SEC Filing - Kala Pharmaceuticals, Inc.

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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 June 30, 2022

☐	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 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 73,208,140 shares of Common Stock, $0.001 par value per share, outstanding as of August 10, 2022.

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		Page
PART I – FINANCIAL INFORMATION		7

Item 1.	Financial Statements (Unaudited)	7

	Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021	7

	Condensed Consolidated Statement of Operations and Comprehensive Loss for the three and six months ended June 30, 2022 and 2021	8

	Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the three and six months ended June 30, 2022 and 2021	9

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021	11

	Notes to Condensed Consolidated Financial Statements	12

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4.	Controls and Procedures	53

PART II – OTHER INFORMATION		54

Item 1.	Legal Proceedings	54

Item 1A.	Risk Factors	54

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	107

Item 6.	Exhibits	108

SIGNATURES		109

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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 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 investigational new drug applications and 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;

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●

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, including the development of KPI-287, our receptor tyrosine kinase inhibitor, and our selective glucocorticoid receptor modulators;

●

our plans to initiate preclinical studies under our KPI-014 program;

●

our expectations regarding our ability to fund our operating expenses, debt service obligations, and capital expenditure requirements with our cash on hand;

●

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 plan to proceed with a workforce reduction and our anticipated annualized reduction in operating expenses associated with such workforce reduction;

●

the impact of COVID-19 on our business and operations; and

●

our expectations regarding the time during which we will be an emerging growth company under the Jumpstart our Business Startups Act of 2012.

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

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potential market opportunities. Industry publications, third-party and our own 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:

●

Following the completion of the sale of our commercial business to Alcon, we no longer have any commercial products in our portfolio, and we have only one product candidate which is currently in clinical development. As a result, we are substantially dependent on the development of KPI-012 for the treatment of PCED and any other product candidates we may develop in the future.

●

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.

●

We may not be able to realize the anticipated benefits from the sale of our commercial business to Alcon.

●

We may fail to realize the anticipated benefits of our Combangio Acquisition and those benefits may take longer to realize than expected.

●

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 June 30, 2022, we had an accumulated deficit of $603.4 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 could result in an event of default and acceleration of amounts due.

●

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 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 or, for drug products, safety and efficacy 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.

●

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.

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●

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 only been evaluated in a clinical trial outside of the United States. We may in the future conduct clinical trials for product candidates at sites outside the United States, and the FDA may not accept data from trials conducted in such locations.

●

The ongoing novel coronavirus pandemic and the efforts to prevent its spread have adversely impacted our operations, 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 and when 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.

●

Our workforce reduction announced in July 2022 could result in total costs and expenses that are greater than expected and could disrupt our business.

●

If we fail to comply with the continued listing requirements of Nasdaq, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.

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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,
	2022		2021

Assets
Current assets:
Cash and cash equivalents	$	42,569	$	92,136
Short-term investments		1,999		—
Short-term restricted cash		450		2,042
Accounts receivable, net		13,822		15,345
Inventory		25		8,639
Prepaid expenses and other current assets		2,143		6,204
Current assets held for sale (Note 3)		22,507		—
Total current assets		83,515		124,366
Non-current assets:
Property and equipment, net		891		2,722
Long-term inventory		—		9,578
Right-of-use assets		51		1,299
Restricted cash and other long-term assets		519		1,462
Total assets	$	84,976	$	139,427
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	10,542	$	4,899
Accrued expenses and other current liabilities		18,306		20,986
Current portion of lease liabilities		52		711
Current portion of contingent consideration		3,772		3,817
Current portion of deferred purchase consideration		219		7,009
Total current liabilities		32,891		37,422
Long-term liabilities:
Long-term lease liabilities		—		548
Long-term debt		79,800		78,929
Long-term contingent consideration		3,839		4,841
Long-term deferred purchase consideration		—		883
Total long-term liabilities		83,639		85,201
Total liabilities		116,530		122,623
Commitments and Contingencies (Note 16)
Stockholders' equity:
Common stock, $0.001 par value; 120,000,000 shares authorized as of June 30, 2022 and December 31, 2021; 72,673,785 and 65,500,275 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively		73		66
Additional paid-in capital		571,814		559,126
Accumulated other comprehensive loss		(1)		—
Accumulated deficit		(603,440)		(542,388)
Total stockholders' (deficit) equity		(31,554)		16,804
Total liabilities and stockholders' (deficit) equity	$	84,976	$	139,427

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,
	2022		2021		2022		2021


Product revenues, net	$	2,100	$	3,051	$	3,472	$	6,317
Costs and expenses:
Cost of product revenues		1,774		1,016		2,549		1,771
Selling, general and administrative		22,673		27,986		49,655		55,685
Research and development		4,473		3,094		8,939		6,220
(Gain) loss on fair value remeasurement of deferred purchase consideration		(789)		—		262		—
Gain on fair value remeasurement of contingent consideration		(59)		—		(1,047)		—
Total costs and expenses		28,072		32,096		60,358		63,676
Loss from operations		(25,972)		(29,045)		(56,886)		(57,359)
Other income (expense):
Interest and other income		68		33		76		76
Interest and other expense		(2,207)		(2,091)		(4,242)		(4,232)
Loss on extinguishment of debt		—		(5,395)		—		(5,395)
Total interest and other expense		(2,139)		(7,453)		(4,166)		(9,551)
Net loss	$	(28,111)	$	(36,498)	$	(61,052)	$	(66,910)
Net loss per share—basic and diluted	$	(0.38)	$	(0.57)	$	(0.83)	$	(1.06)
Weighted average shares outstanding—basic and diluted		73,676,819		64,554,506		73,658,924		63,113,194

Net loss	$	(28,111)	$	(36,498)	$	(61,052)	$	(66,910)
Other comprehensive loss:
Change in unrealized gains on investments		1		(3)		(1)		(4)
Total other comprehensive loss		1		(3)		(1)		(4)
Total comprehensive loss	$	(28,110)	$	(36,501)	$	(61,053)	$	(66,914)

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 (DEFICIT)

(UNAUDITED)

(In thousands, except share and per share amounts)


	Three Months Ended June 30, 2022
						Accumulated
	Common Stock			Additional		Other				Total
	$0.001 Par Value			Paid-In		Comprehensive		Accumulated		Stockholders'
	Shares	Amount		Capital		Income		Deficit		Equity (Deficit)
Balance as of March 31, 2022	72,594,005	$	73		569,974		(2)		(575,329)		(5,284)
Issuance of common stock for vested restricted stock units	79,780		—		—		—		—		—
Stock-based compensation expense	—		—		1,840		—		—		1,840
Change in fair value of investments	—		—		—		1		—		1
Net loss	—		—		—		—		(28,111)		(28,111)
Balance as of June 30, 2022	72,673,785	$	73	$	571,814	$	(1)	$	(603,440)	$	(31,554)


	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 common stock for 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

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 (DEFICIT)

(UNAUDITED)

(In thousands, except share and per share amounts)


	Six Months Ended June 30, 2022
	Common Stock			Additional		Accumulated				Total
	$0.001 Par Value			Paid-In		Other Comprehensive		Accumulated		Stockholders'
	Shares	Amount		Capital		Income		Deficit		Equity (Deficit)
Balance as of December 31, 2021	65,500,275	$	66	$	559,126	$	—	$	(542,388)	$	16,804
Exercise of stock options	5,088		—		3		—		—		3
Issuance of common stock for vested restricted stock units	198,244		—		—		—		—		—
Issuance of common stock under employee stock purchase plan	155,106		—		160		—		—		160
Issuance of common stock to satisfy deferred purchase consideration	6,815,072		7		7,929		—		—		7,936
Stock-based compensation expense	—		—		4,596		—		—		4,596
Change in fair value of investments	—		—		—		(1)		—		(1)
Net loss	—		—		—		—		(61,052)		(61,052)
Balance as of June 30, 2022	72,673,785	$	73	$	571,814	$	(1)	$	(603,440)	$	(31,554)


	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 of $1,161	5,583,329		6		40,724		—		—		40,730
Exercise of stock options	88,888		—		248		—		—		248
Issuance of common stock for 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

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,
	2022		2021
Cash flows from operating activities:
Net loss	$	(61,052)	$	(66,910)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization		306		504
Non-cash operating lease cost		403		1,118
Loss on extinguishment of debt		—		5,395
Loss on fair value remeasurement of deferred purchase consideration		262		—
Gain on fair value remeasurement of contingent consideration		(1,047)		—
Amortization of debt discount and other non-cash interest		871		645
Stock-based compensation		4,721		9,412
Other non-cash (gains) losses		(27)		22
Change in operating assets and liabilities:
Accounts receivable		1,523		(2,255)
Prepaid expenses and other current assets		3,467		826
Inventory		(1,584)		(5,387)
Accounts payable		5,643		1,250
Accrued expenses and other current liabilities		(2,670)		1,966
Lease liabilities and other long-term liabilities		(324)		(834)
Net cash used in operating activities		(49,508)		(54,248)
Cash flows from investing activities:
Purchases of property and equipment and other assets		(253)		(545)
Purchases of short-term investments		(4,992)		—
Proceeds from sales or maturities of short-term investments		3,000		71,250
Net cash (used in) provided by investing activities		(2,245)		70,705
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
Payment of principal on finance lease		(19)		(17)
Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan		163		679
Net cash provided by financing activities		144		41,164
Net (decrease) increase in cash, cash equivalents and restricted cash:		(51,609)		57,621
Cash, cash equivalents and restricted cash at beginning of period		94,878		89,756
Cash, cash equivalents and restricted cash at end of period	$	43,269	$	147,377
Reconciliation of cash, cash equivalents and restricted cash:
Cash, cash equivalents, and restricted cash at end of period	$	43,269	$	147,377
Less restricted cash (Notes 9 and 10)		(700)		(2,742)
Cash and cash equivalents at end of period	$	42,569	$	144,635

Non-cash investing and financing activities:
Purchases of property and equipment in accounts payable and accrued expenses	$	139	$	318

Supplemental disclosure:
Cash paid for interest	$	3,315	$	3,030
Right-of-use assets obtained in exchange of operating lease obligations		424		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 clinical-stage biopharmaceutical company focused on the research, development and commercialization of innovative therapies for rare 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”). Combangio is a clinical-stage biotechnology company focused on developing regenerative biotherapeutics for severe ocular diseases based on mesenchymal stem cell secretomes (“MSC-S”) platform, including its lead product candidate, CMB-012 for the treatment of persistent corneal epithelial defects (“PCED”), which the Company now refers to as KPI-012. 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, the Company has ceased the development of its preclinical pipeline programs that are unrelated to the 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. See Note 3, “Assets Held for Sale”, and Note 17, “Subsequent Events”, 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 the commercial-based sales milestone payments from Alcon, its ability to raise additional capital when needed and, ultimately, attain profitable operations.

Liquidity— Since inception, the Company has incurred significant losses from operations and negative cash flows from operations. As of June 30, 2022, the Company had an accumulated deficit of $603,440. 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 its Commercial Business to Alcon in July 2022. The Company has financed its operations primarily through proceeds from 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 (“ATM Offering”) facility, private placements of preferred stock, 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

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research and development, including preclinical studies and clinical trials, and, prior to the sale of its 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 Company’s Commercial Business to Alcon, the Company intends to devote substantial financial resources to the research and development and potential commercialization of KPI-012. 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 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, cash equivalents and short-term investments as of June 30, 2022, together with the upfront payment of $60,000 received from Alcon upon the closing of the Alcon Transaction in July 2022 and the cash purchase by Alcon of $5,026 for EYSUVIS and INVELTYS inventory on-hand at the closing of the sale of the Commercial Business, net of a $40,000 prepayment to Oxford Finance, 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. This evaluation also assumes that the Company remains in compliance with the covenants under the Loan Agreement (defined below), including as a result of the delisting of the Company’s common stock from the Nasdaq Global Select Market. On May 24, 2022, the Company received a deficiency letter from the Nasdaq Stock Market LLC (“Nasdaq”) notifying it that, for 30 consecutive business days, the bid price of its common stock had closed below the $1.00 per share minimum bid price requirement for continued inclusion on Nasdaq pursuant to Nasdaq Listing Rule 5450(a)(1), and on July 6, 2022, the Company received another deficiency letter from Nasdaq notifying it that it was not in compliance with Nasdaq Listing Rule 5450(b)(2)(A), as the market value of its common stock was less than $50,000,000 for the previous 30 consecutive business days. Each of the deficiency letters indicated that if the Company is unable to cure such deficiency or otherwise regain compliance with the Nasdaq Listing Rules within 180 calendar days from the date of the respective deficiency letter, the Company’s common stock will be subject to delisting.

COVID-19— In order to safeguard the health of its employees from 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.

In addition, government restrictions have at times led to moratoria on elective ocular surgeries in many jurisdictions, which had significantly reduced the demand for INVELTYS, which is indicated for the treatment of post-operative inflammation and pain following ocular surgery. While surgeries have returned to historical levels, the COVID-19 pandemic had negatively impacted revenues from INVELTYS in prior periods. 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 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. The Company also 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. 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 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

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virus, the availability and effectiveness of vaccines, and the impact of the foregoing on customers, 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, contingent consideration, stock-based compensation, accrued expenses, 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—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 the three and six months ended June 30, 2022 and 2021. (See Note 14).

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, 2021 (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.

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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, 2022, other than as described below.

Assets Held for Sale

The Company classifies its long-lived assets to be sold as held for sale, as specified by ASC 360, Property, Plant, and Equipment, in the period (i) it has approved and committed to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to sell the asset have been initiated, (iv) the sale of the asset is probable, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The Company initially measures a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale. Upon designation as an asset held for sale, the Company stops recording depreciation and amortization expense on long-lived assets. The Company assesses the fair value of a long-lived asset less any costs to sell at each reporting period and until the asset is no longer classified as held for sale.

As of June 30, 2022, certain assets met the criteria to be classified as held for sale in connection with the Alcon Transaction and the Company concluded that there was no impairment loss related to held for sale assets for the three or six months ended June 30, 2022. The Company reclassified the property and equipment, inventory, and certain other assets, which had a combined carrying value of $22,507, to current assets held for sale on the condensed consolidated balance sheet as of June 30, 2022. Fair value was determined based on the estimated proceeds from the sale of the Commercial Business utilizing the purchase price as defined in the Asset Purchase Agreement. The sale of these assets was completed on July 8, 2022. See Note 3, “Assets Held for Sale”, and Note 17, “Subsequent Events”, for additional information. There were no assets that met the criteria for classification as held for sale as of December 31, 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 public business entities that meet the definition of an SEC filer, excluding entities eligible to be Smaller Reporting Companies (“SRCs”) as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and for all other entities, including SRCs, for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of ASU 2016-13, beginning January 1, 2023, on its consolidated financial statements. The Company does not expect that the adoption of this standard will have a material impact on its condensed consolidated financial statements.

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3. ASSETS HELD FOR SALE

As of June 30, 2022, the Company presented assets to be disposed of in connection with the Alcon Transaction that met the criteria as held for sale as a single asset in its condensed consolidated financial statements. The combined net carrying amount of $22,507 for assets held for sale is equal to the lower of the carrying value and estimated fair value less costs to sell. The Company concluded that the agreed-upon transaction price of the Commercial Business approximates fair value, which exceeded the carrying value of the related assets as of June 30, 2022. As such, the assets related to the sale were recorded and presented at their carrying value and the Company determined that there was no impairment loss related to held for sale assets for the three months and six months ended June 30, 2022. The Company classified the combined carrying value of all assets that met the criteria of held for sale to current assets held for sale on the condensed consolidated balance sheet. Pursuant to ASC 205-20, Presentation of Financial Statements—Discontinued Operations, the Company recorded $758 of transaction costs incurred related to the Alcon Transaction during the three and six months ended June 30, 2022 to selling, general and administrative expense on the condensed consolidated statement of operations. 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. There were no assets that met the criteria to be presented as held for sale as of December 31, 2021.

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 June 30, 2022:


	June 30,
	2022

Inventories	$	19,651
Prepaid expenses and other current assets		594
Property and equipment, net		1,828
Restricted cash and other long-term assets		434
Total assets held for sale	$	22,507

See Note 2, “Summary of Significant Accounting Policies”, and Note 17, “Subsequent Events”, for further information on the sale of the Company’s Commercial Business.

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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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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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 June 30, 2022 consisted primarily of cash equivalents, short-term investments in U.S. treasury securities and contingent consideration. The Company’s financial instruments as of December 31, 2021 consisted primarily of cash equivalents and contingent consideration. Cash equivalents, short-term investments and contingent consideration are reported at their respective fair values on the Company’s condensed consolidated balance sheets. See Note 5, “Investments” for additional information.

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 7,788,637 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 6,815,072 shares of common stock issued on January 3, 2022 (the “Upfront Shares”) and (ii) an aggregate of 973,565 shares of common stock that have been held back by the Company and will be issuable subject to the terms of the Merger Agreement to the Combangio Equityholders on the date that is fifteen months after the closing (the “Escrow Release Date”). The Company established liabilities for the Deferred Purchase Consideration. The Deferred Purchase Consideration related to the Combangio Acquisition is 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 a significant impact on the fair value of the Deferred Purchase Consideration. Any change in the fair value of the Deferred Purchase Consideration is included in loss from operations in the condensed consolidated statements of operations and comprehensive loss. During the six months ended June 30, 2022, the Company settled $7,935 of the liability upon the issuance of the Upfront Shares. The change in the fair value of the Deferred Purchase Consideration was a gain of $789 and a loss of $262 during the three and six months ended June 30, 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. 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 and six months ended June 30, 2022, the change in fair value of the contingent consideration liabilities was $59 and $1,047, respectively, primarily due to changes in discount rates, partially offset by the passage of time, and were recognized as a gain on fair value remeasurement of contingent consideration in the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2022.

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The following tables set forth the fair value of the Company’s financial instruments by level within the fair value hierarchy as of June 30, 2022 and December 31, 2021:


	June 30, 2022
	Fair Value		Level 1		Level 2		Level 3
Assets:
Cash equivalents	$	34,184	$	34,184	$	—	$	—
Short-term investments		1,999		1,999		—		—
Total Assets	$	36,183	$	36,183	$	—	$	—
Liabilities:
Deferred purchase consideration	$	219	$	—	$	—	$	219
Contingent consideration		7,611		—		—		7,611
Total Liabilities	$	7,830	$	—	$	—	$	7,830

December 31, 2021

Fair Value

Level 1

Level 2

Level 3