KALA BIO, Inc. Fair Value Disclosure
Note 3: Fair Value of Financial Instruments
ASC 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for those instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and its own assumptions (unobservable inputs). The hierarchy consists of three levels:
| ● | Level 1—Quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data. |
| ● | Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques. |
The Company’s financial instruments as of December 31, 2024 and 2023 consisted primarily of cash equivalents and contingent consideration. Cash equivalents and contingent consideration are reported at their respective fair values on the Company’s consolidated balance sheets.
The Company acquired Combangio in November 2021 and in connection with the closing of the Combangio Acquisition, the Company agreed to issue an aggregate of 155,664 shares (the “Deferred Purchase Consideration”) of the Company’s common stock to former Combangio stockholders and other equityholders (the “Combangio Equityholders”)
consisting of (i) an aggregate of 136,314 shares of common stock issued on January 3, 2022 and (ii) an aggregate of 19,350 shares of common stock that were held back as partial security for the satisfaction of indemnification obligations and other payment obligations of the Combangio Equityholders and were issued on March 10, 2023 (the “Holdback Shares”). The Company established liabilities for these considerations. The Deferred Purchase Consideration related to the Combangio Acquisition was 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. Any change in the fair value of the Deferred Purchase Consideration was included in loss from operations in the consolidated statements of operations and comprehensive loss. During the year ended December 31, 2023, the Company settled the remaining liability of $365 upon the issuance of the Holdback Shares and therefore there was no change in the fair value of the Deferred Purchase Consideration during the year ended December 31, 2024. During the years ended December 31, 2023, the change in the fair value of the Deferred Purchase Consideration was a gain of $230, primarily due to the change in the fair value of the underlying stock price and was recognized as the gain on fair value remeasurement of deferred purchase consideration in the consolidated statement of operations and comprehensive loss.
Additionally, the purchase price in connection with the Combangio Acquisition included potential future payments of up to $105,000 that are contingent upon the achievement of specified development, regulatory and commercialization milestones and are required to be recorded at fair value. As of December 31, 2024, of the $105,000 in contingent milestone payments, the Company has paid to the Combangio Equityholders an aggregate of $2,646 in cash and $2,354 in shares of the Company’s common stock (representing an aggregate of 105,038 shares of the Company’s common stock) following dosing of the first patient in the Company’s CHASE Phase 2b clinical trial of KPI-012 for PCED in the United States in February 2023 (the “First Dosing Milestone”). 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 years ended December 31, 2024 and 2023, the change in the fair value of the contingent consideration liabilities was a loss of $549 and $740, respectively, primarily due to changes in discount rates, the passage of time and changes in the expected timing and probability of payment, and were recognized as a loss on fair value remeasurement of contingent consideration in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2024 and 2023.
The following tables set forth the fair value of the Company’s financial instruments by level within the fair value hierarchy as of December 31, 2024 and 2023:
December 31, 2024 | ||||||||||||
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Assets: | ||||||||||||
Cash equivalents | $ | 39,707 | $ | 39,707 | $ | — | $ | — | ||||
Total Assets | $ | 39,707 | $ | 39,707 | $ | — | $ | — | ||||
Liabilities: | ||||||||||||
Contingent consideration | $ | 4,659 | $ | — | $ | — | $ | 4,659 | ||||
Total Liabilities | $ | 4,659 | $ | — | $ | — | $ | 4,659 | ||||
December 31, 2023 | ||||||||||||
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Assets: | ||||||||||||
Cash equivalents | $ | 44,639 | $ | 44,639 | $ | — | $ | — | ||||
Total Assets | $ | 44,639 | $ | 44,639 | $ | — | $ | — | ||||
Liabilities: | ||||||||||||
Contingent consideration | $ | 4,110 | $ | — | $ | — | $ | 4,110 | ||||
Total Liabilities | $ | 4,110 | $ | — | $ | — | $ | 4,110 | ||||
The following tables summarize quantitative information and assumptions pertaining to the fair value measurement of the Level 3 inputs as of December 31, 2024 and 2023:
Fair Value at | |||||||||
December 31, | Range | ||||||||
Financial Instrument |
| 2024 |
| Valuation Technique |
| Unobservable Input |
| (Average) | |
Contingent consideration | $ | 4,659 | Probability-adjusted | Period of expected milestone achievement | 2026 - 2028 (2028) | ||||
discounted cash flow model | Probabilities of achievement | 16.6% - 35.5% (23.4%) | |||||||
Discount rate | 14.3% | ||||||||
Fair Value at | |||||||||
December 31, | Range | ||||||||
Financial Instrument |
| 2023 |
| Valuation Technique |
| Unobservable Input |
| (Average) | |
Contingent consideration | $ | 4,110 | Probability-adjusted | Period of expected milestone achievement | 2025 - 2028 (2027) | ||||
discounted cash flow model | Probabilities of achievement | 16.6% - 35.5% (23.4%) | |||||||
Discount rate | 16.3% | ||||||||
The following table summarizes the changes in the Deferred Purchase Consideration and contingent consideration liabilities measured at fair value using Level 3 inputs for the years ended December 31, 2024 and 2023:
Contingent consideration | |||
Balance at January 1, 2023 | $ | 8,370 | |
Fair value adjustments | 740 | ||
Settlements | (4,854) | ||
Reclassification to accrued expenses and other current liabilities | (146) | ||
Balance at January 1, 2024 | $ | 4,110 | |
Fair value adjustments | 549 | ||
Balance at December 31, 2024 | $ | 4,659 | |
Deferred purchase consideration | |||
Balance at January 1, 2023 | $ | 595 | |
Fair value adjustments | (230) | ||
Settlements | (365) | ||
Balance at December 31, 2023 | $ | — |
During the years ended December 31, 2024 and 2023, there were no transfers between Level 1, Level 2, and Level 3.
The carrying value reported on the accompanying consolidated balance sheets of 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 8, “Debt”) 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.
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.