KALA Pharmaceuticals, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; filed November 8, 2022. The filing’s amounts are unaudited. Dollar figures below are in millions unless stated otherwise. Historical share and per-share figures reflect the 1-for-50 reverse split effective October 20, 2022.
Business context
Kala sold its commercial business, including EYSUVIS, INVELTYS and AMPPLIFY technology rights, to Alcon on July 8, 2022. It now has no commercial products and is focused primarily on KPI-012, a clinical-stage biologic for persistent corneal epithelial defects (PCED), acquired with Combangio. The company plans to submit an IND and, subject to FDA clearance, begin a U.S. Phase 2/3 trial in Q4 2022. It also plans preclinical work on KPI-014 for retinal disease and has discontinued preclinical programs unrelated to its MSC-S platform.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net product revenue | $0.42 | $3.07 | $3.89 | $9.38 |
| Operating expenses | $14.99 | $29.14 | $75.35 | $92.81 |
| Loss from operations | $(14.57) | $(26.07) | $(71.46) | $(83.43) |
| Net income (loss) | $29.07 | $(28.13) | $(31.98) | $(95.04) |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $(65.17) | $(80.33) |
Q3 net income included a $47.0 million gain on the Alcon sale; it does not represent operating profitability. The nine-month net loss improved year over year, while the company continued to incur substantial operating losses. Q3 product revenue fell primarily because the sale closed in July.
At September 30, cash and cash equivalents were $52.4 million, versus $92.1 million at December 31, 2021. Total current assets were $84.7 million and current liabilities $40.2 million. Total liabilities were $86.7 million, including $42.6 million of long-term debt net of discount and issuance costs; principal outstanding was $43.3 million. Stockholders’ equity was negative $1.0 million and accumulated deficit was $574.4 million. No product gross-margin figure is highlighted; Q3 cost of product revenue was $0.01 million.
For the first nine months, investing activities provided $62.7 million, largely from $62.9 million net proceeds from the Alcon transaction; financing activities used $39.7 million, largely for a $40.0 million debt prepayment. Cash, cash equivalents and restricted cash decreased by $42.2 million.
Material changes and unusual items
- Alcon paid $60.0 million in cash at closing and purchased $5.0 million of inventory. Kala recorded a $47.0 million net gain after transaction costs, transferred assets and deferred gain. Up to $325 million in additional Alcon payments depends on sales milestones; timing and receipt are uncertain.
- Kala prepaid $36.7 million of loan principal and paid related fees, totaling $40.0 million, reducing principal from $80.0 million to $43.3 million. Amortization was extended to January 2026, with the remaining balance due in five monthly installments; final maturity is May 2026. The loan bears floating interest, and the reported effective rate was 13.05%.
- SG&A declined to $9.5 million in Q3 from $25.3 million a year earlier, mainly reflecting the business sale and lower commercial-related costs. R&D rose to $5.4 million from $2.9 million, including $2.4 million of KPI-012 development costs.
- The July workforce reduction covered 113 employees. Management estimated approximately $27.6 million in annualized expense reductions once implemented and approximately $2.3 million in charges, primarily recorded in Q3.
- Combangio acquisition consideration includes up to $40 million of development, regulatory and commercialization milestones and a further $65 million of sales-based milestones. The latter were not recorded because achievement was not considered probable.
Outlook, risks and contingencies
Management said September 30 cash was expected to fund operations, debt service and capital expenditures into the second quarter of 2024, and to provide initial data from the planned KPI-012 Phase 2/3 trial, but not to complete KPI-012 development. The liquidity note also states that cash was expected to fund requirements for at least 12 months from issuance of the statements. Both estimates assume continued compliance with loan covenants and may change.
A key risk is Nasdaq listing compliance. Kala reported that it regained compliance with the $1.00 minimum bid-price rule on November 4, 2022, but remained out of compliance with other Nasdaq Global Select Market listing standards, with a January 2, 2023 deadline stated for cure. Delisting or transfer to a less restrictive market could trigger a loan default; absent a waiver or forbearance, the lender could accelerate repayment and enforce collateral, which management said could raise substantial doubt about the company’s ability to continue as a going concern.
Other principal risks include dependence on KPI-012; clinical, regulatory and manufacturing uncertainty; reliance on third-party manufacturers and trial operators; need for additional financing; uncertain Alcon milestone receipts; dilution from future equity financing; and potential effects of COVID-19 on trials and commercialization. KPI-012 had been studied in only 12 patients in trials outside the United States, and the FDA may not accept those data. No material litigation was reported. Management judged disclosure controls effective as of September 30, 2022.
Important facts for investors to verify
- Whether Kala submitted its KPI-012 IND and began the planned U.S. Phase 2/3 trial, and the trial’s enrollment, timing and results.
- Current cash runway, burn rate and financing plans, including whether additional capital will be needed before pivotal development is complete.
- Current Nasdaq listing status and compliance with all loan covenants; any default, waiver or lender action.
- Alcon’s commercialization progress and the conditions and timing for any sales-milestone payments.
- Progress on the workforce reduction and realized savings, alongside KPI-012 development and manufacturing costs.