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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2023

OR

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

For the transition period from           to       

Commission file number 001-38150

KALA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware

27-0604595

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

1167 Massachusetts Avenue

Arlington, MA

02476

(Address of principal executive offices)

(Zip Code)

(781) 996-5252

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act

Title of each class

Common Stock, $0.001 par value per share

Trading symbol(s)

KALA

Name of each exchange on which registered

The Nasdaq Capital Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

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

There were 2,348,687 shares of Common Stock, $0.001 par value per share, outstanding as of May 8, 2023.

TABLE OF CONTENTS

    

Page

PART I – FINANCIAL INFORMATION

7

Item 1.

Financial Statements (Unaudited)

7

Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022

7

Condensed Consolidated Statement of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022

8

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the three months ended March 31, 2023 and 2022

9

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022

10

Notes to Condensed Consolidated Financial Statements

11

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

Item 4.

Controls and Procedures

48

PART II – OTHER INFORMATION

49

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

100

Item 5.

Other Information

101

Item 6.

Exhibits

103

SIGNATURES

104

2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

our expectations with respect to the potential impacts the sale of our commercial business to Alcon Pharmaceuticals Ltd. and Alcon Vision, LLC, which we refer collectively as Alcon, will have on our business, results of operations and financial condition;
our expectations with respect to, and the amount of, future milestone payments we may receive from Alcon in connection with the sale of our commercial business;
our expectations with respect to our dependency on and potential advantages of KPI-012, our product candidate for the treatment of persistent corneal epithelial defects, or PCED;
our expectations with respect to the potential financial impact, synergies, growth prospects and benefits of our acquisition of Combangio, Inc., or Combangio, or the Combangio Acquisition, including our expectations with respect to, and the amount of, future milestone payments we may pay in connection with the Combangio Acquisition;
our development efforts for KPI-012 and our ability to discover and develop new programs and product candidates;
the timing, progress and results of clinical trials for KPI-012, including statements regarding the timing of initiation and completion of clinical trials, dosing of subjects and the period during which the results of the trials will become available;
the timing, scope and likelihood of regulatory filings, including the filing of any biologics license applications for KPI-012 and any other product candidate we may develop in the future;
our ability to obtain regulatory approvals for KPI-012;
our commercialization, marketing and manufacturing capabilities and strategy for KPI-012, if approved;
our estimates regarding potential future revenue from sales of KPI-012, if approved;
our ability to negotiate, secure and maintain adequate pricing, coverage and reimbursement terms and processes on a timely basis, or at all, with third-party payors for KPI-012, if approved;
the rate and degree of market acceptance and clinical utility of KPI-012 and our estimates regarding the market opportunity for KPI-012, if approved;
plans to pursue the development of KPI-012 for indications in addition to PCED;

3

our expectations with respect to our determination to cease the development of our preclinical pipeline programs that are unrelated to our mesenchymal stem cell secretome, or MSC-S, platform;
the timing, progress and results of preclinical studies for our KPI-014 program;
our expectations regarding our ability to fund our operating expenses, lease and debt service obligations, and capital expenditure requirements with our cash on hand;
our expectations regarding the potential benefits of the award from the California Institute for Regenerative Medicine;
our expectations regarding our ability to comply with the covenants under our loan agreement;
our intellectual property position, including intellectual property acquired in the Combangio Acquisition;
our ability to identify additional products, product candidates or technologies with significant commercial potential that are consistent with our commercial objectives;
our estimates regarding expenses, future revenue, timing of any future revenue, capital requirements and needs for additional financing;
the impact of government laws and regulations;
our competitive position;
developments relating to our competitors and our industry;
our ability to maintain and establish collaborations or obtain additional funding;
our business and business relationships, including with employees and suppliers;
our anticipated annualized reduction in operating expenses associated with our workforce reduction announced in July 2022; and
the impact of COVID-19 on our business and operations.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we do not assume any obligation to update any forward-looking statements except as required by applicable law.

This Quarterly Report on Form 10-Q includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by us and third parties as well as our estimates of

4

potential market opportunities. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Our estimates of the potential market opportunity for KPI-012 include several key assumptions based on our industry knowledge, industry publications, third-party research and other surveys, which may be based on a small sample size and may fail to accurately reflect market opportunities. While we believe that our internal assumptions are reasonable, no independent source has verified such assumptions.

Risk Factor Summary

Our business is subject to a number of risks that if realized could materially affect our business, financial condition, results of operations, cash flows and access to liquidity. These risks are discussed more fully in the “Risk Factors” section of this Quarterly Report on Form 10-Q. Our principal risks include the following:

We have incurred significant losses from operations and negative cash flows from operations since our inception. We expect to incur additional losses and may never achieve or maintain profitability. As of March 31, 2023, we had an accumulated deficit of $601.7 million.
Our limited operating history and our limited experience in developing biologics may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development efforts.
Our substantial indebtedness may limit cash flow available to invest in the ongoing needs of our business, and a failure to comply with the covenants under our loan agreement, such as the requirement that our common stock continue to be listed on The Nasdaq Stock Market, could result in an event of default and acceleration of amounts due.
The milestone consideration we are eligible to receive in connection with the sale of our commercial business to Alcon is subject to various risks and uncertainties.
If we are unable to successfully complete the clinical development of, and obtain marketing approval for, KPI-012 or any other product candidate we may develop in the future, or experience significant delays in doing so, or if, after obtaining marketing approvals, we fail to successfully commercialize such product candidates, our business will be materially harmed.
If clinical trials of KPI-012 or any other product candidate that we develop fail to demonstrate potency, safety and purity to the satisfaction of the U.S. Food and Drug Administration, or FDA, or other regulatory authorities or do not otherwise produce favorable results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of such product candidate. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later stage clinical trials, and interim results of a clinical trial do not necessarily predict final results.
If we experience any of a number of possible unforeseen events in connection with our clinical trials, potential marketing approval or commercialization of our product candidates could be delayed or prevented, and our competitors could bring products to market before we do.
We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
KPI-012 has been evaluated in a clinical trial outside of the United States, and we may in the future conduct clinical trials for product candidates at sites outside the United States. The FDA may not accept data from trials conducted in such locations.

5

Public health epidemics, including COVID-19, could impact the development of KPI-012 or any other product candidate we develop, and may continue to adversely affect our business, results of operations and financial condition.
Even if KPI-012 or any other product candidates that we may develop in the future receives marketing approval, such products may fail to achieve market acceptance by clinicians and patients, or adequate formulary coverage, pricing or reimbursement by third-party payors and others in the medical community, and the market opportunity for these products may be smaller than we estimate.
If we are unable to establish and maintain sales, marketing and distribution capabilities or enter into sales, marketing and distribution agreements with third parties, if and when necessary, we may not be successful in commercializing KPI-012 or any other product candidate that we may develop if and when they are approved.
We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do. Our competitors include major pharmaceutical companies with significantly greater financial resources. KPI-012 and any other product candidate we may develop, if approved, may also compete with existing branded, generic and off-label products.
We have relied, and expect to continue to rely, on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.
We contract with third parties for the manufacture of KPI-012 and plan to contract with third parties for preclinical, clinical and commercial supply of any other product candidates we develop. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
The manufacture of biologics is complex and our third-party manufacturers may encounter difficulties in production. If any of our third-party manufacturers encounter such difficulties, our ability to provide supply of product candidates for clinical trials or products for patients, if approved, could be delayed or prevented.
We may be unable to obtain and maintain patent protection for our technology or product candidates, or the scope of the patent protection obtained may not be sufficiently broad or enforceable, such that our competitors could develop and commercialize technology, products and product candidates similar or identical to ours, and our ability to successfully commercialize our technology product candidates may be impaired.
KPI-012 is protected by patent rights exclusively licensed from other companies or institutions. If these third parties terminate their agreements with us or fail to maintain or enforce the underlying patents, or we otherwise lose our rights to these patents, our competitive position and our market share in the markets for any of our products, if and when approved, will be harmed.

6

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share amounts)

March 31, 

December 31, 

    

2023

    

2022

Assets

Current assets:

Cash and cash equivalents

$

63,636

$

70,495

Prepaid expenses and other current assets (Note 7)

2,353

7,852

Current assets held for sale (Note 4)

5,355

7,595

Total current assets

71,344

85,942

Non-current assets:

Property and equipment, net

504

400

Right-of-use assets

6

16

Restricted cash and other long-term assets

372

462

Total assets

$

72,226

$

86,820

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

997

$

2,832

Accrued expenses and other current liabilities

5,076

8,910

Deferred gain on sale of commercial business

4,189

4,189

Current portion of lease liabilities

3

13

Current portion of long-term debt

5,000

Current portion of contingent consideration

4,146

Current portion of deferred purchase consideration

595

Total current liabilities

10,265

25,685

Long-term liabilities:

Long-term debt

33,266

37,937

Long-term contingent consideration

5,234

4,224

Total long-term liabilities

38,500

42,161

Total liabilities

48,765

67,846

Commitments and Contingencies (Note 16)

Stockholders' equity:

Preferred stock, $0.001 par value; 5,000,000 shares authorized as of March 31, 2023 and December 31, 2022; 53,144 shares of Series E Convertible Non-Redeemable Preferred Stock issued and outstanding as of March 31, 2023 and December 31, 2022

Common stock, $0.001 par value; 120,000,000 shares authorized as of March 31, 2023 and December 31, 2022; 2,309,287 and 1,706,971 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively

2

2

Additional paid-in capital

625,124

606,182

Accumulated deficit

(601,665)

(587,210)

Total stockholders' equity

23,461

18,974

Total liabilities and stockholders' equity

$

72,226

$

86,820

See accompanying notes to these unaudited condensed consolidated financial statements.

7

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

(In thousands, except share and per share amounts)

Three Months Ended

March 31, 

    

2023

    

2022

Product revenues, net

$

$

1,372

Costs and expenses:

Cost of product revenues

775

Selling, general and administrative

6,030

26,982

Research and development

4,036

4,466

(Gain) loss on fair value remeasurement of deferred purchase consideration

(230)

1,051

Loss (gain) on fair value remeasurement of contingent consideration

1,847

(988)

Total costs and expenses

11,683

32,286

Loss from operations

(11,683)

(30,914)

Other income (expense):

Interest income

675

8

Interest expense

(1,474)

(2,035)

Other income (expense), net

(1,973)

Total interest and other expense

(2,772)

(2,027)

Net loss

$

(14,455)

$

(32,941)

Net loss per share attributable to common stockholders—basic and diluted

$

(6.99)

$

(22.18)

Weighted average shares outstanding—basic and diluted

2,069,186

1,485,168

Net loss

$

(14,455)

$

(32,941)

Other comprehensive loss:

Change in unrealized gains on investments

(2)

Total other comprehensive loss

(2)

Total comprehensive loss

$

(14,455)

$

(32,943)

See accompanying notes to these unaudited condensed consolidated financial statements.

8

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

(In thousands, except share and per share amounts)

Three Months Ended March 31, 2023

Stockholders' Equity

Accumulated

Series E Preferred Stock

Common Stock

Additional

Other

Total

$0.001 Par Value

$0.001 Par Value

Paid-In

Comprehensive

Accumulated

Stockholders'

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Equity

Balance as of December 31, 2022

53,144

$

1,706,971

$

2

$

606,182

$

$

(587,210)

$

18,974

At the market offering, net of offering costs of $384

475,265

14,893

14,893

Issuance of common stock for vested restricted stock units

2,202

Issuance of common stock under employee stock purchase plan

461

6

6

Issuance of common stock to satisfy deferred purchase consideration

19,350

365

365

Issuance of common stock to satisfy contingent consideration

105,038

2,354

2,354

Stock-based compensation expense

1,324

1,324

Net loss

(14,455)

(14,455)

Balance as of March 31, 2023

53,144

$

2,309,287

$

2

$

625,124

$

$

(601,665)

$

23,461

Three Months Ended March 31, 2022

Stockholders' Equity (Deficit)

Accumulated

Series E Preferred Stock

Common Stock

Additional

Other

Total

$0.001 Par Value

$0.001 Par Value

Paid-In

Comprehensive

Accumulated

Stockholders'

  

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Equity (Deficit)

Balance as of December 31, 2021

$

1,322,464

$

1

$

559,191

$

$

(542,388)

$

16,804

Exercise of stock options

102

3

3

Issuance of common stock for vested restricted stock units

2,370

Issuance of common stock under employee stock purchase plan

3,103

160

160

Issuance of common stock to satisfy deferred purchase consideration

136,314

7,936

7,936

Stock-based compensation expense

2,756

2,756

Change in fair value of investments

(2)

(2)

Net loss

(32,941)

(32,941)

Balance as of March 31, 2022

$

1,464,353

$

1

$

570,046

$

(2)

$

(575,329)

$

(5,284)

See accompanying notes to these unaudited condensed consolidated financial statements.

9

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

Three Months Ended

March 31, 

    

2023

    

2022

Cash flows from operating activities:

Net loss

$

(14,455)

$

(32,941)

Adjustments to reconcile net loss to cash used in operating activities:

Depreciation and amortization

77

157

Non-cash operating lease cost

10

181

(Gain) loss on fair value remeasurement of deferred purchase consideration

(230)

1,051

Loss (gain) on fair value remeasurement of contingent consideration

1,847

(988)

Amortization of debt discount and other non-cash interest

329

432

Stock-based compensation

1,324

2,805

Other non-cash gains, net

(2)

Change in operating assets and liabilities:

Accounts receivable

80

2,325

Prepaid expenses and other current assets

5,470

1,662

Inventory

2,189

(164)

Accounts payable

(1,826)

1,222

Accrued expenses and other current liabilities

(4,489)

326

Lease liabilities and other long-term liabilities

(10)

(155)

Net cash used in operating activities

(9,684)

(24,089)

Cash flows from investing activities:

Purchases of property and equipment and other assets

(108)

(81)

Purchases of short-term investments

(4,992)

Net cash used in investing activities

(108)

(5,073)

Cash flows from financing activities:

Payment of principal and final payment fee on debt

(10,000)

Proceeds from common stock offerings, net of offering costs

14,893

Contingent consideration related to Combangio acquisition

(2,041)

Payment of principal on finance lease

(9)

Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan

6

163

Net cash provided by financing activities

2,858

154

Net decrease in cash, cash equivalents and restricted cash:

(6,934)

(29,008)

Cash, cash equivalents and restricted cash at beginning of period

70,745

94,878

Cash, cash equivalents and restricted cash at end of period

$

63,811

$

65,870

Reconciliation of cash, cash equivalents and restricted cash:

Cash, cash equivalents, and restricted cash at end of period

$

63,811

$

65,870

Less restricted cash (Note 9)

(175)

(700)

Cash and cash equivalents at end of period

$

63,636

$

65,170

Non-cash investing and financing activities:

Purchases of property and equipment in accounts payable and accrued expenses

$

67

$

174

Issuance of common stock to satisfy deferred purchase consideration in additional paid-in capital

365

Issuance of common stock to satisfy contingent consideration in additional paid-in capital

2,354

Supplemental disclosure:

Cash paid for interest

$

1,227

$

1,603

Right-of-use assets obtained in exchange of operating lease obligations

424

See accompanying notes to these unaudited condensed consolidated financial statements.

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Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business— Kala Pharmaceuticals, Inc. (the “Company”) was incorporated on July 7, 2009, and is a clinical-stage biopharmaceutical company dedicated to the research, development and commercialization of innovative therapies for rare and severe diseases of the eye.

On November 15, 2021, the Company and its newly formed, direct wholly owned subsidiary, Ceres Merger Sub, Inc. (the “Merger Subsidiary”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Combangio, Inc. (“Combangio”) and Fortis Advisors LLC, solely in its capacity as Combangio Equityholder Representative in connection with the Merger Agreement, pursuant to which on November 15, 2021, the Merger Subsidiary merged with and into Combangio with Combangio surviving such merger and becoming a direct wholly owned subsidiary of the Company (the “Combangio Acquisition”). In connection with the Combangio Acquisition, the Company acquired Combangio’s mesenchymal stem cell secretomes (“MSC-S”) platform, including its lead product candidate for the treatment of persistent corneal epithelial defects (“PCED”), which the Company refers to as KPI-012. PCED is a rare disease of impaired corneal healing. The Company submitted an investigational new drug application (“IND”) to the U.S. Food and Drug Administration, (“FDA”), which was accepted in December 2022. In February 2023, the Company dosed its first patient in the CHASE (“Corneal Healing After SEcretome therapy”) Phase 2b clinical trial of KPI-012 for PCED in the United States. KPI-012 has received both Orphan Drug and Fast Track designations from the FDA for the treatment of PCED. The Company expects to commercialize in the United States any of its product candidates that receive marketing approval.

In connection with the determination to focus its research and development efforts on KPI-012, in 2022, the Company ceased the development of its preclinical pipeline programs that are unrelated to its MSC-S platform, including the development of KPI-287, its receptor tyrosine kinase inhibitor, and its selective glucocorticoid receptor modulators.

The Company previously developed and commercialized two marketed products, EYSUVIS® (loteprednol etabonate ophthalmic suspension) 0.25%, for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease, and INVELTYS® (loteprednol etabonate ophthalmic suspension) 1%, a topical twice-a-day ocular steroid for the treatment of post-operative inflammation and pain following ocular surgery. Both products applied a proprietary mucus-penetrating particle drug delivery technology, which the Company referred to as the AMPPLIFY® Drug Delivery Technology. On July 8, 2022, the Company closed the transaction (the “Alcon Transaction”), contemplated by the asset purchase agreement, dated as of May 21, 2022 (the “Asset Purchase Agreement”), by and between the Company, Alcon Pharmaceuticals Ltd. and Alcon Vision, LLC (together referred to as “Alcon”), pursuant to which Alcon purchased the rights to manufacture, sell, distribute, market and commercialize EYSUVIS and INVELTYS and to develop, manufacture, market and otherwise exploit the Company’s AMPPLIFY Drug Delivery Technology (collectively, the “Commercial Business”). Alcon also assumed certain liabilities with respect to the Commercial Business at the closing of the Alcon Transaction. See Note 3, “Sale of Commercial Business to Alcon”, for additional information about the Alcon Transaction.

The Company’s success is dependent upon its ability to develop, obtain regulatory approval for and commercialize KPI-012 and any other product candidate it may develop in the future, the success of its research and development efforts, whether it receives any commercial-based sales milestone payments from Alcon, its ability to raise additional capital when needed and, ultimately, attain profitable operations.

Reverse Stock Split— On October 20, 2022, the Company effected a 1-for-50 reverse stock split of the Company’s shares of common stock either issued and outstanding or held by the Company as treasury stock (the “Reverse Stock Split”). As a result of the Reverse Stock Split, every 50 shares of issued and outstanding common stock were automatically combined into one issued and outstanding share of common stock, without any change in the par

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Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

value per share. No fractional shares were issued as a result of the Reverse Stock Split. Any fractional shares that would otherwise have resulted from the Reverse Stock Split were rounded up to the next whole number. The number of authorized shares of common stock under the Company’s Restated Certificate of Incorporation, as amended, remained unchanged at 120,000,000 shares. All historical share and per share amounts reflected throughout these financial statements have been adjusted to reflect the Reverse Stock Split. Proportionate adjustments were made to the per share exercise price and the number of shares of common stock that may be purchased upon exercise of outstanding stock options and warrants, and the number of shares of common stock reserved for future issuance under the Company’s 2017 Equity Incentive Plan and Employee Stock Purchase Plan.

Liquidity— Since inception, the Company has incurred significant losses from operations and negative cash flows from operations including a net loss of $14,455 and $32,941, for the three months ended March 31, 2023 and 2022, respectively, and cash used in operating activities of $9,684 and $24,089, in the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, the Company had an accumulated deficit of $601,665. As the Company commenced a full promotional launch of EYSUVIS in early January 2021 and commercially launched its first product, INVELTYS, in January 2019, the Company generated only limited revenues from product sales prior to the sale of the Commercial Business to Alcon in July 2022. The Company has financed its operations to date primarily through proceeds from the sale of the Commercial Business to Alcon, its initial public offering of common stock, follow-on public common stock offerings and sales of its common stock under its at-the-market offering facility, private placements of common stock and preferred stock (including the Company’s private placement of common stock and preferred stock for gross proceeds of approximately $31.0 million in December 2022 (the “Private Placement”)), borrowings under credit facilities and the Loan and Security Agreement with Oxford Finance LLC (“Oxford Finance”), convertible promissory notes and warrants. The Company has devoted substantially all of its financial resources and efforts to research and development, including preclinical studies and clinical trials, and, prior to the sale of the Commercial Business to Alcon in July 2022, engaging in activities to launch and commercialize EYSUVIS and INVELTYS. As a result of the Combangio Acquisition and the sale of the Commercial Business to Alcon, the Company is devoting substantial financial resources to the research and development and potential commercialization of KPI-012. The Company has no revenue-generating commercial products and, as a result of the Combangio Acquisition, may be required to pay certain milestones and royalty payments to former equityholders of Combangio. Although the Company is eligible to receive up to $325,000 in payments from Alcon based upon the achievement of specified commercial sales-based milestones with respect to EYSUVIS and INVELTYS, there can be no assurance when the Company may receive such milestone payments or of the amount of milestone payments the Company may receive, if any. The Company expects to continue to incur significant expenses and operating losses for the foreseeable future, including in connection with its continued development, regulatory approval efforts and commercialization, if any, of KPI-012. The Company may never achieve or maintain profitability. Net losses may fluctuate significantly from quarter-to-quarter and year-to-year.

The Company expects that its cash and cash equivalents as of March 31, 2023, will enable it to fund its operating expenses, lease and debt service obligations and capital expenditure requirements for at least twelve months from the date these condensed consolidated financial statements were issued. This evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the condensed consolidated financial statements are issued. To the extent these conditions or events change, the Company could deplete its available capital resources sooner than it currently expects.

COVID-19The Company does not know the extent to which the COVID-19 pandemic will impact its development of KPI-012 or any other product candidate it develops. The COVID-19 pandemic negatively impacted the Company’s revenues from INVELTYS. In addition, the COVID-19 pandemic has generally had an adverse impact on the launch of pharmaceutical products, and the Company believes the pandemic impacted the launch of EYSUVIS. The Company cannot predict whether the COVID-19 pandemic will impact Alcon’s ability to commercialize EYSUVIS and INVELTYS, and as a result, it cannot be certain whether the COVID-19 pandemic might adversely affect when the

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KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

Company may receive milestone payments from Alcon, which milestone payments the Company may receive and if the Company will receive any milestone payments at all. Any impact of COVID-19 on Alcon’s commercialization efforts of EYSUVIS and INVELTYS, the Company’s development of KPI-012 and any other product candidate it may develop in the future and the Company’s operational and financial performance will depend on certain future developments, including the length and severity of the pandemic, the timing and extent of any resurgence of the COVID-19 virus or any variant strains of the virus, the availability and effectiveness of vaccines and treatments, and the impact of the foregoing on employees, vendors and government agencies, all of which are uncertain and cannot be predicted. The Company cannot reasonably estimate the extent to which the disruption may materially impact its condensed consolidated results of operations or financial position.

Use of Estimates— The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expense, and related disclosures. The Company bases estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. Estimates and assumptions relied upon in preparing these condensed consolidated financial statements relate to, but are not limited to, revenue recognition, inventory, the present value of lease liabilities and the corresponding right-of-use assets, the fair value of warrants, stock-based compensation, accrued expenses, deferred purchase consideration, contingent consideration, assets held for sale and the recoverability of the Company’s net deferred tax assets and related valuation allowance. Actual results may differ from these estimates under different assumptions or conditions.

Net Loss per Share Attributable to Common Stockholders—The Company follows the two-class method when computing net income (loss) per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net income (loss) per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The two-class method is not applicable during periods with a net loss, as the holders of the convertible preferred stock have no contractual obligation to share in losses. For all periods presented, the two-class method was not applicable.

Basic net loss per share attributable to common stockholders is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed using the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including the assumed exercise of stock options and warrants, the issuance of unvested restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”) and convertible preferred stock using the if-converted method.

The weighted average number of common shares included in the computation of diluted net loss gives effect to all potentially dilutive common equivalent shares, including outstanding stock options, warrants, unvested RSUs and PSUs and convertible preferred stock using the if-converted method. Common stock equivalent shares are excluded from the computation of diluted net loss per share attributable to common stockholders if their effect is antidilutive. In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive. The Company reported a net loss attributable to common stockholders for the three months ended March 31, 2023 and 2022. (See Note 14).

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Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

Unaudited Interim Financial Information—The condensed consolidated financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. The accompanying condensed consolidated financial statements reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations, statement of stockholders’ equity and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year. Accordingly, these condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report”).

The unaudited condensed consolidated financial statements include the accounts of Kala Pharmaceuticals, Inc. and its wholly owned subsidiaries, Kala Pharmaceuticals Security Corporation and Combangio, Inc. All intercompany transactions and balances have been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in the Annual Report. There have been no material changes to the significant accounting policies during the three months ended March 31, 2023.

Recent Accounting Pronouncements

Management has considered all recent accounting pronouncements issued since the last audit of our consolidated financial statements. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s consolidated financial statements.

3. SALE OF COMMERCIAL BUSINESS TO ALCON

On July 8, 2022, the Company closed the Alcon Transaction contemplated by the Asset Purchase Agreement, pursuant to which Alcon purchased the Commercial Business and assumed certain liabilities with respect to the Commercial Business. Alcon paid to the Company an upfront cash payment of $60,000 upon the closing of the Alcon Transaction. In addition, pursuant to the Asset Purchase Agreement, the Company is eligible to receive from Alcon up to four commercial-based sales milestone payments as follows: (1) $25,000 upon the achievement of $50,000 or more in aggregate worldwide net sales of EYSUVIS and INVELTYS in a calendar year from 2023 to 2028, (2) $65,000 upon the achievement of $100,000 or more in aggregate worldwide net sales of EYSUVIS and INVELTYS in a calendar year from 2023 to 2028, (3) $75,000 upon the achievement of $175,000 or more in aggregate worldwide net sales of EYSUVIS and INVELTYS in a calendar year from 2023 to 2029 and (4) $160,000 upon the achievement of $250,000 or more in aggregate worldwide net sales of EYSUVIS and INVELTYS in a calendar year from 2023 to 2029. Each milestone payment will only become payable once, if at all, upon the first time such milestone is achieved, and only one milestone payment will be paid with respect to a calendar year. In the event that more than one milestone is achieved in a calendar year, the higher milestone payment will become payable and the lower milestone payment will become payable only if the corresponding milestone is achieved again in a subsequent calendar year.

Pursuant to the Asset Purchase Agreement, on July 8, 2022, the Company entered into supply and commercial agreements under which the Company agreed to supply EYSUVIS and INVELTYS to Alcon and distribute EYSUVIS and INVELTYS to third-party customers of the Commercial Business on behalf of Alcon for a period of six months following the closing of the Alcon Transaction, subject to early termination. In addition, the Company entered into a transition services agreement under which the Company provided certain transition services to Alcon on a cost-plus

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

pricing arrangement for six months following the closing of the Alcon Transaction. Pursuant to the supply agreement, Alcon purchased from the Company, at the closing of the Alcon Transaction, $5,027 of EYSUVIS and INVELTYS inventory on-hand at the Company. Together, the supply, commercial and transition services agreements are referred to herein as the “Transition Agreement.”

The Company has determined that the disposition of these assets does not qualify for reporting as a discontinued operation as it was not considered a component of an entity that comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company. During the year ended December 31, 2022, the Company recognized a net gain on the sale of the Commercial Business as follows:

Gross consideration from the sale of the Commercial Business

$

65,027

Closing and transaction costs

2,119

Net proceeds from the sale of the Commercial Business

62,908

Book value of assets transferred

Inventories

8,915

Prepaid expenses and other current assets

556

Property and equipment, net

1,819

Other long-term assets

434

Total book value of assets transferred

11,724

Gain on sale of Commercial Business

51,184

Deferred gain on sale of Commercial Business

4,189

Net gain on sale of Commercial Business

$

46,995

Alcon may purchase any remaining inventory owned by the Company (the “Remaining Inventory”) at an agreed upon discounted price. As the overall components of the Alcon Transaction should be reflected at fair value, the Company has deferred a portion of the gross consideration related to the discounted pricing on the Remaining Inventory. The deferred gain on the sale of the Commercial Business of $4,189 was recorded on the condensed consolidated balance sheet as of the transaction date as deferred gain on sale of Commercial Business and will be reduced at the time of recoverability of the Remaining Inventory.

The Company collected cash on behalf of Alcon for revenue generated by sales of EYSUVIS and INVELTYS from July 8, 2022 through the transition period and the Company transferred all cash generated by such sales to Alcon as of December 31, 2022.

As of March 31, 2023, the receivables due from Alcon for reimbursement for services performed under the Transition Agreement and invoices processed on Alcon’s behalf were $669 and $14, respectively, for a total receivable due from Alcon of $683 included in prepaid and other current assets on the condensed consolidated balance sheet as of March 31, 2023. The Company also has $26 of receivables due from third parties in connection with the Transition Agreement as of March 31, 2023. The Company recorded income from the Transition Agreement of $157 which is presented in other income on the condensed consolidated statement of operations and comprehensive loss for the three months ended March 31, 2023 and which offsets operating expenses related to the Transition Agreement captured within loss from operations. The Company’s condensed consolidated balance sheet as of March 31, 2023 reflected an additional $41 in payables to third parties included within accrued expenses and other current liabilities related to amounts the Company is obligated to pay on Alcon’s behalf. As of March 31, 2023, the Company had a net receivable due from Alcon and third parties in connection with the Transition Agreement of $668.

As of December 31, 2022, the Company had total receivables due from Alcon and third parties of $5,394 and $26, respectively, and total payables to third parties related to the Transition Agreement of $3,981 of which $1,737 was

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

included in accounts payable and $2,244 within accrued expenses and other current liabilities related to invoices the Company was obligated to pay on Alcon’s behalf. As of December 31, 2022, the Company had a net receivable due from Alcon and third parties in connection with the Transition Agreement of $1,439.

4. ASSETS HELD FOR SALE

As of March 31, 2023, the Company presented assets to be disposed of that met the criteria as held for sale as a single asset in its condensed consolidated financial statements. The EYSUVIS and INVELTYS product inventory classified as held for sale represents the net realizable value of the Remaining Inventory which Alcon, and solely Alcon, has the right to purchase. As noted in Note 3, “Sale of Commercial Business to Alcon” above, the Company deferred a portion of the gain on the sale of the Commercial Business related to the discounted pricing on the Remaining Inventory of $4,189.

The following is a summary of the major categories of assets that have been reclassified to held for sale on the condensed consolidated balance sheet as of March 31, 2023 and December 31, 2022:

March 31, 

December 31, 

    

2023

    

2022

Inventories

$

5,355

$

7,544

Property and equipment, net

51

Total assets held for sale

$

5,355

$

7,595

See Note 3, “Sale of Commercial Business to Alcon”, for further information on the sale of the Commercial Business.

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and its own assumptions (unobservable inputs). The hierarchy consists of three levels:

Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s financial instruments as of March 31, 2023 and December 31, 2022 consisted primarily of cash equivalents and contingent consideration. Cash equivalents and contingent consideration are reported at their respective fair values on the Company’s condensed consolidated balance sheets.

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KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

The Company acquired Combangio in November 2021 and in connection with the closing of the Combangio Acquisition, the Company agreed to issue an aggregate of 155,664 shares (the “Deferred Purchase Consideration”) of the Company’s common stock to former Combangio stockholders and other equityholders (the “Combangio Equityholders”) consisting of (i) an aggregate of 136,314 shares of common stock issued on January 3, 2022 (the “Upfront Shares”) and (ii) an aggregate of 19,350 shares of common stock that were held back as partial security for the satisfaction of indemnification obligations and other payment obligations of the Combangio Equityholders and were issued on March 10, 2023 (the “Holdback Shares”). The Company established liabilities for these considerations. The Deferred Purchase Consideration related to the Combangio Acquisition was measured at fair value each reporting period using Level 3 unobservable inputs. The fair value of the Deferred Purchase Consideration was based on the fair value of the underlying stock and a discount for lack of marketability. Changes in these estimates and assumptions could have had a significant impact on the fair value of the Deferred Purchase Consideration. Any change in the fair value of the Deferred Purchase Consideration was included in loss from operations in the condensed consolidated statements of operations and comprehensive loss. During the three months ended March 31, 2022, the Company settled $7,935 of the liability upon issuance of the Upfront Shares and during the three months ended March 31, 2023, the Company settled the remaining liability of $365 upon the issuance of the Holdback Shares. The change in the fair value of the Deferred Purchase Consideration was a gain of $230 and a loss of $1,051 during the three months ended March 31, 2023 and 2022, respectively, primarily due to the change in the fair value of the underlying stock price and is recognized as the (gain) loss on fair value remeasurement of deferred purchase consideration in the condensed consolidated statements of operations and comprehensive loss.

Additionally, the purchase price in connection with the Combangio Acquisition included potential future payments of up to $105,000 that are contingent upon the achievement of specified development, regulatory and commercialization milestones and are required to be recorded at fair value. To date and during the three months ended March 31, 2023, of the $105,000 in contingent milestone payments, the Company has paid to the Combangio Equityholders an aggregate of $2,500 in cash and $2,354 in shares of the Company’s common stock (representing an aggregate of 105,038 shares of the Company’s common stock) upon dosing of the first patient in the Company’s CHASE Phase 2b clinical trial of KPI-012 for PCED in the United States in February 2023 (the “Dosing Milestone”). The Company will pay the remaining amount due in connection with the Dosing Milestone of $146 in cash in January 2024, of which the discounted amount of $129 is included within accrued expenses and other current liabilities on the condensed consolidated balance sheet as of March 31, 2023. Contingent consideration liabilities related to acquisitions are measured at fair value each reporting period using Level 3 unobservable inputs. The fair values of the contingent consideration liabilities were based on a probability-adjusted discounted cash flow calculation using Level 3 fair value measurements. Changes in these estimates and assumptions could have a significant impact on the fair value of the contingent consideration liabilities. Any changes in the fair value of these contingent consideration liabilities are included in loss from operations in the condensed consolidated statements of operations and comprehensive loss. During the three months ended March 31, 2023 and 2022, the change in fair value of the contingent consideration liabilities was a loss of $1,847 and a gain of $988 respectively, primarily due to changes in discount rates, partially offset by the passage of time, and were recognized as a loss (gain) on fair value remeasurement of contingent consideration in the condensed consolidated statements of operations and comprehensive loss for the three months ended March 31, 2023 and 2022.

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KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

The following tables set forth the fair value of the Company’s financial instruments by level within the fair value hierarchy as of March 31, 2023 and December 31, 2022:

March 31, 2023

Fair Value

Level 1

Level 2

Level 3

Assets:

Cash equivalents

$

62,514

$

62,514

$

$

Total Assets

$

62,514

$

62,514

$

$

Liabilities:

Contingent consideration

$

5,234

$

$

$

5,234

Total Liabilities

$

5,234

$

$

$

5,234

December 31, 2022

Fair Value

Level 1

Level 2

Level 3

Assets:

Cash equivalents

$

31,587

$

31,587

$

$

Total Assets

$

31,587

$

31,587

$

$

Liabilities:

Deferred purchase consideration

$

595

$

$

$

595

Contingent consideration

8,370

8,370

Total Liabilities

$

8,965

$

$

$

8,965

The following tables summarize quantitative information and assumptions pertaining to the fair value measurement of the Level 3 inputs as of March 31, 2023 and December 31, 2022:

Fair Value at

March 31, 

Range

Financial Instrument

2023

Valuation Technique

Unobservable Input

(Average)

Contingent consideration

$

5,234

Probability-adjusted

Period of expected milestone achievement

2024 - 2027 (2026)

discounted cash flow model

Probabilities of achievement

21.0% - 45.0% (29.7%)

Discount rate

18.0%

Fair Value at

December 31,

Range

Financial Instrument

2022

Valuation Technique

Unobservable Input

(Average)

Deferred purchase consideration

$

595

Option pricing model

Discount for lack of marketability

20%

Contingent consideration

$

8,370

Probability-adjusted

Period of expected milestone achievement

2023 - 2027 (2025)

discounted cash flow model

Probabilities of achievement

19.9% - 95.0% (44.9%)

Discount rate

19.0%

Discount for lack of marketability

20.0%

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KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

The following table summarizes the changes in the Deferred Purchase Consideration and contingent consideration liabilities measured at fair value using Level 3 inputs for the three months ended March 31, 2023 and 2022:

Deferred purchase consideration

Balance at January 1, 2023

$

595

Fair value adjustments

(230)

Settlements

(365)

Balance at March 31, 2023

$

Contingent consideration

Balance at January 1, 2023

$

8,370

Fair value adjustments

1,847

Settlements

(4,854)

Reclassification to accrued expenses and other current liabilities

(129)

Balance at March 31, 2023

$

5,234

Deferred purchase consideration

Balance at January 1, 2022

$

7,892

Fair value adjustments

1,051

Settlements

(7,935)

Balance at March 31, 2022

$

1,008

Contingent consideration

Balance at January 1, 2022

$

8,658

Fair value adjustments

(988)

Balance at March 31, 2022

$

7,670

During the three months ended March 31, 2023 and the year ended December 31, 2022, there were no transfers between Level 1, Level 2, and Level 3.

6. REVENUE

Following the sale of its Commercial Business to Alcon in July 2022, the Company no longer has any commercial products in its portfolio. The Company accounted for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. Under ASC Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to be entitled in exchange for those goods or services. The Company performed the following five steps to recognize revenue under ASC Topic 606: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only recognized revenue when it was probable that it would collect the consideration to which it was entitled in exchange for the goods or services that would be transferred to the customer.

Product revenues, net

The Company sold EYSUVIS and INVELTYS primarily to wholesalers in the United States (collectively, “Customers”). These Customers subsequently resold the Company’s products to specialty and other retail pharmacies. In addition to agreements with Customers, the Company entered into arrangements with third-party payors that provided

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

for government-mandated and/or privately-negotiated rebates, chargebacks and discounts for the purchase of the Company’s products.

The goods promised in the Company’s product sales contracts represented a single performance obligation. The Company recognized revenue from product sales at the point the Customer obtained control of the product, which occurred upon delivery. The transaction price (“net sales price”) that was recognized as revenue for product sales included the selling price to the Customer and an estimate of variable consideration. Components of variable consideration included prompt pay and other discounts, product returns, government rebates, third-party payor rebates, coverage gap rebates, incentives such as patient co-pay assistance, and other fees paid to Customers and other third-party payors where a distinct good or service was not received. Variable consideration was recorded on the condensed consolidated balance sheet as either a reduction of accounts receivable, if payable to a Customer, or as a current liability, if payable to a third-party other than a Customer. The Company considered all relevant information when estimating variable consideration such as assessment of its then current and anticipated sales and demand forecasts, actual payment history, information from third parties regarding the payor mix for products, information from third parties regarding the units remaining in the distribution channel, specific known market events and trends, industry data and current contractual and statutory requirements that were reasonably available. The Company included estimated amounts for variable consideration in the net sales price to the extent it was determined probable that a significant reversal of cumulative revenue recognized would not occur when the uncertainty associated with the variable consideration was resolved.

Payment terms with Customers did not exceed one year and, therefore, the Company did not account for a significant financing component in its arrangements. The Company expensed the incremental cost of obtaining a contract with a Customer when incurred as the period of benefit was generally less than one year.

Reserves for Variable Consideration:

Trade Discounts and Allowances

The Company provided its Customers with certain trade discounts and allowances including discounts for prompt payments and other discounts and fees paid for distribution, data and administrative services. These discounts and fees were based on contractually-determined percentages and were recorded as a reduction of revenue and accounts receivable in the period in which the related product revenue was recognized.

Chargebacks

Chargebacks for fees and discounts to providers represent the estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices charged to Customers who directly purchased the product from the Company. Customers charged the Company for the difference between what they paid for the product and the ultimate selling price to the qualified healthcare providers. These components of variable consideration were established in the same period that the related revenue was recognized, resulting in a reduction of product revenue and accounts receivable. Reserves for chargebacks consisted of credits the Company expected to issue for units that remained in the distribution channel at the end of each reporting period and that the Company expected would be sold to qualified healthcare providers, as well as chargebacks that Customers had claimed, but for which the Company had not yet issued a credit.

Product Returns

Consistent with industry practice, the Company has a product returns policy that provides Customers right of return for product purchased within a specified period prior to and subsequent to the product’s expiration date. The

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KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

Company estimated the amount of its products that may be returned and presented this amount as a reduction of revenue in the period the related product revenue was recognized, in addition to establishing a liability. The Company’s estimates for product returns were based upon available industry data and its own sales information, including its visibility into the inventory remaining in the distribution channel as well as historical returns, which developed over time.

Commercial Payor and Medicare Part D Rebates 

The Company contracted with certain third-party payors, primarily pharmacy benefit managers (“PBMs”) and health plans (“Plans”), for the payment of rebates with respect to utilization of its product. These rebates were based on contractual percentages applied to the amount of product prescribed to patients who were covered by the PBMs or the Plans with which it contracted. The Company estimated the rebates for commercial and Medicare Part D payors based on the contractual discount percentage, the various payor mix for EYSUVIS and INVELTYS as well as future rebates that would be made for product that had been recognized as revenue but remained in the distribution channel at the end of each reporting period. The Company also estimated the number of patients in the prescription drug coverage gap for whom it would owe an additional liability under the Medicare Part D program. Such estimates were recorded in the same period the related revenue was recognized, resulting in a reduction of product revenue and the establishment of a current liability.

Government Rebates

The Company was subject to discount obligations under Medicaid and other government programs. For Medicaid, reserves were based on actual payment history, and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Centers for Medicaid and Medicare Services. The Company’s liability for these rebates consisted of estimates of claims for the current period and estimated future claims that would be made for product that had been recognized as revenue but remained in the distribution channel at the end of each reporting period. These reserves were recorded in the same period the related revenue was recognized, resulting in a reduction of product revenue and the establishment of a current liability.

Co-pay Assistance Programs

The Company offered co-pay assistance programs (the “co-pay programs”), which were intended to provide financial assistance to patients who may or may not be covered by commercial insurance or, with respect to INVELTYS, who opt out of Medicare Part D programs. The calculation of accruals for the co-pay programs was based on actual claims processed during the period as well as an estimate of the number and cost per claim that the Company expected to receive associated with product that had been recognized as revenue but remained in the distribution channel at the end of each reporting period. Allowances for estimated co-pay claims were recorded in the same period the related revenue was recognized, resulting in a reduction of product revenue and the establishment of a current liability.

The following tables summarize activity in each of the Company’s product revenue provision and allowance categories for the three months ended March 31, 2023 and 2022: