herein by reference.Equity Compensation Plan InformationThe following table provides information as of December 31, 2016, with respect to shares of our common stock that may be issued, subject to certainvesting requirements, under our existing equity compensation plans, including our 2010 Equity Incentive Plan (2010 Plan), 2005 Equity Incentive Plan(2005 Plan), 2004 Equity Incentive Plan (2004 Plan) and our 2010 Employee Stock Purchase Plan (ESPP). A B C Number of Securities to beIssued Upon Exercise ofOutstanding Options,Warrants, and Rights Weighted-AverageExercise Price ofOutstanding Options,Warrants and Rights Number of SecuritiesRemaining Available forFuture Issuance UnderEquity CompensationPlans (ExcludingSecurities Reflected inColumn (A)) Plan Category Equity compensation plans approved by securityholders10,804,412(1)$3.22 1,080,492(2)Equity compensation plans not approved by securityholders— — — Total10,804,412 $3.22 1,080,492 (1)Of these shares, 9,736,130 were subject to options then outstanding under the 2010 Plan, 65,072 were subject to options then outstanding under the2005 Plan and 1,003,210 were subject to options then outstanding under the 2004 Plan.(2)Represents 668,830 shares of common stock available for issuance under our 2010 Plan and 411,662 shares of common stock available for issuanceunder our ESPP. No shares are available for future issuance under the 2005 Plan or 2004 Plan. In addition, our 2010 Plan provides for annualincreases in the number of shares available for issuance thereunder on the first day of each fiscal year equal to the least of: (1) 2,000,000 shares ofour common stock; (2) 4% of the shares of common stock outstanding at that time; and (3) such other amount as our board of directors maydetermine. On January 1, 2017, an additional 2,000,000 shares became available for future issuance under our 2010 Plan in accordance with theannual increase. In addition, our ESPP provides for annual increases in the number of shares available for issuance thereunder equal to such numberof shares necessary to restore the number of shares reserved thereunder to 494,422 shares of our common stock. As such, on January 1, 2017, anadditional 82,760 shares became available for future issuance under our ESPP. These additional shares from the annual increase under the 2010Plan and the ESPP are not included in the table above.62Table of ContentsITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item regarding certain relationships and related transactions and director independence will be included in our 2017Proxy Statement and is incorporated herein by reference.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESThe information required by this item regarding principal accounting fees and services will be included in our 2017 Proxy Statement and isincorporated herein by reference.63Table of ContentsPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES(a) The following documents are filed as part of, or incorporated by reference into, this annual report on Form 10-K:1.Financial Statements. See Index to Financial Statements under Item 8 of this annual report on Form 10-K.2.Financial Statement Schedules. All schedules have been omitted because the information required to be presented in them is notapplicable or is shown in the financial statements or related notes.3.Exhibits. We have filed, or incorporated into this annual report on Form 10-K by reference, the exhibits listed on the accompanyingExhibit Index immediately following the financial statements contained in this annual report on Form 10-K.(b) Exhibits. See Item 15(a)(3) above.(c) Financial Statement Schedules. See Item 15(a)(2) above.ITEM 16. FORM 10-K SUMMARYNot applicable.64Table of ContentsSignaturesPursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this annualreport on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in Alpharetta, Georgia, on March 3, 2017. ALIMERA SCIENCES, INC. By:/s/ C. Daniel Myers Chief Executive OfficerPursuant to the requirements of the Securities Act of 1934, this annual report on Form 10-K has been signed below by the following persons on behalfof the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ C. Daniel Myers Chief Executive Officer and Director(Principal Executive Officer) March 3, 2017C. Daniel Myers /s/ Richard S. Eiswirth, Jr. President and Chief Financial Officer (Principal Financial Officerand Principal Accounting Officer) March 3, 2017Richard S. Eiswirth, Jr. /s/ James R. Largent Chairman of the Board of Directors March 3, 2017James R. Largent /s/ Glen Bradley, Ph.D. Director March 3, 2017Glen Bradley, Ph.D. /s/ Mark J. Brooks Director March 3, 2017Mark J. Brooks /s/ Brian K. Halak, Ph.D. Director March 3, 2017Brian K. Halak, Ph.D. /s/ Garheng Kong, M.D., Ph.D. Director March 3, 2017Garheng Kong, M.D., Ph.D. /s/ Peter J. Pizzo, III Director March 3, 2017Peter J. Pizzo, III /s/ Calvin W. Roberts, M.D. Director March 3, 2017Calvin W. Roberts, M.D. 65Table of ContentsALIMERA SCIENCES, INC.INDEX TO FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm67Consolidated Financial Statements as of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015: Consolidated Balance Sheets68Consolidated Statements of Operations69Consolidated Statements of Comprehensive Loss70Consolidated Statements of Changes in Stockholders’ Equity71Consolidated Statements of Cash Flows72Notes to Consolidated Financial Statements7366Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersAlimera Sciences, Inc.We have audited the accompanying consolidated balance sheets of Alimera Sciences, Inc. (a Delaware corporation) and subsidiaries(the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive loss,changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2016. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis forour opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofAlimera Sciences, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows foreach of the two years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the UnitedStates of America.The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. Asdiscussed in Note 3 to the consolidated financial statements, the Company has incurred recurring losses, negative cash flow fromoperations, and has an accumulated deficit of $377 million as of December 31, 2016. These conditions, along with the other matters asset forth in Note 3, raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to thesematters are also discussed in Note 3. The consolidated financial statements do not include any adjustments that might result from theoutcome of this uncertainty./s/ GRANT THORNTON LLPAtlanta, GeorgiaMarch 3, 201767Table of ContentsALIMERA SCIENCES, INC.CONSOLIDATED BALANCE SHEETSAS OF DECEMBER 31, 2016 AND 2015 December 31, 2016 2015 (In thousands, except share and per share data)CURRENT ASSETS: Cash and cash equivalents$30,979 $31,075Restricted cash31 37Accounts receivable, net13,839 9,799Prepaid expenses and other current assets2,107 2,696Inventory, net (Note 4)446 1,552Total current assets47,402 45,159NON-CURRENT ASSETS: Property and equipment — at cost less accumulated depreciation1,787 2,553Intangible asset, net20,604 22,549Deferred tax asset436 223TOTAL ASSETS$70,229 $70,484CURRENT LIABILITIES: Accounts payable$4,986 $4,002Accrued expenses (Note 7)3,758 3,911Derivative warrant liability188 —Note payable (Note 9)— 31,786Capital lease obligations191 234Total current liabilities9,123 39,933NON-CURRENT LIABILITIES: Derivative warrant liability— 2,815Note payable — less current portion (Note 9)33,084 —Capital lease obligations — less current portion274 582Other non-current liabilities2,162 834COMMITMENTS AND CONTINGENCIES (Note 10) STOCKHOLDERS’ EQUITY: Preferred stock, $.01 par value — 10,000,000 shares authorized at December 31, 2016 and 2015: Series A Convertible Preferred Stock, 1,300,000 authorized and 600,000 issued and outstanding atDecember 31, 2016 and 2015; liquidation preference of $24,000 at December 31, 2016 and 201519,227 19,227Series B Convertible Preferred Stock, 8,417 authorized and 8,416.251 issued and outstanding atDecember 31, 2016 and 2015; liquidation preference of $50,750 at December 31, 2016 and 201549,568 49,568Common stock, $.01 par value — 150,000,000 shares authorized, 64,862,904 shares issued andoutstanding at December 31, 2016 and 100,000,000 shares authorized 45,005,833 shares issued andoutstanding at December 31, 2015649 450Additional paid-in capital330,781 299,376Common stock warrants3,707 2,747Accumulated deficit(377,074) (343,900)Accumulated other comprehensive loss(1,272) (1,148)TOTAL STOCKHOLDERS’ EQUITY25,586 26,320TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$70,229 $70,484See Notes to Consolidated Financial Statements.68Table of ContentsALIMERA SCIENCES, INC.CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 Years Ended December 31, 2016 2015 (In thousands, except share and pershare data)NET REVENUE$34,333 $22,438COST OF GOODS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION(2,344) (1,762)GROSS PROFIT31,989 20,676 RESEARCH, DEVELOPMENT AND MEDICAL AFFAIRS EXPENSES12,375 14,840GENERAL AND ADMINISTRATIVE EXPENSES15,263 14,190SALES AND MARKETING EXPENSES29,431 28,090DEPRECIATION AND AMORTIZATION2,767 2,555OPERATING EXPENSES59,836 59,675NET LOSS FROM OPERATIONS(27,847) (38,999) INTEREST EXPENSE AND OTHER(5,178) (4,693)UNREALIZED FOREIGN CURRENCY LOSS, NET(40) (106)LOSS ON EARLY EXTINGUISHMENT OF DEBT(2,564) —CHANGE IN FAIR VALUE OF DERIVATIVE WARRANT LIABILITY2,627 13,283NET LOSS BEFORE TAXES(33,002) (30,515)PROVISION FOR TAXES(172) (130)NET LOSS$(33,174) $(30,645)NET LOSS PER SHARE — Basic and diluted$(0.63) $(0.69)WEIGHTED AVERAGE SHARES OUTSTANDING — Basic and diluted52,801,603 44,450,216See Notes to Consolidated Financial Statements.69Table of ContentsALIMERA SCIENCES, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSFOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 Years Ended December 31, 2016 2015 (In thousands)NET LOSS$(33,174) $(30,645) OTHER COMPREHENSIVE LOSS Foreign currency translation adjustments(124) (336)TOTAL OTHER COMPREHENSIVE LOSS(124) (336)COMPREHENSIVE LOSS$(33,298) $(30,981)See Notes to Consolidated Financial Statements.70Table of ContentsALIMERA SCIENCES, INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYFOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 Common Stock Series A ConvertiblePreferred Stock Series B ConvertiblePreferred Stock AdditionalPaid-InCapital CommonStockWarrants AccumulatedDeficit AccumulatedOtherComprehensiveLoss Total Shares Amount Shares Amount Shares Amount (In thousands, except share data)BALANCE — December 31,201444,320,342 $443 600,000 $19,227 8,416 $49,568 $292,851 $1,497 $(313,255) $(812) $49,519Issuance of commonstock, net of issuancecosts341,239 4 — — — — 920 — — — 924Exercise of stock options344,252 3 — — — — 568 — — — 571Modification of commonstock warrants— — — — — — — 1,250 — — 1,250Stock-basedcompensation— — — — — — 5,037 — — — 5,037Net loss— — — — — — — — (30,645) — (30,645)Foreign currencytranslation adjustments— — — — — — — — — (336) (336)BALANCE — December 31,201545,005,833 450 600,000 19,227 8,416 49,568 299,376 2,747 (343,900) (1,148) 26,320Issuance of commonstock, net of issuancecosts19,645,539 197 — — — — 26,225 — — — 26,422Exercise of stock options211,532 2 — — — — 291 — — — 293Modification of commonstock warrants— — — — — — — 590 — — 590Issuance of commonstock warrants— — — — — — — 370 — — 370Stock-basedcompensation— — — — — — 4,889 — — — 4,889Net loss— — — — — — — — (33,174) — (33,174)Foreign currencytranslation adjustments— — — — — — — — — (124) (124)BALANCE — December 31,201664,862,904 $649 600,000 $19,227 8,416 $49,568 $330,781 $3,707 $(377,074) $(1,272) $25,586See Notes to Consolidated Financial Statements.71Table of ContentsALIMERA SCIENCES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 Years Ended December 31, 2016 2015 (In thousands)CASH FLOWS FROM OPERATING ACTIVITIES: Net loss$(33,174) $(30,645)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization2,767 2,555Inventory reserve104 445Unrealized foreign currency transaction loss40 106Amortization of debt discount1,038 836Deferred taxes (benefit)(213) (223)Loss on early extinguishment of debt2,564 —Stock compensation expense4,889 5,037Change in fair value of derivative warrant liability(2,627) (13,283)Changes in assets and liabilities: Accounts receivable(4,096) (8,919)Prepaid expenses and other current assets556 405Inventory1,000 (386)Accounts payable1,073 (487)Accrued expenses and other current liabilities1,035 (1,401)Other long-term liabilities(55) 596Net cash used in operating activities(25,099) (45,364)CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment(186) (451)Net cash used in investing activities(186) (451)CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options292 571Proceeds from sale of common stock27,763 1,002Payment of issuance cost of common stock(1,341) (27)Payment of Series B convertible preferred stock offering costs— (327)Payment of debt issuance costs (Note 9)(1,069) (264)Payments on capital lease obligations(227) (293)Changes in restricted cash6 (37)Net cash provided by financing activities25,424 625EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS(235) (432)NET DECREASE IN CASH AND CASH EQUIVALENTS(96) (45,622)CASH AND CASH EQUIVALENTS — Beginning of year31,075 76,697CASH AND CASH EQUIVALENTS — End of year$30,979 $31,075SUPPLEMENTAL DISCLOSURES: Cash paid for interest$3,958 $4,177Cash paid for income taxes$193 $263Supplemental schedule of noncash investing and financing activities: Property and equipment acquired under capital leases$76 $1,098Note payable end of term payment accrued but unpaid$1,400 $1,050Common Stock offering costs accrued but unpaid$— $52There were no dividend payments made for the years ended December 31, 2016 and 2015.See Notes to Consolidated Financial Statements.72Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1.NATURE OF OPERATIONSAlimera Sciences, Inc., together with its wholly-owned subsidiaries, (the Company) is a pharmaceutical company that specializes in thecommercialization, research and development of ophthalmic pharmaceuticals. The Company was formed on June 4, 2003 under the laws of the State ofDelaware.The Company is presently focused on diseases affecting the back of the eye, or retina, because the Company’s management believes these diseases arenot well treated with current therapies and represent a significant market opportunity. The Company’s only commercial product is ILUVIEN®, which hasreceived marketing authorization in the United States (U.S.), Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy,Luxembourg, the Netherlands, Norway, Poland, Portugal, Spain, Sweden and the United Kingdom. In the U.S., ILUVIEN is indicated for the treatment ofdiabetic macular edema (DME) in patients who have been previously treated with a course of corticosteroids and did not have a clinically significant rise inintraocular pressure (IOP). In the European Economic Area (EEA) countries in which ILUVIEN has received marketing authorization, it is indicated for thetreatment of vision impairment associated with DME considered insufficiently responsive to available therapies. As part of the approval process in Europe,the Company committed to conduct a five-year, post-authorization, open label registry study in 800 patients treated with ILUVIEN. In the fourth quarter of2016, the Company requested approval to modify its protocol to cap enrollment in the study due to its post market safety surveillance not showing anyunexpected safety signals. Although the Company has not received formal regulatory approval, the Medicines & Healthcare products Regulatory Agency(MHRA) has agreed to allow the Company to suspend enrollment, pending approval of the Company’s protocol amendment. As of December 31, 2016, 548patients were enrolled in this study.The Company launched ILUVIEN in Germany and the United Kingdom in the second quarter of 2013 and in the U.S. and Portugal in the first quarter of2015.In addition, the Company has entered into various agreements under which distributors will provide regulatory, reimbursement or sales and marketingsupport for future commercialization of ILUVIEN in numerous countries in the Middle East, Italy, Australia, New Zealand and Canada.73Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESUse of Estimates in Financial Statements — The financial statements have been prepared in conformity with accounting principles generally acceptedin the United States of America and, as such, include amounts based on informed estimates and judgments of management. Actual results could differ fromthose estimates.Principles of Consolidation — The consolidated financial statements include the accounts of Alimera Sciences, Inc. and all wholly-owned subsidiaries.All significant inter-company balances have been eliminated in consolidation.Cash, Cash Equivalents and Restricted Cash — Cash and cash equivalents include cash and highly liquid investments that are readily convertible intocash and have a maturity of 90 days or less when purchased. Generally, cash and cash equivalents held at financial institutions are in excess of federallyinsured limits. The Company limits its exposure to credit loss by placing its cash and cash equivalents in highly liquid investments with high qualityfinancial institutions. Cash and cash equivalents were $30,979,000 and $31,075,000 as of December 31, 2016 and 2015, respectively, with approximately92.0% and 90.0% of these balances, respectively held in U.S. based financial institutions. In addition, the Company has certain credit arrangements thatrequire the Company to maintain minimum balances in specific bank accounts as collateral which are recorded as restricted cash.Revenue Recognition — The Company recognizes revenue from its product sales when persuasive evidence of an arrangement exists, title to productand associated risk of loss have passed to the customer, the price is fixed or determinable, and collection from the customer is reasonably assured. Title passesgenerally upon shipment or upon receipt by the customer depending on the agreement with the customer. Precise information regarding the receipt of productby the customer is not always readily available. In these cases, the Company estimates the date of receipt based upon shipping policies by geographiclocation. The Company’s shipping policies require delivery within 24 hours of shipment in most instances. Taxes that are collected from customers andremitted to governmental authorities are not included in revenue.In the U.S., the Company sells ILUVIEN to a limited number of pharmaceutical distributors who in turn sell the product downstream to pharmacies andphysician practices. Revenue from U.S. product sales is recorded upon sale to the pharmaceutical distributors net of applicable provisions for rebates andchargebacks under governmental programs, distribution-related fees and other sales-related deductions. Calculating these provisions involves management’sestimates and judgments. The Company reviews its estimates of rebates, chargebacks and other applicable provisions each period and records any necessaryadjustments in the current period’s net product sales.The Company estimates reductions to product sales for Medicaid and Veterans’ Administration (VA) programs and for certain other qualifying federaland state government programs. Based upon the Company’s contracts with government agencies, statutorily-defined discounts applicable to government-funded programs, historical experience and estimated payer mix, the Company estimates and records an allowance for rebates and chargebacks. TheCompany’s liability for Medicaid rebates consists of estimates for claims that a state will make for a current quarter, claims for prior quarters that have beenestimated for which an invoice has not been received and invoices received for claims from prior quarters that have not been paid. The Company’s reservesrelated to discounted pricing to VA, Public Health Services and other institutions (collectively qualified healthcare providers) represent the Company’sestimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices theCompany charges to its customers (i.e., pharmaceutical distributors). The Company’s customers charge the Company for the difference between what theypay for the products and the ultimate selling price to the qualified healthcare providers. The Company’s reserve for this discounted pricing is based onexpected sales to qualified healthcare providers and the historical chargebacks that customers have already claimed.The Company has written contracts with its customers that include terms for distribution-related fees. The Company estimates and records distributionand related fees due to its customers based on gross sales.Consistent with industry practice, the Company offers its customers a limited right to return product purchased directly from the Company, which isprincipally based upon the product’s expiration date. The Company will accept returns for three months prior to and up to nine months after the productexpiration date. Depending on the circumstances, the Company may provide replacement products or cash credit for returns. Product returned is generally notresalable given the nature of the Company’s products and method of administration. The Company develops estimates for product returns based uponhistorical experience, inventory levels, shelf life of the product and other relevant factors. The Company monitors product supply levels in the distributionchannel, as well as sales by its customers to healthcare providers using product-specific data provided by its customers. If necessary, the Company’s estimatesof product returns may be adjusted in the future based on actual returns experience, known or expected changes in the marketplace, or other factors.74Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are generated through sales primarily to pharmacies, hospitals andwholesalers which began in 2013. The Company does not require collateral from its customers for accounts receivable. The carrying amount of accountsreceivable is reduced by an allowance for doubtful accounts that reflects management’s best estimate of the amounts that will not be collected. In addition toreviewing delinquent accounts receivable, management considers many factors in estimating its general allowance, including historical data, experience,customer types, credit worthiness and economic trends. From time to time, management may adjust its assumptions for anticipated changes in any of those orother factors expected to affect collectability. Provisions for doubtful accounts are charged to operations at the time management determines these accountsmay become uncollectable. The Company writes off accounts receivable when management determines they are uncollectable and credits paymentssubsequently received on such receivables to bad debt expense in the period received. The following summarizes activity related to the Company’sallowance for doubtful accounts: Years Ended December 31, 2016 2015 (in thousands)Beginning balance$118 $—Bad debt expense— 118Recovery of bad debt reserve(118) —Ending balance$— $118Inventory — Inventories are stated at the lower of cost or market with cost determined under the first in, first out (FIFO) method. Included in inventorycosts are component parts, work-in-progress and finished goods. The Company relies on third party manufacturers for the production of all inventory anddoes not capitalize any internal costs. The Company periodically reviews inventories for excess, obsolete or expiring inventory and writes down obsolete orotherwise unmarketable inventory to its estimated net realizable value. If the actual net realizable value is less than that estimated, or if there are any furtherdeterminations that inventory will not be marketable based on estimates of demand, additional inventory write-downs will be required.Intangible Assets — The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed,which approximates a straight-line basis, over the estimated periods benefited. The estimated useful life of the intangible asset is approximately thirteenyears.Property and Equipment — Property and equipment are stated at cost. Additions and improvements are capitalized while repairs and maintenance areexpensed. Depreciation is provided on the straight-line method over the useful life of the related assets beginning when the asset is placed in service. Theestimated useful lives of the individual assets are as follows: furniture, fixtures and manufacturing equipment, five years; automobiles, four years; officeequipment and leasehold improvements, 29 months to five years; and software, three years.Impairment — Property and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. When indicators of impairment are present, the Company evaluates the carrying amount of such assets inrelation to the operating performance and future estimated undiscounted net cash flows expected to be generated by the assets. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Theassessment of the recoverability of assets will be impacted if estimated future operating cash flows are not achieved.Income Taxes — In accordance with the Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) 740, Income Taxes,the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of its assets andliabilities. The Company records a valuation allowance against its net deferred tax asset to reduce the net carrying value to an amount that is more likely thannot to be realized.Income tax positions are considered for uncertainty in accordance with ASC 740-10. The Company believes that its income tax filing positions anddeductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position; therefore, no ASC740-10 liabilities for uncertain tax positions have been recorded. The Company will recognize accrued interest and penalties related to unrecognized taxbenefits, if any, as interest expense and income tax expense, respectively, in the consolidated statements of operations.Significant management judgment is involved in determining the provision for income taxes, deferred tax assets and liabilities, and any valuationallowance recorded against net deferred tax assets. Due to uncertainties with respect to the75Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)realization of deferred tax assets as a result of the Company’s history of operating losses, a valuation allowance has been established against the net deferredtax asset balance in the U.S. The valuation allowance is based on management’s estimates of taxable income in the jurisdictions in which the Companyoperates and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or the Company adjuststhese estimates in future periods, a change in the valuation allowance may be needed, which could materially impact the Company’s financial position andresults of operations.Research and Development Costs — Research and development costs are expensed as incurred. Research and development expenses were $2,146,000and $2,395,000 for the years ended December 31, 2016 and 2015, respectively.Stock-Based Compensation — The Company has stock option plans which provide for grants of stock options to employees and directors to purchaseshares of the Company’s common stock at exercise prices generally equal to the fair market values of such stock at the dates of grant. Compensation cost isrecognized for all share-based awards based on the grant date fair value in accordance with the provisions of ASC 718, Compensation — StockCompensation. The fair values for the options are estimated at the dates of grant using a Black-Scholes option-pricing model. Additionally, the Company sponsors an employee stock purchase plan (ESPP) under which employees may elect payroll withholdings to fundpurchases of the Company’s stock at a discount. The Company estimates the fair value of the option to purchase shares of the Company’s common stockusing the Black-Scholes valuation model and recognizes compensation expense in accordance with the provisions of ASC 718-50, Employee Share PurchasePlans.Derivative Financial Instruments — The Company generally does not use derivative instruments to hedge exposures to cash flow or market risks.However, certain warrants to purchase Series A Convertible Preferred Stock or common stock that do not meet the requirements for classification as equity, inaccordance with the Derivatives and Hedging Topic of the ASC, are classified as liabilities. In such instances, net-cash settlement is assumed for financialreporting purposes, even when the terms of the underlying contracts do not provide for a net-cash settlement. These warrants were considered derivativeinstruments at issuance because the agreements provide for settlement in Series A Convertible Preferred Shares or common shares at the option of the holder,an adjustment to the warrant exercise price for common shares at some point in the future and contain anti-dilution provisions whereby the number of sharesfor which the warrants are exercisable and/or the exercise price of the warrants are subject to change in the event of certain issuances of stock at prices belowthe then-effective exercise price of the warrants. The warrant exercise price no longer can be adjusted at some point in the future. The primary underlying riskexposure pertaining to the warrants is the change in fair value of the underlying common stock. Such financial instruments are initially recorded at fair valuewith subsequent changes in fair value recorded as a component of change in fair value of derivative warrant liability in the consolidated statements ofoperations in each reporting period. If these instruments subsequently meet the requirements for equity classification, the Company reclassifies the fair valueto equity. As of December 31, 2016 and 2015, these warrants represented the only outstanding derivative instruments issued or held by the Company.Fair Value of Financial Instruments — The carrying amounts of the Company’s financial instruments, including cash and cash equivalents and currentassets and liabilities approximate their fair value because of their short maturities. The weighted average interest rate of the Company’s notes payableapproximates the rate at which the Company could obtain alternative financing; therefore, the carrying amount of the note approximates the fair value. TheCompany uses the Black-Scholes option pricing model and assumptions that consider, among other variables, the fair value of the underlying stock, risk-freeinterest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivative instruments.Translation Policy - The U.S. dollar is the functional currency for Alimera Sciences, Inc. The Euro is the functional currency for the majority of theCompany’s subsidiaries operating outside of the U.S.For Alimera Sciences, Inc., foreign currency assets and liabilities are remeasured into U.S. dollars at end-of-period exchange rates, except for non-monetary balance sheet accounts, which are remeasured at historical exchange rates. Revenue and expenses are remeasured at average exchange rates in effectduring each period, except for those expenses related to the non-monetary balance sheet amounts, which are remeasured at historical exchange rates. Gains orlosses from foreign currency remeasurements are included in the statement of operations.The financial statements of the foreign subsidiaries whose functional currency is not the U.S. dollar, have been translated into U.S. dollars in accordancewith ASC 830-30, Translation of Financial Statements. For the subsidiaries operating outside of the U.S. that are denominated in the Euro, assets andliabilities are translated at end-of-period rates while revenues and expenses are translated at average rates in effect during the period in which the activitytook place. Equity is translated at historical rates and the resulting cumulative translation adjustments are included as a component of accumulated othercomprehensive loss.76Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Earnings Per Share (EPS) — Basic EPS is calculated in accordance with ASC 260, Earnings per Share by dividing net income or loss attributable tocommon stockholders by the weighted average common stock outstanding. Diluted EPS is calculated in accordance with ASC 260 by adjusting weightedaverage common shares outstanding for the dilutive effect of common stock options, warrants, convertible preferred stock and accrued but unpaid convertiblepreferred stock dividends. In periods where a net loss is recorded, no effect is given to potentially dilutive securities, since the effect would be anti-dilutive.Common stock equivalent securities that would potentially dilute basic EPS in the future, but were not included in the computation of diluted EPS becauseto do so would have been anti-dilutive, were as follows: Years Ended December 31, 2016 2015Series A convertible preferred stock9,022,556 9,022,556Series B convertible preferred stock8,416,251 8,416,251Series A convertible preferred stock warrants4,511,279 4,511,279Common stock warrants1,795,663 738,331Stock options10,804,412 9,475,890Total34,550,161 32,164,307Reporting Segments — The Company determines operating segments in accordance with its internal operating structure. The Company’s chiefoperating decision maker is the Chief Executive Officer (CEO). While the CEO is apprised of a variety of financial metrics and information, the business isprincipally managed and organized based upon geographic and regulatory environment. Each segment is separately managed and is evaluated primarilyupon net loss from operations. The Company does not report balance sheet information by segment since it is not reviewed by the Company’s chief operatingdecision maker. The Company has two reportable segments, U.S. and International.Promotional and Advertising Costs — Promotional and advertising costs are expensed as incurred.Adoption of New Accounting Standards — In June 2014, the FASB issued Accounting Standards Update (ASU) 2014-12, Compensation Stock -Compensation (Topic 718). ASU 2014-12 applies to all reporting entities that grant their employees share-based payments in which the terms of the awardprovide that a performance target that affects vesting could be achieved after the requisite service period. It requires that a performance target that affectsvesting and that could be achieved after the requisite service period be treated as a performance condition and follows existing accounting guidance for thetreatment of performance conditions. The standard was effective for annual periods and interim periods within those annual periods beginning after December15, 2015. The adoption of this guidance did not have a material impact on its financial statements.In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financialstatements are issued and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. ASU 2014-15applies to all entities and is effective for annual and interim reporting periods ending after December 15, 2016, with early adoption permitted. The adoptionof this guidance did not have a material impact on its financial statements.In April 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifyingthe Presentation of Debt Issuance Costs. ASU 2015-03 is intended to simplify the presentation of debt issuance costs. These amendments require that debtissuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability,consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The newstandard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted and thestandard is to be retrospectively applied to all periods presented upon adoption. The Company elected to early adopt ASU 2015-03 effective December 31,2015, and as a result the Company reclassified $629,000 from deferred financing costs to note payable in its Consolidated Balance Sheet as of December 31,2015.In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferredincome taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The Company electedto early adopt ASU 2015-17 effective December 31, 2015 on a prospective basis. Adoption of this ASU resulted in a reclassification of our net currentdeferred tax asset to the net non-current deferred tax asset in its Consolidated Balance Sheet as of December 31, 2015.77Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Accounting Standards Issued but Not Yet Effective — In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic606), as subsequently amended. ASU 2014-09 provides a single, comprehensive revenue recognition model for all contracts with customers. The revenueguidance contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principleis that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to inexchange for those goods or services. The standard is effective for the first interim period within annual reporting periods beginning after December 15, 2017for public entities, with early adoption permitted in the annual reporting period beginning after December 15, 2016. The Company has begun its evaluationof the new guidance on its business and, at this time, do not believe there will be a material impact on the Company’s current direct product sales ininternational markets. For the U.S. business, the Company continues to evaluate the variable consideration provisions of the new guidance and the impact itwill have specifically on the Company’s gross to net revenue adjustments, including chargebacks and rebates. The Company anticipates adopting the newrevenue standard using the modified retrospective transition method.In July 2015, FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This update requires entities to measureinventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonablypredictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retailinventory method. This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those years. TheCompany does not expect the impact of the adoption to have a material effect on its financial statements.In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires all leases with durations greater than twelve months tobe recognized on the balance sheet and is effective for interim and annual reporting periods beginning after December 15, 2018, although early adoption ispermitted. The Company is currently in the process of evaluating the impact of the adoption on its financial statements.In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718). This standard makes several modifications toTopic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excesstax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard iseffective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company does not expectthe impact of the adoption to have a material effect on its financial statements.78Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)3. GOING CONCERNThe accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets andthe satisfaction of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments that might result fromthe outcome of this uncertainty.To date the Company has incurred recurring losses, negative cash flow from operations and has accumulated a deficit of $377,074,000 from theCompany’s inception through December 31, 2016. As of December 31, 2016, the Company had approximately $30,979,000 in cash and cash equivalents.The Company's ability to achieve profitability and positive cash flow is dependent upon its ability to increase revenue and contain its expenses. Further, theCompany must maintain compliance with the debt covenants of its debt agreement (see Note 9). In 2016, in order to continue to fund its operations and meetits debt covenants, the Company raised additional equity and amended its debt agreement. In management’s opinion, the uncertainty regarding futurerevenues raises substantial doubt about the Company’s ability to continue as a going concern without access to additional debt or equity financing, over thecourse of the next twelve months.In order to meet the Company’s working capital needs through the next twelve months and maintain compliance with its debt covenants, the Companymay need to raise additional debt or equity financing. The Company may be able to access capital under the Company’s current at-the-market offeringfacility, which has approximately $22,000,000 of remaining availability. The Company implemented a cost savings program in late 2016 that the Companybelieves will help decrease our cash burn over the next twelve months. While the Company has historically been able to raise additional capital throughissuance of equity and/or debt financing, and while the Company has a plan in place to reduce spending in order to satisfy its obligations due within one yearfrom the date of issuance of these financial statements, there can be no guarantees on the Company’s ability to maintain debt compliance, raise additionalequity, or successfully implement its cost reduction plans. Accordingly, there is substantial doubt about the Company’s ability to continue as a goingconcern within one year after these financial statements are issued.79Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)4. INVENTORYInventory consisted of the following: December 31, 2016 2015 (In thousands)Component parts (1)$115 $131Work-in-process (2)18 333Finished goods353 1,525Total inventory486 1,989Inventory reserve(40) (437)Inventory — net$446 $1,552(1) Component parts inventory consisted of manufactured components of the ILUVIEN applicator.(2) Work-in-process consisted of completed units of ILUVIEN that are undergoing, but have not completed, quality assurance testing as required by U.S. orEEA regulatory authorities.5. PROPERTY AND EQUIPMENTProperty and equipment consisted of the following: December 31, 2016 2015 (In thousands)Furniture and fixtures$391 $376Office equipment838 794Automobiles762 1,028Software973 902Leasehold improvements460 439Manufacturing equipment997 970Total property and equipment4,421 4,509Less accumulated depreciation and amortization(2,634) (1,956)Property and equipment — net$1,787 $2,553Depreciation and amortization expense associated with property and equipment totaled $822,000 and $614,000 for the years ended December 31, 2016and 2015, respectively.80Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)6. INTANGIBLE ASSETSAs a result of the U.S. Food and Drug Administration’s (FDA) approval of ILUVIEN in September 2014, the Company was required to pay pSivida US,Inc. (pSivida) a milestone payment of $25,000,000 (the pSivida Milestone Payment) in October 2014 (see Note 8).The gross carrying amount of the intangible asset is $25,000,000, which is being amortized over approximately 13 years from the acquisition date. Thenet book value of the intangible asset was $20,604,000 and $22,549,000 as of December 31, 2016 and 2015, respectively, and amortization expense was$1,946,000 and $1,940,000 for the years ended December 31, 2016 and 2015, respectively.The estimated remaining amortization as of December 31, 2016 is as follows (in thousands):Years Ending December 31 2017$1,94020181,94020191,94020201,94620211,940Thereafter10,898Total$20,6047. ACCRUED EXPENSESAccrued expenses consisted of the following: December 31, 2016 2015 (In thousands)Accrued clinical investigator expenses$1,122 $732Accrued other compensation expenses1,020 804Accrued rebate, chargeback and other revenue reserves809 452Accrued End of Term Payment (Note 9)— 1,050Other accrued expenses807 873Total accrued expenses$3,758 $3,91181Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)8. LICENSE AGREEMENTSThe Company entered into an agreement with pSivida for the use of fluocinolone acetonide (FAc) in pSivida’s proprietary delivery device in February2005 with a subsequent amendment in 2008. pSivida is a global drug delivery company committed to the biomedical sector and the development of drugdelivery products. The agreement with pSivida provides the Company with a worldwide exclusive license to develop and sell ILUVIEN.The Company’s license rights to pSivida’s proprietary delivery device could revert to pSivida if the Company were to (i) fail twice to cure its breach ofan obligation to make certain payments to pSivida following receipt of written notice thereof; (ii) fail to cure other breaches of material terms of its agreementwith pSivida within 30 days after notice of such breaches or such longer period (up to 90 days) as may be reasonably necessary if the breach cannot be curedwithin such 30-day period; (iii) file for protection under the bankruptcy laws, make an assignment for the benefit of creditors, appoint or suffer appointmentof a receiver or trustee over its property, file a petition under any bankruptcy or insolvency act or have any such petition filed against it and such proceedingremains undismissed or unstayed for a period of more than 60 days; or (iv) notify pSivida in writing of its decision to abandon its license with respect to acertain product using pSivida’s proprietary delivery device. The Company was not in breach of its agreement with pSivida as of December 31, 2016.The Company must share 20% of net profits, determined on a cash basis and 33% of any lump sum milestone payments received from a sub-licensee ofILUVIEN, as defined by the agreement, with pSivida. In connection with this arrangement the Company is entitled to recover 20% of commercialization costsof ILUVIEN, as defined in the agreement, incurred prior to product profitability out of pSivida’s share of net profits, which is recovered as a reduction offuture royalty payments. As of December 31, 2016 and 2015, the Company could offset future royalty payments to pSivida in the amounts of $25,828,000and $21,565,000, respectively, due to the accumulation of commercialization costs. Due to the uncertainty of future net profits, the Company has fullyreserved these amounts in the accompanying consolidated financial statements. As a result of the FDA’s approval of ILUVIEN in September 2014, theCompany paid pSivida a milestone payment of $25,000,000 in October 2014. As of December 31, 2016 the Company owed pSivida approximately $240,000for their portion of net profits on a cash basis, as defined in the amended and restated agreement, from the fourth quarter of 2016.In the second quarter of 2016, pSivida disputed portions of the Company’s claimed commercialization costs for the year ended December 31, 2014. Aspart of this dispute, pSivida notified the Company that it disagreed with $1,290,000 of the $12,956,000 in commercialization costs receivable that theCompany had reported as of December 31, 2014 and claimed incremental profit sharing payments of $136,000 for the year ended December 31, 2014. TheCompany is disputing pSivida’s assertions using the alternative dispute resolution mechanism under the pSivida Agreement. If pSivida’s assertions were toprevail in the alternative dispute resolution mechanism and their assertions were then applied to the commercialization cost calculations for the years endedDecember 31, 2016 and 2015, then the Company believes the commercialization costs receivable from pSivida would be reduced from $25,828,000 to$21,201,000 as of December 31, 2016 and from $21,565,000 to $18,504,000 as of December 31, 2015 and the impact on the statements of operations for theyears ended December 31, 2016 and 2015 would be immaterial.82Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)9. LOAN AGREEMENTSHercules Loan Agreement2014 Loan AgreementIn April 2014, Alimera Sciences Limited (Limited), a subsidiary of the Company, entered into a loan and security agreement (2014 Loan Agreement)with Hercules Capital, Inc. (Hercules) providing for a term loan of up to $35,000,000 (2014 Term Loan), which Limited and Hercules amended in November2015 (the First Loan Amendment), March 2016 (the Second Loan Amendment), May 2016 (the Third Loan Amendment) and October 2016 (the Fourth LoanAmendment and, collectively with the 2014 Loan Agreement, the First Loan Amendment, the Second Loan Amendment and the Third Loan Amendment, theTerm Loan Agreement). Under the 2014 Loan Agreement, Hercules made an advance in the initial principal amount of $10,000,000 to Limited at closing toprovide Limited with additional working capital for general corporate purposes and to repay a 2013 term loan with Silicon Valley Bank. Hercules made anadditional advance of $25,000,000 to Limited in September 2014, following the approval of ILUVIEN by the FDA to fund the pSivida Milestone Payment.The 2014 Loan Agreement provided for interest only payments through November 2015. Interest on the 2014 Term Loan accrued at a floating per annum rateequal to the greater of (i) 10.90%, or (ii) the sum of (A) 7.65%, plus (B) the prime rate. Following the interest only period the 2014 Term Loan was due andpayable to Hercules in equal monthly payments of principal and interest through May 1, 2018. The interest rate on the Term Loan Agreement was 11.25% asof December 31, 2016.First Loan AmendmentIn November 2015, Limited and Hercules amended the 2014 Loan Agreement to extend the interest only payments through May 2017. In connectionwith the First Loan Amendment, Limited paid to Hercules an amendment fee of $262,500 and agreed to make an additional payment of $1,050,000, equal to3% of the 2014 Term Loan at the time of the final payment (End of Term Payment).Limited and the Company, on a consolidated basis with the Company’s other subsidiaries (the Consolidated Group), agreed to customary affirmativeand negative covenants and events of default in connection with these arrangements. The occurrence of an event of default could result in the acceleration ofLimited’s obligations under the Term Loan Agreement and an increase to the applicable interest rate and would permit Hercules to exercise remedies withrespect to the collateral under the Term Loan Agreement. In connection with the First Loan Amendment, Limited agreed to covenants regarding certainrevenue thresholds and a liquidity threshold.Second Loan AmendmentIn January 2016, the revenue threshold covenant was not met by the Consolidated Group and as a result, in March 2016, Limited and Hercules enteredinto the Second Loan Amendment, which further amended certain terms of the 2014 Loan Agreement. In conjunction with the Second Loan Amendment,Hercules waived this covenant violation.The Second Loan Amendment adjusted the revenue covenant to a rolling three-month calculation, first measured for the three months ended May 31,2016. In addition, the Second Loan Amendment increased the liquidity covenant. Upon execution of the Second Loan Amendment, Limited paid Hercules anamendment fee of $350,000 and agreed to increase the End of Term Payment to $1,400,000 from $1,050,000, which is payable in May 2018.The Company concluded that the Second Loan Amendment resulted in a substantial modification of the terms of debt when considered with the FirstLoan Amendment in accordance with the guidance in ASC 470-50, Debt. As a result, the Company accounted for the Second Loan Amendment as anextinguishment and recognized a loss on early extinguishment of debt of approximately $2,564,000 within the consolidated statement of operations for theyear ended December 31, 2016. The loss on early extinguishment consisted primarily of the unamortized debt discount associated with the warrant and debtissuance costs incurred prior to the Second Loan Amendment, the incremental fair value of the warrant as a result of modifying the terms of the warrant andthe debt issuance costs of $360,000 paid to Hercules for the Second Loan Amendment.Third Loan Amendment and July 2016 WaiverIn May 2016, Limited and Hercules entered into the Third Loan Amendment to expand the definition of liquidity to allow for the inclusion of cash ofup to $2,000,000 in bank accounts outside of the U.S. and the United Kingdom.In July 2016, Limited obtained a waiver of the requirements of the liquidity covenant (the Waiver) because the Consolidated Group was not incompliance with the liquidity covenant as of June 30, 2016. The Waiver cured the default of the liquidity covenant then existing under the Term LoanAgreement and decreased the liquidity requirement. In addition, the83Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Waiver modified the three-month revenue covenant so that it was not measured at July 31, 2016 and reduced the three-month revenue target to be measuredat August 31, 2016. Following execution of the Waiver, Limited incurred a weekly ticking fee equal to 0.05% multiplied by the outstanding principalamount through the closing of the Company’s public offering in August 2016 (see Note 12 Common Stock), totaling $65,000. Further, Limited paid Herculesa fee of $350,000 associated with the Waiver.Fourth Loan AmendmentIn October 2016, Limited entered into the Fourth Loan Amendment with Hercules, which further amended certain terms of the Term Loan Agreement.Pursuant to the terms of the Fourth Loan Amendment, Hercules agreed to provide up to an additional $10,000,000 to Limited with (i) the first $5,000,000available at Limited’s option through June 30, 2017 subject to (A) the Consolidated Group’s achievement of $12,000,000 in trailing three month net productrevenue and (B) no event of default having occurred since October 20, 2016 (the Effective Date) and (ii) the second $5,000,000 available at Limited’s optionthrough December 31, 2017 subject to (A) the Consolidated Group’s achievement of $15,000,000 in trailing three month net product revenue, (B) no event ofdefault having occurred since the Effective Date and (C) the prior $5,000,000 having been advanced to Limited (the Additional Advances and, together withthe 2014 Term Loan, the Term Loan). The Fourth Loan Amendment provides for interest only payments through November 30, 2018 (the Interest-OnlyPeriod). Pursuant to the Fourth Loan Amendment, interest on the Term Loan accrues at a floating per annum rate equal the greater of (i) 11.0% and (ii) thesum of (A) 11.0% plus (B) the prime rate as reported in The Wall Street Journal, or if not reported, the prime rate most recently reported in The Wall StreetJournal, minus 3.5%. In addition to the interest described above, the principal balance of the Term Loan will bear “payment-in kind” interest at the rate of1.0% (PIK Interest), which PIK Interest will be added to the outstanding principal balance of the Term Loan so as to increase the outstanding principalbalance of the Term Loan on each payment date for the Term Loan and which amount will be payable when the aggregate outstanding principal amount ofthe Term Loan is payable. The Term Loan will be due and payable to Hercules in 24 equal monthly payments of principal and interest following the Interest-Only Period beginning on December 1, 2018 and matures in full on November 1, 2020.Limited paid Hercules a facility charge of $337,500 and reimbursed Hercules for legal and diligence fees incurred in connection with the Fourth LoanAmendment. If Limited prepays the Term Loan, it will pay Hercules a prepayment penalty (i) if such amounts are prepaid in any of the first 12 monthsfollowing the Effective Date, equal to 3.0% of the principal amount of the Term Loan being repaid, (ii) if such amounts are prepaid after 12 months but priorto 24 months following the Effective Date, equal to 2.0% of the principal amount of the Term Loan being repaid, and (iii) if such amounts are prepaid at anytime thereafter, equal to 1.0% of the principal amount of the Term Loan being repaid.The Consolidated Group also agreed to customary affirmative and negative covenants, including, without limitation, covenants relating to minimumliquidity, minimum trailing six-month net revenue and adjusted EBITDA and events of default in connection with these arrangements. The occurrence of anevent of default could result in the acceleration of Limited’s obligations under the Term Loan Agreement, as amended by the Fourth Loan Amendment andan increase to the applicable interest rate and would permit Hercules to exercise remedies with respect to the collateral under the Term Loan Agreement, asamended by the Fourth Loan Amendment. In the event that the Company maintains $35,000,000 in liquidity, including cash and eligible accountsreceivable, at the end of the month and has not been and is not in breach of the amended debt facility, the six-month trailing revenue covenant is waived forsuch month. As of December 31, 2016, the Company’s liquidity as defined under the Term Loan Agreement was $40,923,000, which consisted of$30,979,000 in cash and cash equivalents and 80% of the Company’s $12,430,000 U.S. eligible accounts receivable.General Discussion of the Term Loan AgreementPursuant to the Term Loan Agreement, Limited’s obligations to Hercules are secured by a first-priority security interest in substantially all of Limited’sassets, excluding intellectual property. Hercules does, however, maintain a negative pledge on Limited’s intellectual property requiring Hercules’ consentprior to the sale of such intellectual property. The Company and certain of the Company’s other subsidiaries are guarantors of the obligations of Limited toHercules under the Term Loan Agreement pursuant to separate guaranty agreements between Hercules and each of Limited and such subsidiaries (Guaranties).Pursuant to the Guaranties, the Company and these subsidiaries granted Hercules a first-priority security interest in substantially all of their respective assetsexcluding intellectual property. The Term Loan Agreement also places limitations on the Company’s ability to declare or pay any dividend or distributionon any shares of capital stock.2014 WarrantIn connection with Limited entering into the 2014 Loan Agreement, the Company issued a warrant to Hercules to purchase up to 285,016 shares of theCompany’s common stock at an exercise price of $6.14 per share (the 2014 Warrant). Sixty percent of the 2014 Warrant was exercisable at the closing inApril 2014 and the remaining forty percent became exercisable upon the funding of the additional $25,000,000 to Limited in September 2014.84Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Company agreed to amend the 2014 Warrant in connection with the First Loan Amendment to increase the number of shares issuable upon exerciseto 660,377 and decrease the exercise price to $2.65 per share. Upon entering into the Second Loan Amendment, the Company agreed to further amend the2014 Warrant to increase the number of shares issuable upon exercise to 862,069 and decrease the exercise price to $2.03 per share. In connection with theJuly 2016 Waiver, the Company agreed to further amend the 2014 Warrant to increase the number of shares issuable upon exercise to 1,258,993 and decreasethe exercise price to $1.39 per share.2016 WarrantIn connection with Limited entering into the Fourth Loan Amendment, the Company agreed to issue a new warrant to Hercules (the 2016 Warrant) topurchase up to 458,716 shares of the Company’s common stock at an exercise price of $1.09 per share, which was equal to $500,000 divided by the lowestvolume-weighted average sale price for a share of the Company’s common stock reported over any ten consecutive trading days during the periodcommencing on and including September 23, 2016 and ending on the earlier to occur of (i) December 30, 2016 (inclusive of such date), and (ii) the secondtrading day immediately preceding the date of closing of a merger event (as defined in the 2016 Warrant).Fair Value of DebtThe weighted average interest rates of the Company’s notes payable approximate the rate at which the Company could obtain alternative financing andthe fair value of the warrants that were issued in connection with the Company’s notes payable are immaterial. Therefore, the carrying amount of the notesapproximated their fair value at December 31, 2016 and 2015.85Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)10. COMMITMENTS AND CONTINGENCIESTerm Note Payable — The Company entered into the Term Loan Agreement in April 2014 and amended the agreement in November 2015, March2016, May 2016 and October 2016 (Note 9). As of December 31, 2016 a schedule of future minimum principal payments, excluding PIK Interest andexcluding the End of Term Payment of $1,400,000 which is payable in May 2018, under the Note Payable is as follows (in thousands): Years Ending December 31(In thousands)2017$—2018$1,3002019$16,5262020$17,174Total$35,000As of December 31, 2016 and 2015, the Company had $336,000 and $333,000 accrued and unpaid interest payable on the Notes Payable, respectively.In addition, the Company is required to make an additional payment of $1,400,000 in May 2018.Operating Leases — The Company leases office space and equipment under non-cancelable agreements accounted for as operating leases. The leasesgenerally require that the Company pay taxes, maintenance, and insurance. Management expects that in the normal course of business, leases that expire willbe renewed or replaced by other leases. In August 2014, the Company signed a lease for office space in the U.S. through September 2021. In December 2014,Limited signed a lease for office space in the United Kingdom through December 24, 2024, however the lease is cancellable after December 17, 2019. Thelease has a contingent escalation clause based on inflation beginning in 2020. The Company also leases office space in Germany and Portugal that expire inJuly 2018 and March 2020, respectively. The Company also leases office space in France, consisting of less than 1,000 square feet. As part of the Company'sdecision in 2016 to close operations in France, which will not be completed until early 2017, the Company gave notice to the leasing company that theCompany would not be renewing the lease after April 2017. As of December 31, 2016, a schedule by year of future minimum payments under all of theCompany’s operating leases is as follows:Years Ending December 31(In thousands)2017$5472018512201945920203502021268Total$2,136Rent expense under all operating leases totaled approximately $544,000 and $541,000 for the years ended December 31, 2016 and 2015, respectively.Capital Leases — The Company leases equipment under capital leases. The property and equipment is capitalized at the lesser of fair market value orthe present value of the minimum lease payments at the inception of the leases using the Company’s incremental borrowing rate.86Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)As of December 31, 2016, a schedule by year of future minimum payments under capital leases, together with the present value of minimum leasepayments, is as follows (in thousands):Years Ending December 31(In thousands)2017$3002018289201910720203Total699Less amount representing interest(41)Less amount representing executory costs(193)Present value of minimum lease payments465Less current portion(191)Non-current portion$274Property and equipment under capital leases, which are included in property and equipment (Note 5), consisted of the following: December 31, 2016 2015 (In thousands)Automobiles$762 $1,028Office equipment63 63Less accumulated depreciation(342) (212)Total$483 $879Depreciation expense associated with property and equipment under capital leases was approximately $267,000 and $210,000 for the years endedDecember 31, 2016 and 2015, respectively.Significant Agreements — In February 2010, the Company entered into an agreement with a third party manufacturer for the manufacture of theILUVIEN implant, the assembly of the ILUVIEN applicator and packaging of the completed ILUVIEN commercial product. The Company is responsible forsupplying the ILUVIEN applicator and the active pharmaceutical ingredient. In accordance with the terms of the agreement, the Company must order at least80% of the ILUVIEN units required in the U.S., Canada and the EEA from the third party manufacturer for an initial term of six years. The agreement has aninitial six year term and will automatically renew for successive one year periods unless either party delivers written notice of non-renewal to the other atleast 12 months prior to the end of the then current term. In February 2016, the Company amended and restated its agreement to extend the term to five years,at which point it will automatically renew for successive one year periods unless either party delivers notice of non-renewal to the other party at least 12months prior to the end of the term or any renewal term.In May 2013, the Company entered into an agreement with the first of three contract research organizations (CROs) for clinical and data managementservices to be performed in connection with the five-year, post-authorization, open label registry study in 800 patients treated with ILUVIEN per the labeledindication in the EEA. Since May of 2013 nine additional agreements have been entered into for work with these CROs. For the years ended December 31,2016 and 2015, the Company incurred $157,000 and $591,000, respectively, of expense associated with these agreements. As of December 31, 2016 and2015, $76,000 and $150,000, respectively, is included in accrued expenses (Note 7). As of December 31, 2016, the Company expects to incur an additional$587,000 of expense associated with these agreements through December 31, 2019.In November 2012, the Company entered into a master services agreement with Quintiles Commercial Europe Limited. Under the agreement, QuintilesCommercial Europe Limited and its affiliates (collectively, Quintiles Commercial) provided certain services to us in relation to the commercialization ofILUVIEN, in France, Germany and the United Kingdom. In December 2013 and January 2014, respectively, the Company transitioned our German andUnited Kingdom country manager positions in-house. In April 2015, the Company terminated the project orders associated with France and Germany andtransitioned the persons employed by Quintiles Commercial to our payroll. In July 2015, the Company terminated the87Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)remaining project orders associated with the United Kingdom and transitioned the persons employed by Quintiles Commercial to the Company’s payroll. Forthe year ended December 31, 2015, the Company incurred $1,030,000 of expense associated with this agreement. As of December 31, 2016 and 2015,$164,000 and $170,000, respectively, was included in accrued expenses. As of December 31, 2015 the master services agreement with Quintiles Commercialhad been terminated and no expense was incurred during the year ended December 31, 2016.Employment Agreements — The Company is party to employment agreements with five executives. The agreements generally provide for annualsalaries, bonuses, and benefits and for the “at-will” employment of such executives. Effective January 1, 2016, the Company is party to five agreements withsalaries ranging from $253,000 to $519,000. If any of the agreements are terminated by the Company without cause, or by the employee for good reason, asdefined in the agreements, the Company will be liable for one year of salary and benefits. Certain other employees have general employment contracts whichinclude stipulations regarding confidentiality, Company property, severance in an event of change of control and miscellaneous items.88Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)11. PREFERRED STOCKSeries A Convertible Preferred StockOn October 2, 2012, the Company closed its preferred stock financing in which it sold units consisting of 1,000,000 shares of Series A ConvertiblePreferred Stock and warrants to purchase 300,000 shares of Series A Convertible Preferred Stock for gross proceeds of $40,000,000, prior to the payment ofapproximately $560,000 of related issuance costs. The powers, preferences and rights of the Series A Convertible Preferred Stock are set forth in the certificateof designation filed by the Company with the Secretary of State of the State of Delaware on October 1, 2012. Each share of Series A Convertible PreferredStock, including any shares of Series A Convertible Preferred Stock issued upon exercise of the warrants, is convertible into shares of the Company’s commonstock at any time at the option of the holder at the rate equal to $40.00 divided by $2.66 (Conversion Price). The initial Conversion Price was subject toadjustment based on certain customary price based anti-dilution adjustments. These adjustment features lapsed in September 2014. Each share of Series AConvertible Preferred Stock shall automatically be converted into shares of common stock at the then-effective Conversion Price upon the occurrence of thelater to occur of both (i) the Company receives and publicly announces the approval by the FDA of the Company’s NDA for ILUVIEN and (ii) the date onwhich the Company consummates an equity financing transaction pursuant to which the Company sells to one or more third party investors either (a) sharesof common stock or (b) other equity securities that are convertible into shares of common stock and that have rights, preference or privileges, senior to or on aparity with, the Series A Convertible Preferred Stock, in each case having an as-converted per share of common stock price of not less than $10.00 and thatresults in total gross proceeds to the Company of at least $30,000,000. The rights and preferences of Series A Convertible Preferred Stock also placelimitations on the Company’s ability to declare or pay any dividend or distribution on any shares of capital stock.Each unit sold in the preferred stock financing included a warrant to purchase 0.30 shares of Series A Convertible Preferred Stock at an exercise priceequal to $44.00 per share. At the election of the holder of a warrant, the warrant may be exercised for the number of shares of common stock then issuableupon conversion of the Series A Convertible Preferred Stock that would otherwise be issued upon such exercise at the then-effective Conversion Price.These warrants are considered derivative instruments because the agreements provide for settlement in Series A Convertible Preferred Stock shares orcommon stock shares at the option of the holder, an adjustment to the warrant exercise price for common shares at some point in the future, and contain anti-dilution provisions whereby the number of shares for which the warrants are exercisable and/or the exercise price of the warrants was subject to change in theevent of certain issuances of stock at prices below the then-effective exercise price of the warrants. Therefore, the warrants were recorded as a liability atissuance. These adjustment features lapsed in September 2014. As of December 31, 2016 and 2015 the fair market value of the warrants was estimated to be$188,000 and $2,815,000, respectively. The Company recorded gains of $2,627,000 and $13,283,000 as a result of the change in fair value of the warrantsduring the years ended December 31, 2016 and 2015, respectively.In April 2014, 2,255,639 shares of common stock were issued pursuant to the conversion of 150,000 shares of Series A Convertible Preferred Stock heldby an investor. In September 2014, 3,759,398 shares of common stock were issued pursuant to the conversion of 250,000 shares of Series A ConvertiblePreferred Stock held by another investor.Series B Convertible Preferred StockOn December 12, 2014, the Company closed a preferred stock financing in which it sold 8,291.873 shares of Series B Convertible Preferred Stock for apurchase price of $6,030.00 per share, or an aggregate purchase price of $50,000,000, prior to the payment of approximately $432,000 of related issuancecosts. The Company has also agreed to issue the purchasers an additional 124.378 shares of Series B Convertible Preferred Stock as a subscription premium.The powers, preferences and rights of the Series B Convertible Preferred Stock are set forth in the certificate of designation filed by the Company with theSecretary of State of the State of Delaware. Each share of Series B Convertible Preferred Stock is convertible into 1,000 shares of the Company’s commonstock at any time at the option of the holder, provided that the holder will be prohibited from converting Series B Convertible Preferred Stock into shares ofthe Company’s common stock if, as a result of such conversion, the holder, together with its affiliates, would own more than 9.98% of the total number ofshares of the Company’s common stock then issued and outstanding. The Series B Convertible Preferred Stock ranks junior to the Company’s existing SeriesA Convertible Preferred Stock, and senior to the Company’s common stock, with respect to rights upon liquidation. The Series B Convertible Preferred Stockranks junior to all existing and future indebtedness. Except as otherwise required by law (or with respect to approval of certain actions), the Series BConvertible Preferred Stock will not have voting rights. The Series B Preferred Stock is not redeemable at the option of the holder. The Series B ConvertiblePreferred Stock is not subject to any price-based or other anti-dilution protections and does not provide for any accruing dividends.89Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Company determined that the conversion option of the Preferred Shares represented a beneficial conversion feature, as the conversion feature hadintrinsic value to the holder on the commitment date as a result of the subscription premium. Therefore, the Company recorded a beneficial conversionfeature of $750,000 during the year ended December 31, 2014 as an increase in additional paid in capital. Because the Series B Convertible Preferred Stockwas immediately convertible into common stock at the option of the holder at issuance, the Company immediately accreted the full value of the beneficialconversion feature to the carrying value of the Series B Convertible Preferred Stock on that date.90Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)12. STOCK INCENTIVE PLANSThe Company has stock option and stock incentive plans which provide for grants of shares to employees and grants of options to employees anddirectors to purchase shares of the Company’s common stock at exercise prices generally equal to the fair values of such stock at the dates of grant. Optionsgranted to employees typically become exercisable over a four-year vesting period and have a ten-year contractual term. Initial options granted to directorstypically vest over a four-year period and have a ten-year contractual term. Annual option grants to directors typically vest immediately and have a ten-yearcontractual term. Upon the exercise of stock options, the Company may issue the required shares out of authorized but unissued common stock or out oftreasury stock at management’s discretion.A summary of stock option transactions under the plans are as follows: Years Ended December 31, 2016 2015 Options WeightedAverageExercisePrice Options WeightedAverageExercisePriceOptions outstanding at beginning of period9,475,890 $3.43 7,681,256 $3.03Grants2,195,250 2.05 2,570,000 4.62Forfeitures(581,497) 3.15 (431,114) 4.79Exercises(285,231) 1.41 (344,252) 1.66Options outstanding at year end10,804,412 3.22 9,475,890 3.43Options exercisable at year end7,363,400 3.29 5,808,528 3.27Weighted average per share fair value of options granted during the year$1.55 $3.58 The following table provides additional information related to outstanding stock options, fully vested stock options, and stock options expected tovest as of December 31, 2016: Shares WeightedAverageExercisePrice WeightedAverageContractualTerm AggregateIntrinsicValue (In thousands)Outstanding10,804,412 $3.22 6.45 years $—Exercisable7,363,400 3.29 5.42 years —Outstanding, vested and expected to vest10,374,846 3.23 6.35 years — 91Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)The Company estimated the fair value of options granted using the Black-Scholes option pricing model. Use of a valuation model requires theCompany to make certain assumptions with respect to selected model inputs. Changes in these input variables would affect the amount of expense associatedwith equity-based compensation. Expected volatility is based on the historical volatility of the Company’s common shares over the expected term of thestock option grant. To estimate the expected term, the Company utilizes the “simplified” method for “plain vanilla” options as discussed within theSecurities and Exchange Commission’s Statement of Accounting Bulletin 107. The Company intends to utilize the simplified method for the foreseeablefuture until more detailed information about exercise behavior will be more widely available. The risk-free interest rate is based on U.S. Treasury DailyTreasury Yield Curve Rates corresponding to the expected life assumed at the date of grant. Dividend yield is zero as there are no payments of dividendsmade or expected. The weighted-average assumptions used for option grants were as follows: Years Ended December 31, 2016 2015Risk-free interest rate1.57% 1.55%Volatility factor93.54% 96.80%Grant date fair value of common stock options$1.55 $3.58Weighted-average expected life5.99 years 6.03 yearsAssumed forfeiture rate10.00% 10.00%Employee stock-based compensation expense related to stock options recognized in accordance with ASC 718 was as follows: Years Ended December 31, 2016 2015 (In thousands)Sales and marketing$1,109 $925Research, development and medical affairs886 1,271General and administrative2,814 2,732Total employee stock-based compensation expense$4,809 $4,928As of December 31, 2016, there was approximately $7,049,000 of total unrecognized compensation cost related to outstanding stock option awardsthat will be recognized over a weighted average period of 2.35 years. The total fair value of shares vested during the year ended December 31, 2016 wasapproximately $4,955,000.The total estimated fair value of options granted during the years ended December 31, 2016 and 2015 was $3,410,000 and $9,172,000, respectively.The total estimated intrinsic value of options exercised during the years ended December 31, 2016 and 2015 was $65,000 and $568,000, respectively.As of December 31, 2016, the Company was authorized to grant options to purchase up to an additional 668,830 shares under the 2010 EquityIncentive Plan. The Company’s 2010 Plan provides for annual increases in the number of shares available for issuance thereunder on the first day of eachfiscal year equal to the lesser of: (1) 2,000,000 shares of our common stock; (2) 4% of the shares of common stock outstanding at that time; and (3) such otheramount as our board of directors may determine. On January 1, 2017, an additional 2,000,000 shares became available for future issuance under the 2010Plan. These additional shares from the annual increase under the 2010 Plan are not included in the foregoing discussion.92Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)13. COMMON STOCK WARRANTSThe Company has issued warrants to purchase common stock to various members of the board of directors, third-parties for services, and lenders. Totalwarrants to purchase common stock issued and exercisable were 1,795,663 and 738,331 as of December 31, 2016 and 2015, respectively. As of December 31,2016, the exercise prices ranged from $1.09 to $11.00 per share. The warrants are exercisable for a period between 5 and 10 years from the issuance date.In connection with Limited entering into the 2014 Loan Agreement (Note 9), the Company entered into the 2014 Warrant to purchase up to 285,016shares of the Company’s common stock at an exercise price of $6.14 per share. Sixty percent of the warrants were exercisable at the closing in April 2014 andthe remaining forty percent became exercisable upon the funding of the additional $25,000,000 to Limited in September 2014.The Company agreed to amend the 2014 Warrant in connection with the First Loan Amendment to increase the number of shares issuable upon exerciseto 660,377 and decrease the exercise price to $2.65 per share. Upon entering into the Second Loan Amendment, the Company agreed to further amend the2014 Warrant to increase the number of shares issuable upon exercise to 862,069 and decrease the exercise price to $2.03 per share. In connection with theJuly 2016 Waiver, the Company agreed to further amend the 2014 Warrant to increase the number of shares issuable upon exercise to 1,258,993 and decreasethe exercise price to $1.39 per share.In connection with Limited entering into the Fourth Loan Amendment, the Company agreed to issue the 2016 Warrant to purchase up to 458,716 sharesof the Company’s common stock at an exercise price of $1.09 per share, which was equal to $500,000 divided by the lowest volume-weighted average saleprice for a share of the Company’s common stock reported over any ten consecutive trading days during the period commencing on and including September23, 2016 and ending on the earlier to occur of (i) December 30, 2016 (inclusive of such date), and (ii) the second trading day immediately preceding the dateof closing of a merger event (as defined in the 2016 Warrant).93Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)14. CONCENTRATIONS AND CREDIT RISKFor the years ended December 31, 2016 and 2015, there were only two customers within the U.S. segment. These two customers, which are largepharmaceutical distributors, accounted for approximately 75% and 68%, respectively, of the Company’s total consolidated revenues. These two samecustomers accounted for approximately 90% and 88% of the Company’s consolidated accounts receivable as of December 31, 2016 and 2015, respectively.For the years ended December 31, 2016 and 2015, there were no vendors that comprised more than 10% of the Company’s total purchases. TheCompany relies on a single manufacturer for ILUVIEN, a single manufacturer for the ILUVIEN applicator and a single active pharmaceutical ingredientmanufacturer for ILUVIEN’s active pharmaceutical ingredient.94Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)15. INCOME TAXESThe components of net loss before taxes are as follows: Years Ended December 31, 2016 2015 (In thousands)United States$(8,516) $(6,026)Foreign(24,486) (24,489)Loss before provision for income taxes$(33,002) $(30,515)In accordance with ASC 740, the Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basisand the tax basis of assets and liabilities at the enacted tax rates in effect for the year in which the differences are expected to reverse. The Company records avaluation allowance against the net deferred tax asset to reduce the net carrying value to an amount that is more likely than not to be realized.The provision for income taxes consists of the following components: Years Ended December 31, 2016 2015 (In thousands)Current expense (benefit): Federal$— $—State— —Foreign385 353Current income tax expense385 353 Deferred expense (benefit): Federal3,099 6,509State(858) 819Foreign(213) (223) 2,028 7,105Valuation allowance(2,241) (7,328)Deferred income tax benefit(213) (223)Total income tax expense$172 $130The following summarizes activity related to the Company’s valuation allowance: Years Ended December 31, 2016 2015 (In thousands)Valuation allowance at beginning of period$(53,727) $(46,399)Income tax provision(2,241) (7,328)Release of valuation allowance— —Other— —Valuation allowance at end of period$(55,968) $(53,727)95Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Worldwide net deferred tax assets and liabilities are as follows: December 31, 2016 2015Deferred tax assets(In thousands)Depreciation and amortization$12 $3Other deferred tax assets5,824 4,643NOL carry-forwards38,183 36,941Research and development costs3,063 4,193Collaboration agreement receivable reserves9,327 8,186Valuation allowance(55,968) (53,727)Total deferred tax assets$441 $239Deferred tax liabilities Unrealized foreign currency gains$— $(12)Other deferred tax liabilities(5) (4)Total deferred tax liabilities(5) (16)Net deferred tax assets and deferred tax liabilities$436 $223A reconciliation from the federal statutory rate to the total provision for income taxes is as follows: Years Ended December 31, 2016 2015 Amount Percent Amount PercentFederal tax benefit at statutory rate$(11,219) 34.0 % $(10,375) 34.0 %State tax — net of federal benefit(10) — (715) 2.4Permanent items and other(225) 0.7 (3,997) 13.1Prior period transfer pricing adjustments— — — —Foreign rate differential8,470 (26.1) 8,352 (27.4)Deferred rate change825 (2.5) — —Other90 (0.3) (463) 1.5Change in valuation allowance2,241 (6.3) 7,328 (24.0)Total tax expense (benefit)$172 (0.5)% $130 (0.4)%The change in permanent differences and other items from 2015 to 2016 is primarily due to the decreased benefit associated with the current periodmovement of the derivative warranty liability. However, as such current period movement creates an increased net operating loss in the United States whichhas a full valuation allowance recorded against its deferred tax assets, there is effectively no impact to total tax expense. Also included in the 2016 permanentdifferences is expense related to incentive stock options of approximately $517,000.96Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)A rollforward of the Company’s uncertain tax positions is as follows: Years Ended December 31, 2016 2015 (In thousands)Balance of uncertain tax positions at beginning of period$46 $—Gross increases - tax positions in current period16 3Gross increases - tax positions in prior period13 43Gross decreases - tax positions in prior period(16) —Settlements— —Lapse of statute of limitations— —Balance of uncertain tax positions at end of period$59 $46Included in the balance of unrecognized tax benefits as of December 31, 2016 and December 31, 2015 are approximately $59,000 and $46,000,respectively, of tax benefits related to research and development tax credits. In accordance with ASC 740-10, such attributes are reduced the amount that isexpected to be recognized in the future. The Company does not accrue interest or penalties as there is no risk of additional tax liability due to significantNOLs available. The Company does not expect any decreases to the unrecognized tax benefits within the next twelve months due to any lapses in statute oflimitations. Tax years from 2012 to 2015 remain subject to examination in California, Georgia, Kentucky, Tennessee, Texas and on the federal level, with theexception of the assessment of NOL carry-forwards available for utilization which can be examined for all years since 2003. The statute of limitations onthese years will close when the NOLs expire or when the statute closes on the years in which the NOLs are utilized.Significant management judgment is involved in determining the provision for income taxes, deferred tax assets and liabilities, and any valuationallowance recorded against net deferred tax assets. Due to uncertainties with respect to the realization of deferred tax assets due to the history of operatinglosses, a valuation allowance has been established against the entire net deferred tax asset balance. The valuation allowance is based on management’sestimates of taxable income in the jurisdictions in which the Company operates and the period over which deferred tax assets will be recoverable. In the eventthat actual results differ from these estimates or the Company adjusts these estimates in future periods, a change in the valuation allowance may be needed,which could materially impact the Company’s financial position and results of operations.As of December 31, 2016 and 2015, the Company had federal net operating loss (NOL) carry-forwards of approximately $104,944,000 and$100,844,000 and state NOL carry-forwards of approximately $83,270,000, and $84,301,000 respectively, that are available to reduce future income unlessotherwise taxable. If not utilized, the federal NOL carry-forwards will expire at various dates between 2029 and 2035 and the state NOL carry-forwards willexpire at various dates between 2020 and 2035.NOL carry-forwards may be subject to annual limitations under Internal Revenue Code (IRC) Section 382 (Section 382) (or comparable provisions ofstate law) in the event that certain changes in ownership of the Company were to occur. The Company periodically evaluates its NOL carry-forwards andwhether certain changes in ownership, including its Initial Public Offering (IPO), have occurred that would limit the Company’s ability to utilize a portion ofits NOL carry-forwards. If it is determined that significant ownership changes have occurred since the Company generated its NOL carry-forwards, it may besubject to annual limitations on the use of these NOL carry-forwards under Section 382 (or comparable provisions of state law). The Company has determinedthat a Section 382 change in ownership occurred in late 2015. Therefore, the annual utilization of the Company’s NOLs are subject to certain limitationsunder Section 382 and other limitations under state tax laws. The Company is currently in the process of calculating these limitations. Any reduction to theCompany’s NOL deferred tax asset due to the annual Section 382 limitation and the NOL carryforward period would result in an offsetting reduction invaluation allowance recorded against the NOL deferred tax asset. Therefore, any limitation would not have an impact on the statements of operations for theperiods presented. The results of the analysis on the impact to the Company’s NOLs will be disclosed at a later date.97Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)As of December 31, 2016, the Company had cumulative book losses in foreign subsidiaries of approximately $92,939,000. The Company has notrecorded a deferred tax asset for the excess of tax over book basis in the stock of its foreign subsidiaries. The Company anticipates that its foreign subsidiarieswill be profitable and have earnings in the future. Once the foreign subsidiaries do have earnings, the Company intends to indefinitely reinvest in its foreignsubsidiaries all undistributed earnings of and original investments in such subsidiaries. As a result, the Company does not expect to record deferred taxliabilities in the future related to excesses of book over tax basis in the stock of its foreign subsidiaries in accordance with ASC 740-30-25.98Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)16. FAIR VALUEThe Company applies ASC 820, Fair Value Measurements in determining the fair value of certain assets and liabilities. Under this standard, fair valueis defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between marketparticipants at the measurement date.In determining fair value, the Company uses various valuation approaches. The hierarchy of those valuation approaches is broken down into threelevels based on the reliability of inputs as follows:Level 1 inputs are quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at themeasurement date. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency andvolume to provide pricing information on an ongoing basis. The valuation under this approach does not entail a significant degree of judgment.Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly orindirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for theasset or liability, (e.g., interest rates and yield curves observable at commonly quoted intervals or current market) and contractual prices for the underlyingfinancial instrument, as well as other relevant economic measures.Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent thatobservable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurementdate.There have been no changes in the methodologies used as of December 31, 2016 and 2015.The following fair value table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis: December 31, 2016 Level 1 Level 2 Level 3 Total (In thousands)Assets: Cash equivalents (1)$— $— $— $—Assets measured at fair value$— $— $— $— Liabilities: Derivative warrant liability (2)$— $188 $— $188Liabilities measured at fair value$— $188 $— $188 December 31, 2015 Level 1 Level 2 Level 3 Total (In thousands)Assets: Cash equivalents (1)$1,010 $— $— $1,010Assets measured at fair value$1,010 $— $— $1,010 Liabilities: Derivative warrant liability (2)$— $2,815 $— $2,815Liabilities measured at fair value$— $2,815 $— $2,815 (1)The carrying amounts approximate fair value due to the short-term maturities of the cash equivalents.99Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(2)The Company uses the Black-Scholes option pricing model and assumptions that consider, among other variables, the fair value of the underlyingstock, risk-free interest rate, volatility, expected life and dividend rates in estimating fair value for the warrants considered to be derivativeinstruments. Assumptions used are generally consistent with those disclosed for stock based compensation (see Note 12).100Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)17. EMPLOYEE BENEFIT PLANSThe Company has a salary deferral 401(k) plan which covers substantially all U.S. employees of the Company. The Company matches participantcontributions subject to certain plan limitations. Compensation expense associated with the Company’s matching plan totaled $287,000 and $268,000 forthe years ended December 31, 2016 and 2015, respectively. The Company may also make an annual discretionary profit-sharing contribution. No suchdiscretionary contributions were made during the years ended December 31, 2016 and 2015, respectively.In April 2010, the Company established an Employee Stock Purchase Plan (the Purchase Plan). Under the Company’s Purchase Plan, eligibleemployees can participate and purchase common stock semi-annually through accumulated payroll deductions. The Purchase Plan is administered by theCompany’s board of directors or a committee appointed by the Company’s board of directors. Under the Purchase Plan eligible employees may purchasestock at 85% of the lower of the fair market value of a share of Common Stock on the offering date or the exercise date. The Purchase Plan provides for twosix-month purchase periods generally starting on the first trading day on or after October 31 and April 30 of each year. Eligible employees may contribute upto 15% of their eligible compensation. A participant may purchase a maximum of 2,500 shares of common stock per purchase period. The value of the sharespurchased in any calendar year may not exceed $25,000.The Purchase Plan was effective upon the completion of the Company’s IPO, at which time a total of 494,422 shares of the Company’s common stockwere made available for sale. As of January 1 of each year, starting in 2011, the number of available shares will automatically be restored to the original level.A total of 82,760 and 72,261 shares of the Company’s common shares were acquired through the Purchase Plan during the years ended December 31, 2016and 2015, respectively. As such, on January 1, 2017 and 2016, respectively, an additional 82,760 and 72,261 shares became available for future issuanceunder the Purchase Plan. In accordance with ASC 718-50, the ability to purchase stock at 85% of the lower of the fair market value of a share of CommonStock on the offering date or the exercise date represents an option. The Company estimates the fair value of such options at the inception of each offeringperiod using the Black-Scholes valuation model. In connection with the Purchase Plan, the Company recorded $80,000 and $109,000 of compensationexpense for the years ended December 31, 2016 and 2015, respectively.101Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)18. SEGMENT INFORMATIONThe following table presents a summary of the Company’s reporting segments for the years ended December 31, 2016 and 2015: Year Ended December 31, 2016 U.S. International Consolidated (In thousands)NET REVENUE$25,765 $8,568 $34,333COST OF GOODS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION(1,694) (650) (2,344)GROSS PROFIT24,071 7,918 31,989 RESEARCH, DEVELOPMENT AND MEDICAL AFFAIRS EXPENSES7,875 4,500 12,375GENERAL AND ADMINISTRATIVE EXPENSES9,316 5,947 15,263SALES AND MARKETING EXPENSES22,134 7,297 29,431DEPRECIATION AND AMORTIZATION2,678 89 2,767OPERATING EXPENSES42,003 17,833 59,836NET LOSS FROM OPERATIONS(17,932) (9,915) (27,847)OTHER INCOME AND EXPENSES, NET (5,155)NET LOSS BEFORE TAXES $(33,002) Year Ended December 31, 2015 U.S. International Consolidated (In thousands)NET REVENUE$15,170 $7,268 $22,438COST OF GOODS SOLD, EXCLUDING DEPRECIATION AND AMORTIZATION(792) (970) (1,762)GROSS PROFIT14,378 6,298 20,676 RESEARCH, DEVELOPMENT AND MEDICAL AFFAIRS EXPENSES9,712 5,128 14,840GENERAL AND ADMINISTRATIVE EXPENSES8,244 5,946 14,190SALES AND MARKETING EXPENSES19,777 8,313 28,090DEPRECIATION AND AMORTIZATION2,491 64 2,555OPERATING EXPENSES40,224 19,451 59,675NET LOSS FROM OPERATIONS(25,846) (13,153) (38,999)OTHER INCOME AND EXPENSES, NET 8,484NET LOSS BEFORE TAXES $(30,515)102Table of ContentsALIMERA SCIENCES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)Selected quarterly financial data for years ended December 31, 2016 and 2015 are as follows (in thousands except per share data): March 31 June 30 September 30 December 31 (In thousands, except share and per share data)2016 NET REVENUE$5,801 $9,557 $8,298 $10,677COST OF GOOD SOLD, EXCLUDING DEPRECIATION ANDAMORTIZATION(378) (556) (486) (924)GROSS PROFIT5,423 9,001 7,812 9,753LOSS FROM OPERATIONS(8,790) (6,449) (7,243) (5,365)NET LOSS BEFORE TAXES(11,136) (6,816) (9,212) (5,838)NET LOSS APPLICABLE TO COMMON STOCKHOLDERS(11,145) (6,858) (9,245) (5,926)NET LOSS PER SHARE APPLICABLE TO COMMONSTOCKHOLDERS - Basic and diluted(0.25) (0.15) (0.16) (0.09) 2015 NET REVENUE$3,938 $5,776 $6,901 $5,823COST OF GOOD SOLD, EXCLUDING DEPRECIATION ANDAMORTIZATION(283) (376) (634) (469)GROSS PROFIT3,655 5,400 6,267 5,354LOSS FROM OPERATIONS(10,994) (9,800) (8,444) (9,761)NET LOSS BEFORE TAXES(9,793) (8,596) (1,543) (10,713)NET LOSS APPLICABLE TO COMMON STOCKHOLDERS(9,793) (8,596) (1,543) (10,713)NET LOSS PER SHARE APPLICABLE TO COMMONSTOCKHOLDERS - Basic and diluted(0.22) (0.19) (0.03) (0.24)As a result of the Company’s weighted averages shares outstanding changing from quarter to quarter, the quarterly per share data will not necessarilyadd to the annual total.103Table of ContentsEXHIBIT INDEX Exhibit ExhibitNumber Title 3.1 Restated Certificate of Incorporation of Registrant, as amended on various dates (filed as Exhibit 3.2 to Amendment No. 4 to theRegistrant’s Registration Statement on Form S-1 (SEC File No. 333-162782), as filed on April 6, 2010, and incorporated herein byreference) 3.2 Amended and Restated Bylaws of the Registrant, as amended (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K,as filed on November 5, 2015, and incorporated herein by reference) 3.3 Certificate of Designation of Series A Convertible Preferred Stock (filed as Exhibit 3.5 to the Registrant’s Current Report on Form8-K, as filed on October 2, 2012, and incorporated herein by reference) 3.4 Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (filed as Exhibit 3.6 to theRegistrant’s Current Report on Form 8-K, as filed on December 15, 2014, and incorporated herein by reference) 3.5* Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant 4.1 Second Amended and Restated Investor Rights Agreement, dated March 17, 2008, by and among the Registrant, certainstockholders and the investors listed on the signature pages thereto (filed as Exhibit 4.3 to Amendment No. 1 to the Registrant’sRegistration Statement on Form S-1 (SEC File No. 333-162782), as filed on December 23, 2009, and incorporated herein byreference) 4.2 Second Amended and Restated Stock Sale Agreement, dated March 17, 2008, by and among the Registrant, certain stockholdersand the investors listed on the signature pages thereto (filed as Exhibit 4.4 to Amendment No. 1 to the Registrant’s RegistrationStatement on Form S-1 (SEC File No. 333-162782), as filed on December 23, 2009, and incorporated herein by reference) 4.3 Omnibus Amendment, dated August 25, 2009, by and among the Registrant, certain stockholders and the investors listed on thesignature pages thereto (filed as Exhibit 4.5 to Amendment No. 1 to the Registrant’s Registration Statement on Form S-1 (SEC FileNo. 333-162782), as filed on December 23, 2009, and incorporated herein by reference) 4.4 Warrant to Purchase Stock dated October 14, 2010 issued to Silicon Valley Bank (filed as Exhibit 4.1 to the Registrant’s CurrentReport, as filed on October 18, 2010, and incorporated herein by reference) 4.5 Warrant to Purchase Stock dated October 14, 2010 issued to MidCap Funding III, LLC (filed as Exhibit 4.2 to the Registrant’sCurrent Report, as filed on October 18, 2010, and incorporated herein by reference) 4.6 Warrant to Purchase Stock dated May 16, 2011 issued to MidCap Funding III, LLC (filed as Exhibit 4.1 to the Registrant’s CurrentReport, as filed on May 17, 2011, and incorporated herein by reference) 4.7 Warrant to Purchase Stock dated May 16, 2011 issued to Silicon Valley Bank (filed as Exhibit 4.2 to the Registrant’s CurrentReport, as filed on May 17, 2011, and incorporated herein by reference) 4.8.A Warrant to Purchase Shares of Series A Preferred issued to Sofinnova Venture Partners VIII, L.P. (filed as Exhibit 4.10.A to theRegistrant’s Current Report on Form 8-K, as filed on October 2, 2012, and incorporated herein by reference) 4.8.B Warrant to Purchase Shares of Series A Preferred issued to Growth Equity Opportunities Fund III, LLC (filed as Exhibit 4.10.B to theRegistrant’s Current Report on Form 8-K, as filed on October 2, 2012, and incorporated herein by reference) 4.8.C Warrant to Purchase Shares of Series A Preferred issued to Micro Cap Partners, L.P. (filed as Exhibit 4.10.C to the Registrant’sCurrent Report on Form 8-K, as filed on October 2, 2012, and incorporated herein by reference) 4.8.D Warrant to Purchase Shares of Series A Preferred issued to Palo Alto Healthcare Master Fund, L.P. (filed as Exhibit 4.10.D to theRegistrant’s Current Report on Form 8-K, as filed on October 2, 2012, and incorporated herein by reference) 4.8.E Warrant to Purchase Shares of Series A Preferred issued to Palo Alto Healthcare Master Fund II, L.P. (filed as Exhibit 4.10.E to theRegistrant’s Current Report on Form 8-K, as filed on October 2, 2012, and incorporated herein by reference) 104Table of Contents4.9 Registration Rights Agreement dated October 2, 2012 between the Registrant and Palo Alto Healthcare Master Fund, L.P., PaloAlto Healthcare Master Fund II, L.P., Micro Cap Partners, L.P., Sofinnova Venture Partners VIII L.P. and Growth EquityOpportunities Fund III, LLC (filed as Exhibit 4.11 to the Registrant’s Current Report on Form 8-K, as filed on October 2, 2012, andincorporated herein by reference) 4.10 Amendment No. 1 to Warrant to Purchase Stock dated May 7, 2013 by and between Silicon Valley Bank and the Registrant (filedas Exhibit 4.10 to the Registrant’s Quarterly Report on Form 10-Q, as filed on August 14, 2013, and incorporated herein byreference) 4.11 Irrevocable Waiver of Rights to Designate Series A Director dated May 16, 2014 (filed as Exhibit 4.11 to the Registrant’s CurrentReport on Form 8-K, as filed on May 16, 2014, and incorporated herein by reference) 4.12 Warrant Agreement dated as of April 24, 2014 issued to Hercules Technology Growth Capital, Inc. (filed as Exhibit 4.11 to theRegistrant’s Quarterly Report on Form 10-Q, as filed on August 11, 2014, and incorporated herein by reference) 4.13 First Amendment to Warrant Agreement dated November 2, 2015 by and among the Registrant and Hercules Technology GrowthCapital, Inc. (filed as Exhibit 4.13 to the Registrant’s Annual Report on Form 10-K, as filed on March 15, 2016, and incorporatedherein by reference) 4.14 Second Amendment to Warrant Agreement dated March 14, 2016 by and among the Registrant and Hercules Technology GrowthCapital, Inc. (filed as Exhibit 4.14 to the Registrant’s Quarterly Report on Form 10-Q, as filed on May 6, 2016, and incorporatedherein by reference) 4.15 Third Amendment to Warrant Agreement dated July 21, 2016 by and among the Registrant and Hercules Capital, Inc. f/k/a HerculesTechnology Growth Capital, Inc. (filed as Exhibit 4.15 to the Registrant’s Quarterly Report on Form 10-Q, as filed on November 4,2016, and incorporated herein by reference) 4.16 Warrant Agreement dated October 20, 2016 by and among the Registrant and Hercules Capital, Inc. f/k/a Hercules TechnologyGrowth Capital, Inc. (filed as Exhibit 4.16 to the Registrant’s Quarterly Report on Form 10-Q, as filed on November 4, 2016, andincorporated herein by reference) 10.1 Form of Indemnification Agreement between the Registrant and each of its directors and executive officers (filed as Exhibit 10.1 tothe Registrant’s Registration Statement on Form S-1 (SEC File No. 333-162782), as filed on October 30, 2009, and incorporatedherein by reference) 10.2 Alimera Sciences, Inc. 2004 Incentive Stock Plan, as amended (filed as Exhibit 10.7 to the Registrant’s Registration Statement onForm S-1 (SEC File No. 333-162782), as filed on October 30, 2009, and incorporated herein by reference) 10.3 Form of Option Certificate under the Alimera Sciences, Inc. 2004 Incentive Stock Plan (filed as Exhibit 10.7.A to the Registrant’sRegistration Statement on Form S-1 (SEC File No. 333-162782), as filed on October 30, 2009, and incorporated herein byreference) 10.4 Alimera Sciences, Inc. 2005 Incentive Stock Plan (filed as Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1(SEC File No. 333-162782), as filed on October 30, 2009, and incorporated herein by reference) 10.5 Form of Option Certificate under the Alimera Sciences, Inc. 2005 Incentive Stock Plan (filed as Exhibit 10.8.A to the Registrant’sRegistration Statement on Form S-1 (SEC File No. 333-162782), as filed on October 30, 2009, and incorporated herein byreference) 10.6 2010 Equity Incentive Plan (filed as Exhibit 10.9 to Amendment No. 4 to the Registrant’s Registration Statement on Form S-1 (SECFile No. 333-162782), as filed on April 6, 2010, and incorporated herein by reference) 10.7 2010 Employee Stock Purchase Plan (filed as Exhibit 10.10 to Amendment No. 4 to the Registrant’s Registration Statement onForm S-1 (SEC File No. 333-162782), as filed on April 6, 2010, and incorporated herein by reference) 10.7.A Amendment No. 1 to 2010 Employee Stock Purchase Plan 10.8 Management Cash Incentive Plan (filed as Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 (SEC File No. 333-162782), as filed on October 30, 2009, and incorporated herein by reference) 10.9 Compensation Program for Non-Employee Directors (filed as Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1(SEC File No. 333-162782), as filed on October 30, 2009, and incorporated herein by reference) 105Table of Contents10.10‡ Amended and Restated Collaboration Agreement by and between pSivida, Inc. (f/k/a/Control Delivery Systems, Inc.) and AlimeraSciences, Inc., dated as of March 14, 2008 (filed as Exhibit 10.13 to Amendment No. 5 to the Registrant’s Registration Statementon Form S-1 (SEC File No. 333-162782), as filed on April 16, 2010, and incorporated herein by reference) 10.11 Office Lease by and between Rubicon, L.C. and Alimera Sciences, Inc., dated as of May 27, 2003, as amended (filed as Exhibit10.18 to the Registrant’s Registration Statement on Form S-1 (SEC File No. 333-162782), as filed on October 30, 2009, andincorporated herein by reference) 10.12‡ Commercial Contract Manufacturing Agreement, between Alimera Sciences, Inc. and Alliance Medical Products, Inc., datedFebruary 5, 2010 (filed as Exhibit 10.26 to Amendment No. 6 to the Registrant’s Registration Statement on Form S-1 (SEC File No.333-162782), as filed on April 20, 2010, and incorporated herein by reference) 10.13 Form of Notice of Stock Option Grant and Stock Option Agreement under 2010 Equity Incentive Plan (filed as Exhibit 10.30 toRegistrant’s Annual Report on Form 10-K, as filed on March 25, 2011, and incorporated herein by reference) 10.14‡ Amendment to Manufacturing Agreement between Registrant and Alliance Medical Products, Inc. (filed as Exhibit 10.3 toRegistrant’s Quarterly Report on Form 10-Q, as filed on August 5, 2011, and incorporated herein by reference) 10.15 Form of Notice of Stock Unit Award and Stock Unit Agreement under 2010 Equity Incentive Plan (filed as Exhibit 10.34 toRegistrant’s Annual Report on Form 10-K, as filed on March 30, 2012, and incorporated herein by reference) 10.16‡ Manufacturing Agreement by and between the Registrant and Flextronics Medical Sales and Marketing, Ltd. (filed as Exhibit10.35 to Registrant’s Quarterly Report on Form 10-Q, as filed on August 14, 2012, and incorporated herein by reference) 10.17 Securities Purchase Agreement dated July 17, 2012 (filed as Exhibit 10.36 to the Registrant’s Current Report, as filed on July 18,2012, and incorporated herein by reference) 10.18 Amendment No. 1 to Securities Purchase Agreement dated September 21, 2012 (filed as Exhibit 10.37 to the Registrant’s CurrentReport, as filed on October 2, 2012, and incorporated herein by reference) 10.19 UK Sub-Plan of the 2010 Equity Incentive Plan of Alimera Sciences, Inc. (filed as Exhibit 10.38 to the Registrant’s QuarterlyReport on Form 10-Q, as filed on November 7, 2012, and incorporated herein by reference and replaced by exhibit 10.46) 10.20 Form of UK Sub-Plan Notice of Stock Option Grant and Stock Option Agreement (filed as Exhibit 10.39 to the Registrant’sQuarterly Report on Form 10-Q, as filed on November 7, 2012, and incorporated herein by reference) 10.21 Form of France Sub-Plan of the 2010 Equity Incentive Plan of Alimera Sciences, Inc. (filed as Exhibit 10.21 to the Registrant’sAnnual Report on Form 10-K, as filed on March 15, 2016, and incorporated herein by reference) 10.22 Employment Contract dated November 3, 2012 by and between the Registrant and Philip Ashman (filed as Exhibit 10.40 to theRegistrant’s Annual Report on Form 10-K, as filed on March 28, 2013) 10.23 Loan and Security Agreement dated May 7, 2013 between Silicon Valley Bank and Alimera Sciences Limited (filed as Exhibit10.42 to the Registrant’s Quarterly Report on Form 10-Q, as filed on August 14, 2013) 10.24 Security Agreement entered into as of May 7, 2013 by and between Silicon Valley Bank and the Registrant (filed as Exhibit 10.43to the Registrant’s Quarterly Report on Form 10-Q, as filed on August 14, 2013) 10.25 Unconditional Guaranty entered into as of May 7, 2013 by Alimera Sciences B.V. in favor of Silicon Valley Bank (filed as Exhibit10.44 to the Registrant’s Quarterly Report on Form 10-Q, as filed on August 14, 2013) 10.26 Unconditional Guaranty entered into as of May 7, 2013 by AS C.V. in favor of Silicon Valley Bank (filed as Exhibit 10.45 to theRegistrant’s Quarterly Report on Form 10-Q, as filed on August 14, 2013) 10.27 Unconditional Guaranty entered into as of May 7, 2013 by the Registrant in favor of Silicon Valley Bank (filed as Exhibit 10.46 tothe Registrant’s Quarterly Report on Form 10-Q, as filed on August 14, 2013) 106Table of Contents10.28 Second Loan Modification Agreement entered into as of May 7, 2013 by and between Silicon Valley Bank and the Registrant(filed as Exhibit 10.47 to the Registrant’s Quarterly Report on Form 10-Q, as filed on August 14, 2013) 10.29 Securities Purchase Agreement dated January 27, 2014 (filed as Exhibit 10.42 to the Registrant’s Current Report, as filed onJanuary 27, 2014, and incorporated herein by reference) 10.30 Loan and Security Agreement dated as of April 24, 2014 by and among Alimera Sciences Limited, the several banks and otherfinancial institutions or entities from time to time parties thereto and Hercules Technology Growth Capital, Inc. (filed as Exhibit10.49 to the Registrant’s Quarterly Report on Form 10-Q, as filed on August 11, 2014, and incorporated herein by reference) 10.31 First Amendment to Loan and Security Agreement dated November 2, 2015 by and among Alimera Sciences Limited, HerculesCapital Funding Trust and Hercules Technology Growth Capital, Inc. (filed as Exhibit 10.31 to the Registrant’s Annual Report onForm 10-K, as filed on March 15, 2016, and incorporated herein by reference) 10.32 Unconditional Guaranty entered into as of April 24, 2014 by the Registrant in favor of Hercules Technology Growth Capital, Inc.(filed as Exhibit 10.50 to the Registrant’s Quarterly Report on Form 10-Q, as filed on August 11, 2014, and incorporated herein byreference) 10.33 Unconditional Guaranty entered into as of April 24, 2014 by Alimera Sciences B.V. in favor of Hercules Technology GrowthCapital, Inc. (filed as Exhibit 10.51 to the Registrant’s Quarterly Report on Form 10-Q, as filed on August 11, 2014, andincorporated herein by reference) 10.34 Unconditional Guaranty entered into as of April 24, 2014 by AS C.V. in favor of Hercules Technology Growth Capital, Inc. (filed asExhibit 10.52 to the Registrant’s Quarterly Report on Form 10-Q, as filed on August 11, 2014, and incorporated herein byreference) 10.35 Sales Agreement dated September 22, 2014 (filed as Exhibit 10.53 to the Registrant’s Current Report on Form 8-K, as filed onSeptember 22, 2014, and incorporated herein by reference) 10.36† Amended and Restated Employment Agreement, effective as of October 23, 2014, by and between the Registrant and C. DanielMyers (filed as Exhibit 10.53 to the Registrant’s Current Report on Form 8-K, as filed on October 23, 2014, and incorporated hereinby reference) 10.37† Amended and Restated Employment Agreement, effective as of October 23, 2014, by and between the Registrant and Richard S.Eiswirth, Jr. (filed as Exhibit 10.54 to the Registrant’s Current Report on Form 8-K, as filed on October 23, 2014, and incorporatedherein by reference) 10.38† Amended and Restated Employment Agreement, effective as of October 23, 2014, by and between the Registrant and KennethGreen, Ph.D. (filed as Exhibit 10.55 to the Registrant’s Current Report on Form 8-K, as filed on October 23, 2014, and incorporatedherein by reference) 10.39† Amended and Restated Employment Agreement, effective as of October 23, 2014, by and between the Registrant and DavidHolland (filed as Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K, as filed on March 15, 2016, and incorporatedherein by reference) 10.40 Securities Purchase Agreement dated November 26, 2014 (filed as Exhibit 10.56 to the Registrant’s Current Report on Form 8-K, asfiled on November 28, 2014, and incorporated herein by reference) 10.41‡ First Amended and Restated Commercial Contract Manufacturing Agreement dated as of February 5, 2016 by and between AlimeraSciences, Inc. and Alliance Medical Products, Inc. d.b.a. Siegfried Irvine (filed as Exhibit 10.41 to the Registrant’s Quarterly Reporton Form 10-Q, as filed on May 6, 2016, and incorporated herein by reference) 10.42 Second Amendment to Loan and Security Agreement dated March 14, 2016 by and among Alimera Sciences Limited, HerculesCapital Funding Trust and Hercules Capital, Inc. f/k/a Hercules Technology Growth Capital, Inc. (filed as Exhibit 10.42 to theRegistrant’s Quarterly Report on Form 10-Q, as filed on May 6, 2016, and incorporated herein by reference) 10.43 Third Amendment to Loan and Security Agreement dated May 26, 2016 by and among Alimera Sciences Limited, Hercules CapitalFunding Trust and Hercules Capital, Inc. f/k/a Hercules Technology Growth Capital, Inc. (filed as Exhibit 10.43 to the Registrant’sCurrent Report on Form 8-K, as filed on May 27, 2016, and incorporated herein by reference) 10.44 Waiver by Hercules Capital, Inc. of Certain Defaults under Loan and Security Agreement dated July 21, 2016 (filed as Exhibit10.45 to the Registrant’s Quarterly Report on Form 10-Q, as filed on November 4, 2016 and incorporated herein by reference) 107Table of Contents10.45 Fourth Amendment to Loan and Security Agreement dated October 20, 2016 by and among Alimera Sciences Limited, HerculesCapital Funding Trust and Hercules Capital, Inc. f/k/a/ Hercules Technology Growth Capital, Inc. (filed as Exhibit 10.45 to theRegistrant’s Quarterly Report on Form 10-Q, as filed on November 4, 2016 and incorporated herein by reference) 10.46* (2017) UK Sub-Plan of the 2010 Equity Incentive Plan of Alimera Sciences, Inc. 10.47* Forms of Notice of Restricted Stock Unit Award and restricted Stock Unit Agreement under 2010 Equity Incentive Plan for the U.S.,Germany, Portugal and the United Kingdom 21.1 List of subsidiaries of the Registrant (including jurisdiction of organization and names under which subsidiaries do business) (filedas Exhibit 21.1 to the Registrant’s Annual Report on Form 10-K, as filed on March 15, 2016, and incorporated herein by reference) 23.1* Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm 31.1* Certification of the Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of the Chief Financial Officer as required by Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certifications of the Chief Executive Officer and Chief Financial Officer as required by 18 U.S.C. 1350 101.INS+* XBRL Instance Document 101.SCH+* XBRL Taxonomy Extension Schema Document 101.CAL+* XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF+* XBRL Taxonomy Extension Definition Linkbase Document 101.LAB+* XBRL Taxonomy Extension Label Linkbase Document 101.PRE+* XBRL Taxonomy Extension Presentation Linkbase Document __________________†Compensation Arrangement.‡Confidential treatment has been granted with respect to certain portions of this document.*Filed herewith.108Exhibit 3.5CERTIFICATE OF AMENDMENT TO THERESTATED CERTIFICATE OF INCORPORATION OFALIMERA SCIENCES, INC.Alimera Sciences, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of theState of Delaware (the “Corporation”),DOES HEREBY CERTIFY:FIRST: The name of the Corporation is Alimera Sciences, Inc.SECOND: The date on which the Certificate of Incorporation of the Corporation was originally filed with the Secretaryof State of the State of Delaware is June 4, 2003, under the name of Alimera Sciences, Inc.THIRD: That the Board of Directors of the Corporation duly adopted a resolution setting forth a proposed amendmentto the Restated Certificate of Incorporation of the Corporation (the “Restated Certificate”), declaring said amendment to be advisableand in the best interests of the Corporation and its stockholders, and authorized the appropriate officers of the Corporation to solicit theapproval of the stockholders therefor, which resolution setting forth the proposed amendment and restatement is as follows:RESOLVED, that the first paragraph of Article IV of the Restated Certificate be amended and restated to read in itsentirety as follows:The Corporation is authorized to issue two classes of stock to be designated common stock (“Common Stock”) andpreferred stock (“Preferred Stock”). The number of shares of Common Stock authorized to be issued is one hundred fiftymillion (150,000,000) par value $0.01 per share, and the number of shares of Preferred Stock authorized to be issued is tenmillion (10,000,000), par value $0.01 per share.FOURTH: That thereafter said amendment was duly adopted in accordance with the provisions of Section 242 of theGeneral Corporation Law of the State of Delaware by written consent of the stockholders holding the requisite number of sharesrequired by statute given in accordance with and pursuant to Section 228 of the General Corporation Law of the State of Delaware.* * * * *IN WITNESS WHEREOF, this Corporation has caused this Certificate of Amendment to the Certificate ofIncorporation to be signed by its President and Chief Financial Officer this 16 day of October 2016./s/ Richard S. Eiswirth, Jr. Richard S. Eiswirth. Jr. President and Chief Financial OfficerExhibit 10.46Neither this document, nor any stock option agreement connected with it, is an approved prospectus for the purposes ofsection 85(1) of the Financial Services and Markets Act 2000 (“FSMA”) and no offer of transferable securities to the public(for the purposes of section 102B of FSMA) is being made in connection with the UK Sub-Plan of the 2010 Equity IncentivePlan of Alimera Sciences, Inc. (the "Sub-Plan"). The Sub-Plan is exclusively available to bona fide employees and formeremployees of Alimera Sciences, Inc., Alimera Sciences Limited and any other UK Subsidiary.UK SUB-PLAN TO THE ALIMERA SCIENCES, INC. 2010EQUITY INCENTIVE PLANAdditional Terms and Conditions for Options received by Employees Resident in the UK1.The purpose of this Sub-Plan is to provide incentives for present and future UK tax resident employees of Alimera SciencesLimited through the grant of options over shares of Common Stock of Alimera Sciences, Inc. (the "Company").2.Capitalized terms are defined in the Company’s 2010 Equity Incentive Plan (the “Plan”), subject to the provisions of this Sub-Plan.3.References to ISOs and NSOs shall not apply to Options granted under the Sub-Plan.4.Options granted under this Sub-Plan shall be taxed in the UK as Unapproved Options.5.This Sub-Plan is governed by THE Plan and all its provisions shall be identical to those of the Plan SAVE THAT (i) "Sub-Plan"shall be substituted for "Plan" where applicable and (ii) the following provisions shall be as stated in this Sub-Plan in order toaccommodate the specific requirements of the laws of England and Wales and the appropriate UK tax legislation.6.ARTICLE 1. INTRODUCTION.The first paragraph of this Article shall be replaced with the following:“The Board adopted the Plan effective as of the date of the relevant board resolution. The purpose of the Plan is to promotethe long-term success of the Company and the creation of stockholder value by (a) encouraging Employees to focus on criticallong-range objectives, (b) encouraging the attraction and retention of Employees with exceptional qualifications and (c) linkingEmployees directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose byproviding for Awards in the form of Options or Stock Units.”7.ARTICLE 2. ADMINISTRATION.The words “Outside Directors and Consultants”; “Consultants and”; and “and Consultants who are not Outside Directors”; shallbe deleted where they appear.8.ARTICLE 3. SHARES AVAILABLE FOR GRANTS.Article 3.3 shall be replaced with the following:“Shares Returned to Reserve. To the extent that Options or Stock Units are forfeited or expire for any other reason beforebeing exercised or settled in full, then the CommonShares subject to such Options or Stock Units shall again become available for issuance under the Plan. If Stock Units aresettled, then only the number of Common Shares (if any) actually issued in settlement of such Stock Units shall reduce thenumber available under Section 3.1 and the balance shall again become available for issuance under the Plan. If CommonShares issued upon the exercise of Options are reacquired by the Company pursuant to a forfeiture provision or for any otherreason, then such Common Shares shall again become available for issuance under the Plan. Shares applied to pay theExercise Price of Options or to satisfy tax withholding obligations related to any Award shall again become available forissuance under the Plan."9.ARTICLE 4. ELIGIBILITY.Article 4.1 and 4.2 should be deleted in their entirety and replaced with the following:“Unapproved Options. Only Employees shall be eligible for the grant of Options under the Plan.Other Grants. Only Employees shall be eligible for the grant of Stock Units under the Plan.”10.ARTICLE 5. OPTIONS.Article 5.1 shall be amended so that the third sentence is replaced with the following:“The Stock Option Agreement shall specify that the Option is an Unapproved Option.”Article 5.4 shall be replaced with the following:“Exercisability and Term. Each Stock Option Agreement shall specify the date or event when all or any installment of theOption is to become exercisable. The Stock Option Agreement shall also specify the term of the Option. A Stock OptionAgreement may provide for accelerated exercisability in the event of the Optionee’s death, disability or retirement or otherevents and may provide for expiration prior to the end of its term in the event of the termination of the Optionee’s Service “Article 5.5 shall be amended so that the second sentence is deleted.Article 5.6 shall be replaced with the following:“Death of Optionee. After an Optionee’s death, any exercisable Options held by such Optionee may be exercised by his orher Personal Representative within 12 months of the Optionee’s death.”Article 5.8(b) shall be deleted in its entirety.11. ARTICLE 6. PAYMENT FOR OPTION SHARES.Article 6.1 shall be amended to that the words “cash equivalents” is replaced with the word “cheque”.Article 6.2 and 6.4 shall be deleted in their entirety.12. The following Articles shall be deleted in their entirety:ARTICLE 7. STOCK APPRECIATION RIGHTS.ARTICLE 8. RESTRICTED SHARES.13. ARTICLE 10. OTHER AWARDS.Article10.1 shall be deleted in its entirety and the second sentence of 10.2 should be deleted in its entirety.14. ARTICLE 11. PROTECTION AGAINST DILUTION.In this Article, the words: “SARs, Restricted Shares”; “or SARs”; “(whether or not the Options are ISOs”) shall be deletedwhether they appear.15. ARTICLE 12. PAYMENT OF DIRECTORS’ FEES IN SECURITIES.This Article shall be deleted in its entirety.16. ARTICLE 13. LIMITATION ON RIGHTS.References to “Outside Directors or Consultants” shall be deleted together with the words “with or without cause”.17. ARTICLE 14. WITHHOLDING TAXES.This Article shall be deleted in its entirety and replaced with the following:“In the event that the Company or any Subsidiary determines that it is required to account to HM Revenue & Customs for anyOption Tax Liability or Secondary NIC Liability (under the Stock Option Agreement) arising from the grant, exercise,assignment, release, cancellation or any other disposal of an Option or arising out of the acquisition, retention and disposal ofthe shares acquired pursuant to the Option, the Optionee, as a condition to the issue of shares in connection with the exerciseof an Option, or on the grant, assignment, release or cancellation of an Option, shall make such arrangements satisfactory tothe Company to enable it or any Subsidiary to satisfy any requirement to account for any Option Tax Liability (and, ifapplicable, any Secondary NIC Liability) that may arise in connection with the Option or the award of Common Sharespursuant to it including, but no limited to, arrangements satisfactory to the Company for withholding Common Shares thatwould otherwise be issued pursuant to the Stock Option Agreement.”18. ARTICLE 15. FUTURE OF THE PLAN.Article 15.1 reference to “IPO date” shall be deleted and replaced with the words “date of the relevant board resolution” andthe second sentence shall be deleted.Article 15.3 shall be amended to include the following sentence at the end of the Article: “The Plan will terminate automaticallyon the termination of the Alimera Sciences, Inc. 2010 Equity Incentive Plan.”Article 15.3 shall be deleted in its entirety.19. ARTICLE 16. DEFINITIONS.The following definitions shall be amended to read as follows:“Award” means an award of Options or Stock Units.“Cause” means(a)An unauthorized use or disclosure by the Participant of the Company’s confidential information or trade secrets, whichuse or disclosure causes material harm to the Company;(b)A material breach by the Participant of any agreement between the Optionee and the Company;(c)A material failure by the Participant to comply with the Company’s written policies or rules;(d)The Participant’s conviction of, or plea of “guilty” or “no contest” to, a felony under the laws of the United States or anyState thereof, or crime under any other applicable law;(e) The Participant’s gross negligence or willful misconduct;(f)A continuing failure by the Participant to perform assigned duties after receiving written notification of such failure fromthe Board; or(g)A failure by the Participant to cooperate in good faith with a governmental or internal investigation of the Company orits directors, officers or employees, if the Company has requested the Participant’s cooperation.“Employee” means an employee or full-time director of the Company, a Parent, a Subsidiary or an Affiliate.“Exercise Price,” in the case of an Option, means the amount for which one Common Share may be purchased upon exerciseof such Option, as specified in the applicable Stock Option Agreement.“Option” means an Unapproved Option granted under the Plan and entitling the holder to purchase Common Shares.“Optionee” means an individual or estate holding an Option.“Service” means service as an Employee or full-time director.The following definitions shall be deleted in their entirety:“Consultant”; “IPO Date”; “NSO”; “Performance Cash Award”; “Performance Period”; “Restricted Stock Agreement”; “SAR”;“SAR Agreement”.The following definitions shall be inserted:"Award Tax Liability" means any liability or obligation of the Company and/or any Subsidiary to account (or pay) for incometax (under the UK withholding system of PAYE (pay as you earn)) or any other taxation provisions and primary class 1 NationalInsurance Contributions in the United Kingdom to the extent arising from the grant, exercise, assignment, release, cancellationor any other disposal of a Stock Unit or arising out of the acquisition, retention and disposal of the Common Shares acquiredunder this Plan.“Data” means certain personal information about the Optionee, including, but not limited to, name, home address andtelephone number, date of birth, social insurance number, salary, nationality, job title, any stock, units or directorships held inthe Company or anySubsidiary, details of all options or other entitlements to shares awarded, cancelled, exercised, vested, unvested, oroutstanding in the Optionee’s favour.“Data Recipients” means third parties assisting the Company in the implementation, administration and management of thePlan."ITEPA" means the Income Tax (Earnings and Pensions) Act 2003.“Joint Election” means an election (in such terms and such form as provided in paragraphs 3A and 3B of Schedule 1 to theSocial Security Contributions and Benefits Act 1992), which has been approved by HM Revenue & Customs for the transfer ofthe whole of or any liability of the Secondary Contributor for any Secondary NIC Liability.“Option Tax Liability” means any liability or obligation of the Company and/or Subsidiary to account (or pay) for income tax(under the UK withholding system of PAYE (pay as you earn)) or any other taxation provisions and primary class 1 NationalInsurance Contributions in the United Kingdom to the extent arising from the grant, exercise, assignment, release, cancellationor any other disposal of an Option or arising out of the acquisition, retention and disposal of the Common Shares acquiredunder this Plan.“Personal Representative” means the personal representative(s) of an Optionee (being either the executors of his will or if hedies intestate the duly appointed administrator(s) or his estate) who have provided to the Board evidence of their appointmentas such.“Secondary Contributor” means a person or company who has a liability to account (or pay) the Secondary NIC Liability toRevenue and Customs.“Secondary NIC Liability” means any liability to employer’s Class 1 National Insurance Contributions to the extent arisingfrom the grant, exercise, release or cancellation of an Option or arising out of the acquisition, retention and disposal of theCommon Shares acquired pursuant to an Option.“Section 431 Election” means an election made under section 431 of ITEPA.“Taxable Event” means any occasion on which an Option Tax Liability or Secondary NIC Liability arises in connection with anOption or any award of Common Shares under it.“UK Subsidiary” means a Subsidiary of the Company which is incorporated in the UK.“Unapproved Option” means an option over shares in the Company that is neither an HM Revenue & Customs approvedcompany share option (under Schedule 4 ITEPA) nor an enterprise management incentive (EMI) option which meets therequirements of Schedule 5 ITEPA.20. APPENDIX A This appendix shall be deleted in its entirety.Exhibit 10.47ALIMERA SCIENCES, INC. 2010 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARDYou have been granted units representing shares of Common Stock of Alimera Sciences, Inc. (the “Company”) on the followingterms:Name of Recipient:[Insert Name]Total Number of Units Granted:[Insert Number]Date of Grant:[Date of Grant]Vesting Schedule:100% of the units subject to this award will vest on [Insert Vesting Date]You and the Company agree that these units are granted under and governed by the terms and conditions of the Alimera Sciences, Inc.2010 Equity Incentive Plan (the “Plan”) and the Restricted Stock Unit Award Agreement, both of which are attached to and made apart of this document.You further agree that the Company may deliver and you shall accept by email all documents relating to the Plan or this award(including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that theCompany is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You alsoagree that the Company may deliver these documents by posting them on a website maintained by the Company or by a third partyunder contract with the Company. If the Company posts these documents on a website, you will be notified by email. Youacknowledge that you may incur costs in connection with electronic delivery, including the cost of accessing the internet and printingfees, and that an interruption of internet access may interfere with your ability to access the documents. This consent will remain ineffect until you give the Company written notice that it should deliver paper documents.You further agree to comply with the Company’s Securities Trading Policy when selling shares of the Company’s Common Stock.RECIPIENT: ALIMERA SCIENCES, INC.By: [Insert Name]Name: Title: ALIMERA SCIENCES, INC. 2010 EQUITY INCENTIVE PLANRESTRICTED STOCK UNIT AWARD AGREEMENTPayment for UnitsNo payment is required for the units that you are receiving.VestingThe units vest as shown in the Notice of Stock Unit Award. No additional units vest afteryour Service has terminated for any reason.ForfeitureIf your Service terminates for any reason, then your units will be forfeited to the extent thatthey have not vested before the termination date. This means that any units that have notvested under this Agreement will be cancelled immediately. You receive no payment for unitsthat are forfeited.The Company determines when your Service terminates for this purpose.Settlement of UnitsEach unit will be settled on the Vesting Date, or the next Trading Day (as defined below) ifthe Vesting Date is not a Trading Day. However, each unit must be settled no later than theMarch 15th of the calendar year following the calendar year in which it vests.At the time of settlement, you will receive one share of the Company’s Common Stock foreach vested unit.“Permissible Trading Day”“Permissible Trading Day” means a day that satisfies each of the following requirements:• The Nasdaq Global Market is open for trading on that day;• You are permitted to sell shares of the Company’s Common Stock on that day withoutincurring liability under Section 16(b) of the Securities Exchange Act of 1934, as amended;• Either (a) you are not in possession of material non-public information that would make itillegal for you to sell shares of the Company’s Common Stock on that day under Rule 10b-5of the Securities and Exchange Commission or (b) Rule 10b5 1 of the Securities andExchange Commission is applicable;• Under the Company’s Securities Trading Policy, you are permitted to sell shares of theCompany’s Common Stock on that day; and• You are not prohibited from selling shares of the Company’s Common Stock on that day bya written agreement between you and the Company or a third party. Section 409AThis paragraph applies only if the Company determines that you are a “specified employee,”as defined in the regulations under Section 409A of the Internal Revenue Code of 1986, asamended (the “Code”), at the time of your “separation from service,” as defined in thoseregulations. If this paragraph applies, then any units that otherwise would have been settledduring the first six months following your separation from service will instead be settledduring the seventh month following your separation from service, unless the settlement ofthose units is exempt from Section 409A of the Code.Nature of UnitsYour units are mere bookkeeping entries. They represent only the Company’s unfunded andunsecured promise to issue shares of Common Stock on a future date. As a holder of units,you have no rights other than the rights of a general creditor of the Company.No Voting Rights or DividendsYour units carry neither voting rights nor rights to cash dividends. You have no rights as astockholder of the Company unless and until your units are settled by issuing shares of theCompany’s Common Stock.Units NontransferableYou may not sell, transfer, assign, pledge or otherwise dispose of any units. For instance, youmay not use your units as security for a loan.Withholding TaxesUnless you elect prior to March 31, 2017, which election must be made on a PermissibleTrading Day, to satisfy Withholding Taxes through any of the following means or by acombination of such means: (i) withholding from any compensation otherwise payable to youby the Company or an Affiliate; or (ii) tendering a cash payment to the Company (which maybe in the form of a check, electronic wire transfer or other method permitted by theCompany), then to the greatest extent permitted under the Plan and applicable law, applicableWithholding Taxes will be satisfied through the mandatory sale of a number of the sharessubject to the Award and the remittance of the cash proceeds of such sale to the Company,pursuant to a “same day sale.” You authorize the Company to make payment from the cashproceeds of this sale directly to the appropriate taxing authorities in an amount equal to theWithholding Taxes. It is the Company’s intent that the mandatory sale to coverWithholding Taxes imposed by the Company on the Participant in connection with thereceipt of this Award comply with the requirements of Rule 10b5-1(c)(1)(i)(B) under theExchange Act and be interpreted to comply with the requirements of Rule 10b5-1(c).If, for any reason, such “same day sale” commitment does not result in sufficient proceeds tosatisfy the Withholding Taxes, the Company or an Affiliate may, in its sole discretion, satisfyall or any portion of the Withholding Taxes relating to your Award by any of the followingmeans or by a combination of such means: (i) withholding from any compensation otherwisepayable to you by the Company or an Affiliate; or (ii) causing you to tender a cash payment(which may be in the form of a check, electronic wire transfer or other method permitted bythe Company). Unless the tax withholding obligations of the Company and/or any Affiliateare satisfied, the Company shall have no obligation to deliver to you any Common Stock.Withholding Taxes shall be equal to the Company’s required tax withholding obligationsusing the minimum statutory withholding rates for federal, state, local and foreign taxpurposes, including payroll taxes, that are applicable to supplemental taxable income.Restrictions on ResaleYou agree not to sell any shares at a time when applicable laws, Company policies or anagreement between the Company and its underwriters prohibit a sale. This restriction willapply as long as your Service continues and for such period of time after the termination ofyour Service as the Company may specify.Employment at WillYour award or this Agreement does not give you the right to be retained by the Company or asubsidiary of the Company in any capacity. The Company and its subsidiaries reserve theright to terminate your Service at any time, with or without cause.AdjustmentsIn the event of a stock split, a stock dividend or a similar change in Company stock, thenumber of your units will be adjusted accordingly, as the Company may determine pursuantto the Plan.Beneficiary DesignationYou may dispose of your units in a written beneficiary designation. A beneficiary designationmust be filed with the Company on the proper form. It will be recognized only if it has beenreceived at the Company’s headquarters before your death. If you file no beneficiarydesignation or if none of your designated beneficiaries survives you, then your estate willreceive any vested units that you hold at the time of your death.Effect of MergerIf the Company is a party to a merger, consolidation or reorganization, then your units will besubject to the applicable provision of the Plan, provided that any action taken must either(a) preserve the exemption of your units from Section 409A of the Code or (b) comply withSection 409A of the Code.Applicable LawThis Agreement will be interpreted and enforced under the laws of the State of Delaware(without regard to their choice-of-law provisions).The Plan and Other AgreementsThe text of the Plan is incorporated in this Agreement by reference.The Plan, this Agreement and the Notice of Restricted Stock Unit Award constitute the entireunderstanding between you and the Company regarding this award. Any prior agreements,commitments or negotiations concerning this award are superseded. This Agreement may beamended only by another written agreement between the parties.BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN.ALIMERA SCIENCES, INC. 2010 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARDYou have been granted units representing shares of Common Stock of Alimera Sciences, Inc. (the “Company”) on the followingterms:Name of Recipient:[Insert Name]Total Number of Units Granted:[Insert Number]Date of Grant:[Date of Grant]Vesting Schedule:100% of the units subject to this award will vest on [Insert Vesting Date]You and the Company agree that these units are granted under and governed by the terms and conditions of the Alimera Sciences, Inc.2010 Equity Incentive Plan (the “Plan”) and the Restricted Stock Unit Award Agreement, both of which are attached to and made apart of this document.You further agree that the Company may deliver and you shall accept by email all documents relating to the Plan or this award(including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that theCompany is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You alsoagree that the Company may deliver these documents by posting them on a website maintained by the Company or by a third partyunder contract with the Company. If the Company posts these documents on a website, you will be notified by email. Youacknowledge that you may incur costs in connection with electronic delivery, including the cost of accessing the internet and printingfees, and that an interruption of internet access may interfere with your ability to access the documents. This consent will remain ineffect until you give the Company written notice that it should deliver paper documents.You further agree to comply with the Company’s Securities Trading Policy when selling shares of the Company’s Common Stock.RECIPIENT: ALIMERA SCIENCES, INC.By: [Insert Name]Name: Title: ALIMERA SCIENCES, INC. 2010 EQUITY INCENTIVE PLANRESTRICTED STOCK UNIT AWARD AGREEMENTPayment for UnitsNo payment is required for the units that you are receiving.VestingThe units vest as shown in the Notice of Stock Unit Award. No additional units vest afteryour Service has terminated for any reason.ForfeitureIf your Service terminates for any reason, then your units will be forfeited to the extent thatthey have not vested before the termination date. This means that any units that have notvested under this Agreement will be cancelled immediately. You receive no payment for unitsthat are forfeited.The Company determines when your Service terminates for this purpose.Settlement of UnitsEach unit will be settled on the first Permissible Trading Day that occurs on or after the daywhen the units vest. However, each unit must be settled no later than the March 15th of thecalendar year following the calendar year in which it vests.At the time of settlement, you will receive one share of the Company’s Common Stock foreach vested unit.“Permissible Trading Day”“Permissible Trading Day” means a day that satisfies each of the following requirements:• The Nasdaq Global Market is open for trading on that day;• You are permitted to sell shares of the Company’s Common Stock on that day withoutincurring liability under Section 16(b) of the Securities Exchange Act of 1934, as amended;• Either (a) you are not in possession of material non-public information that would make itillegal for you to sell shares of the Company’s Common Stock on that day under Rule 10b-5of the Securities and Exchange Commission or (b) Rule 10b5 1 of the Securities andExchange Commission is applicable;• Under the Company’s Securities Trading Policy, you are permitted to sell shares of theCompany’s Common Stock on that day; and• You are not prohibited from selling shares of the Company’s Common Stock on that day bya written agreement between you and the Company or a third party. Section 409AThis paragraph applies only if the Company determines that you are a “specified employee,”as defined in the regulations under Section 409A of the Internal Revenue Code of 1986, asamended (the “Code”), at the time of your “separation from service,” as defined in thoseregulations. If this paragraph applies, then any units that otherwise would have been settledduring the first six months following your separation from service will instead be settledduring the seventh month following your separation from service, unless the settlement ofthose units is exempt from Section 409A of the Code.Nature of UnitsYour units are mere bookkeeping entries. They represent only the Company’s unfunded andunsecured promise to issue shares of Common Stock on a future date. As a holder of units,you have no rights other than the rights of a general creditor of the Company.No Voting Rights or DividendsYour units carry neither voting rights nor rights to cash dividends. You have no rights as astockholder of the Company unless and until your units are settled by issuing shares of theCompany’s Common Stock.Units NontransferableThe units are non-tradable. You may not sell, transfer, assign, pledge or otherwise dispose ofany units. For instance, you may not use your units as security for a loan.Withholding TaxesUnless you elect prior to March 31, 2017, which election must be made on a PermissibleTrading Day, to satisfy Withholding Taxes through any of the following means or by acombination of such means: (i) withholding from any compensation otherwise payable to youby the Company, a Subsidiary or an Affiliate; or (ii) tendering a cash payment to theCompany, a Subsidiary or the Affiliate (which may be in the form of a check, electronic wiretransfer or other method permitted by the Company), then to the greatest extent permittedunder the Plan and applicable law, applicable Withholding Taxes will be satisfied through themandatory sale of a number of the shares subject to the Award and the remittance of the cashproceeds of such sale to the Company, pursuant to a “same day sale” also known as a"exercise-and-sell-version". You authorize the Company, a Subsidiary or an Affiliate to makepayment from the cash proceeds of this sale directly to the appropriate taxing authorities in anamount equal to the Withholding Taxes. It is the Company’s intent that the mandatory saleto cover Withholding Taxes imposed by the Company on the Participant in connectionwith the receipt of this Award comply with the requirements of Rule 10b5-1(c)(1)(i)(B)under the Exchange Act and be interpreted to comply with the requirements of Rule 10b5-1(c).If, for any reason, such “same day sale” commitment does not result in sufficient proceeds tosatisfy the Withholding Taxes, the Company, a Subsidiary or an Affiliate may, in its solediscretion, satisfy all or any portion of the Withholding Taxes relating to your Award by anyof the following means or by a combination of such means: (i) withholding from anycompensation otherwise payable to you by the Company, a Subsidiary or an Affiliate; or (ii)causing you to tender a cash payment (which may be in the form of a check, electronic wiretransfer or other method permitted by the Company). Unless the tax withholding obligationsof the Company and/or any Subsidiary or Affiliate are satisfied, the Company shall have noobligation to deliver to you any Common Stock. Withholding Taxes shall be equal to theCompany’s or its Subsidiary's or Affiliate's required tax withholding obligations using theminimum statutory withholding rates for federal, state, local and foreign tax purposes,including payroll taxes, that are applicable to supplemental taxable income.Restrictions on ResaleYou agree not to sell any shares at a time when applicable laws, Company policies or anagreement between the Company and its underwriters prohibit a sale. This restriction willapply as long as your Service continues and for such period of time after the termination ofyour Service as the Company may specify.Employment at WillYour award or this Agreement does not give you the right to be retained by the Company oran Affiliate or a Subsidiary in any capacity. The Company and its Affiliates or Subsidiariesreserve the right to terminate your Service at any time, with or without cause.AdjustmentsIn the event of a stock split, a stock dividend or a similar change in Company stock, thenumber of your units will be adjusted accordingly, as the Company may determine pursuantto the Plan.Beneficiary DesignationYou may dispose of your units in a written beneficiary designation. A beneficiary designationmust be filed with the Company on the proper form. It will be recognized only if it has beenreceived at the Company’s headquarters before your death. If you file no beneficiarydesignation or if none of your designated beneficiaries survives you, then your estate willreceive any vested units that you hold at the time of your death.Effect of MergerIf the Company is a party to a merger, consolidation or reorganization, then your units will besubject to the applicable provision of the Plan, provided that any action taken must either(a) preserve the exemption of your units from Section 409A of the Code or (b) comply withSection 409A of the Code.Applicable LawThis Agreement will be interpreted and enforced under the laws of the State of Delaware(without regard to their choice-of-law provisions).The Plan and Other AgreementsThe text of the Plan is incorporated in this Agreement by reference.The Plan, this Agreement and the Notice of Restricted Stock Unit Award constitute the entireunderstanding between you and the Company regarding this award. Any prior agreements,commitments or negotiations concerning this award are superseded. This Agreement may beamended only by another written agreement between the parties.BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN.ALIMERA SCIENCES, INC. 2010 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARDYou have been granted units representing shares of Common Stock of Alimera Sciences, Inc. (the “Company”) on the followingterms:Name of Recipient:[Insert Name]Total Number of Units Granted:[Insert Number]Date of Grant:[Date of Grant]Vesting Schedule:100% of the units subject to this award will vest on [Insert Vesting Date]You and the Company agree that these units are granted under and governed by the terms and conditions of the Alimera Sciences, Inc.2010 Equity Incentive Plan (the “Plan”) and the Restricted Stock Unit Award Agreement, both of which are attached to and made apart of this document.You further agree that the Company may deliver and you shall accept by email all documents relating to the Plan or this award(including, without limitation, prospectuses required by the Securities and Exchange Commission) and all other documents that theCompany is required to deliver to its security holders (including, without limitation, annual reports and proxy statements). You alsoagree that the Company may deliver these documents by posting them on a website maintained by the Company or by a third partyunder contract with the Company. If the Company posts these documents on a website, you will be notified by email. Youacknowledge that you may incur costs in connection with electronic delivery, including the cost of accessing the internet and printingfees, and that an interruption of internet access may interfere with your ability to access the documents. This consent will remain ineffect until you give the Company written notice that it should deliver paper documents.You further agree to comply with the Company’s Securities Trading Policy when selling shares of the Company’s Common Stock.RECIPIENT: ALIMERA SCIENCES, INC.By: [Insert Name]Name: Title: ALIMERA SCIENCES, INC. 2010 EQUITY INCENTIVE PLANRESTRICTED STOCK UNIT AWARD AGREEMENTPayment for UnitsNo payment is required for the units that you are receiving.VestingThe units vest as shown in the Notice of Stock Unit Award. No additional units vest afteryour Service has terminated for any reason.ForfeitureIf your Service terminates for any reason, then your units will be forfeited to the extent thatthey have not vested before the termination date. This means that any units that have notvested under this Agreement will be cancelled immediately. You receive no payment for unitsthat are forfeited.The Company determines when your Service terminates for this purpose.Settlement of UnitsEach unit will be settled on the Vesting Date, or the next Trading Day (as defined below) ifthe Vesting Date is not a Trading Day. However, each unit must be settled no later than theMarch 15th of the calendar year following the calendar year in which it vests.At the time of settlement, you will receive one share of the Company’s Common Stock foreach vested unit.“Permissible Trading Day”“Permissible Trading Day” means a day that satisfies each of the following requirements:• The Nasdaq Global Market is open for trading on that day;• You are permitted to sell shares of the Company’s Common Stock on that day withoutincurring liability under Section 16(b) of the Securities Exchange Act of 1934, as amended;• Either (a) you are not in possession of material non-public information that would make itillegal for you to sell shares of the Company’s Common Stock on that day under Rule 10b-5of the Securities and Exchange Commission or (b) Rule 10b5 1 of the Securities andExchange Commission is applicable;• Under the Company’s Securities Trading Policy, you are permitted to sell shares of theCompany’s Common Stock on that day; and• You are not prohibited from selling shares of the Company’s Common Stock on that day bya written agreement between you and the Company or a third party. Section 409AThis paragraph applies only if the Company determines that you are a “specified employee,”as defined in the regulations under Section 409A of the Internal Revenue Code of 1986, asamended (the “Code”), at the time of your “separation from service,” as defined in thoseregulations. If this paragraph applies, then any units that otherwise would have been settledduring the first six months following your separation from service will instead be settledduring the seventh month following your separation from service, unless the settlement ofthose units is exempt from Section 409A of the Code.Nature of UnitsYour units are mere bookkeeping entries. They represent only the Company’s unfunded andunsecured promise to issue shares of Common Stock on a future date. As a holder of units,you have no rights other than the rights of a general creditor of the Company.No Voting Rights or DividendsYour units carry neither voting rights nor rights to cash dividends. You have no rights as astockholder of the Company unless and until your units are settled by issuing shares of theCompany’s Common Stock.Units NontransferableYou may not sell, transfer, assign, pledge or otherwise dispose of any units. For instance, youmay not use your units as security for a loan.Withholding TaxesPresently, there is no withholding tax in relation to your Award, since benefits in kind,although taxable, are excluded from the scope of withholding tax obligations, pursuant to thePortuguese tax legislation in force.If the Portuguese legislation is altered in the future, and withholding tax obligations arise inconnection with the Award, the Company or an Affiliate may, in its sole discretion, satisfy allor any portion of the Withholding Taxes relating to your Award by any of the followingmeans or by a combination of such means: (i) withholding from any compensation otherwisepayable to you by the Company or an Affiliate; or (ii) causing you to tender a cash payment(which may be in the form of a check, electronic wire transfer or other method permitted bythe Company). Unless the tax withholding obligations of the Company and/or any Affiliateare satisfied, the Company shall have no obligation to deliver to you any Common Stock.Withholding Taxes shall be equal to the Company’s required tax withholding obligations asestablished in the applicable law, if withholding tax becomes due in the future, over benefitsin kind attributed to employees.Restrictions on ResaleYou agree not to sell any shares at a time when applicable laws, Company policies or anagreement between the Company and its underwriters prohibit a sale. This restriction willapply as long as your Service continues and for such period of time after the termination ofyour Service as the Company may specify.Employment at WillYour award or this Agreement does not give you the right to be retained by the Company or asubsidiary of the Company in any capacity. The Company and its subsidiaries reserve theright to terminate your Service at any time, with or without cause.AdjustmentsIn the event of a stock split, a stock dividend or a similar change in Company stock, thenumber of your units will be adjusted accordingly, as the Company may determine pursuantto the Plan.Beneficiary DesignationYou may dispose of your units in a written beneficiary designation. A beneficiary designationmust be filed with the Company on the proper form. It will be recognized only if it has beenreceived at the Company’s headquarters before your death. If you file no beneficiarydesignation or if none of your designated beneficiaries survives you, then your estate willreceive any vested units that you hold at the time of your death.Effect of MergerIf the Company is a party to a merger, consolidation or reorganization, then your units will besubject to the applicable provision of the Plan, provided that any action taken must either(a) preserve the exemption of your units from Section 409A of the Code or (b) comply withSection 409A of the Code.Applicable LawThis Agreement will be interpreted and enforced under the laws of the State of Delaware(without regard to their choice-of-law provisions).The Plan and Other AgreementsThe text of the Plan is incorporated in this Agreement by reference.The Plan, this Agreement and the Notice of Restricted Stock Unit Award constitute the entireunderstanding between you and the Company regarding this award. Any prior agreements,commitments or negotiations concerning this award are superseded. This Agreement may beamended only by another written agreement between the parties.BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN.THE UK SUB-PLAN TO THE ALIMERA SCIENCES, INC. 2010 EQUITY INCENTIVE PLAN NOTICE OF RESTRICTED STOCK UNIT AWARDYou have been granted units representing shares of Common Stock of Alimera Sciences, Inc. (the “Company”) on the followingterms:Name of Recipient: [Insert Name]Total Number of Units Granted:[Insert Number]Date of Grant:[Date of Grant]Vesting Schedule:100% of the units subject to this award will vest on [Insert Vesting Date]You and the Company agree that these units are granted under and governed by the terms and conditions of the UK Sub-Plan to theAlimera Sciences, Inc. 2010 Equity Incentive Plan (the “Plan”) and the Restricted Stock Unit Award Agreement (the "Agreement"),both of which are attached to and made a part of this document.You further agree that the Company may deliver and you shall accept by email all documents relating to the Plan or this award(including, without limitation, prospectuses required by the Securities and Exchange Commission, the Joint Election and the Section431 Election) and all other documents that the Company is required to deliver to its security holders (including, without limitation,annual reports and proxy statements). You also agree that the Company may deliver these documents by posting them on a websitemaintained by the Company or by a third party under contract with the Company. If the Company posts these documents on a website,you will be notified by email. You acknowledge that you may incur costs in connection with electronic delivery, including the cost ofaccessing the internet and printing fees, and that an interruption of internet access may interfere with your ability to access thedocuments. This consent will remain in effect until you give the Company written notice that it should deliver paper documents.You further agree to comply with the Company’s Securities Trading Policy when selling shares of the Company’s Common Stock.RECIPIENT: ALIMERA SCIENCES, INC.By: [Insert Name]Name: Title: UK SUB-PLAN TO THE ALIMERA SCIENCES, INC. 2010 EQUITY INCENTIVE PLANRESTRICTED STOCK UNIT AWARD AGREEMENTPayment for UnitsNo payment is required for the units that you are receiving.VestingThe units vest as shown in the Notice of Stock Unit Award. No additional units vest afteryour Service has terminated for any reason.ForfeitureIf your Service terminates for any reason, then your units will be forfeited to the extent thatthey have not vested before the termination date. This means that any units that have notvested under this Agreement will be cancelled immediately. You receive no payment for unitsthat are forfeited.The Company determines when your Service terminates for this purpose.Settlement of UnitsEach unit will be settled on the Vesting Date, or the next Trading Day (as defined below) ifthe Vesting Date is not a Trading Day. However, each unit must be settled no later than theMarch 15th of the calendar year following the calendar year in which it vests.At the time of settlement, you will receive one share of the Company’s Common Stock foreach vested unit.“Permissible Trading Day”“Permissible Trading Day” means a day that satisfies each of the following requirements:• The Nasdaq Global Market is open for trading on that day;• You are permitted to sell shares of the Company’s Common Stock on that day withoutincurring liability under Section 16(b) of the Securities Exchange Act of 1934, as amended;• Either (a) you are not in possession of material non-public information that would make itillegal for you to sell shares of the Company’s Common Stock on that day under Rule 10b-5of the Securities and Exchange Commission or (b) Rule 10b5 1 of the Securities andExchange Commission is applicable;• Under the Company’s Securities Trading Policy, you are permitted to sell shares of theCompany’s Common Stock on that day; and• You are not prohibited from selling shares of the Company’s Common Stock on that day bya written agreement between you and the Company or a third party.Section 409AThis paragraph applies only if the Company determines that you are a “specified employee,”as defined in the regulations under Section 409A of the Internal Revenue Code of 1986, asamended (the “Code”), at the time of your “separation from service,” as defined in thoseregulations. If this paragraph applies, then any units that otherwise would have been settledduring the first six months following your separation from service will instead be settledduring the seventh month following your separation from service, unless the settlement ofthose units is exempt from Section 409A of the Code.Nature of UnitsYour units are mere bookkeeping entries. They represent only the Company’s unfunded andunsecured promise to issue shares of Common Stock on a future date. As a holder of units,you have no rights other than the rights of a general creditor of the Company.No Voting Rights or DividendsYour units carry neither voting rights nor rights to cash dividends. You have no rights as astockholder of the Company unless and until your units are settled by issuing shares of theCompany’s Common Stock.Units NontransferableYou may not sell, transfer, assign, pledge or otherwise dispose of any units. For instance, youmay not use your units as security for a loan.Tax Obligations(a) Withholding of Taxes. In the event that the Company or any Subsidiary determinesthat it is required to account to HM Revenue & Customs for any Award Tax Liabilityor Secondary NIC Liability arising from the grant, vesting, release, cancellation or anyother disposal of this Award or arising out of the acquisition, retention and disposal ofthe Common Stock acquired pursuant to this Award, you, as a condition to the issueof units in connection with the vesting of an Award, or on the grant, release orcancellation of an Award, shall make such arrangements satisfactory to the Companyto enable it or any Subsidiary to satisfy any requirement to account for any AwardTax Liability (and any Secondary NIC Liability) that may arise in connection with theAward or the issue of Common Stock pursuant to it including, but not limited to,arrangements satisfactory to the Company for withholding shares that wouldotherwise be issued.(b) Section 431 election. As a further condition of the vesting of the Award you shallhave signed a Section 431 Election in the form set out in Attachment A or in suchother form as may be determined by HM Revenue & Customs from time to time. (c) Secondary NIC Liability. As a further condition of the vesting of the Award youshall join with the Company and any other company who is or becomes a SecondaryContributor in making a Joint Election which has been approved by HM Revenue &Customs, for the transfer of the whole of any Secondary NIC Liability. (d) Your Tax Indemnity.(i) Indemnity. To the extent permitted by law, you hereby agree to indemnify andkeep indemnified the Company, and the Company as trustee for and on behalf of anyrelated corporation, for any Award Tax Liability and Secondary NIC Liability. (ii) No Obligation to Issue Shares. The Company shall not be obliged to allot ordeliver any Common Stock or any interest in Common Stock pursuant to thisAgreement unless and until you have paid to the Company such sum as is, in theopinion of the Company, sufficient to indemnify the Company in full against theAward Tax Liability and the Secondary NIC Liability, or you have made such otherarrangement as in the opinion of the Company will ensure that the full amount of anyAward Tax Liability and any Secondary NIC Liability will be recovered from youwithin such period as the Company may then determine. (iii) Right of Retention. In the absence of any such other arrangement being made, theCompany shall have the right to retain out of the aggregate number of shares to whichthe you would have otherwise been entitled under this Agreement, such number ofshares as, in the opinion of the Company, will enable the Company to sell as agent foryou (at the best price which can reasonably expect to be obtained at the time of thesale) and to pay over to the Company sufficient monies out of the net proceeds of sale,after deduction of all fees, commissions and expenses incurred in relation to such sale,to satisfy your liability under such indemnity.Data ProtectionBy entering into this Agreement, and as a condition of the grant of the units, you consent tothe collection, use, and transfer of personal data, including but not limited to, name, homeaddress and telephone number, date of birth, social insurance number, salary, nationality, jobtitle, any stock, units or directorships held in the Company or any Subsidiary, details of allRestricted Share Units, options or other entitlement to Common Stock awarded, cancelled,exercised, vested, unvested, or outstanding in your favour (“Data”) to the full extent permittedby and in full compliance with applicable laws.You understand that the Company and its Subsidiaries hold Data about you for the purpose ofmanaging and administering the Plan.You further understand that the Company and/or its Subsidiaries will transfer Data amongthemselves as necessary for the purposes of implementation, administration, and managementof your participation in the Plan, and that the Company and/or its Subsidiary may each furthertransfer Data to any Data Recipients.You understand that these Data Recipients may be located in your country of residence orelsewhere, such as the United States. You authorize the Data Recipients to receive, possess,use, retain, and transfer Data in electronic or other form, for the purposes of implementing,administering, and managing your participation in the Plan, including any transfer of suchData, as may be required for the administration of the Plan and/or the subsequent holding ofShares on your behalf, to a broker or third party with whom the Shares acquired on exercisemay be deposited. Where the transfer is to be to a destination outside the European EconomicArea, the Company shall take reasonable steps to ensure that your Data continues to beadequately protected and securely held.You understand that you may, at any time, review the Data, request that any necessaryamendments be made to it, or withdraw your consent herein in writing by contacting theCompany. You further understand that withdrawing consent may affect your ability toparticipate in the Plan.Additional termsYou have no right to compensation or damages for any loss in respect of the Award wheresuch loss arises (or is claimed to arise), in whole or in part, from the termination of youremployment; or notice to terminate employment given by or to you. This exclusion of liabilityshall apply however termination of employment, or the giving of notice, is caused other thanin a case where a competent tribunal or court, from which there can be no appeal (or whichthe relevant employing company has decided not to appeal), has found that the cessation ofyour employment amounted to unfair or constructive dismissal of you and howevercompensation or damages may be claimed. You have no right to compensation or damages for any loss in respect of the Award wheresuch loss arises (or is claimed to arise), in whole or in part, from any company ceasing to be aSubsidiary of the Company; or the transfer of any business from a Subsidiary of the Companyto any person which is not a Subsidiary of the Company. This exclusion of liability shallapply however the change of status of the relevant company, or the transfer of the relevantbusiness, and however compensation or damages may be claimed.Restrictions on ResaleYou agree not to sell any shares at a time when applicable laws, Company policies or anagreement between the Company and its underwriters prohibit a sale. This restriction willapply as long as your Service continues and for such period of time after the termination ofyour Service as the Company may specify.AdjustmentsIn the event of a stock split, a stock dividend or a similar change in Company stock, thenumber of your units will be adjusted accordingly, as the Company may determine pursuantto the Plan.Effect of MergerIf the Company is a party to a merger, consolidation or reorganization, then your units will besubject to the applicable provision of the Plan, provided that any action taken must either(a) preserve the exemption of your units from Section 409A of the Code or (b) comply withSection 409A of the Code.Applicable LawThis Agreement will be interpreted and enforced under the laws of the State of Delaware(without regard to their choice-of-law provisions). The Joint Election and the Section 431Election are governed by the laws of England and Wales.The Plan and Other AgreementsThe text of the Plan is incorporated in this Agreement by reference.The Plan, this Agreement, the Notice of Restricted Stock Unit Award, the Joint Election andthe Section 431 Election constitute the entire understanding between you and the Companyregarding this award. Any prior agreements, commitments or negotiations concerning thisaward are superseded. This Agreement may be amended only by another written agreementbetween the parties.DefinitionsThe definitions contained in the Plan are hereby incorporated into this Agreement unlessotherwise defined herein.BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN.ATTACHMENT A SECTION 431 ELECTIONEXHIBIT 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our report dated March 3, 2017, with respect to the consolidated financial statements included in the Annual Report ofAlimera Sciences Inc. on Form 10-K for the year ended December 31, 2016. We consent to the incorporation by reference of saidreport in the Registration Statements of Alimera Sciences, Inc. on Forms S-8 (File No. 333-166822, File No. 333-173095, File No. 333-180567, File No. 333-187600, File No. 333-194381, File No. 333-201606, File No. 333-209035, and File No. 333-215451) and FormsS-3 (File No. 333-184996, File No. 333-194382 and File No. 333-198044)./s/ GRANT THORNTON LLPAtlanta, GeorgiaMarch 3, 2017EXHIBIT 31.1CERTIFICATIONI, C. Daniel Myers, certify that: 1.I have reviewed this annual report on Form 10-K of Alimera Sciences, Inc.; 2.Based on my knowledge, this report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision; to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: March 3, 2017 /s/ C. Daniel Myers C. Daniel Myers Chief Executive Officer(Principal Executive Officer)EXHIBIT 31.2CERTIFICATIONI, Richard S. Eiswirth, Jr., certify that: 1.I have reviewed this annual report on Form 10-K of Alimera Sciences, Inc.; 2.Based on my knowledge, this report does not contain any untrue statements of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision; to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: March 3, 2017 /s/ Richard S. Eiswirth, Jr. Richard S. Eiswirth, Jr.President and Chief Financial Officer(Principal Financial and Accounting Officer)EXHIBIT 32.1CERTIFICATIONIn connection with the Annual Report of Alimera Sciences, Inc. (the “Registrant”) on Form 10-K for the annual period ended December 31, 2016 as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, C. Daniel Myers, President, Chief Executive Officer, andDirector of the Company, and Richard S. Eiswirth, Jr., Chief Financial Officer and Chief Operating Officer, certify, certify, pursuant to 18 U.S.C. Section 1350,as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to their respective knowledge: (1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theRegistrant. Date: March 3, 2017 /s/ C. Daniel Myers C. Daniel Myers Chief Executive Officer(Principal Executive Officer) Date: March 3, 2017 /s/ Richard S. Eiswirth, Jr. Richard S. Eiswirth, Jr. President and Chief Financial Officer(Principal Financial and Accounting Officer)This certification is made solely for the purposes of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any otherpurpose. A signed original of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant andfurnished to the United States Securities and Exchange Commission or its staff upon request.This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to beincorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before orafter the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.

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