What changed in this filing

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Item 9A. Controls and Procedures

2022-03-29 compared with 2021-02-25 · 413 added, 247 removed, 732 unchanged (47% of the section changed)

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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.

management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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.

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Other Information .

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

Directors, Executive Officers and Corporate Governance

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Consolidated Balance Sheets as of December 31, 2021 and 2020

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Description of Exhibit

Agreement and Plan of Merger, dated as of November 15, 2021, by and among Kala Pharmaceuticals, Inc., Ceres Merger Sub, Inc., Combangio, Inc.

and, solely in its capacity as Combangio Equityholder Representative, Fortis Advisors LLC.

(incorporated by reference to Exhibit 2.1 of the Registrant’s current report on Form 8-K (File No.

001-38150) filed on November 15, 2021)

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.

5 unchanged sentences

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

1 dated December 13, 2017, of the Registrant (incorporated by reference to Exhibit 4.2 to the Registrant’s annual report on Form 10-K (File No.

001-38150) filed on February 25, 2021)

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.

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333-218936) filed on June 23, 2017)

Description of Exhibit

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)

Description of Exhibit

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.

12 unchanged sentences

001-38150) filed on November 8, 2018)

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.

333-218936) filed on June 23, 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 10.2 to the Registrant’s quarterly report on Form 10-Q (File No.

001-38150) filed on August 5, 2021)

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.

8 unchanged sentences

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.

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 10.3 to the Registrant’s quarterly report on Form 10-Q (File No.

001-38150) filed on August 5, 2021)

Exclusive License Agreement, dated October 11, 2019, by and between Combangio, Inc.

and The Board of Trustees of the Leland Stanford Junior University

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

4 unchanged sentences

001-38150) filed on August 9, 2018)

Description of Exhibit

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)

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.

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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)

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) (incorporated by reference to Exhibit 10.26 of the Registrant’s annual report on Form 10-K (File No.

001-38150) filed on February 25, 2021)

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)

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.

Commercial Supply Agreement, dated June 27, 2016, by and between the Registrant and Woodstock Sterile Solutions, Inc.

(formerly known as Catalent Pharma Solutions, LLC) (incorporated by reference to Exhibit 10.19 to the Registrant’s registration statement on Form S-1 (File No.

333-218936) filed on June 23, 2017)

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.

1 to Commercial Supply Agreement, dated February 16, 2018, by and between the Registrant and Woodstock Sterile Solution, Inc.

(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)

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.

2 to Commercial Supply Agreement, dated March 27, 2020, by and between the Registrant and Woodstock Sterile Solution, Inc.

(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

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)

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.

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)

3 to Commercial Supply Agreement, dated December 11, 2020, by and between the Registrant and Woodstock Sterile Solution, Inc.

(incorporated by reference to Exhibit 10.31 of the Registrant’s annual report on Form 10-K (File No.

001-38150) filed on February 25, 2021)

Amendment No.

4 to Commercial Supply Agreement, effective January 6, 2021, by and between the Registrant and Woodstock Sterile Solution, Inc.

Lease Termination Agreement, dated November 12, 2021, by and between the Registrant and Columbia Massachusetts Arsenal Office Properties, LLC.

(incorporated by reference to Exhibit 10.1 of the Registrant’s current report on Form 8-K (File No.

001-38150) filed on November 15, 2021)

First Amendment to Lease Termination Agreement, dated December 22, 2021, by and between the Registrant and Columbia Massachusetts Arsenal Office Properties, LLC

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)

Loan and Security Agreement, dated May 4, 2021, by and among the Registrant and Oxford Finance LLC, as collateral agent and lender (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No.

001-38150) filed on May 5, 2021)

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.

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Subsidiaries of the Registrant

Consent of Deloitte & Touche LLP

Description of Exhibit

Consent of Deloitte & Touche LLP

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

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KALA PHARMACEUTICALS, INC.

February 25, 2021

March 29, 2022

/s/ Mark Iwicki

Chief Executive Officer, President and

Chief Executive Officer and

Chairman of the Board of Directors

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/s/ Mark Iwicki

President, Chief Executive Officer and Chairman of Board of Directors (Principal Executive Officer)

February 25, 2021

Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)

March 29, 2022

/s/ Mary Reumuth

Chief Financial Officer (Principal Financial and Accounting Officer)

February 25, 2021

March 29, 2022

/s/ Mark Blumenkranz

Mark Blumenkranz

March 29, 2022

/s/ Gregory Grunberg

Gregory Grunberg, M.D.

February 25, 2021

March 29, 2022

/s/ Andrew I.

February 25, 2021

March 29, 2022

/s/ Robert Paull

February 25, 2021

March 29, 2022

/s/ Gregory Perry

February 25, 2021

Gregory Perry

March 29, 2022

/s/ Howard Rosen

February 25, 2021

/s/ Rajeev Shah

February 25, 2021

March 29, 2022

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

To the stockholders 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 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”).

and subsidiaries (the “Company”) as of December 31, 2021 and 2020, 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, 2021 and 2020, 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.

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Boston, Massachusetts

February 25, 2021

March 29, 2022

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

PART I – FINANCIAL INFORMATION

Consolidated Financial Statements.

KALA PHARMACEUTICALS, INC.

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Short-term investments

Short-term restricted cash

Accounts receivable, net

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Current portion of lease liabilities

Current portion of contingent consideration

Current portion of deferred purchase consideration

Total current liabilities

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Long-term debt

Long-term contingent consideration

Long-term deferred purchase consideration

Total long-term liabilities

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Research and development

Acquired in-process research and development

Gain on fair value remeasurement of deferred purchase consideration

Total costs and expenses

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Interest and other expense

Loss on extinguishment of debt

Gain on lease modification

Total interest and other expense

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Weighted average shares outstanding—basic and diluted

Other comprehensive income:

Other comprehensive loss:

Change in unrealized gains on investments

Total other comprehensive income

Total other comprehensive loss

Total comprehensive loss

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Exercise of stock options

Issuance under employee stock purchase plan

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

Issuance of common stock 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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Exercise of stock options

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

Issuance under employee stock purchase plan

Issuance of vested restricted stock units

Issuance of common stock under employee stock purchase plan

Stock-based compensation expense

Warrant exercises

Change in fair value of investments

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Non-cash operating lease cost

Loss on extinguishment of debt

Gain on lease modification

Acquired in-process research and development

Gain on fair value remeasurement of deferred purchase consideration

Amortization of debt discount and other non-cash interest

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Amortization of discount on available-for-sale securities

Other non-cash charges

Change in operating assets and liabilities:

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Cash flows from investing activities:

Cash paid for acquisition of in-process research and development, net of cash acquired

Purchases of property and equipment and other assets

Proceeds from sale of property and equipment

Purchases of short-term investments

Proceeds from sales or maturities of short-term investments

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Proceeds from issuance of debt, net of debt issuance costs of $ 2,218

Payment of principal, prepayment premium and exit fee on debt

Proceeds from common stock offerings, net of offering costs

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Net cash provided by financing activities

Net decrease in cash, cash equivalents and restricted cash:

Net increase (decrease) in cash, cash equivalents and restricted cash:

Cash, cash equivalents and restricted cash at beginning of period

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Non-cash investing and financing activities:

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

Purchases of property and equipment in accounts payable

Purchases of property and equipment in accounts payable and accrued expenses

Supplemental disclosure:

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(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 .

The Company has worldwide rights to a portfolio of innovative products and product candidates that include two marketed products utilizing its proprietary mucus penetrating particle drug delivery technology, which it refers to as its AMPPLIFY® technology, to address medical needs for the front of the eye.

The Company’s product candidates and programs include a proprietary regenerative biotherapy for severe ocular diseases and a pipeline of preclinical new chemical entities (“NCEs”), targeted to address front and back of the eye diseases.

The Company’s two marketed products are EYSUVIS ® (loteprednol etabonate ophthalmic suspension) 0.25%, for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease, and INVELTYS ® (loteprednol etabonate ophthalmic suspension) 1%, a topical twice-a-day ocular steroid for the treatment of post-operative inflammation and pain following ocular surgery.

Both products apply the Company’s AMPPLIFY technology to loteprednol etabonate, a corticosteroid designed for ocular applications.

The AMPPLIFY technology uses selectively-sized nanoparticles that each have a proprietary coating.

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

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 engaged in the commercialization of EYSUVIS and INVELTYS, research and development activities for its clinical-stage product candidate, KPI-012 for the treatment of persistent corneal epithelial defects (“PCED”), 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.

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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.

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”).

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 $ 66,132 .

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

These preclinical development programs include KPI-287, its receptor Tyrosine Kinase Inhibitor and its selective glucocorticoid receptor modulators (“SEGRMs”).

KPI-287 is designed to inhibit the vascular endothelial growth factor and platelet derived growth factor pathways, and is administered by suprachoroidal injection for the treatment of retinal diseases, including wet age-related macular degeneration, diabetic macular edema, and retinal vein occlusion.

SEGRMs are a novel class of therapies designed to modify the downstream activity of the glucocorticoid receptors to exhibit the anti-inflammatory and immunomodulatory properties of the corticosteroid class of therapies while markedly reducing their associated side effects, which we are developing for the treatment of inflammatory diseases.

Combangio, Inc.

Acquisition — On November 15, 2021, the Company and its newly formed, direct wholly owned subsidiary, Ceres Merger Sub, Inc.

(the “Merger Subsidiary”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Combangio, Inc.

(“Combangio”) and Fortis Advisors LLC, solely in its capacity as Combangio Equityholder Representative in connection with the Merger Agreement, pursuant to which on November 15, 2021, the Merger Subsidiary merged with and into Combangio with Combangio surviving such merger and becoming a direct wholly owned subsidiary of the Company (the “Acquisition”).

Combangio is a clinical-stage biotechnology company focused on developing regenerative biotherapeutics for severe ocular diseases based on mesenchymal stem cell

KALA PHARMACEUTICALS, INC.

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(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 .

(“MSCs”) secretomes, including, its lead product candidate, CMB-012 for the treatment of PCED.

Following the Acquisition, the Company refers to CMB-012 as KPI-012.

Refer to Note 3 for further discussion of the Acquisition.

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

Through the first quarter of 2020, the Company issued an aggregate of 4,945,605 shares of its common stock under the ATM Offering, resulting in net proceeds to the Company of $ 25,605 .

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.

On March 11, 2020, the Company sold 16,000,000 shares of its common stock (the “2020 Offering Shares”) in an underwritten offering (the “2020 Offering”), pursuant to the 2018 Shelf Registration, at a public offering price of $ 7.89 per share, 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.

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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.

Under the 2018 Shelf Registration, which expired in August 2021, the Company issued an aggregate of 30,549,976 shares of common stock, including under the ATM Offering, resulting in aggregate gross proceeds of $ 231,666 .

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”).

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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 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.

During the year ended December 31, 2021, the Company issued and sold an additional 5,760,198 shares of its common stock under its ATM Offering resulting in net proceeds of $ 41,232 .

As of December 31, 2021, there were $ 11,344 of shares of common stock remaining under the ATM Offering, and excluding the shares of common stock that may be offered under the ATM Offering, there was approximately $ 275,000 of securities available to be issued under the 2020 Shelf Registration.

Refer to Note 11 for a discussion of debt financing activity.

KALA PHARMACEUTICALS, INC.

1 unchanged sentence

(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.

COVID-19 – In order to safeguard the health of its employees from the ongoing novel coronavirus pandemic, or COVID-19, the Company is following, and will continue to follow, recommendations from the U.S.

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

As a result, all office-based personnel 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 previously suspended its sales force from substantially all in-person interactions with physicians and was limited to conducting educational and promotional activities virtually.

Commencing in the fourth quarter of 2020, the Company’s sales force resumed substantially all in-person interactions in the field, but if the Company suspends all or some in-person interactions with physicians in the future, or to the extent physicians limit in-person interactions, the Company may be limited to conducting educational and promotional activities virtually, which may continue to hamper its ability to market and commercialize EYSUVIS and INVELTYS.

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

In addition, the COVID-19 pandemic has generally had an adverse impact on the launch of pharmaceutical products, and the Company believes the pandemic has impacted, and may continue to impact, the launch of EYSUVIS.

The Company also does not know the extent to which the COVID-19 pandemic will impact its development of KPI-012 or any other product candidate we develop.

The extent of the impact of the COVID-19 pandemic on the Company’s commercialization efforts of EYSUVIS and INVELTYS, its clinical development of KPI-012 and its preclinical developments programs, and its operational and financial performance will depend on certain developments, including the length and severity of this pandemic , the timing and extent of any resurgence of the COVID-19 virus or any variant strains of the virus, the availability and effectiveness of vaccines, and the impact of the foregoing on 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.

1 unchanged sentence

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.

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

All intercompany transactions and balances have been eliminated.

1 unchanged sentence

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 $ 142,605 and $ 104,327 , for the years ended December 31, 2021 and 2020, respectively, and used cash in operations of $ 108,235 and $ 90,694 , in the years ended December 31, 2021 and 2020, 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 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 EYSUVIS and INVELTYS.

1 unchanged sentence

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

The Company expects that its cash and cash equivalents as of December 31, 2021, together with anticipated net revenue from sales of EYSUVIS and INVELTYS, will enable it to fund its operating expenses, debt service obligations and capital expenditure requirements for at least 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

KALA PHARMACEUTICALS, INC.

1 unchanged sentence

(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.

that the consolidated financial statements are issued.

The Company believes the COVID-19 pandemic has impacted and may continue to impact anticipated net revenues in the future.

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

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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-based 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, contingent consideration and acquired in-process research and development (“IPR&D”), 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.

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Provision related to current period sales

Changes in estimate related to prior period sales

Credit/payments made

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(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.

Estimated 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) Estimated 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.

Estimated 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, 2021 and 2020, 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.

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The Company recorded an allowance of $ 2,672 and $ 1,157 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, 2021 and December 31, 2020, respectively.

Acquired IPR&D— A key provision within ASC 805 , Business Combinations, is the single or similar asset threshold.

When substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the acquired set is not a business.

In evaluating the Acquisition, the Company concluded that s ubstantially all of the fair value of the gross assets acquired was concentrated in a single asset, KPI-012, and the Company accounted for the transaction as an asset acquisition.

Acquired IPR&D expense consists of the initial up-front payments and any future milestone payments that are recorded at fair value incurred in connection with the acquisition or licensing of product candidates that do not meet the definition of a business.

Acquired IPR&D is expensed immediately in the period in which it is incurred.

For the year ended December 31, 2021, the Company recorded an expense for the IPR&D acquired in the Acquisition of $ 26,617 as there is no alternative future use.

Contingent Consideration— In addition to upfront consideration and Deferred Purchase Consideration (as defined below) (see Note 3) , the Company’s asset acquisitions may also include contingent consideration payments to be made for future milestone events or royalties on net sales of future products.

The Company assesses whether such contingent consideration is required to be recorded at fair value on the date of the acquisition and subsequently remeasured to fair value at each reporting date.

Contingent consideration payments in an asset acquisition not required to be accounted for at fair value are recognized when the contingency is resolved, and the consideration is paid or becomes payable.

Changes to contingent consideration obligations can result from changes to discount rates, accretion of the liability due to the passage of time, changes in our estimates of the likelihood or timing of achieving certain milestones.

Any changes in the fair value of these contingent consideration liabilities are included in loss from operations in the consolidated statements of operations and comprehensive loss.

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.

The Company recorded the cost of product revenues related to INVELTYS as research and development expenses prior to regulatory approval and recorded the 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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, 2021 and 2020.

These Customers comprised 44 %, 31 % and 24 % of the accounts receivable balance, respectively, as of December 31, 2021 and 39 %, 33 % and 25 % of the accounts receivable balance, respectively, as of December 31, 2020.

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.

To date, losses with respect to the collection of the Company’s accounts receivable have been de minimis and the Company believes that its entire accounts receivable balances is collectible as of December 31, 2021.

The same three Customers comprised 10% or more of the Company’s revenue during the years ended December 31, 2021 and 2020.

2 unchanged sentences

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)

Restricted Cash —As of December 31, 2021, the Company had short-term restricted cash of $ 2,042 , which represented cash held to serve as collateral for its facility lease in Watertown, Massachusetts (see Note 10) and long-term restricted cash of $ 700 which primarily represented cash held to serve as collateral for its vehicle fleet lease (see Note 10).

As of December 31, 2020, the Company had long-term restricted cash of $ 12,492 , which represented cash held to satisfy its prior financial covenant (see Note 11) and serve as collateral for the Company’s vehicle fleet lease, credit cards and its facility lease in Watertown, Massachusetts (see Note 10).

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

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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.

The Company did not record any such impairments during the years ended December 31, 2021 or 2020.

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

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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.

The Company also monitors the status of the product

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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.

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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.

The Company performs an assessment of the recoverability of capitalized inventory during each reporting period, including quality control and assurance reserves for defective inventories, and also writes-down any excess and obsolete inventories to their estimated realizable value in the period in which the impairment is first identified.

Such impairment charges, should they occur, are recorded within cost of product revenues, unless associated with the Company’s samples inventory, in which case the charges are recorded to selling, general and administrative expense.

The determination of whether inventory costs will be realizable requires estimates by management.

If actual market conditions are less favorable than projected by management, additional write-downs of inventory may be required which would be recorded as a cost of product revenues in the consolidated statements of operations and comprehensive loss.

Shipping and handling costs for product shipments are recorded as incurred in costs of revenues along with costs associated with manufacturing the product, and any inventory write-downs.

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.

11 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 consolidated balance sheets and amortized as lease expense on a straight-line basis to the consolidated statements of operations and comprehensive loss.

The Company’s facilities operating leases had 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

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

resulted 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.

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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 and comprehensive loss.

Advertising Costs —Advertising costs are expensed as incurred.

For the years ended December 31, 2021 and 2020, advertising expenses were $ 11,962 and $ 7,593 , respectively, and are included in selling, general and administrative expenses in the accompanying 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.

1 unchanged sentence

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, 2020 and 2019, no impairment charges were recorded.

For the year ended December 31, 2021, impairment charges recorded were de minimis .

For the year ended December 31, 2020, no impairment charges 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.

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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.

5 unchanged sentences

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.

The Company also accrues expenses related to development activities performed by third parties based on an evaluation of services received and efforts expended pursuant to the terms of the contractual arrangements.

The Company also accrues expenses related to development activities performed by third parties based on an evaluation of services received and efforts expended

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

pursuant to the terms of the contractual arrangements.

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

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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.

Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies in addition to its own historical volatility 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” options.

3 unchanged sentences

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)

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.

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

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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

2 unchanged sentences

The Company reported a net loss attributable to common stockholders for the years ended December 31, 2021 and 2020.

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.

(See Note 15).

Recent Accounting Pronouncements

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):

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

2 unchanged sentences

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.

The Company is currently evaluating the impact of the adoption of ASU 2016-13, beginning January 1, 2023, on its consolidated financial statements.

The Company does not expect that the adoption of this standard will have a material impact on its consolidated financial statements.

Acquisition of Combangio, Inc.

In connection with the closing of the Acquisition on November 15, 2021 (the “Closing”), the Company made an upfront payment of an aggregate of $ 5,000 in cash to former Combangio stockholders and other equityholders (the “Combangio Equityholders”), subject to customary adjustments, and agreed to issue an aggregate of 7,788,637 shares (the “Deferred Purchase Consideration”) of the Company’s common stock to the Combangio Equityholders with an aggregate value of approximately $ 16,123 , consisting of (i) an aggregate of 6,815,072 shares of common stock issued on January 3, 2022 (the “Upfront Shares”) and (ii) an aggregate of 973,565 shares of common stock that have been held back by the Company and will be issuable subject to the terms of the Merger Agreement to the Combangio Equityholders (the “Holdback Shares”) on the date that is fifteen months after the Closing (the “Escrow Release Date).

The aggregate value of the Deferred Purchase Consideration was calculated using the closing price of the Company’s common stock on the Nasdaq Global Select Market on November 12, 2021, the last trading day prior to the Closing.

In addition, pursuant to the Merger Agreement, the Combangio Equityholders, in the aggregate and subject to the terms and conditions of the Merger Agreement, will also be entitled to receive from the Company the following contingent consideration (the “Contingent Consideration”):

● up to $ 105,000 in contingent milestone consideration, of which (i) $ 2,300 would become payable in cash and $ 2,700 would be payable in shares of the Company’s common stock upon the first patient dosed with any product candidate whose active ingredient comprises one or more biological factors secreted by MSCs or their progenitors, including KPI-012 (the “Product Candidate”) in a Phase 2 clinical trial (the “Dosing Milestone”), (ii) $ 2,300 would become payable in cash and $ 2,700 would be payable in shares of the Company’s common stock upon the first patient dosed with a Product Candidate in a pivotal clinical trial, (iii) $ 12,500 would become payable (with up to $ 6,250 payable, at the option of the Company, in shares of the Company’s common stock and the remainder in cash) upon regulatory approval by the U.S.

Food and Drug Administration (the “FDA”) of marketing and sale of a Product Candidate in the United States, subject to certain specified

KALA PHARMACEUTICALS, INC.

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(In thousands, except share and per share amounts)

(iv) $ 17,500 would become payable (with up to $ 8,750 payable, at the option of the Company, in shares of the Company’s common stock and the remainder in cash) upon the first commercial sale of a Product Candidate in the United States, subject to certain specified reductions, and (v) an aggregate of up to $ 65,000 would become payable in cash upon the achievement of specified sales milestones;

● tiered cash royalties at percentage rates in the mid-to-high single digits payable on annual net sales of all Product Candidates;

● a cash payment at a percentage rate in the high single digits of all income, including earnout payments, received by the Company or any of its affiliates from a product license granted by the Company to a third party to sell or otherwise commercialize the Product Candidate in countries where neither the Company nor its affiliates conduct sales of such Product Candidate, subject to certain exceptions set forth in the Merger Agreement.

The portion of any payment of Contingent Consideration payable in shares of the Company’s common stock is referred to herein as “Contingent Stock Consideration” and the portion of any payment of Contingent Consideration payable in cash is referred to herein as “Contingent Cash Consideration”.

If the issuance of the Deferred Purchase Consideration or any Contingent Stock Consideration would result in the aggregate number of shares of the Company’s common stock issued under the Merger Agreement equaling or exceeding 19.9 % of the total number of shares of the Company’s common stock issued and outstanding immediately prior to the Closing (the “Share Cap”), then the Company will be required to pay the portion of the Deferred Purchase Consideration or any Contingent Stock Consideration in excess of the Share Cap in cash.

If the aggregate amount of Contingent Cash Consideration payable in any calendar year (after giving effect to the Share Cap) exceeds $ 2,500 (the “Excess Cash Cap”), such excess portion (“Carry Forward Contingent Cash Consideration”) will be carried forward and, subject to application of the Excess Cash Cap in the following calendar year, become payable on the first business day of the following calendar year.

Any Carry Forward Contingent Cash Consideration outstanding on June 1, 2026 is payable in full on June 1, 2026.

For accounting purposes, the transaction was accounted for as an asset acquisition , as substantially all of the fair value of the gross assets acquired was concentrated in a single asset, KPI-012.

Pursuant to the Merger Agreement, following the Acquisition, the Company owns 100 % of the outstanding common stock of Combangio.

The cost of the Acquisition, which represents the total consideration transferred to Combangio stockholders in the Acquisition consists of the following:

Transaction expenses

Deferred Purchase Consideration (1)

Contingent consideration (2)

Total consideration

(1) Deferred Purchase Consideration consists of 6,815,072 Upfront Shares issued on January 3, 2022 recorded at $ 1.79 per share and 973,565 Holdback Shares, which will not be issued until the Escrow Release Date of February 15, 2023 recorded at $ 1.58 per share based on the transaction date fair value.

Contingent consideration consists of the fair value of certain milestone payments.

The total potential maximum payout for the milestone payments, which are recorded at fair value is $ 40,000 and such milestone payments and are contingent upon the achievement of specified development and regulatory milestones.

Additionally, pursuant to the Merger Agreement, the Company could trigger potential future sales-based milestone payments of up to $ 65,000 .

Because the achievement of these sales-based milestones related to KPI-012 was not considered probable as of December 31, 2021, such contingencies have not been recorded in the Company’s financial statements.

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(In thousands, except share and per share amounts)

The following is the allocation of the purchase consideration based on the fair value of assets acquired and the liabilities assumed by the Company in the Acquisition:

Cash and cash equivalents

Prepaid expense and other current assets

Property and equipment

Acquired in-process research and development

Total consideration

Fair Value of Financial Instruments

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

The Company from time to time 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).

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

The Company’s financial instruments 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.

The Company’s financial instruments as of December 31, 2021 consisted primarily of cash equivalents and contingent consideration.

The Company’s financial instruments as of December 31, 2020 consisted primarily of cash equivalents and short-term investments in money market funds and short-term securities.

Cash equivalents, short-term investments and contingent consideration are reported at their respective fair values on the Company’s consolidated balance sheets.

See Note 5, “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:

As discussed in Notes 2 and 3, the Company acquired Combangio in November 2021 and in connection with the closing of the Acquisition, the Company agreed to issue Deferred Purchase Consideration for which the Company has established liabilities for these considerations.

The Deferred Purchase Consideration related to the Acquisition is measured at fair value each reporting period using Level 3 unobservable inputs.

The fair value of the Deferred Purchase Consideration was based on the fair value of the underlying stock and a discount for lack of marketability.

Changes in these estimates and assumptions could have a significant impact on the fair value of the Deferred Purchase Consideration.

Any change in the fair value of the Deferred Purchase Consideration is included in loss from operations in the consolidated statements of operations and comprehensive loss.

During the year ended December 31, 2021, the change in the fair value of the Deferred Purchase Consideration was $ 5,805 primarily due to the change in the fair value of the underlying stock price and is recognized as the gain on fair value remeasurement of deferred purchase consideration in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2021.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Additionally, the purchase price of the Acquisition included potential future payments that are contingent upon the achievement of specified development, regulatory and commercialization milestones and are required to recorded at fair value.

Contingent consideration liabilities related to acquisitions are measured at fair value each reporting period using Level 3 unobservable inputs.

The fair values of the contingent consideration liabilities were based on a probability-adjusted discounted cash flow calculation using Level 3 fair value measurements.

Changes in these estimates and assumptions could have a significant impact on the fair value of the contingent consideration liabilities.

Any changes in the fair value of these contingent consideration liabilities are included in loss from operations in the consolidated statements of operations and comprehensive loss.

During the year ended December 31, 2021, the change in the fair value of the contingent consideration liabilities was de minimis .

The following table sets forth the fair value of the Company’s financial instruments by level within the fair value hierarchy as of December 31, 2021 and 2020:

December 31, 2021

Cash equivalents

Deferred purchase consideration

Contingent consideration

Total Liabilities

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.

The following tables summarizes quantitative information and assumptions pertaining to the fair value measurement of the Level 3 inputs as of December 31, 2021:

Fair Value at

Financial Instrument

Valuation Technique

Unobservable Input

Deferred purchase consideration

Option pricing model

Discount for lack of marketability

15.0 % - 25.0 % ( 20.0 %)

Contingent consideration

Probability-adjusted

Period of expected milestone achievement

2022 - 2027 ( 2025 )

discounted cash flow model

Probabilities of achievement

18.9 % - 90.0 % ( 42.5 %)

Discount rate

Discount for lack of marketability

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

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 11) 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.

KALA PHARMACEUTICALS, INC.

1 unchanged sentence

(In thousands, except share and per share amounts)

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.

The Company held no short-term investments as of December 31, 2021.

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

4 unchanged sentences

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:

5 unchanged sentences

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

2 unchanged sentences

Prepaid expenses and other current assets

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Property and Equipment, Net

Property and equipment, net, consists of the following:

Furniture and office equipment

Computer hardware and software

Furniture and office equipment

Leasehold improvements

4 unchanged sentences

Depreciation expense for the years ended December 31, 2021 and 2020 was $ 933 and $ 908 , respectively.

In connection with the lease termination agreement entered into in November 2021 to accelerate the lease termination o f the Company’s Watertown Lease (as defined below) (see Note 10) , the Company disposed of and sold certain property and equipment.

Additionally, in conjunction with the termination of the Watertown Lease, the Company had $ 211 of assets held for sale as of December 31, 2021 included within prepaid expenses and other current assets on the consolidated balance sheet, which were subsequently sold in the first quarter of 2022.

KALA PHARMACEUTICALS, INC.

3 unchanged sentences

Accrued expenses consist of the following:

Compensation and benefits

Accrued revenue reserves (1)

Compensation and benefits

Commercial costs

5 unchanged sentences

Operating leases

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 the Company’s right of use asset and lease liability.

Terminated Watertown Lease

On February 28, 2018, the Company entered into a lease agreement with 480 Arsenal Group LLC 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 was eight years with an option to extend for an additional five years , which were 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.

The lease commencement date was November 15, 2018 and the Company concluded that it controlled the space, as of the lease commencement date.

The Company identified and assessed the following significant assumptions in recognizing the right-of-use asset and corresponding liability for the Watertown Lease.

● 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.

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.

On November 12, 2021, the Company entered into the Lease Termination Agreement with the landlord of the Watertown Lease, which Lease Termination Agreement was amended on December 22, 2021, modifying the lease to accelerate the lease termination date to January 11, 2022 (the “Lease Termination Date”).

Under the terms of the Lease Termination Agreement, the Company was entitled to receive a payment of $ 2,000 due from the landlord in January 2022, which was collected after December 31, 2021.

The Company was obligated to make rent payments outlined in the lease agreement until the Lease Termination Date.

In connection with the signing of the Lease Termination Agreement, the Company remeasured the lease liability and right-of-use asset and recognized a gain of approximately $ 1,311 , which is included in gain on lease modification in the consolidated statements of operations and comprehensive loss for the year ended December 31, 2021.

Additionally, pursuant to the Lease Termination Agreement, $ 2,042 of restricted cash was released on the Lease Termination Date that was pledged as collateral under a letter of credit with cash on deposit required by the terminated lease.

The restricted cash was included within short-term restricted cash on the consolidated balance sheet as of December 31, 2021 and included within restricted cash and other long-term assets on the consolidated balance sheet as of December 31, 2020.

KALA PHARMACEUTICALS, INC.

1 unchanged sentence

(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

2 unchanged sentences

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.

During the year ended December 31, 2021, the Company modified the Vehicle Fleet Lease to add 54 additional vehicles to the fleet.

The new component of the lease has an expected term of approximately three years , which commenced upon the delivery of the additional vehicles in March 2021.

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

Operating lease cost

Short-term lease cost

Variable lease cost

6 unchanged sentences

Present value of lease liabilities

The weighted average remaining lease term and weighted average discount rate of operating leases are as follows:

Weighted average remaining lease term

Weighted average discount rate

Athyrium Credit Facility

On October 1, 2018, the Company entered into a credit agreement (the “Athyrium Credit Facility”) with Athyrium Opportunities III Acquisition LP (“Athyrium”) for up to $ 110,000 .

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.

On October 1, 2018, the Company borrowed the entire principal

KALA PHARMACEUTICALS, INC.

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(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 $ 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:

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

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

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

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

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

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

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

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

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 .

4 unchanged sentences

The fair value of the Warrant of $ 1,900 was recognized as equity with a corresponding debt discount of $ 1,980 .

As of December 31, 2020, the unpaid principal balance under the Athyrium Credit Facility was $ 75,000 and the unamortized debt discount was $ 3,088 .

On May 4, 2021, the Company repaid all amounts owed under the Athyrium Credit Facility and terminated all commitments by Athyrium to extend further credit thereunder and all guarantees and security interests granted by the Company to the lenders thereunder.

In connection with the termination of the Athyrium Credit Facility, the Company paid to the lenders a prepayment premium of $ 2,250 and an exit fee of $ 750 .

The transaction resulted in a loss on extinguishment of debt of $ 5,395 , consisting of the prepayment premium, the unamortized debt discount and issuance costs and the unaccreted exit fee.

Additionally, the Company released $ 10,000 of restricted cash previously recorded to comply with a financial covenant required by the Athyrium Credit Facility.

Oxford Finance Loan and Security Agreement

On May 4, 2021 (the “Closing Date”), the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Oxford Finance LLC, in its capacity as lender (in such capacity, the “Lender”), and in its capacity as collateral agent (in such capacity, the “Agent”), pursuant to which a term loan of up to an aggregate principal amount of $ 125,000 is available to the Company, consisting of (i) a tranche A term loan that was disbursed on the Closing Date in the aggregate principal amount of $ 80,000 ;

(ii) a contingent tranche B term loan in the aggregate principal amount of $ 20,000 available to the Company through June 30, 2023 and within 90 days of the Company achieving trailing 6-month product revenue equal to or greater than $ 75,000 , subject to certain other terms and conditions;

and (iii) a contingent tranche C term loan in the aggregate principal amount of $ 25,000 available to the Company through December 31, 2023 and within 90 days of the Company achieving trailing 6-month product revenue equal to or greater than $ 100,000 , subject to certain other terms and conditions.

The Company utilized substantially all of the proceeds from the tranche A term loan to repay the Athyrium Credit Facility (as more fully described above).

The term loans bear interest at a floating rate equal to the greater of (i) 30-day LIBOR and (ii) 0.11 %, plus 7.89 %.

The Loan Agreement provides for interest-only payments until December 1, 2024 if neither the tranche B term loan nor the tranche C term loan are made, and until June 1, 2025 if either the tranche B term loan or the tranche C term loan is made (the “Amortization Date”).

The aggregate outstanding principal balance of the term loans are required to be repaid in monthly installments starting on the Amortization Date based on a repayment schedule equal to (i) 18 months if neither the tranche B term loan nor the tranche C term loan is made and (ii) 12 months if either the tranche B term loan or the tranche C term loan is made.

All unpaid principal and accrued and unpaid interest with respect to each term loan is due and payable in full on May 1, 2026 (the “Maturity Date”).

The Company paid a facility fee of $ 400 on the Closing Date and has agreed to pay a facility fee of $ 100 upon closing of the tranche B term loan and a $ 125 facility fee upon the closing of the tranche C term loan.

The Company will be required to make a final payment fee of 7.00 % of the original principal amount of any funded term loan payable on the earlier of (i) the prepayment of the term loan in full or (ii) the Maturity Date.

At the Company’s option, the Company may elect to prepay all, but not less than all, of the outstanding loans, subject to a prepayment fee equal to the following percentage of the principal amount being prepaid:

3.00 % if an advance is prepaid during the first 12 months following

KALA PHARMACEUTICALS, INC.

1 unchanged sentence

(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.

the applicable advance date, 2.00 % if an advance is prepaid after 12 months but prior to 24 months following the applicable advance date, and 1.00 % if an advance is prepaid any time after 24 months following the applicable advance date but prior to the Maturity Date.

In connection with its entry into the Loan Agreement, the Company granted the Agent a security interest in substantially all of the Company’s personal property owned or later acquired, including intellectual property.

The Loan Agreement also contains customary representations and warranties and affirmative and negative covenants, as well as customary events of default.

Certain of the customary negative covenants limit the ability of the Company and certain of its subsidiaries, among other things, to incur future debt, grant liens, make investments, make acquisitions, distribute dividends, make certain restricted payments and sell assets, subject in each case to certain exceptions.

The Loan Agreement includes features requiring (i) additional interest rate upon an event of default accrued at an additional 5 % , and (ii) the Lender’s right to declare all outstanding principal and interest immediately payable upon an event of default.

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

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

The Company determined that, due to the unlikely event of default, the embedded derivatives have a de minimis value as of December 31, 2021.

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

In addition, in connection with the Loan Agreement, the Company paid certain fees to the Lender and other third-party service providers.

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

These costs were amortized using the effective interest method over the term of the Loan Agreement.

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

As of December 31, 2021, the effective interest rate was 10.41 %, 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, 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 .

During the year ended December 31, 2021, the Company recognized interest expense of $ 7,446 for the Loan Agreement and the Athyrium Credit Facility .

This consisted of amortization of debt discount of $ 613 and the contractual coupon interest expense of $ 6,833 .

During the year ended December 31, 2020, the Company recognized interest expense of $ 8,440 for the Athyrium Credit Facility.

This consisted of amortization of debt discount of $ 910 and the contractual coupon interest expense of $ 7,530 .

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

The components of the carrying value of the debt as of December 31, 2021 and December 31, 2020 are detailed below:

3 unchanged sentences

Long-term debt, net

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

The annual principal payments due under the Loan Agreement as of December 31, 2021 were as follows:

Years Ending December 31,

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 11.

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

The following table summarizes the common stock warrants outstanding as of December 31, 2021 and 2020, each exercisable into the number of shares of common stock set forth below as of the specified dates:

Shares Exercisable at

1 unchanged sentence

September 2017

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Common and Preferred Stock

11 unchanged sentences

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 the Company may 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.

4 unchanged sentences

Upon any liquidation, after the payment or provision for payment of all debts and liabilities of the Company and all preferential amounts to which the holders of preferred stock may be entitled with respect to the distribution of assets in liquidation, the holders of common stock shall be entitled to share ratably in the remaining assets of the Company available for distribution.

Reserved Shares

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.

1 unchanged sentence

(In thousands, except share and per share amounts)

Reserved Shares

As of December 31, 2021 and 2020, 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, upon the vesting of RSUs and PSUs and upon the issuance of Upfront Shares and Holdback Shares in connection with the Acquisition as follows (see Note 14):

Warrant rights to acquire common stock

Outstanding inducement stock option awards

Deferred Purchase Consideration

Stock-based Compensation

15 unchanged sentences

During the years ended December 31, 2021 and December 31, 2020, the Company granted non-statutory stock options to purchase an aggregate of 649,400 shares and 350,800 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).

These stock options will vest over a four-year period, with 25 % of the shares underlying each option

KALA PHARMACEUTICALS, INC.

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(In thousands, except share and per share amounts)

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).

A summary of option activity for employee awards under the 2009 Plan, the 2017 Plan and inducement grants for the year ended December 31, 2021 is as follows:

18 unchanged sentences

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

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

4 unchanged sentences

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.

As of December 31, 2021, there was $ 10,408 of unrecognized compensation cost related to the stock options granted, which is expected to be expensed over a weighted-average period of 2.40 years.

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

7 unchanged sentences

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.

In 2020, 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 vested upon the date of the 2021 Annual Meeting of Stockholders.

In 2020, 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 not all of the awards have vested as of December 31, 2021.

In 2021, the Company issued 431,333 RSUs to certain executives and other employees which will vest no sooner than one -third per year over three years on the anniversary of the date of grant as well as 125,000 RSUs to members of the Board which will vest upon the earlier of the first anniversary of the 2021 Annual Meeting of Stockholders or the date of the 2022 Annual Meeting of Stockholders.

As of December 31, 2021, a total of 813,869 RSUs and PSUs were unvested and outstanding , which results in unrecognized stock-based compensation of $ 3,291 to be recognized as stock-based compensation expense over the remaining weighted-average vesting period of 1.27 years.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

A summary of activity for RSUs and PSUs for the year ended December 31, 2021 is as follows:

2 unchanged sentences

Changes during the period:

PSUs forfeited

Unvested and outstanding balance as of December 31, 2021

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Vested and deferred balance as of December 31, 2021

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

11 unchanged sentences

During the year ended December 31, 2020, employees of the Company purchased an aggregate of 314,397 shares under the ESPP.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Loss Per Share

Basic and diluted net loss per share attributable to common stockholders was calculated as follows for the years ended December 31, 2021 and 2020:

Net loss attributable to common stockholders

Weighted-average common shares outstanding, basic and diluted (1)

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

(1) Included in the weighted-average common shares outstanding, basic and diluted for the year ended December 31, 2021 is an aggregate of 6,815,072 shares of common stock issued to Combangio Equityholders on January 3, 2022 and an aggregate of 973,565 shares of common stock that have been held back by the Company and will be issuable subject to the terms of the Merger Agreement to the Combangio Equityholders on the Escrow Release Date of February 15, 2023.

The following potential common stock equivalents, presented based on amounts outstanding at each period end, were excluded from the calculation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect:

Options to purchase shares of common stock

Unvested RSUs and PSUs

Unexercised warrants

The Company has had no income tax expense due to operating losses incurred for the years ended December 31, 2021 and 2020.

1 unchanged sentence

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

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

A reconciliation of the U.S.

2 unchanged sentences

Change in valuation allowance

Research and development tax credits

Acquired in-process research and development

Stock-based compensation

State income taxes, net of federal benefit

Losses limited by Section 382

Research and development tax credits

Effective income tax rate

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

Net deferred tax assets as of December 31, 2021 and 2020 consisted of the following:

1 unchanged sentence

Net operating loss carryforwards

Lease liabilities

Stock-based compensation

2 unchanged sentences

Rebates, incentives, trade discounts and allowances

Lease liabilities

Total deferred tax assets

7 unchanged sentences

Accordingly, a full valuation allowance has been established against the deferred tax assets as of December 31, 2021 and 2020.

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.

The valuation allowance increased by $ 36,568 and $ 17,492 during the years ended December 31, 2021 and 2020, respectively, 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.

1 unchanged sentence

As of December 31, 2021 and 2020, the Company had state net operating loss carryforwards of $ 352,863 and $ 214,989 , 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).

As of December 31, 2021 and 2020, the Company also had federal and state research

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

and development credit carryforwards of approximately $ 3,591 and $ 2,398 , respectively, which begin to expire in 2040 (federal) and 2035 (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 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.

1 unchanged sentence

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, 2021 and 2020 the Company had no uncertain tax positions.

1 unchanged sentence

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, June 2018, and July 2020, which licensed to the Company a portfolio of specified patent rights and remains in full force and effect.

JHU 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.

2 unchanged sentences

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.

During the years ended December 31, 2021 and 2020, amounts paid to JHU for royalties were de minimis .

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

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 EYSUVIS and INVELTYS.

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

The Company paid JHU a $ 150 milestone payment during the year ended December 31, 2021, which was triggered by the first commercial sale of EYSUVIS in the United States in December 2020.

Additional amounts paid to JHU during the years ended December 31, 2021 and 2020 were de minimis .

Stanford License Agreement —In October 2019, Combangio entered into a license agreement with The Board of Trustees of The Leland Stanford Junior University (“Stanford”), which was amended in February 2020 and subsequently transferred to the Company by operation of law upon the Acquisition.

Pursuant to the license agreement with Stanford (the “Stanford Agreement”), the Company has a worldwide, exclusive, sublicensable license under certain patent rights, or licensed patents, directed to methods to promote eye wound healing, to make, have made, use, import, offer to sell and sell products that are covered by the licensed patents (“licensed products”) for use in all fields.

Under the Stanford Agreement, the Company is required to pay Stanford annual license maintenance fees and milestone payments upon the achievement of specified development, regulatory and sales milestones, as well as tiered royalties on net sales of licensed products that are covered by a valid claim of a licensed patent.

KALA PHARMACEUTICALS, INC.

1 unchanged sentence

(In thousands, except share and per share amounts)

The Company’s minimum obligations due under its license agreements as of December 31, 2021, are as follows:

Years Ending December 31,

Total minimum license payments

Commercial Supply Agreement — The Company entered into a commercial supply agreement with Woodstock Sterile Solutions, Inc.

(formerly known as Catalent Pharma Solutions, LLC) to manufacture commercial supplies of EYSUVIS and INVELTYS.

The commercial supply agreement contains annual minimum purchase requirements, which follow the contract year from July 1st to June 30th.

The minimum purchase requirements increased upon FDA approval of EYSUVIS on October 26, 2020.

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

Years Ending December 31,

Thereafter (2)

Total minimum purchase commitments

(1) Amount presented is net of amounts paid towards the minimum purchase obligation as of December 31, 2021.

(2) Beginning with the contract year July 1, 2025 to June 30, 2026, the minimum contract amounts above are 75 % of the actual dollar value of the units ordered for commercial products, in the aggregate, in the contract year immediately prior to the applicable contract year.

The table above assumes each contract year beginning July 1, 2025, purchases are 75 % of the prior year purchases.

Contingencies related to the Merger Agreement —In connection with the acquisition of Combangio, the Company agreed to make additional payments based on the achievement of certain milestone events related to KPI-012.

The Company recognized certain contingent consideration liabilities at fair value on the acquisition date, and revalues the remaining obligations each reporting period.

The total potential maximum payout for the milestone payments, which have been recorded as liabilities at fair value, is $ 40,000 and the milestone payments are contingent upon the achievement of specified development, regulatory and commercialization milestones.

Additionally, pursuant to the Merger Agreement, the Company could trigger potential future sales-based milestone payments of up to $ 65,000 .

Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain development, regulatory or commercial milestones.

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.

KALA PHARMACEUTICALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

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.

6 unchanged sentences

The Company made discretionary matching contributions of $ 612 and $ 446 to the 401(k) Plan during for the years ended December 31, 2021 and 2020, 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:

Three months ended

September 30,

Product revenues, net

Costs and expenses

Total other income (expense)

Net loss attributable to common stockholders

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

Three months ended

September 30,

Product revenues, net

Costs and expenses

Total other income (expense)

Net loss attributable to common stockholders

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