What changed in this filing

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Item 1. Financial Statements

2020-08-06 compared with 2020-05-07 · 258 added, 529 removed, 283 unchanged (74% of the section changed)

Item 1 Financial Statements

Financial Statements

KALA PHARMACEUTICALS, INC.

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Current assets:

Cash and cash equivalents

Short-term investments

Accounts receivable, net

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Common stock, $ 0.001 par value;

120,000,000 shares authorized as of March 31, 2020 and December 31, 2019;

54,585,636 and 36,086,254 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively

120,000,000 shares authorized as of June 30, 2020 and December 31, 2019;

55,831,021 and 36,086,254 shares issued and outstanding as of June 30, 2020 and December 31, 2019 , respectively

Additional paid-in capital

Accumulated other comprehensive income

Accumulated deficit

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Three Months Ended

Six Months Ended

Product revenues, net

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Other income (expense):

Interest income

Interest expense

Total other expense

Net loss per share—basic and diluted

Weighted average shares outstanding—basic and diluted

Interest and other income

Interest and other expense

Total interest and other expense

Net loss per share—basic and diluted

Weighted average shares outstanding—basic and diluted

Other comprehensive income:

Change in unrealized gains/losses on investments:

Change in fair value of investments, net of tax

Total change in unrealized gains/losses on investments, net of tax

Total other comprehensive income

Total comprehensive loss

See accompanying notes to these unaudited condensed consolidated financial statements.

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share data)

Three Months Ended June 30,

$0.001 Par Value

Other Comprehensive

Stockholders'

Balance as of December 31, 2018

Balance as of March 31, 2019

Exercise of stock options

Stock-based compensation expense

Balance as of June 30, 2019

Balance as of March 31, 2020

Exercise of stock options

Common stock offering, net of issuance cost and underwriting fees of $ 0.5 million

Stock-based compensation expense

Warrant exercises

Accumulated other comprehensive income

Balance as of June 30, 2020

See accompanying notes to these unaudited condensed consolidated financial statements

Six Months Ended June 30,

$0.001 Par Value

Other Comprehensive

Stockholders'

Balance as of December 31, 2018

Exercise of stock options

Stock-based compensation expense

Balance as of June 30, 2019

Balance as of December 31, 2019

At the market offering, net of sales agent commission of $ 0.4 million

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Stock-based compensation expense

Balance as of March 31, 2020

Warrant exercises

Accumulated other comprehensive income

Balance as of June 30, 2020

See accompanying notes to these unaudited condensed consolidated financial statements

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(In thousands)

Three Months Ended

Six Months Ended

Cash flows from operating activities:

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Purchases of property and equipment

Purchases of short-term investments

Net cash used in investing activities

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Reconciliation of cash and restricted cash:

Cash and restricted cash at end of period

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

Less restricted cash

Cash at end of period

Cash and cash equivalents at end of period

Non-cash investing and financing activities:

Right-of-use asset obtained in exchange for finance lease obligation

Purchases of property and equipment in accounts payable

Supplemental disclosure:

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See accompanying notes to these unaudited condensed consolidated financial statements.

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 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, and the development of its lead product candidate, KPI-121 0.25%, which if approved it plans to commercialize under the brand name EYSUVIS TM (loteprednol etabonate ophthalmic suspension) 0.25%, for the short-term treatment of the signs and symptoms of dry eye disease.

In October 2018, the Company submitted a New Drug Application (“NDA”) to the FDA for EYSUVIS.

In August 2019, the Company announced that it received a complete response letter (“CRL”) from the FDA indicating that positive efficacy data from an additional clinical trial would be needed to support a resubmission of the NDA.

Based upon the previous recommendation of the FDA, the Company initiated an additional Phase 3 clinical trial (“STRIDE 3”) (STRIDE- S hort T erm R elief I n D ry E ye), in July 2018.

On March 9, 2020, the Company announced that STRIDE 3 met both of its primary symptom endpoints and its key secondary sign endpoint.

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 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, and the development of its lead product candidate, KPI-121 0.25%, which if approved it plans to commercialize under the brand name EYSUVIS TM (loteprednol etabonate ophthalmic suspension) 0.25%, for the short-term treatment of the signs and symptoms of dry eye disease.

In October 2018, the Company submitted a New Drug Application (“NDA”) to the FDA for EYSUVIS.

Based upon the previous recommendation of the FDA, the Company initiated an additional Phase 3 clinical trial (“STRIDE 3”) (STRIDE- S hort T erm R elief I n D ry E ye), in July 2018.

On March 9, 2020, the Company announced that STRIDE 3 met both of its primary symptom endpoints and its key secondary sign endpoint and on April 30, 2020, the Company resubmitted its NDA with the positive data from STRIDE 3.

The Company believes that the data from STRIDE 3 replicates the positive efficacy data from previous clinical trials for both signs and symptoms of dry eye disease and will satisfy the recommendation in the CRL for an additional positive trial.

On April 30, 2020, the Company resubmitted the NDA for EYSUVIS.

The Company believes this application will be considered a Class 2 resubmission, with a targeted six-month review timeline under the Prescription Drug User Fee Act (“PDUFA”).

On May 26, 2020, the Company announced that the FDA stated that our NDA resubmission was a complete, Class 2 response to the CRL and set a Prescription Drug User Fee Act (“PDUFA”) goal date of October 30, 2020 for the completion of its review of the NDA.

In January 2019, the Company launched its first commercial product, INVELTYS, in the United States.

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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 obtain regulatory approval of EYSUVIS, the success of commercializing its products, the success of its research and development efforts, its ability to obtain regulatory approval of its other product candidates, its ability to raise additional capital when needed and, ultimately, attain profitable operations.

The Company is evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosing regimens for the treatment of the signs and symptoms of dry eye disease and for potential chronic treatment of dry eye disease.

The Company is also evaluating compounds in its receptor Tyrosine Kinase Inhibitor program (the “rTKI program”), that inhibit the vascular endothelial growth factor (“VEGF”), pathway, for the potential treatment of a number of retinal diseases, and novel next-generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action for eye disease with the goal of eliminating the risk of interocular pressure (“IOP”) increase and cataract formation.

Liquidity —

Since inception, the Company has incurred significant losses from operations and negative cash flows from operations.

As of March 31, 2020, the Company had an accumulated deficit of $317.4 million.

The Company has generated only limited revenues to date from product sales and has financed operations primarily through proceeds from its initial public offering of common stock (“IPO”), public common stock offerings and sales of its common stock under its at-the-market offering facility, private placements of preferred stock, convertible debt financings, borrowings under credit facilities, 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 launch and

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

commercialize INVELTYS.

The Company is also evaluating other opportunities for MPP nanosuspensions of LE, compounds in its receptor Tyrosine Kinase Inhibitor program (the “rTKI program”), that inhibit the vascular endothelial growth factor (“VEGF”), pathway, for the potential treatment of a number of retinal diseases, and novel next-generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action for eye disease with the goal of eliminating the risk of interocular pressure (“IOP”) increase and cataract formation.

Liquidity — Since inception, the Company has incurred significant losses from operations and negative cash flows from operations.

As of June 30, 2020, the Company had an accumulated deficit of $ 340.7 million.

The Company 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 believes that its existing cash on hand as of March 31, 2020, will enable it to fund its planned operating expenses, debt service obligations and capital expenditure requirements for at least twelve months from the date these condensed consolidated financial statements were issued.

The Company believes that its existing cash, cash equivalents and short-term investments as of June 30, 2020, will enable it to fund its planned 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.

COVID-19 –

The ongoing novel coronavirus pandemic, commonly referred to as COVID-19, which was declared a global pandemic by the World Health Organization on March 11, 2020, has caused federal, state, and local governments to implement measures to slow the spread of the outbreak through quarantines, strict travel restriction and bans, heightened border scrutiny and other measures.

COVID-19 – The ongoing novel coronavirus pandemic, commonly referred to as COVID-19, which was declared a global pandemic by the World Health Organization on March 11, 2020, has caused federal, state, and local governments to implement measures to slow the spread of the outbreak through quarantines, strict travel restriction and bans, heightened border scrutiny and other measures.

The Company is following, and will continue to follow, recommendations from the U.S.

Centers for Disease Control and Prevention (“CDC”) as well as federal, state, and local governments regarding working-from-home practices for non-essential employees.

As a result, the Company has suspended substantially all in-person interactions with customers, including visits to physician offices, clinics, and hospitals, all office-based personnel have been instructed to work from home and the Company’s laboratory facilities, that support our early-stage research activities, are partially closed.

The moratorium on routine medical appointments and elective surgeries in many jurisdictions, including ocular surgeries, has adversely affected the market for INVELTYS, which is indicated for the treatment of inflammation and pain following ocular surgery, resulting in a significant reduction in the demand for INVELTYS.

The extent of the impact of COVID-19 on the Company’s operational and financial performance will depend on certain developments, including the length and severity of this pandemic, impact on its 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 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.

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, the Company previously suspended substantially all in-person interactions with customers, including visits to physician offices, clinics, and hospitals, and was limited to conducting educational and promotional activities virtually, and the Company may be forced to suspend all or some in-person interactions again in the future.

In addition, all office-based personnel have been instructed to work from home and the Company’s laboratory facilities, that support our early-stage research activities, are being utilized as necessary.

The moratoria on routine medical appointments and elective surgeries that have occurred at times in many jurisdictions, including ocular surgeries, has adversely affected the market for INVELTYS, which is indicated for the treatment of inflammation and pain following ocular surgery, resulting in a significant reduction in the demand for INVELTYS.

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 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 sum of 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.

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In periods in which the Company reports a net loss attributable to common stockholders, diluted net loss per share attributable to common stockholders is the same as basic net loss per share attributable to common stockholders since dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.

The Company reported a net loss attributable to common stockholders for the three months ended March 31, 2020 and 2019.

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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”).

The Company reported a net loss attributable to common stockholders for the three and six months ended June 30, 2020 and 2019.

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.

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, 2019 (the “Annual Report”).

The unaudited condensed consolidated financial statements include the accounts of Kala Pharmaceuticals, Inc.

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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 period ended March 31, 2020.

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 period ended June 30, 2020, other than the addition of the Investments section below.

Investments — The Company determines the appropriate classification of its investments at the time of purchase.

The Company’s investments are classified as available-for-sale in accordance with Accounting Standards Codification (“ASC”) Topic 320.

The Company classifies investments available to fund current operations as current assets on its condensed consolidated balance sheets.

Investments are classified as long-term assets on the condensed consolidated balance sheets if (i) the Company has the intent and ability to hold the investments for a period of at least one year and (ii) the contractual maturity date of the investments is greater than one year.

Available-for-sale investments are recorded at fair value, with unrealized gains or losses included in comprehensive loss on the condensed consolidated statements of operations and in accumulated other comprehensive loss on the condensed consolidated balance sheets.

Realized gains and losses, interest income earned on the Company’s cash, cash equivalents and investments, and amortization or accretion of discounts and premiums on investments are included within other income (expense).

The Company reviews investments for other-than-temporary impairment whenever the fair value of an investment is less than the amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time.

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measuremen t (“ASU 2018-13”).

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measuremen t (“ASU 2018-13”).

ASU 2018-13 is intended to improve the effectiveness of disclosures in the notes to financial statements related to fair value measurements in Topic 820.

This ASU will become effective for annual periods beginning after December 15, 2019, including interim periods within that period, and early adoption is permitted.

The ASU was effective on January 1, 2020 and the adoption of ASU 2018-13 did not have a material effect on the Company’s condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15 , Intangibles - Goodwill and Other - Internal-Use Software -Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”).

The ASU was effective on January 1, 2020 and the adoption of ASU 2018-13 did not have a material effect on the Company’s condensed consolidated financial statements.

ASU 2018-15 aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software.

This ASU became effective for annual periods beginning after December 15, 2019, including interim periods within that period, and early adoption is permitted.

The ASU was effective on January 1, 2020 and the adoption of ASU 2018-15 did not have a material effect on the Company’s condensed consolidated financial statements.

In June 2016, the FASB issued 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.

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 period within those fiscal years and for all other entities, including SRCs, for fiscal years beginning December 15, 2022, including interim periods within those fiscal years.

Upon adoption, beginning

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

January 1, 2023, the Company does not expect ASU 2019-10 to have a material effect on its condensed consolidated financial statements.

REVENUE & ACCOUNTS RECEIVEABLE, NET

The Company accounts for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers .

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 period within those fiscal years and for all other entities, including SRCs, for fiscal years beginning 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.

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 our own assumptions (unobservable inputs).

The hierarchy consists of three levels:

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

● Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

● Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

Our financial instruments consist primarily of cash, cash equivalents, and short-term investments in money market funds and short-term securities.

Cash, cash equivalents and short-term investments are reported at their respective fair values on our Condensed Consolidated Balance Sheets.

See Note 4 (Investments) for additional information.

The following table sets forth the fair value of the Company’s financial assets by level within the fair value hierarchy at June 30, 2020:

Carrying Amount

Cash and cash equivalents

Short-term investments

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

Investments by security type consisted of the following as of June 30, 2020:

June 30, 2020

treasury securities

government agencies securities

As of June 30, 2020, all of our investments had a contractual maturity within one year.

The fair value of all our investments are classified as short-term on our Condensed Consolidated Balance Sheets.

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.

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Product revenues, net

The Company sells INVELTYS to wholesalers and/or specialty distributors 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 payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts for the purchase of the Company’s products.

The goods promised in the Company’s product sales contracts represent a single performance obligation;

The Company sells INVELTYS to wholesalers and/or specialty distributors in the United States (collectively, “Customers”).

These Customers subsequently resell the Company’s products to specialty and other retail pharmacies.

The goods promised in the Company’s product sales contracts represent a single performance obligation;

as the promise to transfer the individual products to the Customer is not separately identifiable from other promises in the contracts and, therefore, not distinct.

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 where a distinct good or service is not received.

Variable consideration is recorded on the 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.

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, 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.

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The Company provides its Customers with certain trade discounts and allowances including discounts for prompt payments and fees paid for distribution, data and administrative services.

These discounts and fees are based on

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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.

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 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.

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Product Returns

Consistent with industry practice, the Company has a product returns policy that provides Customers a 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.

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.

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For Medicaid, reserves are based on 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 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.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 Program

The Company offers a co-pay assistance program (the “co-pay program”), which is intended to provide financial assistance to p atients who may or may not be covered by commercial insurance or who opt out of Medicare Part D programs .

The Company offers a co-pay assistance program (the “co-pay program”), which is intended to provide financial assistance to patients who may or may not be covered by commercial insurance or who opt out of Medicare Part D programs.

The calculation of accruals for the co-pay program 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 table summarizes activity in each of the Company’s product revenue provision and allowance categories for the three months ended March 31, 2020:

The following table summarizes activity in each of the Company’s product revenue provision and allowance categories for the six months ended June 30, 2020:

Trade Discounts,

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Balance at March 31, 2020

Trade allowances and chargebacks include fees for distribution service fees, prompt pay discounts, and chargebacks.

Trade allowances and chargebacks are deducted from gross revenue at the time revenues are recognized and are recorded as a reduction to accounts receivable in the Company’s Consolidated Balance Sheets.

Provisions for product returns are deducted from gross revenues at the time revenues are recognized and are included in accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets.

Provision related to current period sales

Changes in estimate related to prior period sales

Credit/payments made

Balance at June 30, 2020

(1) Trade discounts, allowances and chargebacks include fees for distribution service fees, prompt pay discounts, and chargebacks.

Trade discounts, allowances and chargebacks are deducted from gross revenue at the time revenues are recognized and are recorded as a reduction to accounts receivable in the Company’s Condensed Consolidated Balance Sheets.

(2) Provisions for product returns are deducted from gross revenues at the time revenues are recognized and are included in accrued expenses and other current liabilities in the Company’s Condensed Consolidated Balance Sheets.

(3) Rebates and incentives includes managed care rebates, government rebates, co-pay program incentives, and sales incentives and allowances.

Provisions for rebates and discounts are deducted from gross revenues at the time revenues are recognized and are included in accrued expenses and other current liabilities in the Company’s Consolidated Balance Sheets.

Accounts Receivable, net

Accounts receivable are reported on the consolidated balance sheets at outstanding amounts due from Customers for product sales.

Accounts receivable are reported on the condensed consolidated balance sheets at outstanding amounts due from Customers for product sales.

The Company deducts sales discounts for prompt payments and contractual fees for service arrangements from accounts receivable.

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An allowance for doubtful accounts is recorded when a receivable is deemed to be uncollectible.

The Company recorded no allowance for doubtful accounts as of March 31, 2020 or March 31, 2019.

The Company recorded an allowance of $1.4 million and $0.8 million for expected sales discounts, related to prompt pay discounts and contractual fee for service arrangements, to wholesalers and distributors as of March 31, 2020 and March 31, 2019, respectively.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company recorded no allowance for doubtful accounts as of June 30, 2020 or June 30, 2019.

The Company recorded an allowance of $ 0.4 million and $ 0.9 million for expected sales discounts, related to prompt pay discounts and contractual fee for service arrangements, to wholesalers and distributors as of June 30, 2020 and June 30, 2019, respectively.

Current inventory and long-term inventory consist of the following (in thousands):

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Total inventory

As of March 31, 2020, the Company had $5.3 million of current inventory and $3.8 million of long-term inventory.

As of June 30, 2020, the Company had $ 5.7 million of current inventory and $ 4.1 million of long-term inventory.

As of December 31, 2019, the Company had $ 4.6 million of current inventory and $ 3.8 million of long-term inventory.

ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

Compensation and benefits

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Accrued expenses

(1) There were additional revenue reserves included in accounts payable of $0 and $0.7 million, as of March 31, 2020 and December 31, 2019, respectively.

(1) There were additional revenue reserves included in accounts payable of $ 0.6 million and $ 0.7 million, as of June 30, 2020 and December 31, 2019, respectively.

Operating leases

On February 28, 2018, the Company entered into a lease agreement for the lease of a portion of the building located at 490 Arsenal Way, Watertown, Massachusetts (the “Watertown Lease”) to be used as the Company’s corporate headquarters.

T he Company recognized the right-of-use asset and corresponding lease liability on November 15, 2018, by calculating the present value of lease payments, discounted at 9.9%, the Company’s estimated incremental borrowing rate, over the 13-year expected term.

The Company recognized the right-of-use asset and corresponding lease liability on November 15, 2018, by calculating the present value of lease payments, discounted at 9.9 %, the Company’s estimated incremental borrowing rate, over the 13-year expected term.

In connection with the Watertown Lease, the Company issued a letter of credit to the landlord for $ 2.0 million.

The Company secured the letter of credit for the full amount of the letter with cash on deposit, which is reported as restricted cash as of March 31, 2020 and December 31, 2019.

For the three months ended March 31, 2020 and 2019, the variable lease expense for the Watertown Lease, which includes common area maintenance and real estate taxes, was $0.4 million and $0.1 million, respectively.

The remaining lease term was 11.6 years as of March 31, 2020.

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company secured the letter of credit for the full amount of the letter with cash on deposit, which is reported as restricted cash as of June 30, 2020 and December 31, 2019.

For the six months ended June 30, 2020 and 2019, the variable lease expense for the Watertown Lease, which includes common area maintenance and real estate taxes, was $ 1.1 million and $ 0.5 million, respectively.

The remaining lease term was 11.3 years as of June 30, 2020.

Vehicle Fleet lease

During the year ended December 31, 2019, the Company entered into a master fleet lease agreement (the “Vehicle Fleet Lease”), pursuant to which it currently leases approximately 65 vehicles.

In connection with the Vehicle Fleet Lease, the Company issued a letter of credit for $ 0.5 million, which was reported as restricted cash on the balance sheet.

The lease has an expected term of three years , which commenced upon the delivery of the vehicles in March 2019.

As of March 31, 2020, the remaining lease term was 1.9 years.

As of June 30, 2020, the remaining lease term was 1.7 years.

The components of lease expense and related cash flows were as follows (in thousands):

Three Months Ended March 31,

Three Months Ended

Six Months Ended

Operating lease cost

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Athyrium Credit Facility

On October 1, 2018, the Company entered into a credit agreement (the “Athyrium Credit Facility”), with Athyrium Opportunities III Acquisition LP (“Athyrium”) for up to $110.0 million .

The Athyrium Credit Facility provides for a Term Loan A in the aggregate principal amount of $75.0 million (the “Term Loan A”), and a Term Loan B in the aggregate principal amount of $35.0 million (the “Term Loan B”).

On October 1, 2018, the Company entered into a credit agreement (the “Athyrium Credit Facility”), with Athyrium Opportunities III Acquisition LP (“Athyrium”) for up to $ 110.0 million.

The Athyrium Credit Facility provided for a Term Loan A in the aggregate principal amount of $ 75.0 million (the “Term Loan A”), and a Term Loan B in the aggregate principal amount of $ 35.0 million (the “Term Loan B”).

On October 1, 2018, the Company borrowed the entire principal amount of the Term Loan A.

The Company may draw down the Term Loan B upon either (i) FDA approval of EYSUVIS for a dry eye disease indication or (ii) reaching certain net product revenues for INVELTYS, in each case, on or prior to June 30, 2020;

however, the Company does not expect to satisfy either such condition on or prior to June 30, 2020 and, as a result, does not currently expect that it will be eligible to draw down any of the Athyrium Term Loan B funds.

The Company did not satisfy the conditions to draw down any of the Term Loan B funds, and as a result, the Term Loan B funds are no longer available.

The maturity date of the Athyrium Credit Facility is October 1, 2024, the six-year anniversary of the close.

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All mandatory and voluntary prepayments of the Athyrium Credit Facility are subject to the payment of prepayment premiums as follows:

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

that would have accrued on such principal through such second anniversary exceeds (b) the amount of principal prepaid, (ii) if prepayment occurs on or after the second anniversary of the applicable date of issuance but prior to the third anniversary of such issuance, an amount equal to 3% of the principal prepaid, and (iii) if prepayment occurs on or after the third anniversary of the applicable date of issuance but prior to the fourth anniversary of such issuance, an amount equal to 2% of the principal prepaid.

(i) if prepayment occurs prior to the second anniversary of the applicable date of issuance, an amount equal to the amount by which (a) the present value of 105 % of the principal prepaid plus all interest that would have accrued on such principal through such second anniversary exceeds (b) the amount of principal prepaid, (ii) if prepayment occurs on or after the second anniversary of the applicable date of issuance but prior to the third anniversary of such issuance, an amount equal to 3 % of the principal prepaid, and (iii) if prepayment occurs on or after the third anniversary of the applicable date of issuance but prior to the fourth anniversary of such issuance, an amount equal to 2 % of the principal prepaid.

No prepayment premium is due on any principal prepaid after the fourth anniversary of the applicable date of issuance.

The Athyrium Credit Facility includes features requiring (1) additional interest rate upon an event of default accrued at an additional 3%, or a total interest rate of 12.875%, and (2) the lender’s right to declare all outstanding principal and interest immediately payable upon an event of default.

The Athyrium Credit Facility includes features requiring (1) additional interest rate upon an event of default accrued at an additional 3 % , or a total interest rate of 12.875 % , and (2) the lender’s right to declare all outstanding principal and interest immediately payable upon an event of default.

These two features were analyzed and determined to be embedded derivatives to be valued as separate financial instruments.

These embedded derivatives were bundled and valued as one compound derivative in accordance with the applicable accounting guidance for derivatives and hedging transactions.

The Company determined that, due to the unlikely event of default, the embedded derivatives have a de minimis value as of March 31, 2020.

The derivative liability will be remeasured at fair value at each reporting date, with changes in fair value being recorded as other income (expense) in the consolidated statements of operations.

ability to, among other things, incur and prepay additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, change in the nature of business, enter into sale and leaseback transactions, make distributions, and enter into affiliate transactions, in each case, subject to certain exceptions.

The Company determined that, due to the unlikely event of default, the embedded derivatives have a de minimis value as of June 30, 2020.

The derivative liability will be remeasured at fair value at each reporting date, with changes in fair value being recorded as other income (expense) in the condensed consolidated statements of operations.

The Athyrium Credit Facility is secured by a pledge of substantially all of the Company’s assets and contains affirmative and negative covenants customary for financings of this type, including limitations on the Company’s and its subsidiaries’ ability to, among other things, incur and prepay additional debt, grant or permit additional liens, make investments and acquisitions, merge or consolidate with others, dispose of assets, change in the nature of business, enter into sale and leaseback transactions, make distributions, and enter into affiliate transactions, in each case, subject to certain exceptions.

In addition, the Athyrium Credit Facility also contains a financial covenant requiring the Company to maintain at least $ 10.0 million of cash and cash equivalents.

As a result of this financial covenant, the Company has recorded $10.0 million as restricted cash as of March 31, 2020 and December 31, 2019.

In connection with the Athyrium Credit Facility, the Company issued a warrant (“Warrant”), to purchase up to 270,835 shares of the Company’s common stock, at an exercise price per share of $12.18456.

The Warrant is immediately exercisable as to 184,660 shares and will become exercisable as to the remaining 86,175 shares only upon the Company’s draw of the Term Loan B;

however, as noted above, it is unlikely the Company will satisfy either condition to draw down on the Term Loan B.

As a result of this financial covenant, the Company has recorded $ 10.0 million as restricted cash as of June 30, 2020 and December 31, 2019.

The Warrant is immediately exercisable as to 184,660 shares.

The remaining 86,175 shares under the Warrant were exercisable only upon the Company’s draw of the Term Loan B and, as a result, the remaining 86,175 shares under the Warrant are no longer exercisable.

The Warrant is exercisable through October 1, 2025 and is classified as an equity instrument.

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The amortization of debt discount and debt issuance cost is included in interest expense within the Condensed Consolidated Statements of Operations.

As of March 31, 2020, and 2019, the effective interest rate was 11.63% and 11.42%, respectively, which takes into consideration the non-cash accretion of the exit fee and the amortization of the debt discount and issuance costs.

During each of the three months ended March 31, 2020 and March 31, 2019, the Company recognized interest expense of $2.1 million, which consisted of amortization of the debt discount of $0.2 million, and the contractual coupon interest expense of $1.9 million.

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The components of the carrying value of the debt as of March 31, 2020, and December 31, 2019 are detailed below (in thousands):

As of June 30, 2020 and June 30, 2019, the effective interest rate was 11.63 %, which takes into consideration the non-cash accretion of the exit fee and the amortization of the debt discount and issuance costs.

During each of the three months ended June 30, 2020 and June 30, 2019, the Company recognized interest expense of $ 2.1 million, which consisted of amortization of the debt discount of $ 0.2 million, and the contractual coupon interest expense of $ 1.9 million.

During the six months ended June 30, 2020, and June 30, 2019, the Company recognized interest expense of $ 4.2 million and $ 4.1 million, respectively.

This consisted of amortization of debt discount of $ 0.4 million for the periods ended June 30, 2020 and June 30, 2019, and the contractual coupon interest expense of $ 3.8 million and $ 3.7 million as of June 30, 2020 and June 30, 2019, respectively.

The components of the carrying value of the debt as of June 30, 2020, and December 31, 2019 are detailed below (in thousands):

Principal loan balance

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Long-term debt, net

The annual principal payments due under the Athyrium Credit Facility as of March 31, 2020 were as follows (in thousands):

The annual principal payments due under the Athyrium Credit Facility as of June 30, 2020 were as follows (in thousands):

Years Ending December 31,

2020 (remaining nine months)

2020 (remaining six months)

The Company issued warrants in connection with debt transactions that were completed prior to 2017.

Upon the completion of the IPO, the Company’s then outstanding warrants to purchase preferred stock converted into warrants to purchase common stock.

The Company also issued the Warrant to purchase common stock in connection with the Athyrium Credit Facility, described further in Note 9.

The following table summarizes the common stock warrants outstanding as of March 31, 2020 and December 31, 2019, each exercisable into the number of shares of common stock set forth below as of the specified dates:

The following table summarizes the common stock warrants outstanding as of June 30, 2020 and December 31, 2019, each exercisable into the number of shares of common stock set forth below as of the specified dates:

Shares Exercisable at

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September 2017

As of March 31, 2020, and December 31, 2019, warrants outstanding to acquire 86,175 shares of common stock are not exercisable and are only exercisable upon draw down of the Term Loan B.

(1) As of June 30, 2020, and December 31, 2019, the warrant outstanding to acquire 86,175 shares of common stock was not exercisable.

As of June 30, 2020, the Company did not satisfy the conditions to draw down the Term Loan B, and as a result, the warrant to acquire 86,175 shares of common stock expired.

EQUITY FINANCINGS

On August 9, 2018, the Company filed a shelf registration statement on Form S-3 with the SEC, which was declared effective on August 27, 2018 (the “Shelf Registration”).

Under the Shelf Registration, the Company may offer

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

and sell up to $250.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities, purchase contracts, purchase units or any combination of such securities during the three-year period that commenced upon the Shelf Registration becoming effective.

In connection with the filing of the Shelf Registration, the Company entered into a sales agreement with Jefferies, LLC (the “Sales Agreement”) pursuant to which the Company may issue and sell, from time to time, up to an aggregate of $50.0 million of its common stock in an at-the-market equity offering (“ATM Offering”) through Jefferies, LLC, as sales agent.

As of December 31, 2019, the Company issued 2,592,934 shares of its common stock under the ATM Offering, resulting in net proceeds to the Company of approximately $13.1 million.

On August 9, 2018, the Company filed a shelf registration statement on Form S-3 with the SEC, which was declared effective on August 27, 2018 (the “2018 Shelf Registration”).

Under the 2018 Shelf Registration, the Company may offer and sell up to $ 250.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities, purchase contracts, purchase units or any combination of such securities during the three-year period that commenced upon the 2018 Shelf Registration becoming effective.

In connection with the filing of the 2018 Shelf Registration, the Company entered into a sales agreement (the “2018 Sales Agreement”) with Jefferies, LLC (“Jefferies”) pursuant to which the Company could issue and sell, from time to time, up to an aggregate of $ 50.0 million of its common stock in an at-the-market equity offering (“ATM Offering”) through Jefferies, as sales agent.

As of December 31, 2019, the Company issued 2,592,934 shares of its common stock under the ATM Offering, resulting in net proceeds to the Company of $ 13.1 million.

During the first quarter of 2020, the Company issued an aggregate of 2,352,671 shares of its common stock under the ATM Offering, resulting in net proceeds to the Company of $ 12.5 million.

On March 10, 2020 , the Company notified Jefferies LLC (“Jefferies”) that it was suspending and terminating the prospectus related to the Sales Agreement.

The Company will not make any sales of its common stock pursuant to the Sales Agreement unless and until a new prospectus is filed.

On March 11, 2020, the Company sold 16,000,000 shares of the Company’s common stock (the “2020 Offering Shares”) in an underwritten offering (the “2020 Offering”), pursuant to the Shelf Registration filed with the SEC in August 2018, at a public offering price of $7.89 per share, before underwriting discounts, commissions, and offering expenses, resulting in net proceeds of $118.2 million.

On March 10, 2020 , the Company notified Jefferies that it was suspending and terminating the prospectus related to the 2018 Sales Agreement.

price of $ 7.89 per share, before underwriting discounts, commissions, and offering expenses, resulting in net proceeds of $ 118.2 million.

In addition, the underwriters of the 2020 Offering were granted the option for a period of 30 days to purchase up to an additional 2,400,000 shares of common stock offered in the public offering at the public offering price, less underwriting discounts, commissions and offering expenses.

On April 3, 2020, the underwriters exercised their option and purchased an additional 979,371 shares of common stock at $ 7.89 per share, before underwriting discounts, commissions, and offering expenses, resulting in net proceeds to the Company of $ 7.2 million.

The total number of shares sold by the Company in the 2020 Offering was 16,979,371, resulting in total net proceeds to the Company, after underwriting discounts, commissions, and offering expenses, of approximately $125.4 million.

As of March 31, 2020, there was approximately $26.1 million of securities available to be issued under the Shelf Registration.

As a result of the underwriters’

option exercised as noted above, there was approximately $18.3 million of securities available to be issued under the Shelf Registration as of April 3, 2020.

The total number of shares sold by the Company in the 2020 Offering was 16,979,371 , resulting in total net proceeds to the Company, after underwriting discounts, commissions, and offering expenses, of $ 125.4 million.

As of June 30, 2020, there was $ 18.3 million of securities available to be issued under the 2018 Shelf Registration.

On May 7, 2020, the Company filed a shelf registration statement on Form S-3 with the SEC, which was declared effective on May 19, 2020 (the “2020 Shelf Registration”).

Under the 2020 Shelf Registration, the Company may offer and sell up to $ 350.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities or units during the three-year period that commenced upon the 2020 Shelf Registration becoming effective.

In connection with the filing of the 2020 Shelf Registration, the Company entered into an amended and restated sales agreement with Jefferies pursuant to which the Company may issue and sell, from time to time, up to an aggregate of $ 75.0 million of its common stock under its ATM Offering through Jefferies, as a sales agent.

STOCK-BASED COMPENSATION

Stock Incentive Plans —In December 2009, the Board of Directors (the “Board”) adopted the 2009 Employee, Director and Consultant Equity Incentive Plan (the “2009 Plan”) for the issuance of common stock and stock options to employees, officers, directors, consultants, and advisors.

In July 2017, the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) became effective.

The 2017 Plan was established to provide equity-based ownership opportunities for employees, officers, directors, consultants, and advisors.

As of March 31, 2020, there were 138,513 shares of common stock available for grant under the 2017 Plan .

On June 25, 2020, the 2017 Plan was amended to increase the number of shares of common stock authorized for issuance thereunder by 2,000,000 shares.

As of June 30, 2020, there were 1,181,416 shares of common stock available for grant under the 2017 Plan.

In addition, any shares of common stock subject to awards under the 2009 Plan that expire, are forfeited, or are otherwise surrendered, without having been fully exercised or resulting in any common stock being issued will become available for issuance under the prior plan, up to an additional 2,262,070 shares, which is the number of shares issuable pursuant to outstanding awards granted under the prior plan.

Also approved under the 2017 Plan is an annual increase for each of the years through December 31, 2027, equal to the least of (i) 3,573,766 shares of common stock, (ii) 4 % of the shares of common stock outstanding on December 31 of the prior year and (iii) an amount determined by the Board.

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Under the plans, the Board determines the number of shares of common stock to be granted pursuant to the awards, as well as the exercise price and terms of such awards.

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In the past, the Company had granted stock options which contain performance-based vesting criteria.

These criteria were milestone events that were specific to the Company’s corporate goals.

Stock‑based compensation expense associated with performance‑based stock options is recognized if the achievement of the performance condition is considered probable using management’s best estimates.

As of March 31, 2020, there were no performance-based awards outstanding.

Inducement Stock Option Awards —During the three months ended March 31, 2020 and 2019, the Company granted non-statutory stock options to purchase an aggregate of 4,000 shares and 85,500 shares of the Company’s common stock, respectively.

These stock options will vest over a four-year period, with 25% of the shares underlying each option award vesting on the one-year anniversary of the applicable employees’

new hire date and the remaining 75% of the shares underlying each award vesting monthly thereafter for three-years.

Vesting of each option is subject to such employee’s continued service with the Company through the applicable vesting dates.

These stock options were granted outside of the 2017 Plan as an inducement material to each employee’s acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4).

A summary of option activity for employee awards under the 2009 Plan, the 2017 Plan and inducement grants for the three months ended March 31, 2020 is as follows:

These criteria were milestone events that were specific to the Company’s corporate goals.

Stock-based compensation expense associated with performance-based stock options is recognized if the achievement of the performance condition is considered probable using management’s best estimates.

As of June 30, 2020, there were no performance-based stock option awards outstanding.

Inducement Stock Option Awards —During the six months ended June 30, 2020 and 2019, the Company granted non-statutory stock options to purchase an aggregate of 12,000 shares and 63,000 shares of the Company’s common stock, respectively.

These stock options will vest over a four-year period, with 25 % of the shares underlying each option award vesting on the one-year anniversary of the applicable employees’ new hire date and the remaining 75 % of the shares underlying each award vesting monthly thereafter for three-years .

Vesting of each option is subject to such employee’s continued service with the Company through the applicable vesting dates.

These stock options were granted outside of the 2017 Plan as an inducement material to each employee’s acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4).

A summary of option activity for employee awards under the 2009 Plan, the 2017 Plan and inducement grants for the six months ended June 30, 2020 is as follows:

(in thousands)

Outstanding at January 1, 2020

Outstanding at March 31, 2020

Vested or expected to vest at March 31, 2020

Options exercisable at March 31, 2020

Outstanding at June 30, 2020

Vested or expected to vest at June 30, 2020

Options exercisable at June 30, 2020

The Company records stock-based compensation related to stock options granted at fair value.

The Company utilizes the Black-Scholes option-pricing model to estimate the fair value of stock option grants and to determine the related compensation expense.

The assumptions used in calculating the fair value of stock‑based payment awards represent management’s best estimates.

The assumptions used in determining fair value of the stock options granted during the three months ended March 31, 2020 and 2019, are as follows:

Three Months Ended March 31,

The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates.

The assumptions used in determining fair value of the stock options granted during the six months ended June 30, 2020 and 2019, are as follows:

Six Months Ended June 30,

Expected volatility

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Expected term (in years)

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The Company derived the risk-free interest rate assumption from the U.S.

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The Company based the assumed dividend yield on its expectation of not paying dividends in the foreseeable future.

The Company calculated the weighted‑average expected term of options using the simplified method, as the Company lacks relevant historical data due to the Company’s limited operating experience.

The Company calculated the weighted-average expected term of options using the simplified method, as the Company lacks relevant historical data due to the Company’s limited operating experience.

The estimated volatility is based upon the historical volatility of comparable companies with publicly available share prices.

The impact of forfeitures on compensation expense is recorded as they occur.

During the three months March 31, 2020 and 2019, the weighted average grant‑date fair value of options granted was $3.85 and $3.71, respectively.

During the three months June 30, 2020 and 2019, the weighted average grant-date fair value of options granted was $ 9.35 and $ 3.71 , respectively.

During the six months ended June 30, 2020 and 2019, the weighted average grant-date fair value of options granted was $ 3.88 and $ 3.71 , respectively.

The fair value is being expensed over the vesting period of the options on a straight-line basis as the services are being provided.

As of March 31, 2020 and 2019, there was $21.7 million and $25.2 million, respectively, of unrecognized compensation cost related to the stock options granted, which is expected to be expensed over a weighted‑average period of 2.77 years and 2.91 years, respectively.

Stock‑based compensation expense was classified in the statements of operations as follows (in thousands):

Three Months Ended

Cost of product revenues

Research and development

Selling, general and administrative

Stock-based compensation costs for the Company’s manufacturing employees related to INVELTYS manufactured since FDA approval totaled $0.1 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively, and has been capitalized into inventory as a component of overhead expense.

As of June 30, 2020 and 2019, there was

$ 19.1 million and $ 23.0 million, respectively, of unrecognized compensation cost related to the stock options granted, which is expected to be expensed over a weighted-average period of 2.59 years and 2.67 years, respectively.

Stock-based compensation costs for the Company’s manufacturing employees related to INVELTYS manufactured since FDA approval totaled $ 0.01 million for the three months ended June 30, 2020 and 2019, and has been capitalized into inventory as a component of overhead expense.

Stock-based compensation costs for the Company’s manufacturing employees related to INVELTYS manufactured since FDA approval totaled $ 0.03 million and $ 0.3 million for the six months ended June 30, 2020 and 2019, respectively, and has been capitalized into inventory as a component of overhead expense.

Capitalized stock-based compensation is recognized as an expense when the related product is sold or expensed to selling, general and administrative expense when the related sample is issued.

Employee Stock Purchase Plan —

In 2017, the Company approved the 2017 Employee Stock Purchase Plan, which was amended and restated in December 2018 (as amended, the “ESPP”).

Restricted Stock Units —In June 2020, the Company issued restricted stock units (“RSUs”) to certain executives and board members, as well as performance-based restricted stock units (“PSUs”) to certain executives and other employees.

The Company granted 135,560 RSUs to certain executives which vest 50 % on the first anniversary of the grant date, and 50 % on the second anniversary of the grant date.

Additionally, the Company issued 128,000 RSUs to members of the board which will vest upon the earlier of the first anniversary of the 2020 Annual Meeting of Stockholders or the date of the 2021 Annual Meeting of Stockholders.

The Company issued 693,537 PSUs to certain executives and other employees tied to certain performance criteria, which will vest, if at all, as to 50 % on the first anniversary of satisfying the performance criteria and the remaining 50 % vesting upon the second anniversary of satisfying the performance criteria.

For the three and six months ended June 30, 2020, stock-based compensation costs associated with these RSUs and PSUs are immaterial.

A summary of the outstanding RSUs and PSUs as of June 30, 2020 is as follows:

Weighted Average

Non-vested and outstanding balance at December 31, 2019

Changes during the period:

Non-vested and outstanding balance at June 30, 2020

Employee Stock Purchase Plan —In 2017, the Company approved the 2017 Employee Stock Purchase Plan, which was amended and restated in December 2018 (as amended, the “ESPP”).

The ESPP reserved an aggregate of 223,341 shares of common stock and provides for an annual increase on the first day of each fiscal year, beginning on January 1, 2019 and ending on December 31, 2029, in an amount equal to the lowest of:

(1) 893,441 shares of the Company’s common stock;

(2) 1% of the total number of shares of the Company’s common stock outstanding on the first day of the applicable fiscal year;

and (3) an amount determined by the Company’s board of directors.

(1) 893,441 shares of the Company’s common stock;

(2) 1 % of the total number of shares of the Company’s common stock outstanding on the first day of the applicable fiscal year;

and (3) an amount determined by the Company’s board of directors.

The ESPP provides for two six-month offering periods each year;

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the second offering period begins on the first trading day on or after each July 1.

Under the ESPP, participating employees can authorize the Company to withhold a portion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock.

At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lesser of the closing price of the common stock on (i) the first business day of the plan period or (ii) the exercise date.

At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85 % of the lesser of the closing price of the common stock on (i) the first business day of the plan period or (ii) the exercise date.

The fair value of the purchase rights granted under the ESPP was estimated on the date of grant, using the Black-Scholes option-pricing model.

During the year ended December 31, 2019, employees of the Company purchased an aggregate of 123,664 shares under the ESPP.

The second offering period closed on December 31, 2019.

In January 2020, employees of the Company purchased an aggregate 85,553 shares under the ESPP.

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Reserved Shares —As of March 31, 2020 and December 31, 2019, the Company had reserved the following shares of common stock issuable upon exercise of rights under equity compensation plans, inducement stock option awards, and warrant rights to acquire common stock:

In January 2020, employees of the Company purchased an aggregate of 85,553 shares under the ESPP.

In July 2020, employees of the Company purchased an aggregate of 228,844 shares under the ESPP.

Stock-based compensation expense was classified in the condensed consolidated statements of operations as follows for the three and six months ended June 30, 2020 and 2019 (in thousands):

Three Months Ended

Six Months Ended

Cost of product revenues

Research and development

Selling, general and administrative

Reserved Shares —As of June 30, 2020 and December 31, 2019, the Company had reserved the following shares of common stock issuable upon exercise of rights under equity compensation plans, inducement stock option awards, and warrant rights to acquire common stock:

Warrant rights to acquire Common Stock

Outstanding inducement stock option awards

The Company did not record a provision or benefit for income taxes during the three months ended March 31, 2020 and 2019.

The Company did not record a provision or benefit for income taxes during the three months ended June 30, 2020 and 2019.

The Company continues to maintain a full valuation allowance for its U.S.

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The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets.

Management has considered the Company’s history of cumulative net losses incurred since inception and its generation of limited revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets.

Management reevaluates the positive and negative evidence at each reporting period.

Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period.

Under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended, certain substantial changes in the Company’s ownership, including a sale of the Company, or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss carryforwards, which could be used annually to offset future taxable income.

Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period.

The Company recently completed an analysis and determined that an ownership change had occurred prior to December 31, 2019 and that such change has materially limited the net operating loss carryforwards and research and development tax credits available to offset future tax liabilities.

The Company may be further limited by any changes that may have occurred or may occur subsequent to December 31, 2019.

The Company files its corporate income tax returns in the United States and Massachusetts, Alabama, California, Montana, Oklahoma, Illinois, Kentucky, Pennsylvania, New Hampshire, New York, North Carolina and Texas.

All tax years since the date of incorporation remain open to examination by the major taxing jurisdictions (state and federal) to which the Company is subject, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service (“IRS”) or other authorities if they have or will be used in a future period.

The Company files its corporate income tax returns in the United States and various states.

Internal Revenue Service (“IRS”) or other authorities if they have or will be used in a future period.

The Company is not currently under examination by the IRS or any other jurisdictions for any tax year.

As of March 31, 2020, and 2019, the Company had no uncertain tax positions.

The Company’s policy is to recognize interest and penalties related to income tax matters as a component of income tax expense, of which no interest or penalties were recorded for the three months ended March 31, 2020 and 2019.

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of June 30, 2020, and 2019, the Company had no uncertain tax positions.

COMMITMENTS AND CONTINGENCIES

License Agreement —In 2009, the Company entered into an exclusive license agreement with The Johns Hopkins University (“JHU”), as amended in November 2012, May 2014, August 2014, October 2014 and June 2018, which licensed to the Company a portfolio of specified patent rights and remains in full force and effect.

Pursuant to the terms of the agreement, as amended, the Company agreed to pay an initial license fee, minimum annual payments beginning in 2017, certain development and commercial milestone payments, royalties on product sales and reimburse all or a portion of the costs associated with the preparation, filing, prosecution and maintenance of the agreed-upon patents and patent applications to JHU.

3 unchanged sentences

The Company also has an obligation to pay JHU certain one-time development and commercial milestone payments.

During the three months ended March 31, 2020 the Company paid JHU $11,800 in royalty payments associated with the sale of INVELTYS.

The Company recorded other expenses related to the JHU agreement of $45,632 and $0 for the three months ended March 31, 2020 and 2019, respectively.

Litigation —The Company is not currently subject to any material legal proceedings.

Other Commitments —

The Company entered into a commercial supply agreement with Catalent Pharma Solutions, LLC to manufacture commercial supplies of INVELTYS and EYSUVIS, with annual minimum purchase requirements.

During the three months ended June 30, 2020 and 2019, the Company paid JHU $ 0.01 million and $ 0.3 million, respectively, in royalty payments associated with the sale of INVELTYS.

During the six months ended June 30, 2020 and 2019, the Company paid JHU $ 0.02 million and $ 0.3 million, respectively, in royalty payments associated with the sale of INVELTYS.

The Company recorded other expenses related to the JHU agreement of $ 0.03 million and $ 0.1 million for the three months ended June 30, 2020 and 2019, respectively.

The Company recorded other expenses related to the JHU agreement of $ 0.1 million and $ 0.1 million for the six months ended June 30, 2020 and 2019, respectively.

Litigation —The Company is not currently subject to any material legal proceedings.

Other Commitments — The Company entered into a commercial supply agreement with Catalent Pharma Solutions, LLC to manufacture commercial supplies of INVELTYS and EYSUVIS, with annual minimum purchase requirements.

The Company is only subject to the minimum purchase requirements for EYSUVIS upon receiving FDA approval for the product.

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During this period, the Company did not have any material subsequent events that impacted its condensed consolidated financial statements or disclosures.

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

The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission on February 12, 2020.

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties.

The words “anticipate,”

“believe,”

“estimate,”

“expect,”

“intend,”

“may,”

“might,”

“plan,”

“predict,”

“project,”

“target,”

“potential,”

“would,”

“could,”

“should,”

“continue”

and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by forward-looking statements.

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 section entitled “Risk Factors”

in Part II, Item 1A 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 that we may make.

We are a biopharmaceutical company focused on the discovery, development and commercialization of innovative therapies for diseases of the eye.

Our innovative mucus-penetrating particle, or MPP, drug delivery technology, which we refer to as our AMPPLIFY ®

technology, uses selectively‑sized nanoparticles that each have a proprietary coating.

We believe that these two key attributes enable even distribution of drug particles on mucosal surfaces and significantly increase drug delivery to target tissues by enhancing mobility of drug particles through mucus and preventing drug particles from becoming trapped and eliminated by mucus.

We have applied the AMPPLIFY technology to loteprednol etabonate, or LE, a corticosteroid designed for ocular applications, resulting in the August 2018 approval of INVELTYS ®

(loteprednol etabonate ophthalmic suspension) 1%, our topical twice-a-day ocular steroid for the treatment of inflammation and pain following ocular surgery, by the U.S.

Food and Drug Administration, or the FDA, and the development of our lead product candidate, KPI‑121 0.25%, which if approved we plan to commercialize under the brand name EYSUVIS TM (loteprednol etabonate ophthalmic suspension) 0.25%, for the short-term treatment of the signs and symptoms of dry eye disease.

We commercially launched INVELTYS in January 2019.

EYSUVIS is our product candidate for patients with dry eye disease utilizing a two‑week course of therapy.

In January 2018, we announced topline results from two completed Phase 3 clinical trials, which we refer to as STRIDE 1 and STRIDE 2 (STRIDE - S hort T erm R elief I n D ry E ye), evaluating the safety and efficacy of EYSUVIS versus vehicle (placebo) in patients with dry eye disease.

In STRIDE 1, statistical significance was achieved for the primary sign endpoint of conjunctival hyperemia and the primary symptom endpoint of ocular discomfort severity change from baseline to day 15 in the intent-to-treat, or ITT population, in addition, statistical significance was also achieved in STRIDE 1 for a second pre-specified primary symptom endpoint of ocular discomfort severity change from baseline to day 15 in patients with more severe baseline ocular discomfort.

In STRIDE 2, statistical significance was achieved for the primary sign endpoint of conjunctival hyperemia, but statistical significance was not achieved for the primary symptom endpoint of ocular discomfort severity.

EYSUVIS was generally well tolerated in both STRIDE 1 and STRIDE 2, with no clinically significant treatment‑related adverse events observed during the course of either trial, and with elevations in interocular pressure, or IOP, in both trials similar to placebo.

Based upon the previous recommendation of the FDA, we initiated an additional Phase 3 clinical trial, STRIDE 3, in July 2018.

In October 2018, we submitted a New Drug Application, or NDA, to the FDA for EYSUVIS.

In August 2019, we announced that we received a complete response letter, or CRL, from the FDA indicating that positive efficacy data from an additional clinical trial would be needed to support a resubmission of the NDA.

On March 9, 2020, we announced that STRIDE 3 achieved both of its independent primary endpoints, demonstrating a statistically significant reduction in the symptom endpoint of ocular discomfort severity, or ODS, from baseline to day 15 compared to vehicle control in both the overall ITT population (p=0.0002) and in a pre-defined

subgroup of ITT patients with more severe baseline ocular discomfort (p=0.0007), defined as patients who scored greater than or equal to 68 mm in baseline ocular discomfort.

These data replicate the achievement of both primary symptom endpoints of STRIDE 1 (p<0.0001 in the overall ITT population and p=0.0008 in the pre-defined ITT subgroup with more severe ocular discomfort at baseline).

Statistical significance was also achieved in the key secondary endpoint of conjunctival hyperemia at day 15 in the ITT population (p<0.0001).

We believe this result replicates the achievement of the positive results of STRIDE 1 and STRIDE 2, where statistical significance was demonstrated for conjunctival hyperemia at day 15 in the ITT population as a prespecified primary endpoint in each of those trials.

Statistical significance was also achieved for the key secondary endpoint of ODS at day 8 in the ITT population (p=0.0282), which was consistent with STRIDE 1 (p=0.0011) and STRIDE 2 (p=0.0408).

Significant improvement was also observed for corneal staining in the ITT population (p=0.0042), consistent with the result in STRIDE 2 (p=0.0314).

Consistent with STRIDE 1 and STRIDE 2, EYSUVIS was generally well tolerated in STRIDE 3, with no clinically significant treatment related adverse events observed during the course of either trial, and with elevations in interocular pressure, or IOP, in both trials similar to placebo.

On April 30, 2020, we resubmitted the NDA for EYSUVIS.

We believe this application will be considered a Class 2 resubmission, with a targeted six-month review timeline under the Prescription Drug User Fee Act, or PDUFA.

If approved, we believe EYSUVIS could become the preferred first-line prescription therapy for the short-term treatment of the signs and symptoms of dry eye disease, which will include treatment of dry eye flares that affect the vast majority of dry eye patients.

INVELTYS is the first and only FDA‑approved ocular corticosteroid product with a twice-a-day dosing regimen for the treatment of post‑operative inflammation and pain.

Other approved topical ocular corticosteroid products for this indication are dosed three or four times a day.

In clinical trials, INVELTYS showed statistical significance in the primary efficacy endpoints of complete resolution of inflammation at day eight maintained through day 15 with no need for rescue medication compared to placebo and complete resolution of pain at day eight maintained through day 15 with no need for rescue medications compared to placebo.

We are evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosing regimens for the treatment of signs and symptoms of dry eye disease and potential chronic treatment of dry eye disease.

We also are evaluating compounds in our receptor Tyrosine Kinase Inhibitor program, or rTKI program, that inhibit the vascular endothelial growth factor, or VEGF, pathway, for the potential treatment of a number of retinal diseases and novel next-generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action with the goal of eliminating the risk of IOP increase and cataract formation.

INVELTYS received FDA approval under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act, or FDCA, which is the pathway we are pursuing for the approval of EYSUVIS as well.

We have retained worldwide commercial rights for INVELTYS and our current product candidates, including EYSUVIS.

Since the FDA approval of INVELTYS, we have built a commercial infrastructure with our own focused, specialty sales force which includes 57 territory sales managers, or TSMs, 7 regional sales leaders, or RSLs, and 3 directors of national accounts.

If EYSUVIS is approved by the FDA, we plan to increase our sales force from 57 sales representatives to a total of approximately 100 to 125 sales representatives, who will promote both EYSUVIS and INVELTYS.

We expect to commercialize in the United States any of our other product candidates that receive marketing approval as well.

We also expect to explore commercialization of EYSUVIS for the treatment of dry eye disease in certain markets outside the United States, including the European Union, or EU, utilizing a variety of collaboration, distribution and other marketing arrangements with one or more third parties.

Since the initial public offering of our common stock, or IPO, we have financed our operations primarily through common stock offerings pursuant to our shelf registration statement on Form S-3, or Shelf Registration, and sales of our common stock pursuant to a sales agreement with Jefferies, LLC, or the Sales Agreement, under which we may issue and sell, from time to time, common stock in at-the-market offerings, or the ATM Offering, through Jefferies, LLC, as a sales agent.

On March 10, 2020 , the Company notified Jefferies LLC that it was suspending and terminating the prospectus related to the Sales Agreement.

We will not make any sales of our common stock pursuant to the Sales Agreement unless and until a new prospectus is filed.

Through April 3, 2020, we have issued an aggregate of 30,549,976 shares under our Shelf Registration, including the ATM Offerings , resulting in aggregate gross proceeds to us of $231.7 million.

We also have an aggregate amount of $75.0 million of indebtedness outstanding under our credit facility with Athyrium Opportunities III Acquisition LP, or the Athyrium Credit Facility.

Since inception, we have incurred significant losses from operations and negative cash flows from operations.

Our net losses were $22.0 million for the three months ended March 31, 2020 and $94.3 million for the year ended December 31, 2019.

As of March 31, 2020, we had an accumulated deficit of $317.4 million.

As we commercially launched our first product, INVELTYS, in January 2019, we have had only limited revenues to date from product sales and have financed our operations primarily through proceeds from our IPO, public common stock offerings and sales of our common stock under our ATM Offering, private placements of preferred stock, convertible debt financings, borrowings under credit facilities and warrants.

We have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and clinical trials and engaging in activities to commercialize INVELTYS.

Although we expect to continue to generate revenue from sales of INVELTYS, there can be no assurance as to the amount or timing of any such revenue, and we expect to continue to incur significant expenses and operating losses.

Our net losses may fluctuate significantly from quarter‑to‑quarter and year‑to‑year.

Financial Operations Overview

Product Revenues, Net

As a result of the commercial launch of INVELTYS in the United States in early January 2019, we commenced generating product revenues from sales of INVELTYS.

Our product revenues are recorded net of provisions relating to estimates for (i) trade discounts and allowances, such as discounts for prompt payment and distributor fees, (ii) estimated rebates, chargebacks and co-pay assistance program, and (iii) reserves for expected product returns.

These estimates reflect current contractual and statutory requirements, known market events and trends, industry data and forecasted customer buying and payment patterns.

Actual amounts may ultimately differ from these estimates.

If actual results vary, estimates may be adjusted in the period such change in estimate becomes known, which could have an impact on earnings in the period of adjustment.

Beginning in March 2020 and continuing into the second quarter of 2020, prescriptions of INVELTYS and revenue have been adversely affected by the ongoing COVID-19 pandemic as federal, state and local governments implemented restrictions on elective procedures, which include most ocular surgeries.

We expect that many deferred ocular surgeries will be rescheduled once conditions permit, and that INVELTYS prescriptions and revenue will return to growth, however we are unable to project the specific timing or potential impact on future revenues given the continued uncertainty around the impact and duration of the restrictions related to COVID-19 .

Cost of product revenues

Cost of product revenues consists primarily of materials, third-party manufacturing costs, freight and distribution costs, royalty expense, allocation of labor, quality control and assurance, reserves for defective inventory, and other manufacturing overhead costs.

We expensed cost of product revenues related to INVELTYS as research and development expenses prior to regulatory approval which we received on August 22, 2018.

With respect to the ongoing COVID-19 pandemic, we expect that the cost of product revenues will be impacted consistent with the negative impact to product revenues, net.

However, we are unable to predict the specific timing or specific impact on cost of product revenues given the continued uncertainty around the impact and duration of the restrictions related to COVID-19.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of salaries, benefits, commissions, stock‑based compensation and travel expenses related to our commercial infrastructure and our executive, finance, human resources, legal, information technology and business development functions.

Selling, general and administrative expenses also includes external costs related to marketing, samples and professional fees for auditing, tax, information technology, consultants, legal services and allocated facility‑related costs not otherwise included in research and development expenses.

We anticipate that our selling, general and administrative expenses will increase in the future as we continue to build our commercial infrastructure to support the commercialization of INVELTYS or of any product candidates for which we obtain marketing approval, and if and as we increase our administrative headcount to support our continued

research activities and development of our product candidates or additional product candidates, including EYSUVIS.

In addition, we anticipate increased expenses related to supporting a larger organization and increase in selling expense related to EYSUVIS, if approved.

With respect to the ongoing COVID-19 pandemic, we expect that selling, general and administrative expenses could be favorably impacted by a reduction in certain expenses associated with the restriction in the activities of our sales force, which has suspended substantially all in-person interactions with physicians and customers, and are mostly restricted to conducting educational and promotional activities virtually until such time as they can safely return to the field.

However, we are unable to predict the specific amount of this impact or the amount of additional facility-related costs, if any, that could be associated with our personnel safely resuming their activities once the pandemic subsides.

Research and Development Expenses

Research and development expenses consist of costs associated with our research activities, including compensation and benefits for full‑time research and development employees, an allocation of facilities expenses, overhead expenses, payments to universities under our license agreements and other outside expenses.

Our research and development expenses include:

employee‑related expenses, including salaries, related benefits, travel and stock‑based compensation;

expenses incurred for the preclinical and clinical development of our product candidates and under agreements with contract research organizations, or CROs, including costs of manufacturing product candidates prior to receipt of regulatory approval;

facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and supplies;

payments made under our third‑party licensing agreements, including the annual minimum royalty and reimbursable expenses for defense of agreed upon patents under a license agreement with Johns Hopkins University, or JHU.

We expense research and development costs as they are incurred.

Research and development costs that are paid in advance of performance are capitalized as a prepaid expense until incurred.

We track outsourced development costs by development program but do not allocate personnel costs, payments made under our license agreements or other costs to specific product candidates or development programs.

These costs are included in Employee‑related costs and Other research and development costs in the line items in the tables under “Results of Operations”.

We expect that our research and development costs will decrease in 2020 as compared to the year ended December 31, 2019 as a result of the completion of STRIDE 3.

However, we expect that such costs will increase if and as we continue to advance our product candidates and conduct additional late-stage clinical trials.

The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time‑consuming.

We may never succeed in obtaining marketing approval for any of our product candidates, including EYSUVIS.

The probability of success for each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability.

With respect to the ongoing COVID-19 pandemic, we may incur reduced research and development costs resulting from the limitations placed on our laboratory facilities that support our early-stage research.

However, we are unable to predict the specific amount of this impact, nor are we able to predict the additional costs, if any, associated with personnel safely resuming their activities.

Our research and development programs are at various stages of development.

Successful development and completion of clinical trials is uncertain and may not result in approved products.

Completion dates and completion costs can vary significantly for each product candidate and future product candidate and are difficult to predict.

We will continue to make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the scientific and clinical success of each product candidate as well as ongoing assessments as to the commercial potential of product candidates and our ability to enter into collaborations with respect to each product candidate.

We may need to raise additional capital and may seek collaborations in the future

to advance our various product candidates.

Additional private or public financings may not be available to us on acceptable terms, or at all.

Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy.

Interest Income

Interest income consists of interest earned on our cash balance held in a deposit account.

Interest Expense

Interest expense primarily consists of contractual coupon interest expense, amortization of debt discounts and debt issuance costs recognized on our debt facility.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S.

generally accepted accounting principles.

We believe that several accounting policies are important to understanding our historical and future performance.

We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used.

On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below.

We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

There have been no material changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

in our Annual Report on Form 10-K, for the fiscal year ended December 31, 2019 .

Results of Operations

Comparison of the Three Months Ended March 31, 2020 and 2019

The following table summarizes the results of our operations for the three months ended March 31, 2020 and 2019:

Three Months Ended

(in thousands)

Product revenues, net

Costs and expenses:

Cost of product revenues

Selling, general and administrative

Research and development

Total costs and expenses

Loss from operations

Other income (expense)

Interest income

Interest expense

Product revenues, net

Product revenues, net was $1.1 million for the three months ended March 31, 2020 compared to $1.4 million for the three months ended March 31, 2019.

The decrease in net revenue of $0.3 million was driven by higher reserves related to the first quarter of 2020 of $1.3 million as compared to those estimated during the first quarter of 2019, partially offset by a $1.0 million increase in net revenue due to a higher per unit gross selling price.

INVELTYS is our first product to receive regulatory approval, which we launched in the United States in January 2019.

We expect product revenues to increase if and as we increase our market share, obtain and maintain coverage and adequate reimbursement for INVELTYS from third-party payors;

however, we expect full-year product revenues to be negatively impacted for 2020 as a result of the COVID-19 pandemic.

Cost of product revenues

Cost of product revenues was $0.4 million for the three months ended March 31, 2020 compared to $0.2 million for the three months ended March 31, 2019, an increase of $0.2 million.

We began capitalizing inventory costs for INVELTYS after receipt of FDA approval of INVELTYS on August 22, 2018 and, as a result, cost of product revenues for the three months ended March 31, 2019 were more favorably impacted by costs which were expensed as research and development prior to FDA approval.

Selling, general and administrative expenses

Selling, general and administrative expenses were $15.4 million for the three months ended March 31, 2020 compared to $18.2 million for the three months ended March 31, 2019, which was a decrease of $2.8 million.

The decrease was driven by a reduction in selling and marketing expenses of $1.8 million for the three months ended March 31, 2020 primarily attributable to costs associated with the commercial launch of INVELTYS incurred during the three months ended March 31, 2019.

Also contributing to a decrease in selling, general and administrative expenses was a decrease of $0.8 million in employee-related costs including stock compensation as well as reduced relocation and legal fees of $0.4 million partially offset by higher insurance costs of $0.2 million.

We anticipate that our selling, general and administrative expenses will increase in the future if and as we increase our administrative headcount to support our continued research activities and seek marketing approval for our product candidates.

Research and development expenses

The following table summarizes the research and development expenses incurred during the three months ended March 31, 2020 and 2019:

Three Months Ended

(in thousands)

KPI-121 development costs

Employee‑related costs

Other research and development costs

Total research and development

Research and development expenses were $5.4 million for the three months ended March 31, 2020 compared to $7.0 million for the three months ended March 31, 2019, a $1.6 million decrease.

The decrease was primarily the result of a $1.7 million decrease in KPI-121 development costs related to lower external cost on the STRIDE 3 dry eye clinical trial for which we announced topline data in March 2020.

Other research and development costs include facility related costs, pre-clinical studies, certain medical affairs and associated regulatory costs, which decreased $0.2 million.

Offsetting the decrease in KPI-121 development costs was a $0.4 million increase in employee-related costs driven by increased stock-based compensation and an increase in manufacturing employees allocating more time to EYSUVIS research and development .

Interest income

Interest income decreased by $0.5 million to $0.3 million for the three months ended March 31, 2020 compared to $0.8 million for the three months ended March 31, 2019.

Interest income consists of interest earned on our cash balance held in an interest-bearing deposit account.

The decrease was attributable to a lower interest rate on a lower average cash balance during the three months ended March 31, 2020.

Interest expense

We incurred interest expense of $2.1 million for the three months ended March 31, 2020, compared to $2.1 million for the three months ended March 31, 2019.

Interest expense is comprised of the contractual coupon interest expense and the amortization of the debt discount associated with our Athyrium Credit Facility during the three months ended March 31, 2020 and 2019.

During the three months ended March 31, 2019, $75.0 million under the Athyrium Credit Facility was outstanding, and remained outstanding during the three months ended March 31, 2020.

Liquidity and Capital Resources

Since our inception , we have incurred significant operating losses.

As we commercially launched our first product, INVELTYS, in January 2019, we have had limited revenues to date from product sales and have financed our operations primarily through proceeds from our IPO, public common stock offerings and sales of our common stock under our ATM Offering, private placements of preferred stock, convertible debt financings, borrowings under credit facilities, and warrants.

In July 2017, we completed an IPO pursuant to which we issued and sold 6,900,000 shares of our common stock, which included 900,000 shares sold pursuant to the exercise of the underwriters’

option to purchase additional shares, a t a price of $15.00 per share.

We received net proceeds of $94.0 million after deducting underwriting discounts and commission of $7.3 million and offering costs incurred in 2017 of $2.2 million.

On August 9, 2018, we filed a Shelf Registration with the SEC, which was declared effective on August 27, 2018.

Under the Shelf Registration, we may offer and sell up to $250.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities, purchase contracts, purchase units or any combination of such securities during the three-year period that commenced upon the Shelf Registration becoming effective.

Under the Shelf Registration, we may periodically offer one or more types of securities in amounts, at prices and on terms announced, if and when the securities are ever offered.

We initially designated $50.0 million of our Shelf Registration to be offered under our ATM Offering.

On March 10, 2020 , we suspended and terminated the prospectus related to the ATM Offering.

As of March 31, 2020, there was approximately $26.1 million of securities available to be issued under the Shelf Registration.

As a result of the underwriters’

option exercised as noted above, there was approximately $18.3 million of securities available to be issued under the Shelf Registration as of April 3, 2020.

On October 1, 2018, we entered into the Athyrium Credit Facility for up to $110 million.

The Athyrium Credit Facility provides for a Term Loan A in the aggregate principal amount of $75.0 million, or Term Loan A, and a Term Loan B in the aggregate principal amount of $35.0 million, or Term Loan B.

On October 1, 2018, we borrowed the entire principal amount of the Term Loan A.

We may draw down the Term Loan B upon either (i) FDA approval of EYSUVIS for a dry eye disease indication or (ii) reaching certain net product revenues for INVELTYS, in each case, on or prior to June 30, 2020;

however, we do not expect to satisfy either such condition on or prior to June 30, 2020 and, as a result, do not currently expect that we will be eligible to draw down any of the Athyrium Term Loan B funds.

The maturity date of the Athyrium Credit Facility is October 1, 2024.

The Term Loan A bears interest at a rate of 9.875% per annum, with quarterly, interest-only payments until the fourth anniversary of the Term Loan A.

The unpaid principal amount of the Term Loan A is due and payable in quarterly installments starting at the end of the fourth anniversary of the loan.

On October 5, 2018, we sold 7,500,000 shares of common stock in an underwritten offering pursuant to the Shelf Registration at a public offering price of $8.25 per share, before underwriting discounts and commissions.

addition, the underwriters were granted an overallotment option to purchase an additional 1,125,000 shares of the common stock at the same public offering price, less underwriting discounts and commissions.

On October 11, 2018, the underwriters exercised in full their option to purchase the overallotment shares.

The total number of shares sold by us in the offering was 8,625,000 shares, resulting in net proceeds to us, after underwriting discounts and offering expenses, of approximately $66.1 million.

On March 11, 2020, we sold 16,000,000 shares of our common stock in an underwritten offering pursuant to the Shelf Registration at a public offering price of $7.89 per share, before underwriting discounts, commissions, and offering expenses, resulting in net proceeds of $118.2 million.

In addition, the underwriters of the offering were granted the option for a period of 30 days to purchase up to an additional 2,400,000 shares of common stock offered in the public offering at the public offering price, less underwriting discounts and commissions.

On April 3, 2020, the underwriters exercised their option and purchased an additional 979,371 shares of common stock at $7.89 per share, before underwriting discounts, commissions, and offering expenses, resulting in net proceeds to us of $7.2 million.

The total number of shares sold by us in the offering was 16,979,371, resulting in total net proceeds to us, after underwriting discounts and offering expenses, of approximately $125.4 million.

In connection with the filing of the Shelf Registration, we entered into a sales agreement with Jefferies, LLC pursuant to which we may issue and sell, from time to time, up to an aggregate of $50.0 million of our common stock in an ATM Offering, through Jefferies, LLC, as sales agent.

As of December 31, 2019, we had issued an aggregate of 2,592,934 shares of our common stock under the ATM Offering, resulting in net proceeds to us of approximately $13.1 million.

During the first quarter of 2020, we issued an aggregate of 2,352,671 shares of our common stock under the ATM Offering, resulting in net proceeds to us of approximately $12.5 million.

On March 10, 2020 , we suspended and terminated the prospectus related to the ATM Offering .

As of March 31, 2020, we had $196.5 million in cash on hand and $75.0 million in indebtedness.

The following table summarizes our sources and uses of cash for the three months ended March 31, 2020 and 2019:

Three Months Ended

(in thousands)

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Increase / (decrease) in cash and restricted cash

Net Cash Used in Operating Activities

During the three months ended March 31, 2019, our cash used in operating activities was primarily due to our net loss of $25.4 million primarily consisting of $0.2 million of cost of product revenues, $18.2 million of selling, general and administrative costs and $7.0 million of research and development costs and partially offset by non-cash charges of $3.3 million, consisting primarily of $2.5 million in stock-based compensation, $0.4 million in non-cash operating lease expense, $0.4 million in depreciation and amortization of debt discount.

Net cash used by changes in our operating assets and liabilities primarily consisted of a $4.7 million increase in accounts receivable from our first quarter of product sales, $1.0 million increase in inventory related to our INVELTYS product, offset by a $4.0 million decrease in accounts payable and accrued expense primarily driven by the timing of payments and a $0.6 million decrease in prepaid expenses and other current assets primarily driven by the receipt of landlord reimbursement related to our Watertown facility and amortization of prepaid expense for the period.

During the three months ended March 31, 2020, our cash used in operating activities was primarily due to our net loss of $22.0 million primarily consisting of $15.4 million of selling, general and administrative costs and $5.4

million of research and development costs, partially offset by non-cash charges of $3.5 million, consisting primarily of $2.5 million in stock-based compensation.

Net cash used by changes in our operating assets and liabilities primarily consisted of a $6.8 million decrease in accounts receivable driven by a decrease in sales of INVELTYS when compared to the three months ended March 31, 2019, offset by a $7.4 million decrease in accounts payable and accrued expenses, mainly driven by a decrease in accrued compensation as a result of bonus payments during the three months ended March 31, 2020.

Net Cash Used in Investing Activities

Net cash used in investing activities was $0.4 million for the three months ended March 31, 2019, consisting primarily of purchases of furniture and fixtures.

Net cash used in investing activities was $0.3 million for the three months ended March 31, 2020, consisting primarily of purchases of laboratory and manufacturing equipment.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $29,000 for the three months ended March 31, 2019, consisting of $39,000 of proceeds from the exercise of stock options, offset by $10,000 of principal payments on our finance lease obligation.

Net cash provided by financing activities was $131.2 million for the three months ended March 31, 2020, consisting of $118.2 million of net proceeds from the sale of shares of our common stock under the Shelf Registration, $12.5 million of net proceeds from the sale of shares of our common stock under the ATM Offering, and $0.4 million of proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan.

Funding Requirements

We anticipate that our expenses will increase substantially as compared to prior periods as we continue to commercialize INVELTYS in the United States and engage in activities to prepare for commercialization of our lead product candidate, EYSUVIS, for the short-term treatment of the signs and symptoms of dry eye disease, as a result of increased headcount, including our plan to increase our sales force from 57 sales representatives to a total of approximately 100 to 125 sales representatives if EYSUVIS is approved by the FDA, as well as management personnel to support our clinical, manufacturing and commercialization activities, expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated with being a public company and increased insurance premiums, among other factors.

Our expenses will also increase if and as we:

continue to grow our sales, marketing and distribution capabilities in connection with the commercialization of INVELTYS and any product candidates, including EYSUVIS , for which we recently resubmitted our NDA to obtain marketing approval;

conduct any necessary clinical trials and other development activities and/or seek marketing approvals for EYSUVIS and any other product candidates;

in‑license or acquire the rights to other products, product candidates or technologies;

pursue the clinical development of KPI‑121 for the treatment of other additional indications or for use in other patient populations;

pursue the preclinical and clinical development of product candidates, including our rTKI program, for use in the treatment of retinal diseases, and novel next-generation anti-inflammatories designed to exhibit

steroid-like anti-inflammatory action with the goal of eliminating the risk of IOP increase and cataract formation;

seek regulatory approval for EYSUVIS, INVELTYS or any other product candidate outside of the United States;

continue to scale up our manufacturing processes and capabilities to support commercialization of INVELTYS, and any of our product candidates, including EYSUVIS, for which we seek and/or obtain marketing approval ;

leverage our proprietary AMPPLIFY technology to advance additional potential high‑value therapeutics into preclinical and clinical development ;

maintain, expand and protect our intellectual property portfolio;

hire additional clinical, quality control, scientific, manufacturing, commercial and management personnel ;

expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company ;

increase our product liability insurance coverage as we expand our commercialization efforts, including increased coverage for EYSUVIS, if approved.

We expect to continue to incur significant expenses and operating losses.

Net losses may fluctuate significantly from quarter-to-quarter and year-to-year.

We expect that our existing cash on hand as of March 31, 2020, will enable us to fund our operations, lease and debt service obligations, and capital expenditure requirements into at least the second quarter of 2022.

We have based this estimate on assumptions that may prove to be wrong, and our operating plan may change as a result of many factors currently unknown to us.

As a result, we could deplete our available capital resources sooner than we currently expect.

Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability.

Our expenses will increase from what we anticipate if :

we elect to or are required by the FDA or non‑U.S.

regulatory agencies to perform clinical trials or studies in addition to those expected;

there are any delays in enrollment of patients in or completing our clinical trials or the development of our product candidates;

there are any third‑party challenges to our intellectual property portfolio, or the need arises to defend against intellectual property‑related claims or enforce our intellectual property rights.

Our ability to become and remain profitable depends on our ability to generate revenue.

While we began to generate revenue from the sales of INVELTYS in January 2019, there can be no assurance as to the amount or timing of any such revenue, and we may not achieve profitability.

Achieving and maintaining profitability will require us to be successful in a range of challenging activities, including:

successfully growing INVELTYS revenues ;

obtaining marketing approval of EYSUVIS or any other product candidates;

achieving an adequate level of market acceptance and obtaining and maintaining coverage and adequate reimbursement from third‑party payors for INVELTYS and EYSUVIS, if approved, and any other products we commercialize ;

manufacturing at commercial scale, marketing, selling and distributing INVELTYS or any product candidates for which we obtain marketing approval, including EYSUVIS;

maintaining regulatory and marketing approvals for INVELTYS and for any other product candidates for which we obtain approval, including EYSUVIS;

hiring and building a full commercial organization required for marketing, selling and distributing those products for which we obtain marketing approval, including EYSUVIS;

obtaining, maintaining and protecting our intellectual property rights;

adapting our business in response to the current pandemic health event resulting from the novel coronavirus (COVID-19) and its collateral consequences .

INVELTYS is our only product that has been approved for sale and it has only been approved in the United States.

Our ability to generate revenue from operations will depend, in part, on the success of commercial sales of INVELTYS, which we commercially launched in the United States in January 2019.

However, the successful commercialization of INVELTYS in the United States is subject to many risks.

We are currently undertaking our first commercial launch with INVELTYS, and we may not be able to do so successfully.

There are numerous examples of unsuccessful product launches and failures to meet expectations of market potential, including by pharmaceutical companies with more experience and resources than us.

We do not anticipate our revenue from sales of INVELTYS alone will be sufficient for us to become profitable for several years, if at all.

In addition, our recent commercialization efforts have been hampered by the operational restrictions on our sales force from quarantines, travel restrictions and bans and other governmental restrictions related to COVID-19.

As a result of these restrictions, our sales force have suspended substantially all in-person interactions with physicians and customers and are mostly restricted to conducting educational and promotional activities for INVELTYS virtually, which is hampering our ability to market INVELTYS.

In addition, these restrictions have led to a moratorium on elective ocular surgeries in many jurisdictions, which has, in turn, significantly reduced the demand for INVELTYS, which is indicated for the treatment of inflammation and pain following ocular surgery.

The extent of the impact of COVID-19 on our commercialization efforts will depend on the length and severity of this pandemic, which is uncertain and cannot be predicted.

We may never succeed in these activities and may never generate revenue that is sufficient to achieve profitability.

Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations.

A decline in the value of our company could also cause you to lose all or part of your investment.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, royalty agreements, and marketing and distribution arrangements.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder.

Debt financing and preferred equity financing, if available, may involve agreements that include pledging of assets as collateral, covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

Our pledge of our assets as collateral to secure our obligations under our Athyrium Credit Facility may limit our ability to obtain additional debt financing.

Under our Athyrium Credit Facility, we are also

restricted from paying dividends on our common stock and limited with respect to certain other uses of our cash without the lenders’

We may need to raise additional capital in the future to advance our business.

Additional private or public financings may not be available to us on acceptable terms, or at all.

Additionally, the COVID-19 pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact our ability to raise additional funds.

The COVID-19 pandemic has also impacted, and may continue to impact, the volatility of our stock price and trading in our stock.

Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future.

Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy.

If we raise additional funds through collaborations, strategic alliances, licensing arrangements, royalty agreements, or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us.

If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or current or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves.

Off‑Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off‑balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.

Quantitative and Qualitative Disclosures About Market Risk.

We did not hold any cash equivalents or investments as of March 31, 2020.

As of March 31, 2020, the aggregate principal amount outstanding under the Athyrium Credit Facility was $75.0 million, which bears interest at a fixed rate of 9.875% per annum .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements