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Item 9A. Controls and Procedures

2021-02-25 compared with 2020-02-12 · 545 added, 446 removed, 434 unchanged (70% of the section changed)

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Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2020.

The term “disclosure controls and procedures,”

as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures as of December 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s annual report on internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company.

Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

● Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;

● Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

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Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020.

In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013).

Based on that assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was effective.

As an “emerging growth company”, as defined in the JOBS Act, our independent registered public accounting firm is not required to issue an attestation report on the internal control over financial reporting.

Changes in internal control over financial reporting

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The information required by this Item is incorporated by reference from the information that will be contained in our Proxy Statement for our 2021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the end of the fiscal year to which this Annual Report on Form 10-K relates pursuant to General Instruction G(3) of Form 10-K.

Principal Accounting Fees and Services

Principal Accountant Fees and Services

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Consolidated Balance Sheets as of December 31, 2020 and 2019

Consolidated Statements of Operations for the years ended December 31, 2019 and 2018

Consolidated Statements of Stockholders’

Equity for the years ended December 31, 2019 and 2018

Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2020 and 2019

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019

Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019

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No financial statement schedules have been filed as part of this Annual Report on Form 10-K because they are not applicable, not required or because the information is otherwise included in our financial statements or notes thereto.

(3) Exhibits .

The following is a list of exhibits filed or furnished as part of this Annual Report on Form 10-K.

Description of Exhibit

Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8‑K (File No.

Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s current report on Form 8-K (File No.

001-38150) filed on July 25, 2017)

Amended and Restated By‑laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s current report on Form 8‑K (File No.

Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s current report on Form 8-K (File No.

001-38150) filed on July 25, 2017)

Specimen Stock Certificate evidencing the shares of common stock (incorporated by reference to Exhibit 4.1 to the Registrant’s registration statement on Form S‑1/A (File No.

Specimen Stock Certificate evidencing the shares of common stock (incorporated by reference to Exhibit 4.1 to the Registrant’s registration statement on Form S-1/A (File No.

333-218936) filed on July 10, 2017)

Third Amended and Restated Registration Rights Agreement of the Registrant, as amended (incorporated by reference to Exhibit 10.1 to the Registrant’s registration statement on Form S‑1 (File No.

333‑218936) filed on June 23, 2017)

Description of the Registrant’s Securities Registered under Section 12 of the Exchange Act

2009 Employee, Director and Consultant Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s registration statement on Form S‑1 (File No.

Third Amended and Restated Registration Rights Agreement of the Registrant dated April 4, 2016, as amended by Amendment No.

1 dated December 13, 2017, of the Registrant

Description of the Registrant’s Securities Registered under Section 12 of the Exchange Act (incorporated by reference to Exhibit 4.3 of the Registrant’s annual report on Form 10-K (File No.

001-38150) filed on February 12, 2020)

2009 Employee, Director and Consultant Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s registration statement on Form S-1 (File No.

333-218936) filed on June 23, 2017)

Form of Stock Option Agreement under the 2009 Employee, Director and Consultant Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s registration statement on Form S‑1 (File No.

333-218936) filed on June 23, 2017)

Amended and Restated 2017 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q (File No.

001-38150) filed on May 9, 2019)

2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s registration statement on Form S‑1/A (File No.

333‑218936) filed on July 10, 2017)

Form of Incentive Stock Option Agreement under 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s registration statement on Form S‑1/A (File No.

333‑218936) filed on July 10, 2017)

Description of Exhibit

Forms of Non‑Qualified Option Agreement under 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s registration statement on Form S‑1/A (File No.

2017 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K (File No.

001-38150) filed on June 26, 2020)

Form of Incentive Stock Option Agreement under 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s registration statement on Form S-1/A (File No.

333-218936) filed on July 10, 2017)

Exclusive License Agreement, dated November 10, 2009, by and between the Registrant and The Johns Hopkins University, as amended by the First Amendment dated November 19, 2012, the Second Amendment dated May 23, 2014 and the Third Amendment dated August 26, 2014 (incorporated by reference to Exhibit 10.7 to the Registrant’s registration statement on Form S‑1 (File No.

Forms of Non-Qualified Option Agreement under 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s registration statement on Form S-1/A (File No.

333-218936) filed on July 10, 2017)

Form of Non-Employee Director Restricted Stock Unit Award under 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s quarterly report on Form 10-Q (File No.

001-38150) filed on May 7, 2020)

Form of Non-Employee Director Deferred Restricted Stock Unit Award under 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s quarterly report on Form 10-Q (File No.

001-38150) filed on May 7, 2020)

Form of Employee Restricted Stock Unit Award under 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s quarterly report on Form 10-Q (File No.

001-38150) filed on August 6, 2020)

Form of Inducement Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q (File No.

001-38150) filed on November 8, 2018)

333-218936) filed on June 23, 2017)

Settlement and License Agreement, dated October 24, 2014, by and between the Registrant and GrayBug, LLC (incorporated by reference to Exhibit 10.8 to the Registrant’s registration statement on Form S‑1 (File No.

Fourth Amendment to Exclusive License Agreement, dated June 22, 2018, by and between the Johns Hopkins University and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q (File No.

001-38150) filed on August 9, 2018)

Fifth Amendment to Exclusive License Agreement, date July 6, 2020, by and between the Johns Hopkins University and the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant’s quarterly report on Form 10-Q (File No.

001-38150) filed on August 6, 2020)

Exclusive License Agreement, effective as of May 1, 2017, by and between the Registrant and The Johns Hopkins University (incorporated by reference to Exhibit 10.15 to the Registrant’s registration statement on Form S-1 (File No.

333-218936) filed on June 23, 2017)

Assignment, dated April 26, 2017, by and between the Registrant and The Johns Hopkins University (incorporated by reference to Exhibit 10.16 to the Registrant’s registration statement on Form S-1 (File No.

333-218936) filed on June 23, 2017)

Assignment, dated April 26, 2017, by and between the Registrant and The Johns Hopkins University (incorporated by reference to Exhibit 10.17 to the Registrant’s registration statement on Form S-1 (File No.

333-218936) filed on June 23, 2017)

Inducement Stock Option Agreement by and between the Registrant and Eric L.

Trachtenberg (incorporated by reference to Exhibit 10.2 to the Registrant’s quarterly report on Form 10-Q (File No.

001-38150) filed on August 9, 2018)

Letter Agreement, dated March 25, 2018, by and between the Registrant and Eric L.

Trachtenberg (incorporated by reference to Exhibit 10.3 to the Registrant’s quarterly report on Form 10-Q (File No.

001-38150) filed on August 9, 2018)

Amended and Restated Letter Agreement, dated September 10, 2015, by and between the Registrant and Mark Iwicki, as amended by the First Amendment, dated September 28, 2017 (incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly report on Form 10‑Q (File No.

001-38150) filed on November 7, 2017)

Letter Agreement, dated November 6, 2017, by and between the Registrant and Todd Bazemore (incorporated by reference to Exhibit 10.12 of the Registrant’s annual report on Form 10-K (File No.

Description of Exhibit

Letter Agreement, dated November 6, 2017, by and between the Registrant and Todd Bazemore (incorporated by reference to Exhibit 10.12 of the Registrant’s annual report on Form 10-K (File No.

001-38150) filed on April 2, 2018)

Amended and Restated Letter Agreement, dated May 10, 2016, by and between the Registrant and Kim Brazzell (incorporated by reference to Exhibit 10.13 to the Registrant’s registration statement on Form S‑1 (File No.

333-218936) filed on June 23, 2017)

Form of Indemnification Agreement between the Registrant and each of its Executive Officers and Directors (incorporated by reference to Exhibit 10.14 to the Registrant’s registration statement on Form S‑1/A (File No.

Form of Amendment to Offer Letters (incorporated by reference to Exhibit 10.30 to the Registrant’s annual report on Form 10-K (File No.

001-38150) filed on March 12, 2019)

333-218936) filed on July 10, 2017)

10.15†

333‑218936) filed on June 23, 2017)

10.16†

333‑218936) filed on June 23, 2017)

10.17†

333‑218936) filed on June 23, 2017)

10.18†

Amended and Restated Master Services Agreement, dated October 4, 2017, by and between the Registrant and Alliance Contract Pharma, LLC (incorporated by reference to Exhibit 10.18 of the Registrant’s annual report on Form 10-K (File No.

Amended and Restated Master Services Agreement, dated October 4, 2017, by and between the Registrant and Altasciences company (formerly Alliance Contract Pharma, LLC) (incorporated by reference to Exhibit 10.18 of the Registrant’s annual report on Form 10-K (File No.

001-38150) filed on April 2, 2018)

10.19†

Commercial Supply Agreement, dated June 27, 2016, by and between the Registrant and Catalent Pharma Solutions, LLC (incorporated by reference to Exhibit 10.19 to the Registrant’s registration statement on Form S‑1 (File No.

Amendment No.

1 to Amended and Restated Master Services Agreement, dated August 25, 2020 by and between the Registrant and Altasciences company (formerly Alliance Contract Pharma, LLC)

Manufacturing and Supply Agreement, dated January 10, 2017, by and between the Registrant and Chemo Iberica SA (incorporated by reference to Exhibit 10.20 to the Registrant’s registration statement on Form S-1 (File No.

333-218936) filed on June 23, 2017)

10.20†

333-218936) filed on June 23, 2017)

10.21†

Amendment No.

1 to Commercial Supply Agreement, dated February 16, 2018, by and between the Registrant and Catalent Pharma Solutions, LLC (incorporated by reference to Exhibit 10.21 of the Registrant’s annual report on Form 10-K (File No.

001-38150) filed on April 2, 2018)

Description of Exhibit

Lease, dated as of February 28, 2018, by and between the Registrant and 480 Arsenal Group LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K filed on March 12, 2018)

10.23†

001‑38150) filed on August 9, 2018)

Credit Agreement, dated as of October 1, 2018, among the Registrant, as the Borrower, certain subsidiaries of the Borrower, as the Guarantors, Athyrium Opportunities III Acquisition LP, as the Administrative Agent, and the lenders (incorporated by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K (File No.

Amendment No.

2 to Commercial Supply Agreement, dated March 27, 2020, by and between the Registrant and Catalent Pharma Solutions, LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q (File No.

001-38150) filed on May 7, 2020)

Amendment No.

3 to Commercial Supply Agreement, dated December 11, 2020, by and between the Registrant and Catalent Pharma Solutions, LLC

001-38150) filed on October 2, 2018)

Security Agreement, dated October 1, 2018, by and among the Registrant and Athyrium Opportunities III Acquisition LP (incorporated by reference to Exhibit 10.2 to the Registrant’s current report on Form 8-K (File No.

001-38150) filed on October 2, 2018)

Pledge Agreement, dated October 1, 2018, by and among the Registrant and Athyrium Opportunities III Acquisition LP (incorporated by reference to Exhibit 10.3 to the Registrant’s current report on Form 8-K (File No.

001-38150) filed on October 2, 2018)

Common Stock Purchase Warrant, dated October 1, 2018, by and among the Registrant and Athyrium Opportunities III Acquisition LP (incorporated by reference to Exhibit 10.4 to the Registrant’s current report on Form 8-K (File No.

001-38150) filed on October 2, 2018)

Form of Inducement Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly report on Form 10-Q (File No.

001‑38150) filed on November 8, 2018)

Sales Agreement, dated August 9, 2018, by and between the Registrant and Jefferies LLC (incorporated by reference to Exhibit 1.2 to the Registrant’s registration statement on Form S-3 (File No.

333‑226748) filed on August 9, 2018)

Form of Amendment to Offer Letters (incorporated by reference to Exhibit 10.30 to the Registrant’s annual report on Form 10-K (File No.

001-38150) filed on March 12, 2019)

Amended and Restated Sales Agreement, dated May 7, 2020, by and between the Registrant and Jefferies LLC (incorporated by reference to Exhibit 1.2 to the Registrant’s Registration Statement on Form S-3 (File No.

333-238087) filed on May 7, 2020)

Subsidiaries of the Registrant

Consent of Deloitte & Touche LLP

Description of Exhibit

Rule 13a-14(a) Certification of Principal Executive Officer

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Certification of Principal Financial Officer pursuant to 18 U.S.C.

XBRL Instance Document.

XBRL Taxonomy Extension Schema Document.

XBRL Taxonomy Extension Calculation Linkbase Document.

XBRL Taxonomy Extension Definition Linkbase Document.

XBRL Taxonomy Extension Label Linkbase Document.

XBRL Taxonomy Extension Presentation Linkbase Document.

Inline XBRL Instance Document.

Inline XBRL Taxonomy Extension Schema Document.

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

Inline XBRL Taxonomy Extension Definition Linkbase Document.

Inline XBRL Taxonomy Extension Label Linkbase Document.

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)

* Filed herewith.

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Confidential materials omitted and filed separately with the Securities and Exchange Commission.

# Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K.

+ Management contract or compensatory plan or arrangement filed in response to Item 15(a)(3) of the Instructions to the Annual Report on Form 10-K.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Kala Pharmaceuticals, Inc.

To the shareholders and the Board of Directors of Kala Pharmaceuticals, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Kala Pharmaceuticals, Inc.

and its subsidiary (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’

equity, and cash flows for each of the two years in the period ended December 31, 2019 and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

and subsidiary (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows, for the years then ended, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

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The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

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We have served as the Company's auditor since 2013 .

PART I –

FINANCIAL INFORMATION

PART I – FINANCIAL INFORMATION

Consolidated Financial Statements.

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Current assets:

Cash and cash equivalents

Short-term investments

Accounts receivable, net

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Right-of-use assets

Restricted cash

Restricted cash and other long-term assets

Liabilities and Stockholders' Equity

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Long-term liabilities:

Long-term lease liabilities - less current portion

Long-term lease liabilities

Long-term debt

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Additional paid-in capital

Accumulated other comprehensive income

Accumulated deficit

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KALA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share amounts)

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Other income (expense):

Interest income

Interest expense

Loss on extinguishment of debt

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 on investments

Total other comprehensive income

Total comprehensive loss

The accompanying notes are an integral part of these consolidated financial statements.

KALA PHARMACEUTICALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share amounts)

$0.001 Par Value

Other Comprehensive

Stockholders'

Balance as of January 1, 2018

Common stock offering, net of issuance cost and underwriting fees of $5.0 million

At the market offering, net of sales agent commission and fees of $0.1 million

Issuance of equity classified warrants, net of issuance cost

Balance as of December 31, 2018

At the market offering, net of offering costs of $ 262

Exercise of stock options

Issuance under employee stock purchase plan

Stock-based compensation expense

Balance as of December 31, 2019

At the market offering, net of sales agent commission and fees of $0.3 million

At the market offering, net of offering costs $ 1,026

Exercise of stock options

Common stock offering, net of offering costs of $ 8,475

Issuance under employee stock purchase plan

Stock-based compensation expense

Warrant exercises

Change in fair value of investments

Balance as of December 31, 2020

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

Depreciation and amortization

Non-cash operating lease cost

Loss on extinguishment of debt

Amortization of debt discount and other non-cash interest

Stock-based compensation

Amortization of discount on available-for-sale securities

Change in operating assets and liabilities:

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Cash flows from investing activities:

Purchases of property and equipment

Purchases of property and equipment and other assets

Purchases of short-term investments

Proceeds from sales or maturities of short-term investments

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from common stock offerings, net of underwriters' discounts and offering cost

Proceeds from venture debt, net of debt issuance costs of $0 and $50

Proceeds from issuance of debt and warrants, net of debt issuance costs of $0 and $3,073

Payment of principal and prepayment penalty on venture debt

Proceeds from common stock offerings, net of offering costs

Payment of principal on finance lease

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Net cash provided by financing activities

Net 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:

Cash and restricted cash at end of period

Less restricted cash

Cash at end of period

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

Reconciliation of cash, cash equivalents and restricted cash:

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

Less restricted cash (Notes 9 and 10)

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 accrued expenses

Purchases of property and equipment in accounts payable

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KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENT S

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Nature of business

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 temporary relief 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 regarding this NDA.

The FDA indicated that efficacy data from an additional clinical trial will 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 the third quarter of 2018, which the Company expects will serve as the basis for its response to the CRL.

The Company is targeting topline data for STRIDE 3 in the first quarter of 2020 and resubmission of the NDA in the second quarter of 2020.

The Company is evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosing regimens for the temporary relief 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 with the goal of eliminating the risk of IOP increase and cataract formation.

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

The Company is currently engaged in 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 a product for the first time.

Nature of Business — Kala Pharmaceuticals, Inc.

(the “Company”) was incorporated on July 7, 2009, and is a biopharmaceutical company focused on the discovery, development and commercialization of innovative therapies for diseases of the eye.

The Company has applied its AMPPLIFY ® mucus-penetrating particle (“MPP”) Drug Delivery Technology to loteprednol etabonate (“LE”), a corticosteroid designed for ocular applications, resulting in the U.S.

Food and Drug Administration’s (the “FDA”) approval of EYSUVIS 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 and began shipping its second commercial product, EYSUVIS, to wholesalers in the United States in late December 2020 with the full promotional launch commencing in early January 2021.

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

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

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

The Company’s success is dependent upon its ability to raise additional capital in order to fund ongoing and future research and development, obtain regulatory approval of its product candidates, successfully commercialize its products, generate revenue, meet its obligations, and, ultimately, attain profitable operations.

October 2018 and Subsequent 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 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.

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

In 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 (the “Overallotment Shares”).

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

The Company is also progressing its pipeline of proprietary preclinical development programs targeted to address front and back of the eye diseases.

These preclinical development programs, all of which are new chemical entities, include its receptor Tyrosine Kinase Inhibitor program, that is designed to inhibit the vascular endothelial growth factor pathway, for the treatment of retinal diseases, including wet age-related macular degeneration;

its selective glucocorticoid receptor modulators, which are a novel class of therapies designed to modify the downstream activity of the receptors to exhibit the anti-inflammatory and immunomodulatory properties of the corticosteroid class of therapies without their associated side effects;

and its novel surface targeting steroid designed to target the ocular surface and thus have the potential to have fewer side effects compared to traditional topical steroids.

The Company owns all intellectual property and worldwide rights to these pipeline preclinical development programs.

Recent 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 could initially 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.

On October 5, 2018, the Company sold 7,500,000 shares of the Company’s common stock (the “Shares”) in an underwritten offering pursuant to the 2018 Shelf Registration at a public offering price of $ 8.25 per share, before 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 and Overallotment Shares sold by the Company in the offering was 8,625,000 shares, resulting in net proceeds to the Company, after underwriting discounts and offering expenses, of approximately $66.1 million.

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.

In the period beginning January 1, 2020 through the issuance date of these consolidated financial statements, the Company issued and sold an additional 583,411 shares of its common stock under the ATM Offering, resulting in net proceeds to the Company of approximately $2.2 million.

As of December 31, 2019, there was approximately $36.4 million shares of common stock remaining under the ATM Offering that the Company may issue and sell in the future and, excluding the funds designated to be offered under the ATM Offering, there was approximately $128.8 million of securities available to be issued under the Shelf Registration .

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

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

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

In connection with the filing of the Shelf Registration, the Company entered into a sales agreement with Jefferies, LLC (the “2018 Sales Agreement”) pursuant to which the Company may 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, 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 $ 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 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.

On March 11, 2020, the Company sold 16,000,000 shares of its common stock in an underwritten offering (the “2020 Offering”), pursuant to the 2018 Shelf Registration, at a public offering price of $ 7.89 per share, resulting in net proceeds of $ 118,207 , after underwriting discounts, commissions, and offering expenses.

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, resulting in net proceeds to the Company of $ 7,216 , after underwriting discounts, commissions, and offering expenses.

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 $ 125,423 .

Under the 2018 Shelf Registration, the Company has issued an aggregate of 30,549,976 shares of common stock, including under the ATM Offering, resulting in aggregate gross proceeds of $ 231,666 .

There was $ 18,334 of securities available to be issued under the 2018 Shelf Registration as of December 31, 2020.

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 $ 350,000 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 it 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.

During the fourth quarter of 2020, the Company issued an aggregate of 2,821,059 shares of its common stock under the ATM Offering, resulting in net proceeds of $ 20,612 .

As of December 31, 2020, there was approximately $ 53,751 of shares of common stock remaining under the ATM Offering that the Company may issue and sell in the future and, excluding the funds designated to be offered under its ATM Offering, there was approximately $ 275,000 of securities available to be issued under the 2020 Shelf Registration.

In January 2021, the Company issued and sold an additional 2,552,457 shares of its common stock under its ATM Offering, resulting in net proceeds of $ 18,226 .

As of the date of this Annual Report on Form 10-K, there was $ 35,000 of shares of common stock remaining under the ATM Offering that we may issue and sell in the future.

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

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

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

The Company may draw down the Athyrium 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.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

COVID-19 – The ongoing novel coronavirus pandemic, commonly referred to as COVID-19, which began in December 2019 and was declared a global pandemic by the World Health Organization on March 11, 2020, has spread worldwide, causing federal, state and local governments to implement measures to slow the spread of the pandemic through quarantines, strict travel restrictions and bans, heightened border scrutiny and other measures.

In order to safeguard the health of its employees, the Company is following, and will continue to follow, recommendations from the U.S.

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

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

In addition, the Company previously suspended its sales force from substantially all in-person interactions with physicians and customers and was limited to conducting educational and promotional activities virtually.

However, the Company’s sales force has resumed substantially all in-person interactions in the field.

If it suspends all or some in-person interactions with physicians and customers in the future, or to the extent physicians and customers limit in-person interactions, the Company is limited to conducting educational and promotional activities virtually, which has hampered, and may continue to hamper, its ability to market INVELTYS.

The effects of COVID-19 may also disrupt the full promotional launch and commercialization of EYSUVIS.

In addition, government restrictions have at times led to moratoria on elective ocular surgeries in many jurisdictions, which has significantly reduced, and may in the future continue to significantly reduce, the demand for INVELTYS, which is indicated for the treatment of post-operative inflammation and pain following ocular surgery.

The extent of the impact of COVID-19 on the Company’s commercialization efforts of EYSUVIS and INVELTYS and its operational and financial performance will depend on certain developments, including the length and severity of this pandemic 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 consolidated results of operations or financial position.

Summary of Significant Accounting Policies

Principles of consolidation—

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

Principles of Consolidation— The accompanying consolidated financial statements include the accounts of Kala Pharmaceuticals, Inc.

and its wholly owned subsidiary, Kala Pharmaceuticals Security Corporation, which is a Massachusetts subsidiary created to buy, sell and hold securities.

All intercompany transactions and balances have been eliminated.

Basis of Presentation —The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

The Company has generated only limited revenues to date from product sales and has incurred recurring losses and negative cash flows from operations, including a net loss of $94.3 million and $66.7 million, for the years ended December 31, 2019 and 2018, respectively, and used cash in operations of $92.7 million and $54.1 million, in the years ended December 31, 2019 and 2018, respectively.

The Company has financed its operations to date primarily through proceeds from its initial public offering of common stock (“IPO”), private placements of preferred stock, convertible debt financings, borrowings under credit facilities, warrants, public offerings of common stock and sales of its common stock under its ATM Offering facility.

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 for the next several years.

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

The Company also expects that its existing cash on hand as of December 31, 2019, together with anticipated net revenue from sales of INVELTYS, will enable it to fund its planned operations, lease and debt service obligations, and capital expenditure requirements for at least 12 months from the date of these consolidated financial statements.

This evaluation is based on the Company’s current operating plan which include projected net revenue from sales of INVELTYS.

If the Company does not achieve its projected net revenue, it believes it has the ability to manage spending under its operating plan in order to fund operations for at least 12 months from the date of these consolidated financial statements.

This evaluation is based on relevant conditions and events that are currently known or reasonably knowable.

The Company has generated only limited revenues to date from product sales and has incurred recurring losses and negative cash flows from operations, including a net loss of $ 104,327 and $ 94,347 , for the years ended December 31, 2020 and 2019, respectively, and used cash in operations of $ 90,694 and $ 92,720 , in the years ended December 31, 2020 and 2019, respectively.

The Company has financed its operations to date primarily through proceeds from its initial public offering of common stock (“IPO”), follow-on public offerings of common stock and sales of its common stock under its ATM Offering facility, private placements of preferred stock, borrowings under credit facilities, convertible debt financings and warrants.

The Company expects to continue to incur significant expenses and operating losses.

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

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The Company expects that its cash, cash equivalents and short-term investments as of December 31, 2020, together with anticipated net revenue from sales of INVELTYS, will enable it to fund its operating expenses, debt service obligations and capital expenditure requirements for at least 12 months from the date these 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 consolidated financial statements are issued.

As a result, the Company could deplete its available capital resources sooner than it currently expects.

The Company has based these estimates on assumptions that may prove to be wrong, and the Company’s operating projections including its projected net revenue, may change as a result of many factors currently unknown.

Reclassifications —

Certain reclassifications, primarily related to gross deferred tax assets and liabilities, have been made to prior period amounts to conform to the current period financial statement presentation.

Use of Estimates —

The preparation of 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.

Use of Estimates— The preparation of 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 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.

Estimates and assumptions relied upon in preparing these consolidated financial statements relate to, but are not limited to, revenue recognition, inventory, the present value of lease liabilities and the corresponding right-of-use assets, the fair value of warrants, stock-based compensation, accrued expenses and the recoverability of the Company’s net deferred tax assets and related valuation allowance.

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

Product Revenues, Net —

The Company sells INVELTYS, its topical twice-a-day ocular steroid for the treatment of inflammation and pain following ocular surgery, 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 our product.

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

Product Revenues, Net — The Company sells EYSUVIS for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease, and INVELTYS, its topical twice-a-day ocular steroid for the treatment of post-operative inflammation and pain following ocular surgery, primarily to wholesalers in the United States (“Customers”).

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

In addition to agreements with Customers, the Company enters into arrangements with third-party payors that provide for government-mandated and/or privately-negotiated rebates, chargebacks and discounts for the purchase of its products.

The Company accounts for revenue in accordance with Accounting Standards Codification (“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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Performance Obligations

The Company determined that performance obligations are satisfied and revenue is recognized when a customer takes control of the Company’s product, which occurs at a point in time.

The Company determined that performance obligations are satisfied and revenue is recognized when a customer takes control of the Company’s products, which occurs at a point in time.

This generally occurs upon delivery of the products to customers, at which point the Company recognizes revenue and records accounts receivable.

Payment is typically received 70 to 90 days after satisfaction of the Company’s performance obligations.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Transaction Price and Variable Consideration

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer (“transaction price”).

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products to a customer (“transaction price”).

The transaction price for product sales includes variable consideration related to chargebacks, rebates, sales incentives and allowances, distribution service fees, and returns.

The Company will estimate the amount of variable consideration that should be included in the transaction price.

These estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as the Company’s historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.

These provisions reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract.

The amount of variable consideration that is included in the transaction price may be constrained and is included in net sales only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period.

In general, performance obligations do not include any estimated amounts of variable consideration that are constrained.

Actual amounts of consideration ultimately received may differ from the Company’s estimates.

If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.

The following table summarizes activity in each of the Company’s product revenue provision and allowance categories for the year ended December 31, 2019:

Actual amounts of consideration ultimately received may differ from the Company’s estimates.

The following table summarizes activity in each of the Company’s product revenue provision and allowance categories for the years ended December 31, 2020 and 2019:

Trade Discounts,

3 unchanged sentences

Incentives (3)

Balance at January 1, 2019

Balance as of January 1, 2019

Provision related to current period sales

Credit/payments made

Balance at December 31, 2019

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.

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.

As of December 31, 2019, the Company did not have any transaction price allocated to remaining performance obligations and any costs to obtain contracts with customers, including pre-contract costs and set up costs, were immaterial.

Accounts Receivable, net —

Accounts receivable are reported on the 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, and chargebacks from accounts receivable.

Balance as of December 31, 2019

Provision related to current period sales

Changes in estimate related to prior period sales

Credit/payments made

Balance as of December 31, 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 on the Company’s 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 on the Company’s consolidated balance sheets.

(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 on the Company’s consolidated balance sheets.

As of December 31, 2020 and 2019, the Company did not have any transaction price allocated to remaining performance obligations and any costs to obtain contracts with customers, including pre-contract costs and set up costs, were immaterial.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

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

The Company evaluates the collectability of accounts receivable on a regular basis, by reviewing the financial condition and payment history of Customers, an overall review of collections experience on other accounts, and economic factors or events expected to affect future collections experience.

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 December 31, 2019.

The Company recorded an allowance of approximately $1.8 million for expected sales discounts, related to prompt pay discounts and contractual fee for service arrangements, to wholesalers and distributors as of December 31, 2019.

Cost of Product Revenues —

The 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.

The Company expenses cost of product revenues related to product candidates as research and development expenses prior to regulatory approval in the respective territory.

The Company received U.S.

regulatory approval for INVELTYS on August 22, 2018.

Cash and Concentration of Credit Risk —Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and accounts receivable.

Periodically, the Company maintains deposits in accredited financial institutions in excess of federally insured limits.

The Company deposits its cash in financial institutions that it believes have high credit quality and has not experienced any losses on such accounts and does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

Three Customers comprised 10% or more of the Company’s accounts receivable balance as of December 31, 2019.

These Customers comprised 41%, 35% and 23% of the accounts receivable balance, respectively, as of December 31, 2019.

To date, the Company has not experienced any losses with respect to the collection of its

accounts receivable and believes that its entire accounts receivable balances is collectible as of December 31, 2019.

The same three Customers comprised 10% or more of the Company’s revenue during the year ended December 31, 2019.

These Customers comprised 39%, 33% and 26% of revenue, respectively.

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

The Company recorded an allowance of $ 1,157 and $ 1,783 for expected sales discounts, related to prompt pay discounts and other discounts, contractual fee for service arrangements and chargebacks, to wholesalers and distributors as of December 31, 2020 and December 31, 2019, respectively.

Cost of Product Revenues— The 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 as well as excess or obsolete inventory, and other manufacturing overhead costs.

The Company expensed cost of product revenues related to INVELTYS as research and development expenses prior to regulatory approval and expensed cost of product revenues related to EYSUVIS as research and development expenses prior to the determination that FDA approval was probable and before the future economic benefit of the drug was expected to be realized.

Cash and Concentration of Credit Risk —Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable.

Periodically, the Company maintains cash, cash equivalents, short-term investments in accredited financial institutions in excess of federally insured limits.

The Company deposits its cash, cash equivalents, short-term investments in financial institutions that it believes have high credit quality and has not experienced any losses on such accounts and does not believe it is exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

Three Customers comprised 10% or more of the Company’s accounts receivable balance as of December 31, 2020 and 2019.

These Customers comprised 39 %, 33 % and 25 % of the accounts receivable balance, respectively, as of December 31, 2020 and 41 %, 35 % and 23 % of the accounts receivable balance, respectively, as of December 31, 2019.

To date, the Company has not experienced any losses with respect to the collection of its accounts receivable and believes that its entire accounts receivable balances is collectible as of December 31, 2020.

The same three Customers comprised 10% or more of the Company’s revenue during the years ended December 31, 2020 and 2019.

These Customers comprised 40 %, 29 % and 28 % of revenue, respectively, during the year ended December 31, 2020 and 39 %, 33 % and 26 % of revenue, respectively, during the year ended December 31, 2019.

The Company has no financial instruments with off-balance sheet risk of loss.

Restricted Cash —As of December 31, 2019 and 2018, the Company had restricted cash of $12.6 million and $12.2 million, respectively, which represents cash held to satisfy its financial covenant (See Note 8) and serve as collateral for the Company’s vehicle fleet lease, credit cards and its facility lease in Watertown, Massachusetts.

This cash is classified as a non-current asset in the accompanying consolidated balance sheets.

Inventory —

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

Cash Equivalents —The Company considers all short-term, highly liquid investments with original maturities of 90 days or less at acquisition date to be cash equivalents.

Restricted Cash —As of December 31, 2020 and 2019, the Company had restricted cash of $ 12,492 and $ 12,582 , respectively, which represents cash held to satisfy its financial covenant (See Note 10) and serve as collateral for the Company’s vehicle fleet lease, credit cards and its facility lease in Watertown, Massachusetts (See Note 9).

This cash is classified as a non-current asset and included within Restricted cash and other long-term assets in the accompanying consolidated balance sheets.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 ASC Topic 320.

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

Investments are classified as long-term assets on the 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 consolidated statements of operations and comprehensive loss and in accumulated other comprehensive income or loss on the 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.

The Company did not record any such impairments during the year ended December 31, 2020.

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

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

Capitalization of costs as inventory begins when the product has received regulatory approval.

The Company expenses inventory costs related to product candidates as research and development expenses prior to regulatory approval in the respective territory, even if this inventory may later be sold.

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

regulatory approval on August 22, 2018.

Inventory produced that will be used in a promotional sample program is expensed to selling, general and administrative expense when it is selected for use and shipped as part of a marketing program.

Long-term inventory includes inventory with an anticipated sale or consumption beyond one year based on the Company’s forecasted expectations.

Leases —At the inception of an arrangement the Company determines whether the arrangement is or contains a lease.

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 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-launch 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 when the Company believed regulatory approval and subsequent commercialization of the product candidate was probable and expected the future economic benefit of the drug to be realized, which was concluded to be 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 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 CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Leases —At the inception of an arrangement the Company determines whether the arrangement is or contains a lease.

Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities.

10 unchanged sentences

Rather, they would account for each lease component and the related non-lease component together as a single component.

The Company’s facilities operating leases have lease and non-lease components which the Company has elected to use the practical expedient and account for each lease component and related non-lease component as one single component.

The lease component results in a right-of-use asset being recorded on the balance sheet and amortized as lease expense on a straight-line basis to the statements of operations.

Property and Equipment, net —Property and equipment are recorded at cost.

The lease component results in a right-of-use asset being recorded on the consolidated balance sheets and amortized as lease expense on a straight-line basis to the consolidated statements of operations and comprehensive loss.

Property and Equipment, net —Property and equipment are recorded at cost.

Depreciation is provided using the straight-line method over the estimated useful lives of the related assets.

Depreciation expense is included in operations.

Depreciation expense is included in loss from operations on the consolidated statements of operations and comprehensive loss.

Laboratory equipment and office and computer equipment is depreciated over three to five years .

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maintenance and repairs, which do not improve or extend the life of the respective assets, are expensed as incurred.

Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in loss from operations.

Patent Costs —Costs to secure and defend patents are expensed as incurred and are classified as selling, general and administrative expenses in the Company’s consolidated statements of operations.

Impairment of Long‑Lived Assets —Long‑lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in loss from operations on the consolidated statements of operations and comprehensive loss.

Impairment of Long-Lived Assets —Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

When such events occur, the Company compares the carrying amounts of the assets to their undiscounted expected future cash flows.

If the undiscounted cash flows are insufficient to recover the carrying value, the assets are recorded at the lesser of the carrying value or fair value.

For the years ended December 31, 2019 and 2018, no impairments were recorded.

Segment Information —Operating segments are identified as components of an enterprise about which separate discrete financial information is made available for evaluation by the chief operating decision maker (“CODM”) in making decisions regarding resource allocation and assessing performance.

The CODM is the Company’s Chief Executive Officer.

For the years ended December 31, 2020 and 2019, no impairment charges were recorded.

The CODM is the Company’s Chief Executive Officer.

The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions.

The Company’s singular focus is on the development and commercialization of therapeutics using its proprietary AMPPLIFY technology.

All of the Company’s tangible assets are held in the United States.

To date, all of the Company’s revenue has been generated in the United States.

Research and Development Costs —Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits for full‑time research and development employees, an allocation of facilities expenses, overhead expenses, payments to universities under the Company’s license agreements and other outside expenses.

The Company’s singular focus is on the development and commercialization of innovative therapies for diseases of the eye.

All of the Company’s tangible assets are held in the United States.

To date, all of the Company’s revenue has been generated in the United States.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Research and Development Costs —Research and development expenses consist of expenses incurred in performing research and development activities, including compensation and benefits for full-time research and development employees, an allocation of facilities expenses, overhead expenses and other outside expenses.

Research and development costs are expensed as incurred.

The Company expenses costs relating to the production of inventory for its product candidates as research and development expenses within its consolidated statements of operations and comprehensive loss in the period incurred, until the point the Company believes regulatory approval and subsequent commercialization of the product candidate is probable and it expects the future economic benefit from sales of the drug to be realized.

Research and development costs that are paid in advance of performance, including nonrefundable prepayments for goods or services, are deferred and capitalized as a prepaid expense.

Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.

Accrued Expenses —

The Company accrues for variable consideration related to rebates, sales incentives and allowances, distribution service fees, and returns.

Accrued Expenses — The Company accrues for variable consideration related to rebates, sales incentives and allowances, and returns.

Such estimates are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of the accrued expense.

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Payments under some of these contracts depend on clinical trial milestones.

There may be instances in which payments made to the Company’s vendors will exceed the level of services provided and result in a prepayment of expenses.

In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period.

If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual or prepaid expense accordingly.

Stock‑Based Compensation —The Company accounts for all stock‑based awards granted as compensation expense at fair value.

The Company generally issues stock option awards with the measurement date for awards as the date of grant.

Stock‑based compensation costs are recognized as expense over the employees’

requisite service period, which is the vesting period, on a straight‑line basis.

Stock‑based compensation is classified in the accompanying consolidated statements of operations based on the function to which the related services are provided, or capitalized with inventory until related expense is recognized.

Stock-Based Compensation —The Company accounts for all stock-based awards granted as compensation expense at fair value.

The Company generally issues stock-based awards with the measurement date for awards as the date of grant.

Stock-based compensation costs are recognized as expense over the employees’ requisite service period, which is the vesting period, on a straight-line basis.

For performance awards whose vesting is contingent upon a specified event, the Company recognizes stock-based compensation expense over the derived service period, based on the probability of achievement of the specified event.

The Company recognizes compensation expense for the portion of awards that have vested.

After the adoption of Accounting Standards Update (“ASU”) 2016-09, described in further detail below, forfeitures are recorded as they occur.

Forfeitures are recorded as they occur.

Stock-based compensation is classified in the accompanying consolidated statements of operations and comprehensive loss based on the function to which the related services are provided, or capitalized with inventory until related expense is recognized.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model.

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

The Company lacks sufficient company-specific historical and implied volatility information.

Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and will continue to do so until it has adequate historical data regarding the volatility of its own traded stock price.

The expected term of the Company’s stock options has been determined utilizing the “simplified”

method for awards that qualify as “plain‑vanilla”

The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options.

The risk-free interest rate is determined by reference to the U.S.

Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term

of the award.

Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award.

Expected dividend yield is based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.

Common Stock Valuation Prior to the IPO —Through the consummation of the IPO in July 2017, due to the absence of an active market for the Company’s common stock, the Company utilized methodologies in accordance with the framework of the American Institute of Certified Public Accountants Technical Practice Aid, Valuation of Privately‑Held Company Equity Securities Issued as Compensation, to estimate the fair value of its common stock.

In determining the exercise prices for options granted, the Company has considered the estimated fair value of the common stock as of the measurement date.

The estimated fair value of the common stock has been determined at each grant date based upon a variety of factors, including the illiquid nature of the common stock, arm’s‑length sales of the Company’s capital stock (including redeemable convertible preferred stock), the effect of the rights and preferences of the preferred shareholders, and the prospects of a liquidity event.

Among other factors are the Company’s financial position and historical financial performance, the status of technological developments within the Company’s research, the composition and ability of the current research and management team, an evaluation or benchmark of the Company’s competition, and the current business climate in the marketplace.

Significant changes to the key assumptions underlying the factors used could have resulted in different fair values of common stock at each valuation date.

Income Taxes —Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the Company’s consolidated financial statements and tax returns.

The fair value of restricted stock units (“RSUs”) and performance stock units (“PSUs”) are equal to the closing sale price of the Company’s common stock on the date of grant.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Deferred tax assets and liabilities are determined based upon the differences between the consolidated financial statement carrying amounts and the tax basis of existing assets and liabilities and for loss and credit carryforwards using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse.

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As a result, reserves are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present.

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

Diluted net loss per share is computed using the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including the assumed exercise of stock options and warrants.

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.

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

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

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The Company reported a net loss attributable to common stockholders for the years ended December 31, 2020 and 2019.

Comprehensive Loss —Comprehensive loss is equal to net loss for the periods presented.

As of December 31, 2020 and 2019, potentially dilutive securities excluded from the calculation of diluted net loss per share because including such securities would have an anti-dilutive effect consisted of outstanding options to purchase 8,745,127 and 7,453,076 shares of the Company’s common stock, respectively, an aggregate of 942,222 unvested RSUs and PSUs as of December 31, 2020 and an aggregate of 248,505 and 384,163 unexercised warrants as of December 31, 2020 and 2019, respectively.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) effective January 1, 2018.

ASU 2014-09 states that an entity should recognize revenue based on the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The FASB subsequently issued amendments to ASU 2014-09 that had the same effective date of

January 1, 2018.

Revenue from sales of INVELTYS, as well as any other future revenue arrangements, are and will be recognized under the provisions of ASU 2014-09.

While the Company adopted ASU 2014-09 effective January 1, 2018, the Company did not generate any revenue from product sales prior to 2019.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”).

ASU 2018-07 substantially aligns accounting for share-based payments to employees and non-employees.

This ASU became effective for annual periods beginning after December 15, 2018, including interim periods within that period, and early adoption is permitted.

The new standard was effective on January 1, 2019 and the adoption of ASU 2018-07 did not have an impact on the Company’s consolidated financial statements and related disclosures.

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.

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 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”).

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.

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 consolidated financial statements.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

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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.

ASU 2016-13 is effective for the Company's fiscal year beginning December 1, 2020 and subsequent interim periods.

The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

In August 2018, the 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 adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

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”).

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 adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements and related disclosures.

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

In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”) , which is effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be Smaller Reporting Companies (“SRCs”) as defined by the SEC, for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and for all other entities, including SRCs, for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

Upon adoption, beginning January 1, 2023, the Company does not expect ASU 2019-10 to have a material effect on its 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 its own assumptions (unobservable inputs).

The hierarchy consists of three levels:

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

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

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

The Company’s financial instruments consist primarily of cash equivalents and short-term investments in money market funds and short-term securities.

Cash equivalents and short-term investments are reported at their respective fair values on the Company’s 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 as of December 31, 2020:

December 31, 2020

Cash equivalents

Short-term investments

During the year ended December 31, 2020 there were no transfers between Level 1 , Level 2 , and Level 3.

There were no cash equivalents or short-term investments as of December 31, 2019.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The carrying value reported on the accompanying consolidated balance sheets of cash, restricted cash, accounts receivable, accounts payable and accrued expenses approximate their fair value due to their short-term nature.

Management believes that the Company’s long-term debt (see Note 10) bears interest at the prevailing market rate for instruments with similar characteristics and, accordingly, the carrying value of long-term debt, also approximates its fair value.

The fair value of the outstanding debt was estimated using a discounted cash flow analysis based on current market interest rates for debt issuances with similar remaining years to maturity, adjusted for credit risk, which represents a Level 3 measurement.

Investments by security type consisted of the following as of December 31, 2020:

December 31, 2020

treasury securities

government agencies securities

As of December 31, 2020, all of the Company’s investments had a contractual maturity within one year.

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

The Company did not have any investment securities as of December 31, 2019.

Inventory consists of the following:

Raw materials

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Total 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 December 31, 2018 , the Company had $4.1 million of current inventory and no long-term inventory.

As of December 31, 2020, the Company had $ 5,229 of current inventory and $ 6,219 of long-term inventory.

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

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Prepaid Expenses and Other Current Assets

Prepaid Expenses and Other Current Assets, consists of the following (in thousands):

Prepaid expenses and other current assets, consists of the following:

Non-trade receivables

Receivable for construction related to facility

Prepaid expenses and other current assets

Property and Equipment, Net

Property and equipment, net, consists of the following (in thousands):

Leasehold improvements

Computer hardware and software

Property and equipment, net, consists of the following:

Furniture and office equipment

Computer hardware and software

Leasehold improvements

Construction in progress

Property and equipment —

Property and equipment — at cost

Accumulated depreciation

Property and equipment—net

Depreciation expense for the years ended December 31, 2019 and 2018 was $0.8 million and $0.4 million respectively.

Property and equipment—net

Depreciation expense for the years ended December 31, 2020 and 2019 was $ 908 and $ 843 , respectively.

KALA PHARMACEUTICALS, INC.

NOTES TO 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:

Compensation and benefits

Accrued revenue reserves (1)

Development costs

Commercial costs

Professional services

Commercial cost

Contract manufacturing

Payable related to construction of facility

Development costs

Accrued expenses

As of December 31, 2019, $0.7 million of additional revenue reserves were in accounts payable.

(1) As of December 31, 2020 and 2019, $ 280 and $ 742 of additional revenue reserves were in accounts payable, respectively.

Operating leases

The Company entered into a three‑year lease agreement for its former headquarters (the “Waltham Lease”) on September 30, 2013, with a commencement date of February 1, 2014.

On June 30, 2016, the lease was amended to extend the term from January 31, 2017 to January 31, 2019.

In connection with the lease agreement, the Company issued a letter of credit to the landlord for $0.1 million.

The Company secured the letter of credit for the full amount of the letter with cash on deposit, which was reported as restricted cash as of December 31, 2018.

Upon the expiration of the lease term on January 31, 2019, the deposit was returned.

On February 28, 2018, the Company entered into a lease agreement with 480 Arsenal Group LLC (the “Arsenal Group”) for the lease of a portion of the building located at 490 Arsenal Way Watertown, Massachusetts (the “Watertown Lease”).

The initial term of the Watertown Lease is eight years with an option to extend for an additional five years, which are recognized as part of our right of use asset and lease liability .

The initial term of the Watertown Lease is eight years with an option to extend for an additional five years , which are recognized as part of the Company’s right of use asset and lease liability.

The Company occupied the premises in Watertown in early 2019 as its corporate headquarters and for research and development.

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● Expected lease term – The expected lease term includes both contractual lease periods and, when applicable, cancelable option periods where failure to exercise such options would result in an economic penalty.

Incremental borrowing rate - As the Company’s lease does not provide an implicit rate, the Company estimated the incremental borrowing rate based on a yield curve analysis, utilizing the interest rate derived from the fair value analysis of the Company’s Athyrium Credit Facility and adjusting it for factors that reflect the profile of secured borrowin g over the expected term of the lease.

The Company recognized the right-of-use asset and corresponding lease liability, 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 .

● Incremental borrowing rate - As the Company’s lease does not provide an implicit rate, the Company estimated the incremental borrowing rate based on a yield curve analysis, utilizing the interest rate derived from the fair value analysis of the Company’s Athyrium Credit Facility and adjusting it for factors that reflect the profile of secured borrowin g over the expected term of the lease.

The Company recognized the right-of-use asset and corresponding lease liability 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.

As of December 31, 2020, the remaining lease term on the Watertown Lease was 10.8 years.

Variable lease expense for the Watertown Lease, includes real estate taxes, common area maintenance, and management fees.

In connection with the Watertown Lease, the Company issued a letter of credit to the Arsenal Group 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 on the Consolidated Balance Sheets.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

In connection with the Watertown Lease, the Company issued a letter of credit to the Arsenal Group for $ 2,042 .

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 consolidated balance sheets as of December 31, 2020 and December 31, 2019.

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 65 vehicles.

In connection with the Vehicle Fleet Lease, the Company issued a letter of credit for $0.5 million, which is reported as restricted cash on the Consolidated Balance Sheet.

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 $ 450 , which is reported as restricted cash on the consolidated balance sheets as of December 31, 2020 and December 31, 2019.

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

As of December 31, 2020, the remaining lease term was 1.2 years.

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

Years Ended December 31,

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

Operating lease cost

Short-term lease cost

Variable lease cost

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Operating cash outflows from operating leases

Maturities of lease liability due under these lease agreements as of December 31, 2019 are as follows (in thousands):

Maturities of lease liability due under these operating lease agreements as of December 31, 2020 are as follows:

Years Ending December 31,

Operating Lease

Obligations (1)

Finance Lease

Obligation (2)

Present value adjustment

Present value of lease payments

Future minimum lease payments under the Company’s Watertown Lease and its Vehicle Fleet Lease.

Future minimum lease payments under the Company’s finance lease obligation.

(2) Future minimum lease payments under the Company's finance lease obligation.

2014 Debt Facility

In November 2014, the Company entered into a venture debt facility (“2014 Debt Facility”) for a total loan commitment of $10.0 million.

On October 13, 2016, the Company entered into a First Amendment to the 2014 Debt Facility the (''First Amendment''), which reaffirmed the initial commitment to a total of $10.0 million of funding (“Term Loan A”) and increased the Company’s total borrowing capacity by an additional $10.0 million (“Term Loan B”

and together with Term Loan A, ''Term Loans'').

In connection with the 2014 Debt Facility, the Company issued warrants that can be exercised into common stock that expire between April 2021 and October 2026 (see Note 9).

Under the terms of the 2014 Debt Facility, the borrowings accrued interest at an annual rate equal to 3.00% above the Prime Rate then in effect.

The applicable interest rate for the outstanding principal balance was 8.25% as of

the repayment date of October 1, 2018.

The Company recognized interest expense of $1.2 million related to the 2014 Debt Facility during the year ended December 31, 2018, which consisted of amortization of the debt discount of $0.1 million, and contractual coupon interest of $1.1 million.

On October 1, 2018, the Company repaid the outstanding principal balance under the 2014 Debt Facility of $20.0 million.

In connection with the repayment of the 2014 Debt Facility, the Company paid a prepayment fee of $0.2 million.

Athyrium Credit Facility

On October 1, 2018, the Company entered into a $110.0 million Athyrium Credit Facility with Athyrium.

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

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

Total minimum lease payments

amount representing interest

Present value of lease liabilities

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.

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.

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

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

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 on October 1, 2022.

The Company may make voluntary prepayments, in whole or in part, and subject to certain exceptions, is required to make mandatory prepayments upon the occurrence of certain events of default as defined in the agreement, including but not limited to, the occurrence of a change of control.

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 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:

1 unchanged sentence

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

The Athyrium Credit Facility includes two features upon the event of default 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 has a right to declare all outstanding principal and interest immediately payable.

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.

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 December 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.

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.

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 and comprehensive loss .

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 $ 10,000 of cash and cash equivalents.

As a result of this financial covenant, the Company has recorded $ 10,000 as restricted cash as of December 31, 2020 and December 31, 2019.

As of December 31, 2020, the Company was in compliance with the covenants.

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 Athyrium Term Loan B.

The Warrant is exercisable through October 1, 2025.

The Warrant is considere d equity classified and as such, the Company allocated the proceeds from the Athyrium Term Loan A to the Warrant using the relative fair value method.

The initial fair value of the Warrant of $1.9 million is recorded in equity and creates a debt discount.

In addition, the Company paid certain fees to Athyrium and another third party service provider in the aggregate amount of $3.0 million.

These fees paid Athyrium were recorded as a debt discount while the fees paid to the other third party service provider were recorded as debt issuance cost, respectively, in the aggregate amount of $3.0 million.

These costs, along with the fair value of Warrant of $1.9 million 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 Consolidated Statements of Operations.

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.

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 $ 1,900 was recognized as equity with a corresponding debt discount of $ 1,980 .

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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 $ 1,900 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 consolidated statements of operations and comprehensive loss.

As of December 31, 2020, 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 the year ended December 31, 2019, the Company recognized interest expense of $8.3 million which consisted of amortization of the debt discount of $0.8 million, and the contractual coupon interest expense of $7.5 million.

The components of the carrying value of the debt consist of the following (in thousands) :

During the year ended December 31, 2020, the Company recognized interest expense of $ 8,440 which consisted of amortization of the debt discount of $ 910 , and the contractual coupon interest expense of $ 7,530 .

During the year ended December 31, 2019, the Company recognized interest expense of $ 8,316 , which consisted of amortization of the debt discount of $ 807 , and the contractual coupon interest expense of $ 7,509 .

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

Principal loan balance

2 unchanged sentences

Long-term debt, net

The future annual principal payments due under the Athyrium Credit Facility as of December 31, 2019 were as follows (in thousands):

The annual principal payments due under the Athyrium Credit Facility as of December 31, 2020 were as follows:

Years Ending December 31,

The Company has issued warrants in connection with debt transactions that were completed prior to 2017 (see Note 8).

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

In connection with and in consideration for the commitment of the Athyrium Credit Facility, on October 1, 2018, the Company issued to Athyrium the Warrant as described in Note 10.

3 unchanged sentences

September 2017

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

Fair Value of Financial Instruments

The Company classifies fair value based measurements using a three-level hierarchy that prioritizes the inputs used to measure fair value.

This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.

The three levels of inputs used to measure fair value are as follows:

Level 1, quoted market prices in active markets for identical assets or liabilities;

Level 2, observable inputs other than quoted market prices included in Level 1, such as quoted market prices for markets that are not active or other inputs that are observable or can be corroborated by observable market data;

and Level 3, unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including estimates and assumptions developed by the Company, reflective of those that a market participant would use, as inputs to certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The carrying value of cash, restricted cash, accounts payable and accrued expenses approximate their fair value due to the short ‑ term nature of these assets and liabilities.

Management believes that the Company’s long ‑ term debt (See Note 8) bears interest at the prevailing market rate for instruments with similar characteristics and, accordingly, the carrying value of long ‑ term debt, also approximates its fair value.

There were no transfers between fair value measurement levels during the year ended December 31, 2019 or December 31, 2018.

Common and Preferred Stock

4 unchanged sentences

The Company had 58,915,375 and 36,086,254 shares of common stock issued and outstanding as of December 31, 2020 and 2019 , respectively.

Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights.

Each election of directors by our stockholders will be determined by a plurality of the votes cast by the stockholders entitled to vote on the election.

Holders of common stock are entitled to receive proportionately any dividends as may be declared by our Board, subject to any preferential dividend rights of outstanding preferred stock that we may issue in the future.

In the event of our liquidation or dissolution, the holders of our common stock are entitled to receive proportionately all assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any of our outstanding preferred stock.

Holders of our common stock have no preemptive, subscription, redemption or conversion rights.

The rights, preferences and privileges of holders of our common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of our preferred stock that we may designate and issue in the future.

Voting, dividend and liquidation rights of the holders of the common stock are subject to and qualified by the rights, powers and preferences of the holders of preferred stock that we may issue in the future.

Holders of the Company’s common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights.

Each election of directors by the Company’s stockholders will be determined by a plurality of the votes cast by the stockholders entitled to vote on the election.

Holders of common stock are entitled to receive proportionately any dividends as may be declared by the Company’s Board of Directors (the “Board”), subject to any preferential dividend rights of outstanding preferred stock that it may issue in the future.

In the event of the Company’s liquidation or dissolution, the holders of its common stock are entitled to receive proportionately all assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any of its outstanding preferred stock.

Holders of the Company’s common stock have no preemptive, subscription, redemption or conversion rights.

The rights, preferences and privileges of holders of the Company’s common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of its preferred stock that it may designate and issue in the future.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Each holder of outstanding shares of common stock shall be entitled to one vote in respect of each share.

5 unchanged sentences

Reserved Shares

As of December 31, 2019 and 2018, the Company has reserved shares of common stock for issuance upon exercise of rights under warrants, under the Amended and Restated 2017 Employee Stock Purchase Plan (as amended, the “ESPP”) and upon the exercise of stock options as follows (see Note 12):

As of December 31, 2020 and 2019, the Company has reserved shares of common stock for issuance upon exercise of rights under warrants, under the Amended and Restated 2017 Employee Stock Purchase Plan (as amended, the “ESPP”), upon the exercise of stock options and upon the vesting of RSUs and PSUs as follows (see Note 13):

Warrant rights to acquire common stock

Outstanding inducement stock option awards

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Stock-based Compensation

Stock Incentive Plans

In December 2009, 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, and as a result no further awards will be made under the 2009 Plan.

Upon the closing of the Company’s IPO, no further awards will be made under the 2009 Plan.

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.

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 December 31, 2020, there were 1,323,847 shares of common stock available for grant under the 2017 Plan.

2 unchanged sentences

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.

The exercise price of incentive stock options could not be less than the fair value of the common stock on the date of grant.

The exercise price of incentive stock options cannot be less than the fair value of the common stock on the date of grant.

Stock options awarded under the plans expire 10 years after the grant date, unless the Board sets a shorter term.

2 unchanged sentences

Inducement Stock Option Awards

During the year ended December 31, 2019, the Company granted non-statutory stock options to purchase an aggregate of 207,500 shares of the Company’s common stock to new employees.

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’

hire date and the remaining 75% of the shares underlying each option 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).

During the years ended December 31, 2020 and December 31, 2019, the Company granted non-statutory stock options to purchase an aggregate of 350,800 shares and 207,500 shares of the Company’s common stock, respectively, to new employees.

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 option award vesting monthly thereafter for three-years .

Vesting of each option award 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).

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

(in thousands)

Outstanding at January 1, 2019

Outstanding at December 31, 2019

Vested or expected to vest at December 31, 2019

Options exercisable at December 31, 2019

Outstanding as of January 1, 2020

Outstanding as of December 31, 2020

Vested or expected to vest as of December 31, 2020

Options exercisable as of December 31, 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 in the years ended December 31, 2019 and 2018 are as follows:

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 years ended December 31, 2020 and 2019 are as follows:

Year Ended December 31,

6 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 calculated the 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 Company based the expected dividend yield on its expectation of not paying dividends in the foreseeable future.

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

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.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The weighted average grant-date fair value of options granted during the years ended December 31, 2020 and 2019, was $ 3.20 and $ 3.45 , respectively.

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

As of December 31, 2019 and 2018, there was $19.2 million and $21.1 million of unrecognized compensation cost related to the stock options granted, which is expected to be recognized over a weighted-average period of 2.31 years and 2.84 years, respectively.

Stock-based compensation recognized was classified in the consolidated statements of operations as follows (in thousands):

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 December 31, 2020 and 2019, there was $ 15,753 and $ 19,201 , respectively, of unrecognized compensation cost related to the stock options granted, which is expected to be expensed over a weighted-average period of 2.35 years and 2.31 years, respectively.

Stock-based compensation expense was classified in the consolidated statements of operations and comprehensive loss as follows:

Cost of product revenues

1 unchanged sentence

Selling, general and administrative

For the year ended December 31, 2019, stock-based compensation expense for the Company’s manufacturing employees related to INVELTYS manufactured since the FDA approval of $0.1 million, has been capitalized into inventory as a component of overhead.

The Company received cash proceeds from the exercise of stock options of $42,000 and $0.5 million during the years ended December 31, 2019 and 2018, respectively.

The total intrinsic value of options exercised for the year ended December 31, 2019 and 2018, was $0.1 million and $1.3 million, respectively.

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”), under which 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.

Stock-based compensation costs capitalized into inventory totaled $ 888 and $ 59 for the years ended December 31, 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 product is designated as a sample.

The Company received cash proceeds from the exercise of stock options of $ 1,087 and $ 42 during the years ended December 31, 2020 and 2019, respectively.

The total intrinsic value of options exercised for the year ended December 31, 2020 and 2019, was $ 2,124 and $ 98 , respectively.

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.

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.

The Company has determined that the performance criteria for these awards has been achieved but the awards have not vested as of December 31, 2020.

As of December 31, 2020, a total of 942,222 RSUs and PSUs were unvested and outstanding, which results in unrecognized stock-based compensation of $ 7,315 to be recognized as stock-based compensation expense over the remaining weighted-average vesting period of 1.16 years.

A summary of activity for RSUs and PSUs for the year ended December 31, 2020 is as follows:

Weighted Average

Unvested and outstanding balance as of January 1, 2020

Changes during the period:

PSUs forfeited

Unvested and outstanding balance as of December 31, 2020

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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.

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

the first offering period begins on the first trading day on or after each January 1;

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.

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, 2020, employees of the Company purchased an aggregate of 314,397 shares under the ESPP.

The second offering period for 2019 ended on December 31, 2019.

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

The Company recorded $0.3 million of stock-based compensation expense related to the ESPP for the year ended December 31, 2019.

There were no purchases under the ESPP for the year ended December 31, 2018.

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

The Company has had no income tax expense due to operating losses incurred for the years ended December 31, 2020 and 2019.

The Company has also not recorded any income tax benefits for the net operating losses incurred in each period due to its uncertainty of realizing a benefit from those items.

All of the Company’s losses before income taxes were generated in the United States.

A reconciliation of the U.S.

federal statutory income tax rate to the Company’s effective income tax rate is as follows:

Federal statutory income tax rate

Change in valuation allowance

State income taxes, net of federal benefit

Research and development tax credits

State income taxes, net of federal benefit

Effective income tax rate

Net deferred tax assets as of December 31, 2019 and 2018 consisted of the following (in thousands):

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Net deferred tax assets as of December 31, 2020 and 2019 consisted of the following:

Deferred tax assets:

Net operating loss carryforwards

Research and development tax credit carryforwards

Stock-based compensation

Lease liabilities

Stock-based compensation

Capitalized research and development and start-up expenditures

Research and development tax credit carryforwards

Rebates, incentives, trade discounts and allowances

Total deferred tax assets

5 unchanged sentences

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 has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets.

Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2020 and 2019.

The valuation allowance increased by $13.5 million in 2019 due to an increase in the net operating loss carryforwards and research and development tax credits, partially offset by limitations caused by ownership changes under the provisions of 382.

The valuation allowance increased by $ 17,492 in 2020 due to an increase in the net operating loss carryforwards and research and development tax credits, partially offset by limitations caused by ownership changes under the provisions of Section 382 and Section 383 of the Internal Revenue Code of 1986.

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

At December 31, 2019 and 2018, the Company had federal net operating loss carryforwards of $168.8 million and $165.0 million, respectively, which may be available to offset future federal tax liabilities and expire at various dates beginning in 2030.

At December 31, 2019 and 2018, the Company had state net operating loss carryforwards of $171.8 million and $156.4 million, respectively, which may be available to offset future state income tax liabilities and expire at various dates beginning in 2030.

As of December 31, 2019 and 2018, the Company also had federal and state research and development credit carryforwards of approximately $6.3 million and $5.1 million, respectively, which are available to reduce future income taxes, if any, from 2030 through 2039 (federal) and 2025 through 2034 (state).

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, 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.

The Company previously determined that an ownership change occurred as of April 2016, and such change did not materially impact the Company’s ability to utilize its net operating loss carryforwards and research and development tax credits as of that date to offset future tax liabilities.

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

As of December 31, 2020 and 2019, the Company had federal net operating loss carryforwards of $ 243,155 and $ 168,801 , respectively, which may be available to offset future federal tax liabilities and expire at various dates beginning in 2030.

As of December 31, 2020 and 2019, the Company had state net operating loss carryforwards of $ 214,989 and $ 171,804 , respectively, which may be available to offset future state income tax liabilities and expire at various dates beginning in 2030.

As of December 31, 2020 and 2019, the Company also had federal and state research and development credit carryforwards of approximately $ 2,398 and $ 6,250 , respectively, which begin to expire in 2039 (federal) and 2034 (state).

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 previously completed an analysis and determined that an ownership change has materially limited the net operating loss carryforwards and research and development tax credits available to offset future tax liabilities.

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

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

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

As of December 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 years ended December 31, 2019 and 2018.

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 launch of INVELTYS, the annual minimum payment increased to $0.1 million.

The Company is obligated to pay JHU a tiered royalty rate in the low single-digits on net annual sales of the licensed products.

Upon the first commercial sale of INVELTYS, the annual minimum payment increased to $ 113 .

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 year ended December 31, 2019, the Company paid JHU $0.4 million related to the first commercial sale milestone and subsequent royalties.

The Company also recorded expenses totaling $0.3 million for each of the years ended December 31, 2019 and 2018, respectively, primarily related to the prosecution and maintenance costs on the JHU patent rights licensed to the Company.

The Company’s minimum obligations due under its license agreements as of December 31, 2019, are as follows (in thousands):

During the year ended December 31, 2020, the Company paid JHU $ 113 in royalty payments associated with the sale of EYSUVIS and INVELTYS.

During the year ended December 31, 2019, the Company paid JHU $ 413 related to the first commercial sale milestone and subsequent royalties.

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 which has been included within accrued expenses and other current liabilities on the consolidated balance sheet as of December 31, 2020.

The Company recorded other expenses related to the JHU agreement of $ 134 and $ 253 for each of the years ended December 31, 2020 and 2019, respectively.

The Company’s minimum obligations due under its license agreements as of December 31, 2020, are as follows:

Years Ending December 31,

Total minimum license payments

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 subject to these minimum purchase requirements upon receiving an approval for commercial sale for the approved product.

The Company has the following minimum purchase obligations for INVELTYS (in thousands):

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

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

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

Years Ending December 31,

Total minimum purchase commitments

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

Guarantees and Indemnifications —The Company’s Certificate of Incorporation authorizes the Company to indemnify and advance expenses to its officers and directors and agents to the fullest extent permitted by law.

The Company leases office space under a non-cancelable operating lease, pursuant to which the Company is required to

indemnify the landlord against claims, actions, or damages incurred in connection with, among other items, the Company’s occupancy and use of the premises.

The Company’s equity agreements and certain other arrangements include standard indemnifications against claims, actions, or other matters that may arise in connection with these arrangements.

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

The Company leases office space under a non-cancelable operating lease, pursuant to which the Company is required to indemnify the landlord against claims, actions, or damages incurred in connection with, among other items, the Company’s occupancy and use of the premises.

The Company’s equity agreements and certain other arrangements include standard indemnifications against claims, actions, or other matters that may arise in connection with these arrangements.

As of December 31, 2020 and 2019, the Company had not experienced any losses related to these indemnification obligations, and no claims with respect thereto were outstanding.

2 unchanged sentences

Defined Contribution Plan

The Company has a 401(k) defined contribution plan (the ‘‘401(k) Plan’’) for substantially all of its employees.

Eligible employees may make pretax contributions to the 401(k) Plan up to statutory limits.

The Company made discretionary matching contributions of $0.5 million and $0.2 million to the 401(k) Plan during for the year ended December 31, 2019 and 2018, respectively.

The Company made discretionary matching contributions of $ 446 and $ 454 to the 401(k) Plan during for the years ended December 31, 2020 and 2019, respectively.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Selected Quarterly Financial Data (Unaudited)

Selected quarterly financial data is as follows (in thousands, except per share data):

Selected quarterly financial data is as follows:

Three months ended

September 30,

(in thousands, except per share data)

Product revenues, net

2 unchanged sentences

Net loss attributable to common stockholders

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

Three months ended

September 30,

(in thousands, except per share data)

Product revenues, net

2 unchanged sentences

Net loss attributable to common stockholders

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

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 consolidated financial statements or disclosures.

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

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-K

Item 9A. Controls and Procedures