Kala Pharmaceuticals(KALA) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The company presents unaudited financial statements showing a net loss of $45.3 million and a significant increase in assets Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $128,023 | $85,449 | | Total current assets | $197,024 | $105,484 | | Total assets | $245,510 | $154,323 | | Total liabilities | $116,567 | $124,631 | | Total stockholders' equity | $128,943 | $29,692 | Condensed Consolidated Statements of Operations Highlights (in thousands) | Account | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Product revenues, net | $833 | $1,904 | | Total costs and expenses | $22,113 | $43,309 | | Loss from operations | $(21,280) | $(41,405) | | Net loss | $(23,312) | $(45,267) | | Net loss per share | $(0.42) | $(0.94) | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Account | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(39,134) | $(51,596) | | Net cash used in investing activities | $(57,450) | $(943) | | Net cash provided by financing activities | $139,160 | $19 | Nature of Business and Liquidity The biopharmaceutical company faces significant losses and COVID-19 impacts but believes cash is sufficient for one year - The company's lead product candidate, EYSUVIS™, has a Prescription Drug User Fee Act (PDUFA) goal date of October 30, 2020, for its NDA review by the FDA[19] - As of June 30, 2020, the company had an accumulated deficit of $340.7 million, having incurred significant losses since inception[22] - Management believes that existing cash, cash equivalents, and short-term investments as of June 30, 2020, will be sufficient to fund planned operating expenses for at least the next twelve months[23][24] - The COVID-19 pandemic has adversely affected the market for INVELTYS due to moratoria on elective ocular surgeries, resulting in a significant reduction in demand[25] Revenue & Accounts Receivable, Net The company recognizes revenue from INVELTYS sales upon delivery, with net sales reflecting various deductions and reserves - Revenue from product sales is recognized at the point the customer obtains control of the product, which occurs upon delivery[45] Activity in Product Revenue Provisions and Allowances (in thousands) | Category | Balance at Dec 31, 2019 | Provision for H1 2020 Sales | Payments/Credits in H1 2020 | Balance at June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Trade Discounts, Allowances and Chargebacks | $1,783 | $1,060 | $(2,450) | $398 | | Product Returns | $180 | $0 | $(1) | $64 | | Rebates and Incentives | $10,044 | $6,770 | $(11,103) | $5,570 | Debt The company holds a $75.0 million term loan at a fixed rate, secured by company assets and requiring a minimum cash balance - On October 1, 2018, the company entered into the Athyrium Credit Facility and borrowed the full $75.0 million principal amount of the Term Loan A[65] - The loan bears a fixed interest rate of 9.875% per annum, with principal payments starting on the fourth anniversary of the loan (October 2022)[66] Carrying Value of Debt (in thousands) | Component | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Principal loan balance | $75,000 | $75,000 | | Unamortized debt discount and issuance cost | $(3,559) | $(3,999) | | Cumulative accretion of exit fee | $256 | $183 | | Long-term debt, net | $71,697 | $71,184 | Equity Financings The company raised over $137 million in net proceeds from equity offerings in H1 2020 and established new financing facilities - In Q1 2020, the company raised net proceeds of $12.5 million by issuing 2,352,671 shares through its at-the-market (ATM) offering[77] - In March and April 2020, the company sold 16,979,371 shares in an underwritten offering, resulting in total net proceeds of $125.4 million[78][80] - In May 2020, the company filed a new $350.0 million shelf registration statement and entered into a new amended and restated sales agreement for up to $75.0 million of common stock under an ATM offering[81][82] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting COVID-19's impact on revenue and improved liquidity from recent capital raises - The company's primary focus is on the commercialization of INVELTYS and the development and potential launch of EYSUVIS, which has a PDUFA goal date of October 30, 2020[111][115] - The COVID-19 pandemic has adversely impacted INVELTYS sales by reducing elective ocular surgeries and has restricted sales force activities, leading to lower-than-expected revenue[124][125][129] - As of June 30, 2020, the company had $128.0 million in cash and cash equivalents and $56.5 million in short-term investments, sufficient to fund operations into at least Q2 2022[8][183][222] Results of Operations This section details how decreased product revenue from COVID-19 was offset by lower SG&A and R&D operating expenses - The decrease in product revenue was primarily driven by a reduction in total units sold, attributed to the decline in elective surgeries resulting from COVID-19 restrictions[145][154] - The decrease in R&D expenses was mainly due to a $1.9 million reduction in external spending on the STRIDE 3 clinical trial for EYSUVIS, which concluded in March 2020[150] Comparison of Results for the Three Months Ended June 30 (in thousands) | Account | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Product revenues, net | $833 | $2,057 | $(1,224) | | Selling, general and administrative | $15,301 | $17,007 | $(1,706) | | Research and development | $6,053 | $7,108 | $(1,055) | | Net loss | $(23,312) | $(23,825) | $513 | Comparison of Results for the Six Months Ended June 30 (in thousands) | Account | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Product revenues, net | $1,904 | $3,443 | $(1,539) | | Selling, general and administrative | $30,709 | $35,243 | $(4,534) | | Research and development | $11,487 | $14,067 | $(2,580) | | Net loss | $(45,267) | $(49,213) | $3,946 | Liquidity and Capital Resources The company raised $137.9 million from stock offerings in H1 2020, ensuring sufficient liquidity into at least Q2 2022 - In H1 2020, the company raised $125.4 million from an underwritten offering and $12.6 million from an ATM offering, for total net proceeds of $139.2 million from financing activities[167][170][179] - Management estimates that existing cash, cash equivalents, and short-term investments of $184.6 million as of June 30, 2020, will fund operations into at least the second quarter of 2022[183][222] - Net cash used in operating activities decreased to $39.1 million in H1 2020 from $51.6 million in H1 2019, reflecting lower operating expenses[173][174][175] Quantitative and Qualitative Disclosures About Market Risk The company's market risk is low, with investments in short-term government securities and fixed-rate debt - The company's cash, cash equivalents, and short-term investments of $184.6 million are held in short-term U.S. Government securities, with low sensitivity to a 10% change in interest rates[196] - The $75.0 million outstanding debt under the Athyrium Credit Facility has a fixed interest rate of 9.875%, posing no risk from interest rate fluctuations[197] Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes during the quarter - Based on an evaluation as of June 30, 2020, the CEO and CFO concluded that the company's disclosure controls and procedures were effective at the reasonable assurance level[198] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, such controls[199] PART II – OTHER INFORMATION Legal Proceedings The company reports that it is not currently subject to any material legal proceedings - The company is not currently subject to any material legal proceedings[200] Risk Factors The company faces significant risks including a history of losses, product dependency, COVID-19 impacts, and IP reliance - The company has a history of significant losses ($340.7M accumulated deficit as of June 30, 2020) and expects to incur further losses, requiring substantial additional funding[203][218] - The business is highly dependent on the commercial success of INVELTYS and obtaining marketing approval for its lead product candidate, EYSUVIS[238] - The COVID-19 pandemic has adversely impacted operations and the market for INVELTYS due to reduced elective surgeries and may continue to adversely affect the business[259][260] - The company relies on third-party manufacturers like Catalent for commercial supply, which increases risks related to production issues, regulatory compliance, and supply chain disruptions[294][301][302] - A substantial portion of the company's patent portfolio, including for INVELTYS and EYSUVIS, is in-licensed from The Johns Hopkins University (JHU), making the company dependent on this agreement[348] Unregistered Sales of Equity Securities and Use of Proceeds The company issued unregistered inducement stock options to new employees in accordance with Nasdaq listing rules - On April 15, 2020, the company granted stock options to purchase 8,000 shares of common stock to two new employees as an inducement grant[459] - These options were granted outside of the company's 2017 Equity Incentive Plan, in accordance with Nasdaq Listing Rule 5635(c)(4)[459] Exhibits This section lists key filed exhibits, including sales and license agreements, and required CEO/CFO certifications - Key exhibits filed include the Amended and Restated Sales Agreement with Jefferies LLC and the Fifth Amendment to the Exclusive License Agreement with The Johns Hopkins University[464] - The filing also includes CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906[464]