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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to       

Commission file number 001-38150

KALA PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware

27-0604595

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

1167 Massachusetts Avenue

Arlington, MA

02476

(Address of principal executive offices)

(Zip Code)

(781) 996-5252

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act

Title of each class

Common Stock, $0.001 par value per share

Trading symbol(s)

KALA

Name of each exchange on which registered

The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No  

There were 1,518,424 shares of Common Stock, $0.001 par value per share, outstanding as of November 7, 2022.

TABLE OF CONTENTS

    

Page

PART I – FINANCIAL INFORMATION

7

Item 1.

Financial Statements (Unaudited)

7

Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021

7

Condensed Consolidated Statement of Operations and Comprehensive Loss for the three and nine months ended September 30, 2022 and 2021

8

Condensed Consolidated Statements of Changes in Mezzanine Equity and Stockholders' (Deficit) Equity for the three and nine months ended September 30, 2022 and 2021

9

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021

11

Notes to Condensed Consolidated Financial Statements

12

Item 2.

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

36

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

55

Item 4.

Controls and Procedures

56

PART II – OTHER INFORMATION

57

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

110

Item 6.

Exhibits

111

SIGNATURES

112

2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical fact, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

our expectations with respect to the potential impacts the sale of our commercial business to Alcon Pharmaceuticals Ltd. and Alcon Vision, LLC, which we refer collectively as Alcon, will have on our business, results of operations and financial condition;
our expectations with respect to, and the amount of, future milestone payments we may receive from Alcon in connection with the sale of our commercial business;
our expectations with respect to our dependency on and potential advantages of KPI-012, our product candidate for the treatment of persistent corneal epithelial defects, or PCED;
our expectations with respect to the potential financial impact, synergies, growth prospects and benefits of our acquisition of Combangio, Inc., or Combangio, or the Combangio Acquisition, including our expectations with respect to, and the amount of, future milestone payments in connection with the Combangio Acquisition;
our development efforts for KPI-012 and our ability to discover and develop new programs and product candidates;
the timing, progress and results of clinical trials for KPI-012, including statements regarding the timing of initiation and completion of clinical trials, dosing of subjects and the period during which the results of the trials will become available;
the timing, scope and likelihood of regulatory filings, including the filing of any investigational new drug applications and biologics license applications for KPI-012 and any other product candidate we may develop in the future;
our ability to obtain regulatory approvals for KPI-012;
our commercialization, marketing and manufacturing capabilities and strategy for KPI-012, if approved;
our estimates regarding potential future revenue from sales of KPI-012, if approved;
our ability to negotiate, secure and maintain adequate pricing, coverage and reimbursement terms and processes on a timely basis, or at all, with third-party payors for KPI-012, if approved;
the rate and degree of market acceptance and clinical utility of KPI-012 and our estimates regarding the market opportunity for KPI-012, if approved;
plans to pursue the development of KPI-012 for indications in addition to PCED;

3

our expectations with respect to our determination to cease the development of our preclinical pipeline programs that are unrelated to our mesenchymal stem cell secretome, or MSC-S, platform, including the development of KPI-287, our receptor tyrosine kinase inhibitor, and our selective glucocorticoid receptor modulators;
our plans to initiate preclinical studies under our KPI-014 program;
our expectations regarding our ability to fund our operating expenses, debt service obligations, and capital expenditure requirements with our cash on hand;
our expectations regarding our ability to comply with the covenants under our Loan Agreement;
our intellectual property position, including intellectual property acquired in the Combangio Acquisition;
our ability to identify additional products, product candidates or technologies with significant commercial potential that are consistent with our commercial objectives;
our estimates regarding expenses, future revenue, timing of any future revenue, capital requirements and needs for additional financing;
the impact of government laws and regulations;
our competitive position;
developments relating to our competitors and our industry;
our ability to maintain and establish collaborations or obtain additional funding;
our business and business relationships, including with employees and suppliers;
our anticipated annualized reduction in operating expenses associated with our workforce reduction announced in July 2022;
the impact of COVID-19 on our business and operations; and
our expectations regarding the time during which we will be an emerging growth company under the Jumpstart our Business Startups Act of 2012.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in the “Risk Factors” section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q, and we do not assume any obligation to update any forward-looking statements except as required by applicable law.

4

This Quarterly Report on Form 10-Q includes statistical and other industry and market data that we obtained from industry publications and research, surveys and studies conducted by us and third parties as well as our estimates of potential market opportunities. Industry publications, third-party and our own research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. Our estimates of the potential market opportunity for KPI-012 include several key assumptions based on our industry knowledge, industry publications, third-party research and other surveys, which may be based on a small sample size and may fail to accurately reflect market opportunities. While we believe that our internal assumptions are reasonable, no independent source has verified such assumptions.

Risk Factor Summary

Our business is subject to a number of risks that if realized could materially affect our business, financial condition, results of operations, cash flows and access to liquidity. These risks are discussed more fully in the “Risk Factors” section of this Quarterly Report on Form 10-Q. Our principal risks include the following:

Following the completion of the sale of our commercial business to Alcon, we no longer have any commercial products in our portfolio, and we have only one product candidate which is currently in clinical development. As a result, we are substantially dependent on the development of KPI-012 for the treatment of PCED and any other product candidates we may develop in the future.
The milestone consideration we are eligible to receive in connection with the sale of our commercial business to Alcon is subject to various risks and uncertainties.
We may not be able to realize the anticipated benefits from the sale of our commercial business to Alcon.
We may fail to realize the anticipated benefits of our Combangio Acquisition and those benefits may take longer to realize than expected.
We have incurred significant losses from operations and negative cash flows from operations since our inception. We expect to incur additional losses and may never achieve or maintain profitability. As of September 30, 2022, we had an accumulated deficit of $574.4 million.
Our limited operating history and our limited experience in developing biologics may make it difficult for you to evaluate the success of our business to date and to assess our future viability.
We will need substantial additional funding. If we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product development efforts.
Our substantial indebtedness may limit cash flow available to invest in the ongoing needs of our business, and a failure to comply with the covenants under our Loan Agreement, such as the requirement that our common stock continue to be listed on the Nasdaq Global Select Market, could result in an event of default and acceleration of amounts due.
If we are unable to successfully complete the clinical development of, and obtain marketing approval for, KPI-012 or any other product candidate we may develop in the future, or experience significant delays in doing so, or if, after obtaining marketing approvals, we fail to successfully commercialize such product candidates, our business will be materially harmed.
If clinical trials of KPI-012 or any other product candidate that we develop fail to demonstrate potency, safety and purity or, for drug products, safety and efficacy to the satisfaction of the U.S. Food and Drug Administration, or FDA, or other regulatory authorities or do not otherwise produce favorable results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of such product candidate.
If we experience any of a number of possible unforeseen events in connection with our clinical trials, potential marketing approval or commercialization of our product candidates could be delayed or prevented, and our competitors could bring products to market before we do.

5

We may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
KPI-012 has only been evaluated in a clinical trial outside of the United States, and we may in the future conduct clinical trials for product candidates at sites outside the United States. The FDA may not accept data from trials conducted in such locations.
The ongoing novel coronavirus pandemic and the efforts to prevent its spread have adversely impacted our operations, could impact the development of KPI-012 or any other product candidate we develop, and may continue to adversely affect our business, results of operations and financial condition.
Even if KPI-012 or any other product candidates that we may develop in the future receives marketing approval, such products may fail to achieve market acceptance by clinicians and patients, or adequate formulary coverage, pricing or reimbursement by third-party payors and others in the medical community, and the market opportunity for these products may be smaller than we estimate.
If we are unable to establish and maintain sales, marketing and distribution capabilities or enter into sales, marketing and distribution agreements with third parties, if and when necessary, we may not be successful in commercializing KPI-012 or any other product candidate that we may develop if and when they are approved.
We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do. Our competitors include major pharmaceutical companies with significantly greater financial resources. KPI-012 and any other product candidate we may develop, if and when approved, may also compete with existing branded, generic and off-label products.
We have relied, and expect to continue to rely, on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet deadlines for the completion of such trials.
We contract with third parties for the manufacture of KPI-012 and plan to contract with third parties for preclinical, clinical and commercial supply of any other product candidates we develop. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.
The manufacture of biologics is complex and our third-party manufacturers may encounter difficulties in production. If any of our third-party manufacturers encounter such difficulties, our ability to provide supply of product candidates for clinical trials or products for patients, if approved, could be delayed or prevented.
We may be unable to obtain and maintain patent protection for our technology or product candidates, or the scope of the patent protection obtained may not be sufficiently broad or enforceable, such that our competitors could develop and commercialize technology, products and product candidates similar or identical to ours, and our ability to successfully commercialize our technology product candidates may be impaired.
KPI-012 is protected by patent rights exclusively licensed from other companies or institutions. If these third parties terminate their agreements with us or fail to maintain or enforce the underlying patents, or we otherwise lose our rights to these patents, our competitive position and our market share in the markets for any of our products, if and when approved, will be harmed.
Our workforce reduction announced in July 2022 could result in total costs and expenses that are greater than expected and could disrupt our business.
If we fail to comply with the continued listing requirements of Nasdaq, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted. If our common stock is delisted from Nasdaq, we will be in default under our Loan Agreement.

6

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share amounts)

September 30, 

December 31, 

    

2022

    

2021

Assets

Current assets:

Cash and cash equivalents

$

52,393

$

92,136

Short-term restricted cash

2,042

Accounts receivable, net

190

15,345

Inventory

8,639

Prepaid expenses and other current assets (Note 8)

22,576

6,204

Current assets held for sale (Note 4)

9,513

Total current assets

84,672

124,366

Non-current assets:

Property and equipment, net

517

2,722

Long-term inventory

9,578

Right-of-use assets

34

1,299

Restricted cash and other long-term assets

475

1,462

Total assets

$

85,698

$

139,427

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable

$

7,348

$

4,899

Accrued expenses and other current liabilities

25,368

20,986

Deferred gain on sale of commercial business

3,408

Current portion of lease liabilities

32

711

Current portion of contingent consideration

3,923

3,817

Current portion of deferred purchase consideration

162

7,009

Total current liabilities

40,241

37,422

Long-term liabilities:

Long-term lease liabilities

548

Long-term debt

42,642

78,929

Long-term contingent consideration

3,783

4,841

Long-term deferred purchase consideration

883

Total long-term liabilities

46,425

85,201

Total liabilities

86,666

122,623

Commitments and Contingencies (Note 17)

Mezzanine equity:

Preferred stock, $0.001 par value; 5,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 73,208 and 0 Series D redeemable preferred shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

Stockholders' equity:

Common stock, $0.001 par value; 120,000,000 shares authorized as of September 30, 2022 and December 31, 2021; 1,476,637 and 1,322,464 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively

1

1

Additional paid-in capital

573,398

559,191

Accumulated deficit

(574,367)

(542,388)

Total stockholders' (deficit) equity

(968)

16,804

Total liabilities and stockholders' (deficit) equity

$

85,698

$

139,427

See accompanying notes to these unaudited condensed consolidated financial statements.

7

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

(In thousands, except share and per share amounts)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2022

    

2021

    

2022

    

2021

Product revenues, net

$

420

$

3,067

$

3,892

$

9,384

Costs and expenses:

Cost of product revenues

11

908

2,560

2,679

Selling, general and administrative

9,549

25,349

59,204

81,034

Research and development

5,391

2,881

14,330

9,101

(Gain) loss on fair value remeasurement of deferred purchase consideration

(57)

205

Loss (gain) on fair value remeasurement of contingent consideration

95

(952)

Total costs and expenses

14,989

29,138

75,347

92,814

Loss from operations

(14,569)

(26,071)

(71,455)

(83,430)

Other income (expense):

Interest income

234

16

310

92

Interest expense

(1,447)

(2,072)

(5,689)

(6,304)

Loss on extinguishment of debt

(2,583)

(2,583)

(5,395)

Gain on sale of commercial business

46,995

46,995

Other income (expense), net

443

443

Total interest and other income (expense)

43,642

(2,056)

39,476

(11,607)

Net income (loss)

$

29,073

$

(28,127)

$

(31,979)

$

(95,037)

Net income (loss) per share—basic

$

19.39

$

(21.41)

$

(21.46)

$

(73.80)

Net income (loss) per share—diluted

$

19.25

$

(21.41)

$

(21.46)

$

(73.80)

Weighted average shares outstanding—basic

1,499,001

1,313,466

1,490,159

1,287,772

Weighted average shares outstanding—diluted

1,510,421

1,313,466

1,490,159

1,287,772

Net income (loss)

$

29,073

$

(28,127)

$

(31,979)

$

(95,037)

Other comprehensive income (loss):

Change in unrealized gains on investments

1

(4)

Total other comprehensive income (loss)

1

(4)

Total comprehensive income (loss)

$

29,074

$

(28,127)

$

(31,979)

$

(95,041)

See accompanying notes to these unaudited condensed consolidated financial statements.

8

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY (DEFICIT)

(UNAUDITED)

(In thousands, except share and per share amounts)

Three Months Ended September 30, 2022

Mezzanine Equity

Stockholders' Equity (Deficit)

Accumulated

Series D Preferred Stock

Common Stock

Additional

Other

Total

$0.001 Par Value

$0.001 Par Value

Paid-In

Comprehensive

Accumulated

Stockholders'

Shares

    

Amount

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Equity (Deficit)

Balance as of June 30, 2022

$

1,465,949

$

1

$

571,886

$

(1)

$

(603,440)

$

(31,554)

Issuance of common stock for vested restricted stock units

Issuance of common stock under employee stock purchase plan

10,688

138

138

Issuance of redeemable non-controlling Series D preferred stock

73,208

Stock-based compensation expense

1,374

1,374

Change in fair value of investments

1

1

Net income

29,073

29,073

Balance as of September 30, 2022

73,208

$

1,476,637

$

1

$

573,398

$

$

(574,367)

$

(968)

Three Months Ended September 30, 2021

Mezzanine Equity

Stockholders' Equity

Accumulated

Series D Preferred Stock

Common Stock

Additional

Other

Total

$0.001 Par Value

$0.001 Par Value

Paid-In

Comprehensive

Accumulated

Stockholders'

  

Shares

    

Amount

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Equity

Balance as of June 30, 2021

$

1,307,860

$

1

$

550,962

$

$

(466,693)

$

84,270

At the market offering, net of sales agent commission of $9

2,283

333

333

Issuance of common stock under employee stock purchase plan

4,019

906

906

Stock-based compensation expense

4,087

4,087

Net loss

(28,127)

(28,127)

Balance as of September 30, 2021

$

1,314,162

$

1

$

556,288

$

$

(494,820)

$

61,469

9

Nine Months Ended September 30, 2022

Mezzanine Equity

Stockholders' Equity (Deficit)

Accumulated

Series D Preferred Stock

Common Stock

Additional

Other

Total

$0.001 Par Value

$0.001 Par Value

Paid-In

Comprehensive

Accumulated

Stockholders'

Shares

    

Amount

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Equity (Deficit)

Balance as of December 31, 2021

$

1,322,464

$

1

$

559,191

$

$

(542,388)

$

16,804

Exercise of stock options

102

3

3

Issuance of common stock for vested restricted stock units

3,966

Issuance of common stock under employee stock purchase plan

13,791

298

298

Issuance of common stock to satisfy deferred purchase consideration

136,314

7,936

7,936

Issuance of redeemable non-controlling Series D preferred stock

73,208

Stock-based compensation expense

5,970

5,970

Change in fair value of investments

Net loss

(31,979)

(31,979)

Balance as of September 30, 2022

73,208

$

1,476,637

$

1

$

573,398

$

$

(574,367)

$

(968)

Nine Months Ended September 30, 2021

Mezzanine Equity

Stockholders' Equity

Accumulated

Series D Preferred Stock

Common Stock

Additional

Other

Total

$0.001 Par Value

$0.001 Par Value

Paid-In

Comprehensive

Accumulated

Stockholders'

Shares

    

Amount

Shares

    

Amount

    

Capital

    

Income

    

Deficit

    

Equity

Balance as of December 31, 2020

$

1,190,763

$

1

$

499,773

$

4

$

(399,783)

$

99,995

At the market offering, net of offering costs of $1,161

113,950

41,063

41,063

Exercise of stock options

1,778

248

248

Issuance of common stock for vested restricted stock units

2,156

Issuance of common stock under employee stock purchase plan

5,515

1,337

1,337

Stock-based compensation expense

13,867

13,867

Change in fair value of investments

(4)

(4)

Net loss

(95,037)

(95,037)

Balance as of September 30, 2021

$

1,314,162

$

1

$

556,288

$

$

(494,820)

$

61,469

See accompanying notes to these unaudited condensed consolidated financial statements.

10

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

Nine Months Ended

September 30, 

    

2022

    

2021

Cash flows from operating activities:

Net loss

$

(31,979)

$

(95,037)

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

Depreciation and amortization

457

763

Non-cash operating lease cost

421

1,711

Gain on sale of commercial business

(46,995)

Loss on extinguishment of debt

2,583

5,395

Loss on fair value remeasurement of deferred purchase consideration

205

Gain on fair value remeasurement of contingent consideration

(952)

Amortization of debt discount and other non-cash interest

1,130

1,080

Stock-based compensation

6,048

13,340

Other non-cash (gains) losses, net

76

8

Change in operating assets and liabilities:

Accounts receivable

15,143

(3,026)

Prepaid expenses and other current assets

(16,928)

(1,239)

Inventory

(1,011)

(6,772)

Accounts payable

2,433

4,251

Accrued expenses and other current liabilities

4,531

495

Lease liabilities and other long-term liabilities

(335)

(1,300)

Net cash used in operating activities

(65,173)

(80,331)

Cash flows from investing activities:

Proceeds from sale of commercial business, net of transaction costs

62,908

Purchases of property and equipment and other assets

(291)

(874)

Proceeds from sale of property and equipment

41

50

Purchases of short-term investments

(4,992)

Proceeds from sales or maturities of short-term investments

5,000

76,250

Net cash provided by investing activities

62,666

75,426

Cash flows from financing activities:

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

77,782

Payment of principal, prepayment premium and final payment fee on debt

(40,000)

(78,010)

Proceeds from common stock offerings, net of offering costs

41,063

Payment of principal on finance lease

(29)

(26)

Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan

301

1,585

Net cash (used in) provided by financing activities

(39,728)