Kala Pharmaceuticals(KALA) - 2022 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements and detailed notes for Q1 2022 and FY 2021, covering key financial positions and performance Condensed Consolidated Balance Sheets Provides a snapshot of the company's financial position, including assets, liabilities, and equity, as of March 31, 2022, and December 31, 2021 Condensed Consolidated Balance Sheets (in thousands) | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Cash and cash equivalents | $65,170 | $92,136 | | Total current assets | $98,255 | $124,366 | | Total assets | $111,574 | $139,427 | | Total current liabilities | $32,758 | $37,422 | | Total long-term liabilities | $84,100 | $85,201 | | Total liabilities | $116,858 | $122,623 | | Total stockholders' (deficit) equity | $(5,284) | $16,804 | | Accumulated deficit | $(575,329) | $(542,388) | - The company's cash and cash equivalents decreased by $26,966 thousand from December 31, 2021, to March 31, 2022. Total assets decreased by $27,853 thousand, while total liabilities decreased by $5,765 thousand. Stockholders' equity shifted from a positive balance of $16,804 thousand to a deficit of $(5,284) thousand, primarily due to an increase in accumulated deficit[21] Condensed Consolidated Statement of Operations and Comprehensive Loss Details the company's revenues, expenses, and net loss for the three months ended March 31, 2022, and 2021 Condensed Consolidated Statement of Operations and Comprehensive Loss (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Product revenues, net | $1,372 | $3,266 | $(1,894) | | Cost of product revenues | $775 | $755 | $20 | | Selling, general and administrative | $26,982 | $27,699 | $(717) | | Research and development | $4,466 | $3,126 | $1,340 | | Loss on fair value remeasurement of deferred purchase consideration | $1,051 | $0 | $1,051 | | Gain on fair value remeasurement of contingent consideration | $(988) | $0 | $(988) | | Total costs and expenses | $32,286 | $31,580 | $706 | | Loss from operations | $(30,914) | $(28,314) | $(2,600) | | Net loss | $(32,941) | $(30,412) | $(2,529) | | Net loss per share—basic and diluted | $(0.45) | $(0.49) | $0.04 | - Net product revenues decreased by $1.9 million year-over-year, primarily due to lower INVELTYS unit sales and higher estimated allowances per unit, partially offset by higher per-unit gross selling prices[24][152]. Research and development expenses increased by $1.3 million, reflecting increased investment in KPI-012 development and other pipeline programs[24][156]. The company also recognized a $1.1 million loss on fair value remeasurement of deferred purchase consideration and a $1.0 million gain on fair value remeasurement of contingent consideration in Q1 2022, which were not present in Q1 2021[158][159] Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) Outlines changes in stockholders' equity (deficit) for the three months ended March 31, 2022, and 2021, reflecting net loss and capital adjustments Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) (in thousands) | Metric (in thousands) | Balance as of Dec 31, 2021 | Balance as of Mar 31, 2022 | Change | | :-------------------- | :------------------------- | :------------------------- | :----- | | Common Stock, $0.001 Par Value (Amount) | $66 | $73 | $7 | | Additional Paid-In Capital | $559,126 | $569,974 | $10,848 | | Accumulated Other Comprehensive Income (Loss) | $0 | $(2) | $(2) | | Accumulated Deficit | $(542,388) | $(575,329) | $(32,941) | | Total Stockholders' Equity (Deficit) | $16,804 | $(5,284) | $(22,088) | - The total stockholders' equity shifted from a positive balance of $16,804 thousand at December 31, 2021, to a deficit of $(5,284) thousand at March 31, 2022. This change was primarily driven by a net loss of $32,941 thousand during the quarter, partially offset by an increase in additional paid-in capital from stock issuances related to deferred purchase consideration and stock-based compensation[28] Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2022, and 2021 Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | | Net cash used in operating activities | $(24,089) | $(32,640) | $8,551 | | Net cash (used in) provided by investing activities | $(5,073) | $48,031 | $(53,104) | | Net cash provided by financing activities | $154 | $35,315 | $(35,161) | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(29,008) | $50,706 | $(79,714) | | Cash, cash equivalents and restricted cash at end of period | $65,870 | $140,462 | $(74,592) | - Net cash used in operating activities decreased by $8.5 million, primarily due to timing of working capital fluctuations[31][179]. Net cash from investing activities saw a significant decrease of $53.1 million, shifting from a net inflow in 2021 (due to proceeds from short-term investments) to a net outflow in 2022 (due to purchases of short-term investments)[180][181]. Financing activities also decreased substantially by $35.2 million, as there were no common stock offerings in Q1 2022 compared to $34.7 million in Q1 2021[182] Notes to Condensed Consolidated Financial Statements Provides detailed explanations of the company's accounting policies, financial instrument valuations, and other significant financial disclosures 1. Nature of Business and Basis of Presentation Describes Kala Pharmaceuticals' biopharmaceutical focus, product portfolio, acquisition details, financial condition, and COVID-19 impact - Kala Pharmaceuticals, Inc. is a biopharmaceutical company focused on ophthalmic therapies, commercializing EYSUVIS® and INVELTYS® using its AMPPLIFY® technology[33][34]. The company is also developing KPI-012 for persistent corneal epithelial defects (PCED) and has preclinical programs for new chemical entities (NCEs)[35][39] - The company acquired Combangio, Inc. on November 15, 2021, integrating its lead product candidate CMB-012 (now KPI-012) for PCED[36]. The acquisition involved issuing 6,815,072 shares of common stock upfront and 973,565 shares held back, plus potential contingent milestone payments up to $105 million and tiered cash royalties[38] - Kala Pharmaceuticals has incurred significant operating losses and negative cash flows since inception, with an accumulated deficit of $575.3 million as of March 31, 2022[40]. The company expects its current cash, cash equivalents, and short-term investments, along with anticipated product revenues, to fund operations for at least twelve months from the financial statement issuance date[41] - The COVID-19 pandemic has adversely impacted the commercialization of INVELTYS and EYSUVIS, and its future impact on KPI-012 development and financial performance remains uncertain[42]. The company has resumed in-person sales interactions but acknowledges potential future disruptions[43] 2. Summary of Significant Accounting Policies Outlines the company's key accounting principles and policies, consistent with prior reports, with no material changes - The company's significant accounting policies are consistent with those described in its Annual Report on Form 10-K for the fiscal year ended December 31, 2021, with no material changes during the three months ended March 31, 2022[49] - The company is evaluating the impact of ASU 2016-13 (Credit Losses) adoption, effective January 1, 2023, but does not expect a material impact on its condensed consolidated financial statements[50] 3. Fair Value of Financial Instruments Details the fair value measurements of financial instruments, including cash equivalents, investments, and contingent consideration - The company's financial instruments include cash equivalents, short-term investments, and contingent consideration, all reported at fair value[52]. Deferred purchase consideration and contingent consideration are measured using Level 3 unobservable inputs[54] Fair Value of Financial Instruments (in thousands) | Instrument | March 31, 2022 (Fair Value) | December 31, 2021 (Fair Value) | | :-------------------------- | :-------------------------- | :--------------------------- | | Cash equivalents | $61,152 | $86,135 | | Short-term investments | $4,992 | — | | Deferred purchase consideration | $1,008 | $7,892 | | Contingent consideration | $7,670 | $8,658 | - During Q1 2022, the company recognized a $1,051 thousand loss on fair value remeasurement of deferred purchase consideration, primarily due to changes in the underlying stock price, and a $988 thousand gain on fair value remeasurement of contingent consideration, mainly due to changes in discount rates[53][54][57] 4. Investments Presents the composition and fair value of the company's short-term investment portfolio as of March 31, 2022 Investments by Security Type as of March 31, 2022 (in thousands) | Security Type | Gross Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | | :------------------ | :------------------- | :--------------------- | :---------------------- | :--------- | | U.S. treasury securities | $4,994 | — | $(2) | $4,992 | | Total | $4,994 | — | $(2) | $4,992 | - As of March 31, 2022, all investments were short-term U.S. treasury securities with contractual maturities within one year[58]. The company held no short-term investments as of December 31, 2021[58] 5. Revenue & Accounts Receivable, Net Explains revenue recognition policies, variable consideration estimates, and the composition of net accounts receivable - Revenue from product sales (EYSUVIS and INVELTYS) is recognized when customers obtain control of the product upon delivery[61]. The net sales price includes estimates for variable consideration such as discounts, returns, and rebates, which are recorded as a reduction of revenue and accounts receivable or as a current liability[62] Product Revenue Provision and Allowance Categories (in thousands) | Category | Balance as of Dec 31, 2021 | Provision related to current period sales (Q1 2022) | Changes in estimate related to prior period sales (Q1 2022) | Credit/payments made (Q1 2022) | Balance as of Mar 31, 2022 | | :-------------------------- | :------------------------- | :------------------------------------------ | :------------------------------------------ | :----------------------------- | :------------------------- | | Trade Discounts, Allowances and Chargebacks | $2,672 | $2,133 | $(1) | $(3,261) | $1,543 | | Product Returns | $1,140 | $210 | $(138) | $(415) | $797 | | Rebates and Incentives | $11,280 | $13,359 | $(242) | $(10,108) | $14,289 | - Accounts receivable are reported net of sales discounts and contractual fees[73]. No allowance for doubtful accounts was recorded as of March 31, 2022, or December 31, 2021, but an allowance for expected sales discounts and chargebacks of $1,543 thousand was recorded as of March 31, 2022[74] 6. Inventory Details the composition of inventory, including raw materials, work in progress, and finished goods Inventory Composition (in thousands) | Category | March 31, 2022 | December 31, 2021 | | :-------------- | :------------- | :---------------- | | Raw materials | $1,324 | $1,328 | | Work in progress | $9,739 | $9,799 | | Finished goods | $7,269 | $7,090 | | Total inventory | $18,332 | $18,217 | - Total inventory remained relatively stable, with current inventory at $10,531 thousand and long-term inventory at $7,801 thousand as of March 31, 2022[75] 7. Accrued Expenses Provides a breakdown of accrued expenses, including revenue reserves, compensation, and development costs Accrued Expenses (in thousands) | Category | March 31, 2022 | December 31, 2021 | | :------------------------ | :------------- | :---------------- | | Accrued revenue reserves | $11,692 | $10,300 | | Compensation and benefits | $4,591 | $6,324 | | Commercial costs | $1,626 | $2,134 | | Professional services | $1,313 | $881 | | Contract manufacturing | $979 | $396 | | Development costs | $504 | $127 | | Other | $534 | $824 | | Total Accrued expenses | $21,239 | $20,986 | - Total accrued expenses increased slightly to $21,239 thousand as of March 31, 2022, from $20,986 thousand at December 31, 2021[76]. Notable changes include an increase in accrued revenue reserves and development costs, offset by a decrease in compensation and benefits and commercial costs[76] 8. Leases Discusses lease agreements, including the termination of the corporate headquarters lease and associated costs - The company terminated its Watertown Lease for corporate headquarters, effective January 11, 2022, resulting in a gain of approximately $1,311 thousand in 2021 and the release of $2,042 thousand in restricted cash in Q1 2022[78][79] - The company leases approximately 100 vehicles under a master fleet lease agreement, with a remaining term of about three years, and has a $450 thousand letter of credit reported as restricted cash[80] Lease Costs and Cash Flows (in thousands) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------- | :-------------------------------- | :-------------------------------- | | Operating lease cost | $176 | $1,216 | | Short-term lease cost | $40 | — | | Variable lease cost | $447 | $509 | | Total lease cost | $663 | $1,725 | | Operating cash outflows from operating leases | $719 | $1,584 | 9. Debt Details the company's loan agreements, principal balances, and associated interest expenses - On May 4, 2021, the company repaid the $75 million Athyrium Credit Facility, incurring a $5,395 thousand loss on extinguishment of debt, and entered into a new Loan and Security Agreement with Oxford Finance LLC for up to $125 million[83][84][85] - The new Loan Agreement includes an $80 million tranche A term loan disbursed on May 4, 2021, and contingent tranches B ($20 million) and C ($25 million) available upon achieving specific product revenue milestones[85]. The loans bear a floating interest rate (30-day LIBOR or 0.11%, plus 7.89%) and require interest-only payments until December 2024 or June 2025, followed by monthly principal installments[86] Debt Carrying Value (in thousands) | Component | March 31, 2022 | December 31, 2021 | | :-------------------------------------- | :------------- | :---------------- | | Principal loan balance | $80,000 | $80,000 | | Unamortized debt discount and issuance cost | $(1,814) | $(1,927) | | Cumulative accretion of exit fee | $1,175 | $856 | | Long-term debt, net | $79,361 | $78,929 | - Interest expense for Q1 2022 was $1,713 thousand, related to the Oxford Finance Loan Agreement, compared to $2,092 thousand in Q1 2021 for the Athyrium Credit Facility[91]. The effective interest rate for the Loan Agreement was 10.41% as of March 31, 2022[92] 10. Warrants Provides information on outstanding common stock warrants, including exercise prices and expiration dates Common Stock Warrants Outstanding | Issued | Exercise Price | Expiration Date | Exercisable From | Shares Exercisable at March 31, 2022 | Shares Exercisable at December 31, 2021 | | :----- | :------------- | :-------------- | :--------------- | :----------------------------------- | :------------------------------------ | | 2014 | $7.50 | November 2024 | July 2017 | 16,000 | 16,000 | | 2016 | $8.27 | October 2026 | September 2017 | 14,512 | 14,512 | | 2018 | $12.18 | October 2025 | October 2018 | 184,660 | 184,660 | | Total | | | | 215,172 | 215,172 | - The total number of common stock warrants outstanding remained constant at 215,172 shares from December 31, 2021, to March 31, 2022, with various exercise prices and expiration dates[94] 11. Equity Financings Summarizes the company's shelf registrations and available capacity for future equity offerings - The company's 2018 Shelf Registration for $250 million expired in August 2021, under which 30,549,976 shares were issued for $231,666 thousand gross proceeds[95] - Under the 2020 Shelf Registration, the company can offer up to $350 million in securities[96]. As of March 31, 2022, $11.3 million of common stock remained available under the ATM Offering, and $275 million of other securities were available under the shelf registration[96]. No shares were sold under the ATM Offering in Q1 2022[96] 12. Stock‑Based Compensation Details stock option grants, restricted stock units, and the associated stock-based compensation expense - During Q1 2022, the company granted options for 3,698,408 shares of common stock (including performance-based options) and 345,865 restricted stock units[97]. Employees purchased 155,106 shares under the Employee Stock Purchase Plan[97] Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Cost of product revenues | $48 | $34 | | Research and development | $525 | $966 | | Selling, general and administrative | $2,232 | $3,702 | | Total | $2,805 | $4,702 | - Total stock-based compensation expense decreased by $1,897 thousand year-over-year, primarily due to a $1.4 million decrease in selling, general and administrative stock-based compensation costs[102][154] 13. Loss Per Share Presents the calculation of net loss per share, including weighted-average common shares outstanding Net Loss Per Share (in thousands, except per share amounts) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss attributable to common stockholders | $(32,941) | $(30,412) | | Weighted-average common shares outstanding, basic and diluted | 73,640,830 | 61,655,867 | | Net loss per share attributable to common stockholders, basic and diluted | $(0.45) | $(0.49) | - Basic and diluted net loss per share improved slightly to $(0.45) in Q1 2022 from $(0.49) in Q1 2021, despite a higher net loss, due to an increase in weighted-average common shares outstanding[103] - Potential common stock equivalents, including stock options, unvested RSUs/PSUs, and unexercised warrants, were excluded from diluted EPS calculation for both periods as their effect was anti-dilutive due to net losses[104] 14. Income Taxes Discusses the company's income tax provision, valuation allowance, and limitations on net operating loss carryforwards - The company did not record a provision or benefit for income taxes in Q1 2022 or Q1 2021, maintaining a full valuation allowance for its U.S. federal and state deferred tax assets due to a history of cumulative net losses[105][106] - An ownership change has materially limited the company's net operating loss carryforwards and research and development tax credits, which could further be limited by future ownership changes[107] 15. Commitments and Contingencies Outlines license agreements, minimum purchase obligations, and contingent consideration liabilities - The company has an exclusive license agreement with Johns Hopkins University (JHU) for patent rights related to its AMPPLIFY® technology, EYSUVIS, and INVELTYS, requiring annual minimum payments and low single-digit royalties on product sales[110][111] - A license agreement with Stanford University, transferred via the Combangio acquisition, grants worldwide exclusive rights for certain patent rights related to KPI-012, requiring annual maintenance fees, milestone payments, and tiered royalties[112][113] Minimum Purchase Obligations for EYSUVIS and INVELTYS (in thousands) | Years Ending December 31, | Amount | | :------------------------ | :----- | | 2022 (remaining nine months) | $3,423 | | 2023 | $6,190 | | 2024 | $6,380 | | 2025 | $9,370 | | 2026 | $7,028 | | Thereafter | $14,411 | | Total minimum purchase commitments | $46,802 | - In connection with the Combangio acquisition, the company has recorded contingent consideration liabilities at fair value for potential milestone payments up to $40 million[115]. An additional $65 million in sales-based milestone payments are contingent but not yet recorded as probable[115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides detailed analysis of financial condition and results of operations for Q1 2022 vs Q1 2021, covering business impact, policies, and liquidity Business Impact of COVID-19 Pandemic Discusses the adverse effects of the COVID-19 pandemic on product commercialization and development programs - The COVID-19 pandemic has negatively impacted the commercialization of INVELTYS and EYSUVIS, primarily due to past moratoria on elective ocular surgeries and limitations on in-person interactions for the sales force[129]. While in-person interactions have resumed, future restrictions could continue to hamper marketing efforts[130] - The extent of the pandemic's impact on the development of KPI-012 and other preclinical programs, as well as overall operational and financial performance, remains uncertain and depends on factors like the pandemic's severity, vaccine effectiveness, and impact on stakeholders[130] Financial Operations Overview Provides an overview of revenue recognition, cost of product revenues, and trends in operating expenses - Product revenues are recognized net of estimated variable consideration, including trade discounts, allowances, rebates, chargebacks, and product returns[132]. These estimates are based on contractual requirements, market trends, and sales forecasts[132] - Cost of product revenues includes materials, manufacturing, freight, distribution, and royalties[135]. These costs are expensed as R&D prior to regulatory approval and expected future economic benefit[135] - Selling, general and administrative (SG&A) expenses are expected to decrease in 2022 due to the completion of commercial infrastructure buildout and termination of the corporate headquarters lease[137]. However, SG&A will increase substantially if KPI-012 is approved and commercialized[137] - Research and development (R&D) expenses are expected to increase in 2022 as the company advances KPI-012 clinical development and other preclinical programs (KPI-287, SEGRM program)[142]. R&D costs are expensed as incurred[142] - Loss on fair value remeasurement of deferred purchase consideration and gain on fair value remeasurement of contingent consideration relate to the Combangio acquisition, with changes recognized in the condensed consolidated statements of operations[144][145] Critical Accounting Policies and Significant Judgments and Estimates Highlights key accounting policies and estimates, including revenue recognition, inventory, and fair value measurements - The company's financial statements rely on estimates and judgments in areas such as revenue recognition, inventory, lease liabilities, fair value of warrants and contingent consideration, stock-based compensation, and deferred tax assets[148]. No material changes to these critical accounting estimates were reported from the prior Annual Report on Form 10-K[149] Results of Operations Compares financial performance for the three months ended March 31, 2022, and 2021, detailing revenue and expense changes Results of Operations (in thousands) | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | | Product revenues, net | $1,372 | $3,266 | $(1,894) | | Cost of product revenues | $775 | $755 | $20 | | Selling, general and administrative | $26,982 | $27,699 | $(717) | | Research and development | $4,466 | $3,126 | $1,340 | | Loss on fair value remeasurement of deferred purchase consideration | $1,051 | — | $1,051 | | Gain on fair value remeasurement of contingent consideration | $(988) | — | $(988) | | Loss from operations | $(30,914) | $(28,314) | $(2,600) | | Net loss | $(32,941) | $(30,412) | $(2,529) | - Net product revenues decreased by $1.9 million, primarily due to lower INVELTYS unit sales and higher estimated allowances, partially offset by higher per-unit gross selling prices[152]. The company expects revenues to increase with market share growth and improved third-party payor coverage for EYSUVIS and INVELTYS[152] - Selling, general and administrative expenses decreased by $0.7 million, mainly due to lower stock-based compensation and facility-related costs, partially offset by increased external sales and marketing for EYSUVIS[154] - Research and development expenses increased by $1.4 million, driven by a $0.7 million increase in KPI-012 development costs and increases in employee-related and other R&D costs for pipeline programs[156] - A $1.1 million loss on fair value remeasurement of deferred purchase consideration was recorded due to changes in stock price, and a $1.0 million gain on fair value remeasurement of contingent consideration was recognized due to changes in discount rates[158][159] Liquidity and Capital Resources Analyzes the company's cash position, debt, cash flows, and future funding requirements to support operations - Since inception, the company has incurred significant operating losses and negative cash flows, financing operations through IPOs, stock offerings, debt, and warrants[162]. As of March 31, 2022, the accumulated deficit was $575.3 million[128] - The company had $70.2 million in cash, cash equivalents, and short-term investments as of March 31, 2022, and $80.0 million in outstanding indebtedness under the Loan Agreement with Oxford Finance LLC[178] Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Change | | :------------------------ | :-------------------------------- | :-------------------------------- | :----- | | Net cash used in operating activities | $(24,089) | $(32,640) | $8,551 | | Net cash (used in) provided by investing activities | $(5,073) | $48,031 | $(53,104) | | Net cash provided by financing activities | $154 | $35,315 | $(35,161) | | Net (decrease) increase in cash and restricted cash | $(29,008) | $50,706 | $(79,714) | - The company anticipates its current capital and projected revenues from EYSUVIS and INVELTYS will fund operations into Q2 2023[183]. Future funding requirements are expected to increase substantially with the clinical development of KPI-012 and other pipeline programs, as well as potential commercialization efforts[184] - Raising additional capital may dilute stockholders, impose restrictive covenants through debt financing, or require relinquishing rights to technologies[191][232][234]. The company's substantial indebtedness ($80.0 million) may limit cash flow for business needs[234] Item 3. Quantitative and Qualitative Disclosures About Market Risk Discusses market risks, primarily interest rate fluctuations affecting cash, investments, and the $80.0 million floating-rate debt - The company's financial instruments, including cash equivalents and short-term investments, are primarily exposed to interest rate risk[194]. Due to their short-term maturities, a 10% change in interest rates would not materially affect their fair market value[194] - The $80.0 million outstanding under the Loan Agreement bears a floating interest rate (30-day LIBOR or 0.11%, plus 7.89%)[195][236]. An immediate 10% change in LIBOR would not materially impact operating results or cash flows, but the phase-out of LIBOR introduces uncertainty regarding future interest rate costs[237] Item 4. Controls and Procedures Reports on the effectiveness of disclosure controls and procedures and confirms no material changes in internal control over financial reporting - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2022, and concluded they were effective at the reasonable assurance level[196] - There were no changes in internal control over financial reporting during the three months ended March 31, 2022, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[197] PART II – OTHER INFORMATION Item 1. Legal Proceedings Confirms that Kala Pharmaceuticals is not currently involved in any material legal proceedings - The company is not currently involved in any material legal proceedings[199] Item 1A. Risk Factors Outlines significant risks impacting business, financial condition, and stock price, including acquisition, funding, commercialization, and regulatory challenges Risks Related to Our Recent Acquisition of Combangio Addresses potential challenges and integration risks associated with the Combangio acquisition and KPI-012 development - The company may fail to realize anticipated benefits from the Combangio acquisition, including integrating KPI-012, due to complexities, costs, and diversion of management attention[201][207]. This could adversely affect commercialization efforts for existing products and overall financial performance[207] - Risks include delays or failures in IND filing and clinical trials for KPI-012, difficulties in manufacturing, market acceptance challenges, and potential unknown liabilities from the acquisition[202][205][206]. Investing in KPI-012 development may also mean foregoing other opportunities[206] - Existing stockholders will experience dilution from the issuance of 6,815,072 shares to former Combangio equityholders and potential future issuances of up to $5.4 million in stock for milestones, plus an option to pay up to $15 million of certain milestones in stock[208][209] Risks Related to Our Financial Position and Need For Additional Capital Highlights the company's accumulated deficit, ongoing losses, and the critical need for substantial additional funding - The company has incurred significant operating losses and negative cash flows since inception, with an accumulated deficit of $575.3 million as of March 31, 2022[210]. It expects to continue incurring losses for several years, particularly with the development and potential commercialization of KPI-012[210] - Research and development expenses are expected to increase substantially for KPI-012 and other preclinical programs[211]. Selling, general and administrative expenses will also increase significantly if KPI-012 is approved and commercialized[212] - The company anticipates its current capital and projected revenues will fund operations into Q2 2023[228]. However, it may need substantial additional funding, and failure to raise capital could force delays or elimination of product development or commercialization efforts[224][225] - Raising additional capital may dilute stockholders, impose restrictive covenants through debt financing (e.g., limitations on incurring debt, making investments, or paying dividends under the Loan Agreement), or require relinquishing valuable rights to technologies or product candidates[232][233] - The company's $80.0 million indebtedness under the Loan Agreement may limit cash flow for business needs, increase vulnerability to economic changes, and subject it to restrictive covenants[234][235]. Fluctuations in floating interest rates (e.g., LIBOR) could also increase interest expense[236] Risks Related to the Commercialization of EYSUVIS, INVELTYS and our Product Candidates Discusses challenges in market acceptance, competition, and reimbursement for existing products and pipeline candidates - The COVID-19 pandemic has adversely impacted the market for INVELTYS (due to moratoria on elective ocular surgeries) and the commercialization of EYSUVIS (due to limitations on in-person sales interactions)[244][245]. It could also delay KPI-012 development and impact manufacturing and supply chains[247][248][249] - EYSUVIS, INVELTYS, and KPI-012 may fail to achieve market acceptance by clinicians and patients, or adequate formulary coverage, pricing, or reimbursement from third-party payors[250][251][253](index=253&type=chunk]. Competition from existing treatments (including generics and off-label use) and potentially smaller-than-estimated market opportunities could limit revenue[255][258][259] - The company's ability to commercialize successfully depends on maintaining and expanding its sales, marketing, and distribution capabilities, or entering into third-party agreements[264]. Risks include high costs, management diversion, and potential inability to recruit and retain personnel[266][267] - The company faces substantial competition from major pharmaceutical companies with greater resources, as well as existing branded, generic, and off-label products[269][270][271](index=271&type=chunk][272][273][274][275][276][277][278][279]. Competitors may develop and commercialize products that are safer, more effective, or less expensive[270] - Product liability lawsuits related to its products or product candidates could divert resources, incur substantial liabilities, harm reputation, and limit commercialization[280]. Current insurance coverage of $15 million may be inadequate[281] Risks Related to Product Development Covers uncertainties in clinical trials, regulatory approvals, and the high costs associated with product development - Successful commercialization of KPI-012 and other product candidates depends on timely IND submission and clearance, favorable clinical trial results, regulatory approvals, effective manufacturing, market acceptance, and intellectual property protection[282][283][284](index=284&type=chunk]. Failure in any of these areas would materially harm the business[284] - Clinical trials are expensive, time-consuming, and uncertain[285]. Negative or inconclusive results, safety concerns, or delays in patient enrollment (especially for rare diseases like PCED for KPI-012) could lead to additional costs, delays, or abandonment of product development[287][289][291][292][293] - Serious adverse events or undesirable side effects identified during development or commercialization could force the company to abandon or limit product development/marketing[294]. Incorrect use of products by patients could also lead to unexpected side effects and hamper market adoption[294] - The company's limited resources mean it must focus on specific product candidates and indications, potentially missing more profitable opportunities[295]. Investing in KPI-012 may require foregoing other ventures[295] - KPI-012's Phase 1b clinical trials were conducted outside the U.S. (Mexico)[296]. The FDA may not accept data from foreign trials, potentially requiring additional costly and time-consuming trials and delaying development[297] Risks Related to Our Dependence on Third Parties Addresses risks from reliance on third-party manufacturers, clinical research organizations, and collaborators for product supply and development - The company relies on third-party manufacturers (e.g., Woodstock, Altasciences, Chemo Iberica) for EYSUVIS, INVELTYS, and KPI-012[298][299][300]. This reliance increases risks of insufficient quantities, unacceptable costs, supply disruptions (e.g., raw material shortages, manufacturing issues, natural disasters, pandemics), and delays in development or commercialization[301] - Manufacturing biologics like KPI-012 is complex, requiring specialized facilities and strict quality control[302]. Deviations, contaminations, or issues with process scale-up could lead to lot failures, recalls, or delays[303]. The company lacks redundant supply arrangements for bulk drug substances and may face challenges in securing long-term commercial supply for KPI-012[301] - Failure of third-party manufacturers to comply with cGMP regulations or other requirements could result in regulatory sanctions, supply interruptions, and harm to business[305]. The company is also committed to minimum purchase amounts for EYSUVIS and INVELTYS, risking payment for excess product if demand falls short[309] - Collaborations with third parties for development or commercialization (especially outside the U.S.) carry risks, including collaborators not dedicating sufficient resources, pursuing competing products, or terminating agreements[312][313][314][315](index=315&type=chunk]. This could delay development, reduce revenue, and require the company to raise additional capital[315] - Reliance on third parties for clinical trials reduces control and does not relieve the company of its responsibilities (e.g., Good Clinical Practices)[316][317]. Failures by these third parties could delay marketing approvals or commercialization[318][319] Risks Related to Our Intellectual Property Details challenges in obtaining, maintaining, and enforcing patent protection and defending against infringement claims - The company's success depends on obtaining and maintaining patent protection for its technology, products, and product candidates[324]. The patent prosecution process is expensive, time-consuming, and uncertain, with no guarantee that pending applications will result in issued patents or provide meaningful protection against competitors[325][326][327][328][329][330] - Failure to obtain patent term extensions under the Hatch-Waxman Act (U.S.) or similar foreign legislation could shorten market exclusivity, allowing competitors to enter the market sooner and materially harming the business[331][332](index=332&type=chunk]. EYSUVIS and INVELTYS patents are not expected to be eligible for extension[333] - The company may become involved in costly and time-consuming lawsuits to protect or enforce its intellectual property, or defend against claims of infringement from third parties[336][337](index=337&type=chunk]. Adverse outcomes could invalidate patents, narrow claims, or result in substantial monetary damages and injunctions[339][341][342] - Compliance with procedural, document submission, and fee payment requirements for patents is critical[343]. Non-compliance, or reliance on licensors for these tasks, could lead to abandonment or lapse of patent rights[343] - A substantial portion of the company's patent portfolio is in-licensed (e.g., from JHU, Stanford)[344][346]. Termination of these agreements or failure by licensors to maintain/enforce patents could result in loss of rights, harming the company's competitive position[349][350] - Some intellectual property developed with government funding may be subject to federal regulations like 'march-in' rights, reporting requirements, and a preference for U.S. manufacturing, potentially limiting exclusive rights and increasing compliance costs[347][348] - Protecting intellectual property globally is expensive and challenging, as foreign laws may not offer the same level of protection as the U.S[353]. Competitors may use technologies in unprotected jurisdictions or export infringing products[354][355] - The company may face claims of misappropriating third-party intellectual property or disputes over ownership of its own IP, leading to litigation, loss of rights, or distraction of management[356][357][358] - Failure to protect trade secrets through confidentiality agreements could harm the business if proprietary information is lawfully obtained, independently developed, or disclosed by third parties[360] Risks Related to Regulatory Approval of Our Product Candidates and Other Legal Compliance Matters Covers hurdles in regulatory approvals, post-marketing compliance, and the impact of healthcare laws and privacy regulations - Failure to obtain required regulatory approvals for product candidates (beyond EYSUVIS and INVELTYS) will prevent commercialization and materially impair revenue generation[361][362]. The approval process is expensive, lengthy, and uncertain, with regulatory authorities having substantial discretion[364][365] - Disruptions at regulatory agencies (e.g., FDA due to government shutdowns or COVID-19) can prolong review and approval times, adversely affecting the business[366][367] - Obtaining marketing approval in foreign jurisdictions is separate and can involve additional testing and different requirements[369]. FDA approval does not guarantee foreign approval, and delays in one country can negatively impact others[370][371] - Post-marketing regulations and restrictions (e.g., advertising, promotion, safety monitoring, manufacturing compliance with cGMPs) can limit how products are manufactured and marketed, potentially impairing revenue generation[372][373][374](index=374&type=chunk]. Non-compliance can lead to severe penalties[376][377][378] - The company may not obtain orphan drug exclusivity for KPI-012, or such exclusivity may not prevent competition[379][380]. If a competitor obtains exclusivity for a similar product first, the company could be barred from marketing KPI-012 for PCED during the exclusivity period[381][382][383][384] - Seeking Breakthrough Therapy, Fast Track, or Priority Review designations for product candidates does not guarantee faster development or approval, and such designations can be revoked[385][386][387][389][390] - Biologic products like KPI-012, if approved, may face competition from biosimilars approved through an abbreviated pathway, potentially shortening exclusivity periods and increasing competitive pressure[391][392] - Relationships with customers and third-party payors are subject to anti-kickback, fraud and abuse, false claims, and privacy laws (e.g., federal Anti-Kickback Statute, False Claims Act, HIPAA)[393][394][395]. Non-compliance could lead to criminal sanctions, civil penalties, and reputational harm[396] - Existing and future healthcare legislation (e.g., ACA, Medicare Modernization Act, Budget Control Act, 2017 Tax Act, CARES Act) could increase the difficulty and cost of obtaining reimbursement, leading to downward pressure on product pricing and reduced demand[397][398][399][400][401][402][403][404][405] - Compliance with Medicaid Drug Rebate Program and other governmental drug pricing programs is complex and involves subjective decisions[407]. Failure to comply or submitting false information could result in penalties, sanctions, and adverse financial impacts[408][409][410][411] - Failure to comply with environmental, health, and safety laws by the company or its third-party manufacturers could lead to fines, penalties, significant costs, and disruptions in manufacturing and supply[412][413][414][415] - The company is subject to anti-corruption laws (e.g., FCPA, U.K. Bribery Act) and Trade Control laws[416][417]. Non-compliance could result in civil/criminal penalties, sanctions, and reputational harm, especially with international expansion[418][419][420] - Stringent privacy and information security laws (e.g., HIPAA, GDPR) apply to personal data[421]. Failure to comply could lead to significant fines, penalties, litigation, reputational damage, and costly remediation efforts[422][423][424][425] - The company may not be able to fully utilize its net operating loss (NOL) carryforwards and R&D tax credit carryforwards due to ownership changes (Section 382/383 of the Code) or future regulatory changes, increasing future tax liabilities[426][427][428][429] Risks Related to Employee Matters and Managing Growth Addresses challenges in retaining key personnel, managing organizational growth, and mitigating cybersecurity risks - The company's future success depends on retaining key executives (e.g., CEO Mark Iwicki, CFO Mary Reumuth) and attracting/retaining qualified scientific, clinical, manufacturing, and commercial personnel[430]. Loss of key individuals or inability to compete for talent could harm business strategy[431] - Managing growth, especially with the integration of Combangio and its biological product candidate, poses difficulties[432]. Limited financial resources and experience in managing such expansion could disrupt operations and hinder the integration of KPI-012[433] - Internal computer systems or those of vendors are vulnerable to cyber-attacks and security breaches, which could disrupt product development, commercialization, lead to loss of proprietary information, incur liabilities, and harm competitive position[434][435] - A partially or fully remote workplace, following the termination of the corporate headquarters lease, could negatively impact employee productivity, morale, training, strain technology resources, and increase operational risks, including heightened cyber incident risk[436][437] Risks Related to Our Common Stock Discusses factors influencing stock price volatility, potential dilution, and Nasdaq listing compliance risks - Executive officers, directors, and their affiliates collectively own approximately 15.99% of the capital stock, giving them significant influence over stockholder matters, which could delay or prevent a change in control[438][439] - Provisions in the corporate charter documents and Delaware law (e.g., classified board, advance notice requirements, Section 203) could make an acquisition of the company more difficult and limit stockholders' ability to replace management[440][441][443] - The trading market for common stock may not be sustained, and the stock price is likely to be volatile due to factors like clinical trial results, competition, regulatory developments, and financial performance, potentially resulting in substantial losses for investors[444][445][447] - Sales of a substantial number of common shares into the market, including those issued to former Combangio equityholders and shares under equity plans, could significantly depress the stock price[450][451][452][454] - Failure to comply with Nasdaq's continued listing requirements (e.g., minimum bid price) could lead to delisting, reducing liquidity, harming the stock price, and impacting the ability to raise capital[455][456]. A delisting is also an event of default under the Loan Agreement[457] - As an 'emerging growth company' and 'smaller reporting company,' the company benefits from reduced disclosure requirements, which may make its common stock less attractive to some investors and increase stock price volatility[458][459][460][461] - Operating as a public company incurs increased costs and requires substantial management time for compliance initiatives (e.g., Sarbanes-Oxley Act, Nasdaq listing rules)[462][464]. Failure to comply with Section 404 requirements could result in a loss of confidence in financial statements[465] - The company does not anticipate paying cash dividends in the foreseeable future, making capital appreciation the sole source of gain for stockholders[466]. The Loan Agreement also restricts dividend payments[466] - The company's certificate of incorporation designates Delaware state courts as the exclusive forum for certain stockholder actions, which could discourage lawsuits against the company and its directors/officers[467][468] General Risk Factors Covers broader risks such as changes in tax laws and the impact of patent legislation on the business - Changes in tax laws (e.g., 2017 Tax Act, CARES Act, FFCR Act, CAA, ARPA) or their interpretation could adversely affect the business and financial condition, particularly regarding NOL carryforwards[469][470][471][472] - The Leahy-Smith America Invents Act could increase uncertainties and costs related to patent prosecution and enforcement, potentially leading to more challenges against the company's patents through tribunals like the PTAB[473] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports on unregistered equity sales, specifically 15,000 stock options granted to a new employee, and confirms no use of public offering proceeds - On February 15, 2022, the company granted 15,000 stock options to a new employee at an exercise price of $0.77 per share, as an inducement grant outside its 2017 Equity Incentive Plan, vesting over four years[474] - No shares of common stock, preferred stock, warrants, or restricted stock awards were issued or sold during the period that were not registered under the Securities Act of 1933, as amended, other than the inducement grant[475] - There was no use of proceeds from public offerings of common stock and no repurchase of shares or company equity securities during the period[476][477] Item 6. Exhibits Lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and Inline XBRL financial data documents - The exhibits include certifications from the CEO and CFO as required by the Sarbanes-Oxley Act