What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-05 compared with 2020-08-06 · 253 added, 172 removed, 369 unchanged (54% of the section changed)

3 unchanged sentences

(In thousands, except share and per share amounts)

September 30,

Current assets:

8 unchanged sentences

Right-of-use assets

Restricted cash

Restricted cash and other long-term assets

Liabilities and Stockholders' Equity

12 unchanged sentences

Common stock, $ 0.001 par value;

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

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

56,061,365 and 36,086,254 shares issued and outstanding as of September 30, 2020 and December 31, 2019 , respectively

Additional paid-in capital

Accumulated other comprehensive income

Accumulated other comprehensive loss

Accumulated deficit

3 unchanged sentences

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Product revenues, net

11 unchanged sentences

Weighted average shares outstanding—basic and diluted

Other comprehensive income:

Other comprehensive income (loss):

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 other comprehensive income (loss)

Total comprehensive loss

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In thousands, except share data)

Three Months Ended June 30,

(In thousands, except share amounts)

Three Months Ended September 30,

$0.001 Par Value

1 unchanged sentence

Stockholders'

Balance as of March 31, 2019

Income (Loss)

Balance as of June 30, 2019

At the market offering, net of sales agent commission of $ 66

Exercise of stock options

Issuance under employee stock purchase plan

Stock-based compensation expense

Balance as of September 30, 2019

Balance as of June 30, 2020

Balance as of March 31, 2020

Exercise of stock options

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

Issuance under employee stock purchase plan

Stock-based compensation expense

Warrant exercises

Accumulated other comprehensive income

Balance as of June 30, 2020

Change in fair value of investments

Balance as of September 30, 2020

See accompanying notes to these unaudited condensed consolidated financial statements

Six Months Ended June 30,

Nine Months Ended September 30,

$0.001 Par Value

2 unchanged sentences

Balance as of December 31, 2018

At the market offering, net of sales agent commission of $ 66

Exercise of stock options

Issuance under employee stock purchase plan

Stock-based compensation expense

Balance as of June 30, 2019

Balance as of September 30, 2019

Balance as of December 31, 2019

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

At the market offering, net of sales agent commission of $ 388

Exercise of stock options

Common stock offering, net of issuance cost and underwriting fees of $ 8.1 million

Common stock offering, net of issuance cost and underwriting fees of $ 8,475

Issuance under employee stock purchase plan

1 unchanged sentence

Warrant exercises

Accumulated other comprehensive income

Balance as of June 30, 2020

Change in fair value of investments

Balance as of September 30, 2020

See accompanying notes to these unaudited condensed consolidated financial statements

2 unchanged sentences

(In thousands)

Six Months Ended

Nine Months Ended

September 30,

Cash flows from operating activities:

11 unchanged sentences

Cash flows from investing activities:

Purchases of property and equipment

Purchases of property and equipment and intangible assets

Purchases of short-term investments

5 unchanged sentences

Net cash provided by financing activities

Net increase/(decrease) in cash and restricted cash:

Cash and restricted cash at beginning of period

Cash and restricted cash at end of period

Reconciliation of cash and restricted cash:

Net decrease in cash, cash equivalents and restricted cash:

Cash, cash equivalents and restricted cash at beginning of period

Cash, cash equivalents and restricted cash at end of period

Less restricted cash

Reconciliation of cash, cash equivalents and restricted cash:

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

Less restricted cash (Notes 8 and 9)

Cash and cash equivalents at end of period

1 unchanged sentence

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

Purchases of property and equipment in accounts payable

Supplemental disclosure:

2 unchanged sentences

See accompanying notes to these unaudited condensed consolidated financial statements.

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

NATURE OF BUSINESS AND BASIS OF PRESENTATION

2 unchanged sentences

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 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 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.

Food and Drug Administration’s (the “FDA”) approval of EYSUVIS TM (loteprednol etabonate ophthalmic suspension) 0.25%, for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease, and INVELTYS ® (loteprednol etabonate ophthalmic suspension) 1% as the first and only topical twice-daily ocular corticosteroid for treatment of post-operative inflammation and pain following ocular surgery.

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

The Company is engaged in the commercialization of INVELTYS, pursuing FDA approval of, and preparing to launch, EYSUVIS, research and development activities, raising capital and recruiting skilled personnel.

The Company expects to begin shipping its second commercial product, EYSUVIS, to wholesalers in the U.S.

by the end of 2020 and for the full promotional launch to begin in January of 2021.

The Company is engaged in preparing for the launch of EYSUVIS, the commercialization of INVELTYS, research and development activities, raising capital and recruiting skilled personnel.

The Company is subject to a number of risks similar to those of other companies conducting high-risk, research and development of pharmaceutical product candidates and launching products for the first time.

Principal among these risks are dependence on key individuals and intellectual property, competition from other products and companies and the technical risks associated with the successful research, development and marketing of its product candidates.

The Company’s success is dependent upon its ability to 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 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.

The Company’s success is dependent upon its ability to successfully commercialize its products, the success of its research and development efforts, its ability to obtain regulatory approval of its product candidates, its ability to raise additional capital when needed and, ultimately, attain profitable operations.

The Company is also evaluating other opportunities for MPP nanosuspensions of LE, compounds in its receptor Tyrosine Kinase Inhibitor program, that inhibit the vascular endothelial growth factor, 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 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.

As of September 30, 2020, the Company had an accumulated deficit of $ 368,671 .

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 commercialize INVELTYS.

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, 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.

The Company believes that its existing cash, cash equivalents and short-term investments as of September 30, 2020, will enable it to fund its operating expenses, debt service obligations and capital expenditure requirements for at least twelve months from the date these condensed consolidated financial statements were issued.

This evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the condensed consolidated financial statements are issued.

3 unchanged sentences

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.

As a result, the Company previously suspended substantially all in-person interactions with customers, including visits to physician offices, clinics, and

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 the Company’s 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 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 effects of COVID-19 may also disrupt the launch and commercialization of EYSUVIS.

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 and the 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 condensed consolidated results of operations or financial position.

6 unchanged sentences

Net Loss per Share —Basic net loss per share is computed using the weighted average number of common shares outstanding during the period.

The weighted average number of common shares included in the computation of diluted net loss gives effect to all potentially dilutive common equivalent shares, including outstanding stock options and warrants.

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, warrants and the assumed issuance of unvested restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”).

Common stock equivalent shares are excluded from the computation of diluted net loss per share if their effect is antidilutive.

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

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

The Company reported a net loss attributable to common stockholders for each of the three and nine months ended September 30, 2020 and 2019.

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”).

1 unchanged sentence

GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations.

The accompanying condensed consolidated financial statements reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations,

statement of stockholders’ equity and cash flows for the interim periods presented.

Interim results are not necessarily indicative of results for a full year.

3 unchanged sentences

All intercompany transactions and balances have been eliminated in consolidation.

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

There have been no material changes to the significant accounting policies during the nine months ended September 30, 2020, other than the addition of the Investments section and certain updates to the Inventory section below.

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

5 unchanged sentences

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.

Inventory — Inventory is stated at the lower of cost or net realizable value, on a first-in, first-out (“FIFO”) method.

Costs include amounts related to third party manufacturing, transportation, internal labor and overhead.

The Company capitalizes pre-launch inventory when it believes regulatory approval and subsequent commercialization of the product candidate is probable and expects the future economic benefit from the sale of the drug to be realized.

In doing so, management must consider a number of factors in order to determine the amount of inventory to be capitalized, including the historical experience of achieving regulatory approvals for the Company’s similar products, the amount of inventory that is likely to be used in commercial production, receipt and analysis of positive Phase 3 clinical trial results for the underlying product candidate, results from meetings with the relevant regulatory authorities prior to the filing of regulatory applications and the compilation of the regulatory application.

The Company also monitors the status of the product within the regulatory review and approval process, including all relevant communication with regulatory authorities.

For inventories capitalized in preparation for product launch, anticipated future sales, expected shelf life and expected approval date are taken into account when evaluating realizability.

The shelf life of a product is determined as part of the regulatory approval process;

however, in assessing whether to capitalize pre-launch inventory, the Company considers the product stability data of all of the pre-approval inventory procured or produced to date to determine whether there is adequate shelf life.

If management is aware of any specific material risks or contingencies other than the normal regulatory review and approval process, or if the criteria for capitalizing inventory produced prior to regulatory approval are otherwise not met, the Company would not capitalize such inventory costs, choosing instead to recognize such costs as a research and development expense in the period incurred.

For INVELTYS, capitalization of costs as inventory began upon U.S.

regulatory approval.

For EYSUVIS, capitalization of costs as inventory began in the third quarter of 2020 when the Company believed regulatory approval and subsequent commercialization of the product candidate was probable and expected the future economic benefit from the sale of the drug to be realized.

Inventory produced that will be used in a promotional sample program is expensed to selling, general and administrative expense when it is designated as a sample.

Long-term inventory includes raw materials, work-in-progress and/or finished goods inventory with an anticipated consumption or sale beyond one year based on the Company’s forecasted expectations.

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Recent Accounting Pronouncements

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”).

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.

1 unchanged sentence

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.

1 unchanged sentence

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 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.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”) , which is effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be Smaller Reporting Companies (“SRCs”) as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and for all other entities, including SRCs, for fiscal years beginning 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.

1 unchanged sentence

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:

2 unchanged sentences

● 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.

The Company’s 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 the Company’s 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:

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

Carrying Amount

1 unchanged sentence

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

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

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

September 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.

As of September 30, 2020, all of the Company’s investments had a contractual maturity within one year.

The fair value of all of the Company’s investments are classified as short-term on its condensed consolidated balance sheets.

REVENUE & ACCOUNTS RECEIVABLE, NET

14 unchanged sentences

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 Company recognizes revenue from product sales at the point the Customer

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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.

19 unchanged sentences

The Company contracts with certain third-party payors, primarily pharmacy benefit managers (“PBMs”) and health plans (“Plans”), for the payment of rebates with respect to utilization of its product.

These rebates are based on contractual percentages applied to the amount of product prescribed to patients who are covered by the PBMs or the Plans with which it contracts.

The Company estimates the rebates for commercial and Medicare Part D payors based on the contractual discount percentage, the various payor mix for INVELTYS as well as future rebates that will be made for product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period.

These rebates are based on contractual percentages applied to the amount of product prescribed to patients who are covered by the PBMs or the

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Plans with which it contracts.

The Company estimates the rebates for commercial and Medicare Part D payors based on the contractual discount percentage, the various payor mix for the product as well as future rebates that will be made for product that has been recognized as revenue but remains in the distribution channel at the end of each reporting period.

The Company also estimates the number of patients in the prescription drug coverage gap for whom it will owe an additional liability under the Medicare Part D program.

4 unchanged sentences

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.

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

2 unchanged sentences

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 six months ended June 30, 2020:

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

Trade Discounts,

3 unchanged sentences

Incentives (3)

Balance at December 31, 2019

Balance as of December 31, 2019

Provision related to current period sales

1 unchanged sentence

Credit/payments made

Balance at March 31, 2020

Balance as of March 31, 2020

Provision related to current period sales

1 unchanged sentence

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.

Balance as of June 30, 2020

Provision related to current period sales

Changes in estimate related to prior period sales

Credit/payments made

Balance as of September 30, 2020

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

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(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.

(3) Rebates and incentives include 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 condensed consolidated balance sheets.

4 unchanged sentences

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 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):

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

The Company recorded an allowance of $ 817 and $ 1,107 for expected sales discounts, related to prompt pay discounts and contractual fee for service arrangements, to wholesalers and distributors as of September 30, 2020 and September 30, 2019, respectively.

Inventory consists of the following:

September 30,

Raw materials

2 unchanged sentences

Total 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.

As of September 30, 2020, the Company had $ 7,538 of current inventory and $ 2,689 of long-term inventory.

As of December 31, 2019, the Company had $ 4,648 of current inventory and $ 3,778 of long-term inventory.

Work in progress inventory as of September 30, 2020 includes $ 1,127 related to the commercial production of pre-launch inventories of EYSUVIS to support the FDA approval of the product with an indication for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease, which occurred in October 2020.

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

Accrued expenses consist of the following:

September 30,

Compensation and benefits

5 unchanged sentences

Accrued expenses

(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.

(1) There were additional revenue reserves included in accounts payable of $ 470 and $ 741 , as of September 30, 2020 and December 31, 2019, respectively.

Operating leases

1 unchanged sentence

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 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.

In connection with the Watertown Lease, the Company issued a letter of credit to the landlord for $ 2,057 .

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

For the nine months ended September 30, 2020 and 2019, the variable lease expense for the Watertown Lease, which includes common area maintenance and real estate taxes, was $ 1,472 and $ 882 respectively.

The remaining lease term was 11.1 years as of September 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.

In connection with the Vehicle Fleet Lease, the Company issued a letter of credit for $ 453 , which was reported as restricted cash on the condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019.

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

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):

As of September 30, 2020, the remaining lease term was 1.4 years.

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The components of lease expense and related cash flows were as follows:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Operating lease cost

3 unchanged sentences

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 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 entered into a credit agreement (the “Athyrium Credit Facility”), with Athyrium Opportunities III Acquisition LP (“Athyrium”) for up to $ 110,000 .

The Athyrium Credit Facility provided for a Term Loan A in the aggregate principal amount of $ 75,000 (the “Term Loan A”), and a Term Loan B in the aggregate principal amount of $ 35,000 (the “Term Loan B”).

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

5 unchanged sentences

In addition, upon payment or repayment of any outstanding balance under the Athyrium Credit Facility, the Company will have to pay a 1 % exit fee of the total principal payments (whether mandatory, voluntary, or at maturity) made throughout the term.

The exit fee of $ 0.7 million based on the $ 75.0 million principal amount outstanding, will be accreted to the carrying amount of the debt using the effective interest method over the term of the loan.

The exit fee of $ 750 based on the $ 75,000 principal amount outstanding, will be accreted to the carrying amount of the debt using the effective interest method over the term of the loan.

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

4 unchanged sentences

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

The derivative liability will be remeasured at fair value at each reporting

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 June 30, 2020 and December 31, 2019.

In addition, the Athyrium Credit Facility also contains a financial covenant requiring the Company to maintain at least $ 10,000 of cash and cash equivalents.

As a result of this financial covenant, the Company has recorded $ 10,000 as restricted cash as of September 30, 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 .

3 unchanged sentences

The Company allocated the proceeds from the Term Loan A to the Warrant using the relative fair value method.

The fair value of the Warrant of $ 1.9 million was recognized as equity and a corresponding debt discount.

The fair value of the Warrant of $ 1,899 was recognized as equity with a corresponding debt discount of $ 1,980 .

In addition, the Company paid certain fees to Athyrium and other third-party service providers.

These fees paid to Athyrium were recorded as a debt discount while the fees paid to other third-party service providers were recorded as debt issuance cost.

These costs, along with the fair value of the Warrant of $ 1.9 million are being amortized using the effective interest method over the term of the Athyrium Credit Facility.

These costs, along with the fair value of the Warrant of $ 1,899 are being amortized using the effective interest method over the term of the Athyrium Credit Facility.

The amortization of debt discount and debt issuance cost is included in interest expense within the condensed consolidated statements of operations.

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):

As of September 30, 2020 and September 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 September 30, 2020 and September 30, 2019, the Company recognized interest expense of $ 2,125 , which consisted of amortization of the debt discount of $ 232 , and the contractual coupon interest expense of $ 1,893 .

During the nine months ended September 30, 2020, and September 30, 2019, the Company recognized interest expense of $ 6,308 and $ 6,211 , respectively.

This consisted of amortization of debt discount of $ 671 and $ 595 for the periods ended September 30, 2020 and September 30, 2019, and the contractual coupon interest expense of $ 5,637 and $ 5,616 as of September 30, 2020 and September 30, 2019, respectively.

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The components of the carrying value of the debt as of September 30, 2020 and December 31, 2019 are detailed below:

September 30,

Principal loan balance

2 unchanged sentences

Long-term debt, net

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

The annual principal payments due under the Athyrium Credit Facility as of September 30, 2020 were as follows:

Years Ending December 31,

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 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:

2020 (remaining three months)

The following table summarizes the common stock warrants outstanding as of September 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

September 30,

November 2024

September 2017

(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 “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.

Under the 2018 Shelf Registration, the Company may offer and sell up to $ 250,000 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 $ 50,000 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 $ 13,059 .

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

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

proceeds to the Company of $ 12,546 .

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.

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 2018 Shelf Registration, at a public offering price of $ 7.89 per share, before underwriting discounts, commissions, and offering expenses, resulting in net proceeds of $ 118,207 .

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 $ 125.4 million.

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

As of September 30, 2020, there was $ 18,334 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.

Under the 2020 Shelf Registration, the Company may offer and sell up to $ 350,000 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 $ 75,000 of its common stock under its ATM Offering through Jefferies, as a sales agent.

STOCK‑BASED COMPENSATION

3 unchanged sentences

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.

As of September 30, 2020, there were 1,275,550 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 2017 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.

4 unchanged sentences

A portion of the unvested stock options will vest upon the sale of all or substantially all of the stock or assets of the Company.

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 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.

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Inducement Stock Option Awards —During the nine months ended September 30, 2020 and 2019, the Company granted non-statutory stock options to purchase an aggregate of 40,800 shares and 175,500 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 .

1 unchanged sentence

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:

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

(in thousands)

Outstanding at January 1, 2020

Outstanding at June 30, 2020

Vested or expected to vest at June 30, 2020

Options exercisable at June 30, 2020

Outstanding as of January 1, 2020

Outstanding as of September 30, 2020

Vested or expected to vest as of September 30, 2020

Options exercisable as of September 30, 2020

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

1 unchanged sentence

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,

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

Nine Months Ended September 30,

Expected volatility

5 unchanged sentences

Treasury zero-coupon bonds with maturities similar to those of the expected term of the awards being valued.

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

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

The expected 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 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.

During the three months ended September 30, 2020 and 2019, the weighted average grant-date fair value of options granted was $ 7.06 and $ 2.82 , respectively.

During the nine months ended September 30, 2020 and 2019, the weighted average grant-date fair value of options granted was $ 4.00 and $ 3.70 , 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 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.

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.

As of September 30, 2020 and 2019, there was $ 17,483 and $ 20,469 , respectively, of unrecognized compensation cost related

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

to the stock options granted, which is expected to be expensed over a weighted-average period of 2.40 years and 2.46 years, respectively.

Stock-based compensation costs capitalized into inventory totaled $ 234 and $ 19 for the three months ended September 30, 2020 and 2019, respectively, and $ 535 and $ 355 for the nine months ended September 30, 2020 and 2019, respectively.

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

Restricted Stock Units and Performance-Based Restricted Stock Units —In June 2020, the Company issued RSUs to certain executives and Board members, as well as 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.

1 unchanged sentence

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:

The Company has assessed the probability of achievement of the performance criteria and has recorded related stock compensation expense to this extent as of September 30, 2020.

As of September 30, 2020, a total of 946,767 RSUs and PSUs were unvested and outstanding, which results in unrecognized stock-based compensation of $ 8,586 to be recognized as stock-based compensation expense over the remaining weighted-average vesting period of 1.41 years.

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

Weighted Average

Non-vested and outstanding balance at December 31, 2019

Unvested and outstanding balance as of December 31, 2019

Changes during the period:

Non-vested and outstanding balance at June 30, 2020

PSUs forfeited

Unvested and outstanding balance as of September 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”).

11 unchanged sentences

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):

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Stock-based compensation expense was classified in the condensed consolidated statements of operations as follows for the three and nine months ended September 30, 2020 and 2019:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Cost of product revenues

1 unchanged sentence

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:

Reserved Shares —As of September 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:

September 30,

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 June 30, 2020 and 2019.

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

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

9 unchanged sentences

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

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 June 30, 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 and six months ended June 30, 2020 and 2019.

As of September 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.

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, June 2018 and July 2020, 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.

After 2016 and until the first commercial sale of product, which occurred in January 2019, the minimum annual payment was $ 38 .

Upon the first commercial sale of INVELTYS, the annual minimum payment increased to $ 0.1 million.

Upon the first commercial sale of INVELTYS, the annual minimum payment increased to $ 112 .

The Company is obligated to pay JHU low single-digit running royalties based upon a percentage of net sales of the licensed products, which is applied to the annual minimum payment.

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

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.

During the three months ended September 30, 2020 and 2019, the Company paid JHU $ 8 and $ 34 , respectively, in royalty payments associated with the sale of INVELTYS.

During the nine months ended September 30, 2020 and 2019, the Company paid JHU $ 44 and $ 334 , respectively, in royalty payments associated with the sale of INVELTYS.

The Company recorded other expenses related to the JHU agreement of $ 44 and $ 116 for the three months ended September 30, 2020 and 2019, respectively.

The Company recorded other expenses related to the JHU agreement of $ 121 and $ 197 for the nine months ended September 30, 2020 and 2019, respectively.

The Company is obligated to pay JHU a $ 150 milestone payment within 60 days of the first commercial sale of EYSUVIS in the United States.

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.

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

The commercial supply agreement contains annual minimum purchase requirements, which increased upon FDA approval of EYSUVIS on October 26, 2020.

The Company has the following minimum purchase obligations for INVELTYS and EYSUVIS:

Years Ending December 31,

2020 (remaining three months)

Total minimum purchase commitments

KALA PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

SUBSEQUENT EVENTS

The Company has evaluated all events and transactions that occurred after the balance sheet date through the date of this filing.

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

On October 26, 2020, the FDA approved the Company’s New Drug Application for EYSUVIS (loteprednol etabonate ophthalmic suspension) 0.25% for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease.

Refer to Note 14, “Commitments and Contingencies” for additional commitments identified as a result of the FDA approval of EYSUVIS.

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