KALA

Business Context and Reporting Period

KALA BIO, Inc. (KALA) is a clinical-stage biopharmaceutical company focused on developing therapies for rare and severe eye diseases. The company's primary asset is KPI-012, a mesenchymal stem cell secretome (MSC-S) currently in Phase 2b clinical development for the treatment of persistent corneal epithelial defects (PCED). KPI-012 has received Orphan Drug and Fast Track designations from the FDA. The company previously sold its commercial business (EYSUVIS and INVELTYS) to Alcon in July 2022 and has since ceased development of preclinical programs unrelated to its MSC-S platform. This report covers the quarterly period ended September 30, 2024.

Key Financial Metrics

Note: The company has no revenue-generating commercial products. Grant income of $1.95 million (Q3) and $4.00 million (YTD) from the California Institute for Regenerative Medicine (CIRM) is recorded as "Other income," not revenue.

Material Changes vs. Prior Period

• Net Loss: The net loss for the nine months ended September 30, 2024, was $30.34 million, a decrease of $3.24 million compared to $33.57 million in the same period in 2023. This improvement was primarily driven by the absence of a $4.25 million "Other expense, net" recorded in 2023 related to the write-off of inventory and deferred gains from the Alcon transaction.
• Operating Expenses: Total operating expenses increased by $1.48 million year-over-year for the nine-month period. Research and development expenses rose by $2.97 million due to increased KPI-012 development costs and employee-related costs. General and administrative expenses decreased by $1.81 million, largely due to reduced professional service fees.
• Financing Activities: The company raised significant capital in the first nine months of 2024 through private placements of Series G and Series H preferred stock and common stock, generating net proceeds of approximately $23.2 million. This contrasts with the prior year, which saw net financing proceeds of $6.0 million.
• Debt Structure: The company reclassified a significant portion of its long-term debt to current liabilities. As of September 30, 2024, $17.98 million of the $33.96 million principal balance is due within the next 12 months, reflecting the upcoming amortization schedule starting January 1, 2025.

Guidance, Outlook, and Risks

Outlook and Guidance: Management expects to report topline safety and efficacy data from the CHASE Phase 2b clinical trial of KPI-012 in the second quarter of 2025. The company anticipates that its current cash resources, combined with remaining anticipated funding from the CIRM award ($5.9 million), will fund operations into the fourth quarter of 2025. However, management explicitly states that existing resources are insufficient to complete the full clinical development of KPI-012, necessitating additional capital raises.

Key Risks and Contingencies:

• Liquidity and Debt Covenants: The company has substantial indebtedness ($34.0 million principal) with Oxford Finance. Failure to comply with covenants, including maintaining Nasdaq listing standards, could trigger an event of default and acceleration of debt. The company must maintain minimum stockholders' equity of $2.5 million to avoid delisting.
• Capital Requirements: The company has an accumulated deficit of $659.7 million and expects to incur significant losses for the foreseeable future. Failure to raise additional capital could force the company to delay or cease operations.
• Clinical Development: Success is heavily dependent on KPI-012. Delays in the CHASE trial, failure to meet CIRM milestones (which could result in loss of funding), or unfavorable safety/efficacy data would materially harm the business.
• Contingent Consideration: The company has recorded a liability of $4.66 million for contingent consideration related to the Combangio acquisition, which is subject to fair value adjustments based on milestone probabilities.

Investor Verification Checklist

• Cash Runway: Verify the company's ability to fund operations through Q4 2025 given the $49.2 million cash balance and the $17.98 million debt principal due in 2025.
• Debt Covenants: Monitor compliance with Nasdaq listing requirements (specifically the $2.5 million stockholders' equity threshold) to avoid triggering a default under the Oxford Finance loan agreement.
• CIRM Milestones: Track progress on the CHASE trial milestones required to secure the remaining $5.9 million in CIRM grant funding.
• Capital Raising: Assess the dilution impact of future equity offerings required to fund the completion of KPI-012 development beyond 2025.
• Contingent Liabilities: Review the fair value assumptions used for the $4.66 million contingent consideration liability related to the Combangio acquisition.