SEC Filing - Kala Bio

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Table of Contents

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 June 30, 2021

☐	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.)


490 Arsenal Way, Suite 120
Watertown, MA	02472
(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 Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T 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 64,971,096 shares of Common Stock, $0.001 par value per share, outstanding as of August 4, 2021.

Table of Contents

TABLE OF CONTENTS


		Page
PART I – FINANCIAL INFORMATION		3

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020	3

	Condensed Consolidated Statement of Operations and Comprehensive Loss for the three and six months ended June 30, 2021 and 2020	4

	Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2021 and 2020	5

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

PART II – OTHER INFORMATION		38

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	86

Item 6.	Exhibits	87

SIGNATURES		88

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share amounts)


	June 30,		December 31,
	2021		2020

Assets
Current assets:
Cash and cash equivalents	$	144,635	$	77,264
Short-term investments		5,000		76,276
Accounts receivable, net		11,859		9,604
Inventory		8,046		5,229
Prepaid expenses and other current assets		2,180		3,006
Total current assets		171,720		171,379
Non-current assets:
Property and equipment, net		3,416		3,166
Long-term inventory		9,157		6,219
Right-of-use assets		27,953		27,853
Restricted cash and other long-term assets		3,218		12,989
Total assets	$	215,464	$	221,606
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	2,844	$	1,724
Accrued expenses and other current liabilities		21,255		18,971
Current portion of lease liabilities		1,977		1,530
Total current liabilities		26,076		22,225
Long-term liabilities:
Long-term lease liabilities		27,063		27,143
Long-term debt		78,055		72,243
Total long-term liabilities		105,118		99,386
Total liabilities		131,194		121,611
Commitments and Contingencies (Note 14)
Stockholders' equity:
Common stock, $0.001 par value; 120,000,000 shares authorized as of June 30, 2021 and December 31, 2020; 64,770,219 and 58,915,375 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively		65		59
Additional paid-in capital		550,898		499,715
Accumulated other comprehensive income		—		4
Accumulated deficit		(466,693)		(399,783)
Total stockholders' equity		84,270		99,995
Total liabilities and stockholders' equity	$	215,464	$	221,606

See accompanying notes to these unaudited condensed consolidated financial statements.

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KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

(In thousands, except share and per share amounts)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020


Product revenues, net	$	3,051	$	833	$	6,317	$	1,904
Costs and expenses:
Cost of product revenues		1,016		759		1,771		1,113
Selling, general and administrative		27,986		15,301		55,685		30,709
Research and development		3,094		6,053		6,220		11,487
Total costs and expenses		32,096		22,113		63,676		43,309
Loss from operations		(29,045)		(21,280)		(57,359)		(41,405)
Other income (expense):
Interest and other income		33		102		76		400
Interest and other expense		(2,091)		(2,134)		(4,232)		(4,262)
Loss on extinguishment of debt		(5,395)		—		(5,395)		—
Total interest and other expense		(7,453)		(2,032)		(9,551)		(3,862)
Net loss	$	(36,498)	$	(23,312)	$	(66,910)	$	(45,267)
Net loss per share—basic and diluted	$	(0.57)	$	(0.42)	$	(1.06)	$	(0.94)
Weighted average shares outstanding—basic and diluted		64,554,506		55,703,882		63,113,194		48,232,933

Net loss	$	(36,498)	$	(23,312)	$	(66,910)	$	(45,267)
Other comprehensive loss:
Change in unrealized gains on investments		(3)		17		(4)		17
Total other comprehensive loss		(3)		17		(4)		17
Total comprehensive loss	$	(36,501)	$	(23,295)	$	(66,914)	$	(45,250)

See accompanying notes to these unaudited condensed consolidated financial statements.

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KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands, except share and per share amounts)


	Three Months Ended June 30, 2021
						Accumulated
	Common Stock			Additional		Other				Total
	$0.001 Par Value			Paid-In		Comprehensive		Accumulated		Stockholders'
	Shares	Amount		Capital		Income		Deficit		Equity
Balance as of March 31, 2021	63,805,108	$	64	$	539,920	$	3	$	(430,195)	$	109,792
At the market offering, net of sales agent commission of $170	837,257		1		6,020		—		—		6,021
Exercise of stock options	20,074		—		64		—		—		64
Issuance of vested restricted stock units	107,780		—		—		—		—		—
Stock-based compensation expense	—		—		4,894		—		—		4,894
Change in fair value of investments	—		—		—		(3)		—		(3)
Net loss	—		—		—		—		(36,498)		(36,498)
Balance as of June 30, 2021	64,770,219	$	65	$	550,898	$	—	$	(466,693)	$	84,270


	Three Months Ended June 30, 2020
						Accumulated
	Common Stock			Additional		Other				Total
	$0.001 Par Value			Paid-In		Comprehensive		Accumulated		Stockholders'
	Shares	Amount		Capital		Income		Deficit		Equity
Balance as of March 31, 2020	54,585,636	$	55	$	458,866	$	—	$	(317,411)	$	141,510
Exercise of stock options	249,870		—		772		—		—		772
Common stock offering, net of offering costs of $464	979,371		1		7,215		—		—		7,216
Stock-based compensation expense	—		—		2,774		—		—		2,774
Warrant exercises	16,144		—		—		—		—		—
Change in fair value of investments	—		—		—		(17)				(17)
Net loss	—		—		—		—		(23,312)		(23,312)
Balance as of June 30, 2020	55,831,021	$	56	$	469,627	$	(17)	$	(340,723)	$	128,943

See accompanying notes to these unaudited condensed consolidated financial statements.

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	Six Months Ended June 30, 2021
	Common Stock			Additional		Accumulated				Total
	$0.001 Par Value			Paid-In		Other Comprehensive		Accumulated		Stockholders'
	Shares	Amount		Capital		Income		Deficit		Equity
Balance as of December 31, 2020	58,915,375	$	59	$	499,715	$	4	$	(399,783)	$	99,995
At the market offering, net of offering costs $1,161	5,583,329		6		40,724		—		—		40,730
Exercise of stock options	88,888		—		248		—		—		248
Issuance of vested restricted stock units	107,780		—		—		—		—		—
Issuance of common stock under employee stock purchase plan	74,847		—		431		—		—		431
Stock-based compensation expense	—		—		9,780		—		—		9,780
Change in fair value of investments	—		—		—		(4)		—		(4)
Net loss	—		—		—		—		(66,910)		(66,910)
Balance as of June 30, 2021	64,770,219	$	65	$	550,898	$	—	$	(466,693)	$	84,270


	Six Months Ended June 30, 2020
	Common Stock			Additional		Accumulated				Total
	$0.001 Par Value			Paid-In		Other Comprehensive		Accumulated		Stockholders'
	Shares	Amount		Capital		Income		Deficit		Equity
Balance as of December 31, 2019	36,086,254	$	36	$	325,112	$	—	$	(295,456)	$	29,692
At the market offering, net of sales agent commission of $388	2,352,671		3		12,543		—		—		12,546
Exercise of stock options	311,028		—		938		—		—		938
Common stock offering, net of issuance cost and underwriting fees of $8,475	16,979,371		17		125,406		—		—		125,423
Issuance of common stock under employee stock purchase plan	85,553		—		270		—		—		270
Stock-based compensation expense	—		—		5,358		—		—		5,358
Warrant exercises	16,144		—		—		—		—		—
Change in fair value of investments	—		—		—		(17)		—		(17)
Net loss	—		—		—		—		(45,267)		(45,267)
Balance as of June 30, 2020	55,831,021	$	56	$	469,627	$	(17)	$	(340,723)	$	128,943

See accompanying notes to these unaudited condensed consolidated financial statements.

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KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)


	Six Months Ended
	June 30,
	2021		2020
Cash flows from operating activities:
Net loss	$	(66,910)	$	(45,267)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		504		454
Non-cash operating lease cost		1,118		952
Loss on extinguishment of debt		5,395		—
Amortization of debt discount and other non-cash interest		645		513
Stock-based compensation		9,412		5,271
Amortization of discount on available-for-sale securities		22		—
Change in operating assets and liabilities:
Accounts receivable		(2,255)		7,282
Prepaid expenses and other current assets		826		1,351
Inventory		(5,387)		(1,306)
Accounts payable		1,250		(973)
Accrued expenses and other current liabilities		1,966		(6,782)
Lease liabilities and other long-term liabilities		(834)		(629)
Net cash used in operating activities		(54,248)		(39,134)
Cash flows from investing activities:
Purchases of property and equipment and other assets		(545)		(915)
Purchases of short-term investments		—		(56,535)
Proceeds from sales or maturities of short-term investments		71,250		—
Net cash provided by (used in) investing activities		70,705		(57,450)
Cash flows from financing activities:
Proceeds from issuance of debt, net of debt issuance costs of $2,218		77,782		—
Payment of principal, prepayment premium and exit fee on debt		(78,010)		—
Proceeds from common stock offerings, net of offering costs		40,730		137,969
Payment of principal on finance lease		(17)		(16)
Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan		679		1,207
Net cash provided by financing activities		41,164		139,160
Net increase in cash, cash equivalents and restricted cash:		57,621		42,576
Cash, cash equivalents and restricted cash at beginning of period		89,756		98,031
Cash, cash equivalents and restricted cash at end of period	$	147,377	$	140,607
Reconciliation of cash, cash equivalents and restricted cash:
Cash, cash equivalents, and restricted cash at end of period	$	147,377	$	140,607
Less restricted cash (Note 8)		(2,742)		(12,584)
Cash and cash equivalents at end of period	$	144,635	$	128,023

Non-cash investing and financing activities:
Purchases of property and equipment in accrued expenses	$	318	$	—

Supplemental disclosure:
Cash paid for interest	$	3,030	$	3,749
Right-of-use assets obtained in exchange of operating lease obligations		1,218		—

See accompanying notes to these unaudited condensed consolidated financial statements.

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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 biopharmaceutical company focused on the discovery, development and commercialization of innovative therapies for diseases of the eye. The Company has applied its AMPPLIFY^® mucus-penetrating particle (“MPP”) Drug Delivery Technology to loteprednol etabonate (“LE”), a corticosteroid designed for ocular applications, resulting in the U.S. Food and Drug Administration’s (the “FDA”) approval of 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% as the first and only topical twice-daily ocular corticosteroid for treatment of post-operative inflammation and pain following ocular surgery.

In January 2019, the Company launched its first commercial product, INVELTYS, in the United States and began shipping its second commercial product, EYSUVIS, to wholesalers in the United States in late December 2020 with the full promotional launch commencing in early January 2021. The Company is engaged in the commercialization of EYSUVIS and INVELTYS, research and development activities, raising capital and recruiting skilled personnel. The Company is subject to a number of risks similar to those of other companies conducting high-risk, research and development of pharmaceutical product candidates and launching products for the first time. Principal among these risks are dependence on key individuals and intellectual property, competition from other products and companies and the technical risks associated with the successful research, development and marketing of its product candidates. The Company’s success is dependent upon its ability to successfully commercialize its products, the success of its research and development efforts, its ability to obtain regulatory approval of its product candidates, its ability to raise additional capital when needed and, ultimately, attain profitable operations.

The Company is also progressing its pipeline of proprietary preclinical development programs targeted to address front and back of the eye diseases. These preclinical development programs, all of which are new chemical entities, include its receptor Tyrosine Kinase Inhibitor program, that is designed to inhibit the vascular endothelial growth factor pathway, for the treatment of retinal diseases, including wet age-related macular degeneration; its selective glucocorticoid receptor modulators, which are a novel class of therapies designed to modify the downstream activity of the receptors to exhibit the anti-inflammatory and immunomodulatory properties of the corticosteroid class of therapies without their associated side effects; and its novel surface targeting steroid designed to target the ocular surface and thus have the potential to have fewer side effects compared to traditional topical steroids. The Company owns all intellectual property and worldwide rights to these pipeline preclinical development programs.

Liquidity— Since inception, the Company has incurred significant losses from operations and negative cash flows from operations. As of June 30, 2021, the Company had an accumulated deficit of $466,693. As the Company commenced a full promotional launch of EYSUVIS in early January 2021 and commercially launched its first product, INVELTYS, in January 2019, it has had only limited revenues to date from product sales and has financed operations primarily through proceeds from its initial public offering of common stock (“IPO”), follow-on public common stock offerings and sales of its common stock under its at-the-market offering (“ATM Offering”) facility, private placements of preferred stock, borrowings under credit facilities, 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 engaging in activities to commercialize EYSUVIS and INVELTYS. Although the Company expects to continue to generate revenue from sales of EYSUVIS and INVELTYS, there can be no assurance as to the amount or timing of any such revenue, and it expects to continue to incur significant expenses and operating losses. Net losses may fluctuate significantly from quarter-to-quarter and year-to-year.

The Company expects that its cash, cash equivalents and short-term investments as of June 30, 2021, together with anticipated net revenue from sales of EYSUVIS and INVELTYS, will enable it to fund its operating expenses, 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. As a result, the Company could deplete its available capital resources sooner than it currently expects.

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KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

COVID-19 –In order to safeguard the health of its employees from the ongoing novel coronavirus pandemic, or COVID-19, the Company is following, and will continue to follow, recommendations from the U.S. Centers for Disease Control and Prevention, as well as federal, state and local governments, regarding working-from-home practices for non-essential employees. As a result, all office-based personnel are permitted to work from home, and the Company’s laboratory facilities that support its early-stage research activities are being utilized as necessary. In addition, the Company previously suspended its sales force from substantially all in-person interactions with physicians and was limited to conducting educational and promotional activities virtually. The Company’s sales force has since resumed substantially all in-person interactions in the field, but if the Company suspends all or some in-person interactions with physicians in the future, or to the extent physicians limit in-person interactions, the Company may be limited to conducting educational and promotional activities virtually, which may continue to hamper its ability to market and commercialize EYSUVIS and INVELTYS.

In addition, government restrictions have at times led to moratoria on elective ocular surgeries in many jurisdictions, which had significantly reduced, and may in the future continue to significantly reduce, the demand for INVELTYS, which is indicated for the treatment of post-operative inflammation and pain following ocular surgery. The extent of the impact of the COVID-19 pandemic on the Company’s commercialization efforts of EYSUVIS and INVELTYS and its operational and financial performance will depend on certain developments, including the length and severity of this 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 the impact of the foregoing on our customers, employees and 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 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—Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share 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 and the issuance of unvested restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”).

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 and unvested RSUs and PSUs. Common stock equivalent shares are excluded from the computation of diluted net loss per share 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 each of the three and six months ended June 30, 2021 and 2020.

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KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

As of June 30, 2021 and 2020, potentially dilutive securities excluded from the calculation of diluted net loss per share because including such securities would have an anti-dilutive effect consisted of outstanding options to purchase 10,043,748 and 8,573,573 shares of the Company’s common stock, respectively, an aggregate of 1,282,830 and 957,097 unvested RSUs and PSUs, respectively, and an aggregate of 215,172 and 248,505 unexercised warrants, respectively.

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, 2020 (the “Annual Report”).

The unaudited condensed consolidated financial statements include the accounts of Kala Pharmaceuticals, Inc. and its wholly owned subsidiary, Kala Pharmaceuticals Security Corporation. 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 June 30, 2021.

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”), which is effective for Smaller Reporting Companies (“SRCs”) as defined by the SEC for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, beginning January 1, 2023, the Company does not expect ASU 2019-10 to have a material effect on its condensed consolidated financial statements.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has short-term investments which are considered financial instruments that are measured on a recurring basis. 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.

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KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

●

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 consist primarily of cash equivalents and short-term investments in money market funds and short-term securities. Cash equivalents and short-term investments are reported at their respective fair values on the Company’s condensed consolidated balance sheets. See Note 4, “Investments” for additional information.

The following tables set forth the fair value of the Company’s financial assets by level within the fair value hierarchy as of June 30, 2021 and December 31, 2020:


	June 30, 2021
	Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	126,118	$	126,118	$	—	$	—
Short-term investments		5,000		5,000		—		—
Total Assets	$	131,118	$	131,118	$	—	$	—


	December 31, 2020
	Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	63,811	$	63,811	$	—	$	—
Short-term investments		76,276		76,276		—		—
Total Assets	$	140,087	$	140,087	$	—	$	—

During the three and six months ended June 30, 2021 and the year ended December 31, 2020, there were no transfers between Level 1, Level 2, and Level 3.

4. INVESTMENTS

Investments by security type consisted of the following as of June 30, 2021 and December 31, 2020:


	June 30, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. government agencies securities	$	5,000	$	—	$	—	$	5,000
Total	$	5,000	$	—	$	—	$	5,000

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KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

	December 31, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
U.S. treasury securities	$	26,744	$	2	$	—	$	26,746
U.S. government agencies securities		49,528		2		—		49,530
Total	$	76,272	$	4	$	—	$	76,276

As of June 30, 2021 and December 31, 2020, all of the Company’s investments had a contractual maturity within one year. The fair value of all of the Company’s investments are classified as short-term on its condensed consolidated balance sheets.

5. REVENUE & ACCOUNTS RECEIVABLE, NET

The Company accounts 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 performs 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 recognizes revenue when it is probable that it will collect the consideration to which it is entitled in exchange for the goods or services that will be transferred to the customer.

Product revenues, net

The Company sells EYSUVIS and INVELTYS primarily to wholesalers in the United States (collectively, “Customers”). These Customers subsequently resell the Company’s products to specialty and other retail pharmacies. In addition to agreements with Customers, the Company enters into arrangements with third-party payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts for the purchase of the Company’s products.

The Company also holds inventory at a third-party pharmacy on a consignment basis and records revenue when control of the product transfers to the customer upon sale to the end user. The amount of inventory held on a consignment basis as of June 30, 2021 and December 31, 2020 was immaterial.

The goods promised in the Company’s product sales contracts represent a single performance obligation. The Company recognizes revenue from product sales at the point the Customer obtains control of the product, which occurs upon delivery. The transaction price (“net sales price”) that is recognized as revenue for product sales includes the selling price to the Customer and an estimate of variable consideration. Components of variable consideration include 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 is not received. Variable consideration is 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 considers all relevant information when estimating variable consideration such as assessment of its 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 are reasonably available. The Company includes estimated amounts for variable consideration in the net sales price to the extent it is determined probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.

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KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

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

Reserves for Variable Consideration:

Trade Discounts and Allowances

The Company provides 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 are based on contractually-determined percentages and are recorded as a reduction of revenue and accounts receivable in the period in which the related product revenue is 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 purchase the product from the Company. Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These components of variable consideration are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Reserves for chargebacks consist of credits the Company expects to issue for units that remain in the distribution channel at the end of each reporting period and that the Company expects will be sold to qualified healthcare providers, as well as chargebacks that Customers have claimed, but for which the Company has 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 Company estimates the amount of its products that may be returned and presents this amount as a reduction of revenue in the period the related product revenue is recognized, in addition to establishing a liability. The Company’s estimates for product returns are 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 develop over time.

Commercial Payor and Medicare Part D Rebates

The Company contracts 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 are based on contractual percentages applied to the amount of product prescribed to patients who are covered by the PBMs or the Plans with which it contracts. The Company estimates 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 will be made for product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. The Company also estimates the number of patients in the prescription drug coverage gap for whom it will owe an additional liability under the Medicare Part D program. Such estimates are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.

Government Rebates

The Company is subject to discount obligations under Medicaid and other government programs. For Medicaid, reserves are 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 consists of estimates of claims for the current period and estimated future claims that will be made for

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KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except share and per share amounts)

product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. These reserves are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability.

Co-pay Assistance Programs

The Company offers co-pay assistance programs (the “co-pay programs”), which are 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 is based on actual claims processed during the period as well as an estimate of the number and cost per claim that the Company expects to receive associated with product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period. Allowances for estimated co-pay claims are recorded in the same period the related revenue is 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 and six months ended June 30, 2021 and 2020:


	Trade Discounts,
	Allowances and				Rebates and
	Chargebacks (1)		Product Returns (2)		Incentives (3)
Balance as of December 31, 2020	$	1,157	$	600	$	4,904
Provision related to current period sales		2,201		245		10,216
Changes in estimate related to prior period sales		3		30		(26)
Credit/payments made		(1,823)		(419)		(7,880)
Balance as of March 31, 2021	$	1,538	$	456	$	7,214
Provision related to current period sales		2,103		356		11,193
Changes in estimate related to prior period sales		30		142		(353)
Credit/payments made		(2,260)		(253)		(9,801)
Balance as of June 30, 2021	$	1,411	$	701	$	8,253


	Trade Discounts,
	Allowances and				Rebates and
	Chargebacks (1)		Product Returns (2)		Incentives (3)
Balance as of December 31, 2019	$	1,783	$	180	$	10,044
Provision related to current period sales		725		—		4,576
Changes in estimate related to prior period sales		2		(66)		93
Credit/payments made		(1,114)		—		(8,090)
Balance as of March 31, 2020	$	1,396	$	114	$	6,623
Provision related to current period sales		335		—