0001558370-17-008322.txt : 20171107 0001558370-17-008322.hdr.sgml : 20171107 20171107080208 ACCESSION NUMBER: 0001558370-17-008322 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 73 CONFORMED PERIOD OF REPORT: 20170930 FILED AS OF DATE: 20171107 DATE AS OF CHANGE: 20171107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Kala Pharmaceuticals, Inc. CENTRAL INDEX KEY: 0001479419 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 270604595 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38150 FILM NUMBER: 171181163 BUSINESS ADDRESS: STREET 1: 100 BEAVER STREET STREET 2: SUITE 201 CITY: WALTHAM STATE: MA ZIP: 02453 BUSINESS PHONE: 781-996-5252 MAIL ADDRESS: STREET 1: 100 BEAVER STREET STREET 2: SUITE 201 CITY: WALTHAM STATE: MA ZIP: 02453 10-Q 1 kala-20170930x10q.htm 10-Q KALA_Current_Folio_10Q

 

 

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, 2017

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.)

 

 

 

100 Beaver Street, Suite 201

 

Waltham, MA

02453

(Address of principal executive offices)

(Zip Code)

 

(781) 996-5252

(Registrant’s telephone number, including area code)

 


 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ¨

 

 

(Do not check if a
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 24,521,131 shares of Common Stock, $0.001 par value per share, outstanding as of October 31, 2017.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

    

Page

PART I – FINANCIAL INFORMATION 

      

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

5

 

 

 

 

 

Condensed Balance Sheets as of September 30, 2017 and December 31, 2016

 

5

 

 

 

 

 

Condensed Statement of Operations for the three and nine months ended September 30, 2017 and 2016

 

6

 

 

 

 

 

Condensed Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

 

7

 

 

 

 

 

Notes to Condensed Financial Statements

 

8

 

 

 

 

Item 2. 

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

 

25

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

Item 4. 

Controls and Procedures

 

36

 

 

 

 

PART II – OTHER INFORMATION 

 

 

 

 

 

 

Item 1. 

Legal Proceedings

 

36

 

 

 

 

Item 1A. 

Risk Factors

 

37

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

80

 

 

 

 

Item 6. 

Exhibits

 

81

 

 

 

 

 

 

 

 

SIGNATURES 

 

82

 

 

 


 

SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS

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,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “target,” “potential,” “would,” “could,” “should,” “continue” 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 ongoing clinical trials, including our two Phase 3 clinical trials of KPI‑121 0.25% in patients with dry eye disease;

·

our plans to develop and commercialize INVELTYSTM (KPI-121 1.0%), KPI‑121 0.25% and any other product candidates, if they are approved;

·

the timing of and our ability to obtain and maintain regulatory approvals for INVELTYS;

·

the timing of and our ability to submit applications for, or obtain and maintain regulatory approvals for KPI‑121 0.25% and other product candidates; 

·

our expectations regarding our ability to fund our operating expenses and capital expenditure requirements with our cash on hand;

·

the potential advantages of our product candidates;

·

the rate and degree of market acceptance and clinical utility of our products;

·

our estimates regarding the potential market opportunity for our product candidates;

·

our commercialization, marketing and manufacturing capabilities and strategy;

·

our intellectual property position;

·

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; and

3


 

·

our expectations regarding the time during which we will be an emerging growth company under the JOBS Act.

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 reference in this Quarterly Report on Form 10-Q and 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


 

PART I – FINANCIAL INFORMATION

Item  1 Financial Statements

KALA PHARMACEUTICALS, INC.

CONDENSED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share amounts)

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2017

    

2016

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$

122,049

 

$

45,472

Prepaid expenses and other current assets

 

 

886

 

 

154

Total current assets

 

 

122,935

 

 

45,626

Property and equipment, net

 

 

623

 

 

594

Restricted cash

 

 

133

 

 

109

Total assets

 

$

123,691

 

$

46,329

Liabilities, Convertible Preferred Stock and Stockholders' Equity (Deficit)

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

$

6,111

 

$

556

Accounts payable

 

 

1,135

 

 

997

Accrued expenses

 

 

3,938

 

 

3,993

Total current liabilities

 

 

11,184

 

 

5,546

Long-term liabilities:

 

 

 

 

 

 

Long-term debt - less current portion

 

 

13,629

 

 

9,098

Warrant liability

 

 

 —

 

 

1,039

Other long-term liabilities

 

 

15

 

 

17

Total long-term liabilities

 

 

13,644

 

 

10,154

Total liabilities

 

 

24,828

 

 

15,700

Commitments and Contingencies (Note 13)

 

 

 

 

 

 

Convertible preferred stock, 0 shares and 170,336,260 shares authorized as of September 30, 2017 and December 31, 2016, respectively

 

 

 

 

 

 

Series Seed convertible preferred stock, $0.001 par value - 0 shares and 11,323,209 shares designated as of September 30, 2017 and December 31, 2016, respectively; 0 shares and 11,243,209 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 

 

 —

 

 

11,065

Series A convertible preferred stock, $0.001 par value - 0 shares and 9,583,432 shares designated, issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 

 

 —

 

 

10,736

Series B convertible preferred stock, $0.001 par value - 0 shares and 16,597,221 shares designated as of September 30, 2017 and December 31, 2016, respectively; 0 shares and 15,624,999 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 

 

 —

 

 

22,185

Series B-1 convertible preferred stock, $0.001 par value - 0 shares and 4,629,629 shares designated, issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 

 

 —

 

 

6,885

Series C convertible preferred stock, $0.001 par value - 0 shares and 43,034,639 shares designated as of September 30, 2017 and December 31, 2016, respectively; 0 shares and 42,782,688 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 

 

 —

 

 

67,520

Stockholders' equity (deficit):

 

 

 

 

 

 

Preferred stock, $0.001 par value; 5,000,000 shares and 0 shares authorized as of September 30, 2017 and December 31, 2016, respectively; no shares issued or outstanding as of September 30, 2017 or December 31, 2016

 

 

 —

 

 

 —

Common stock, $0.001 par value - 120,000,000 and 110,251,951 shares authorized as of September 30, 2017 and December 31, 2016, respectively; 24,347,150 and 1,181,429 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

 

 

24

 

 

 1

Additional paid-in capital

 

 

221,920

 

 

4,374

Accumulated deficit

 

 

(123,081)

 

 

(92,137)

Total stockholders’ equity (deficit)

 

 

98,863

 

 

(87,762)

Total liabilities, convertible preferred stock and stockholders' equity (deficit)

 

$

123,691

 

$

46,329

 

See accompanying notes to these unaudited condensed financial statements.

5


 

 KALA PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

7,018

 

$

8,256

 

$

23,128

 

$

18,117

General and administrative

 

 

2,516

 

 

1,491

 

 

5,607

 

 

6,356

Total operating expenses

 

 

9,534

 

 

9,747

 

 

28,735

 

 

24,473

Loss from operations

 

 

(9,534)

 

 

(9,747)

 

 

(28,735)

 

 

(24,473)

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

194

 

 

60

 

 

276

 

 

90

Interest expense

 

 

(212)

 

 

(186)

 

 

(618)

 

 

(566)

Change in fair value of warrant liability

 

 

(623)

 

 

206

 

 

(1,844)

 

 

177

Total other income (expense)

 

 

(641)

 

 

80

 

 

(2,186)

 

 

(299)

Net loss attributable to common stockholders—basic and diluted

 

$

(10,175)

 

$

(9,667)

 

$

(30,921)

 

$

(24,772)

Net loss per share attributable to common stockholders—basic and diluted

 

$

(0.56)

 

$

(8.18)

 

$

(4.51)

 

$

(20.97)

Weighted average shares outstanding—basic and diluted

 

 

18,034,278

 

 

1,181,429

 

 

6,860,777

 

 

1,181,429

 

See accompanying notes to these unaudited condensed financial statements.

 

 

6


 

 

KALA PHARMACEUTICALS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

    

2017

    

2016

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(30,921)

 

$

(24,772)

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

 

 

 

 

 

 

Depreciation

 

 

213

 

 

220

Change in fair value of warrant liability

 

 

1,844

 

 

(177)

Amortization of debt discount and debt issuance costs

 

 

86

 

 

83

Write-off of deferred offering costs

 

 

 —

 

 

1,789

Stock-based compensation

 

 

2,070

 

 

1,747

Increase (decrease) in cash from:

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(732)

 

 

(29)

Accounts payable

 

 

74

 

 

(292)

Accrued expenses

 

 

(166)

 

 

1,432

Other long-term liabilities

 

 

(2)

 

 

(22)

Net cash used in operating activities

 

 

(27,534)

 

 

(20,021)

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(197)

 

 

(95)

Restricted cash

 

 

(25)

 

 

 —

Net cash used in investing activities

 

 

(222)

 

 

(95)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of Series C convertible preferred stock

 

 

 —

 

 

67,922

Proceeds from common stock offering, net of underwriters discounts

 

 

96,255

 

 

 —

Proceeds from venture debt

 

 

10,000

 

 

 —

Payment of principal on venture debt facility

 

 

 —

 

 

(1,000)

Payment of Series C issuance costs

 

 

 —

 

 

(402)

Payment of common stock offering costs

 

 

(2,111)

 

 

 —

Payment of deferred offering costs

 

 

 —

 

 

(283)

Proceeds from exercise of stock options

 

 

189

 

 

 —

Net cash provided by financing activities

 

 

104,333

 

 

66,237

Net increase in cash

 

 

76,577

 

 

46,121

Cash at beginning of period

 

 

45,472

 

 

5,759

Cash at end of period

 

$

122,049

 

$

51,880

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Conversion of convertible preferred stock into common stock

 

$

118,391

 

$

 —

Reclassification of warrants to additional paid-in capital

 

 

2,883

 

 

 —

Common stock offering costs included in accounts payable and accruals

 

 

131

 

 

 —

Purchases of property and equipment in accounts payable

 

 

45

 

 

 —

Cash paid for interest

 

$

532

 

$

490

 

See accompanying notes to these unaudited condensed financial statements.

 

 

7


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

 

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Nature of Business—Kala Pharmaceuticals, Inc. (the “Company”) was incorporated on July 7, 2009, and is a biopharmaceutical company focused on the development and commercialization of therapies using its proprietary nanoparticle‑based Mucus Penetrating Particles, or MPP, technology, with an initial focus on the treatment of eye diseases. The Company has applied the MPP technology to lotepredol etabonate, or LE, a corticosteroid designed for ocular applications, resulting in two lead product candidates. These product candidates are INVELTYSTM (KPI-121 1.0%), for the treatment of post‑operative inflammation and pain following ocular surgery, for which the Company has submitted a New Drug Application, or NDA, and KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease, currently in Phase 3 clinical development. The Company is evaluating opportunities for MPP nanosuspensions of LE with less frequent daily dosing regimens for the treatment of inflammation and pain following ocular surgery, for the temporary relief of the signs and symptoms of dry eye disease and for potential chronic treatment of dry eye disease. The Company is also evaluating compounds in its topically applied MPP receptor Tyrosine Kinase Inhibitor program, or rTKI program, that inhibit the vascular endothelial growth factor, or VEGF, pathway, for the potential treatment of a number of retinal diseases. The brand name INVELTYS has been conditionally approved by the U.S. Food and Drug Administration.

 

The Company is engaged in research and development activities, raising capital and recruiting skilled personnel. The Company is subject to a number of risks similar to those of other companies conducting high‑risk, early‑stage research and development of pharmaceutical product candidates. Principal among these risks are dependence on key individuals and intellectual property, competition from other products and companies and the technical risks associated with the successful research, development and marketing of its product candidates. The Company’s success is dependent upon its ability to raise additional capital in order to fund ongoing research and development, obtain regulatory approval of its product candidates, successfully commercialize its products, generate revenue, meet its obligations, and, ultimately, attain profitable operations.

On July 25, 2017, the Company completed its initial public offering (“IPO”) of common stock pursuant to its registration statement on Form S-1, as amended (File No. 333-218936), which was declared effective by the Securities Exchange Commission (the “SEC”) on July 19, 2017. Pursuant to the registration statement, the Company issued and sold 6,900,000 shares of $0.001 par value common stock at an initial offering price of $15.00 per share, which included 900,000 shares of common stock pursuant to the underwriters’ option to purchase additional shares. The Company’s shares began trading on the NASDAQ Global Select Market under the symbol “KALA” on July 20, 2017.

Proceeds from the Company’s IPO were approximately $94.1 million after deducting underwriting discounts and commissions of $7.2 million and offering costs of $2.2 million. Upon the closing of the IPO, all of the Company’s outstanding shares of convertible preferred stock automatically converted into 16,101,970 shares of common stock at the applicable conversion ratio then in effect. All of the Company’s outstanding warrants to purchase preferred stock automatically converted into warrants to purchase 202,020 shares of common stock.

The Company believes that its existing cash on hand as of September 30, 2017, will enable it to fund its planned operating expenses, debt service obligations and capital expenditure requirements through the second quarter of 2019. The Company has based these estimates on assumptions that may prove to be wrong, and its operating plan may change as a result of many factors currently unknown. As a result, the Company could deplete its available capital resources sooner than it currently expects.

Unaudited Interim Financial Information

The condensed financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and

8


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

 

footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. The accompanying condensed financial statements reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.  Interim results are not necessarily indicative of results for a full year.  Accordingly, these financial statements should be read in conjunction with the financial statements as of and for the year ended December 31, 2016, and notes thereto, included in the Company’s final prospectus for the IPO filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) on July 20, 2017 (the “Prospectus”).

Reverse Stock SplitOn July 7, 2017, the Company effected a one-for-5.2083 reverse stock split of the Company’s issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for the Company’s convertible preferred stock. The par value per share and authorized shares of common and convertible preferred stock were not adjusted as a result of the reverse stock split. All common stock and common stock per share amounts within the financial statements and notes thereto have been retroactively adjusted for all periods presented to give effect to this reverse stock split, including reclassifying an amount equal to the reduction in par value of common stock to additional paid-in capital.

Automatic Conversion of Preferred Stock – On July 7, 2017, the Company effected an amendment to its Amended and Restated Certificate of Incorporation, as amended. This amendment eliminated the minimum price per share of Common Stock for an underwritten public offering that would result in the automatic conversion of all outstanding shares of the Company’s Series Seed, Series A, Series B, Series B‑1 and Series C Preferred Stock.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expense, and related disclosures. The Company bases estimates and assumptions on historical experience when available and on various factors that it believes to be reasonable under the circumstances. The Company evaluates its estimates and assumptions on an ongoing basis. Estimates relied upon in preparing these financial statements relate to, but are not limited to, the fair value of common stock, preferred stock, warrants, stock compensation, accrued expenses and the recoverability of the Company’s net deferred tax assets and related valuation allowance. Actual results may differ from these estimates under different assumptions or conditions.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” in the Prospectus. There have been no material changes to the significant accounting policies during the period ended September 30, 2017.

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016‑09, Improvements to Employee Share‑Based Payment Accounting (“ASU 2016‑09” or “Topic 718”), which simplifies share‑based payment accounting through a variety of amendments. The standard is effective for annual periods beginning after December 15, 2016 and for interim periods within those fiscal years. The changes resulting from the adoption of this standard impact the accounting for income taxes, accounting for forfeitures, statutory tax withholding and the presentation of statutory tax withholding on the statement of cash flows. The Company adopted this standard on January 1, 2017. Under guidance within ASU 2016‑09, excess tax benefits and deficiencies are to be recognized as income tax expense or benefit in the statement of operations in the period in which they occur rather than

9


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

 

as an increase or decrease in stockholders’ equity (deficit). Since the Company maintains a full valuation allowance on its net deferred tax asset, there was no net impact to its accumulated deficit or its net loss resulting from the adoption of this standard. Also under the guidance in ASU 2016‑09, an entity may elect to account for forfeitures as they occur or continue to estimate the total number of awards that are vested or expected to vest. The Company elected to account for forfeitures as they occur and applied the accounting change on a modified retrospective basis as a cumulative effect adjustment to accumulated deficit as of the date of adoption, January 1, 2017. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or statement of cash flows.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016‑02, Leases (Topic 842) (“ASU 2016‑02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight‑line basis over the term of the lease, respectively. A lessee is also required to record a right‑of‑use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. ASU 2016‑02 (ASC Topic 842) supersedes the previous leases standard, ASC 840, Leases. The standard is effective for public entities for annual periods beginning after December 15, 2018 and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016‑02 will have on its financial statements.

In August 2016, the FASB issued ASU No. 2016‑15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016‑15”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2016-15 should be applied retrospectively and early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of the adoption of ASU 2016‑15, but believes its adoption will not have a material impact on its statement of cash flows.

In November 2016, the FASB issued ASU 2016‑18, Statement of Cash Flows Restricted Cash (“ASU 2016‑18”). This new standard requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning‑of‑period and end‑of‑period total amounts shown on the statement of cash flows. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017, and requires retrospective application. The Company does not believe that the adoption of ASU 2016‑18 will have a material impact on its financial statements and related disclosures.

In May 2017, the FASB issued ASU Update No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in ASU 2017-09 are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact that ASU 2017-09 will have on the Company’s balance sheets, results of operations and statements of cash flows.

In July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments also clarify existing disclosure requirements for equity-classified instruments. The amendments in Part

10


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

 

II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for, including adoption in an interim period. The Company is currently evaluating the impact of adopting this standard on its financial statements and related disclosures.

 

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2017

    

2016

 

 

 

 

 

 

 

Rent

 

$

61

 

$

58

Insurance

 

 

667

 

 

55

Other

 

 

158

 

 

41

Prepaid expenses and other current assets

 

$

886

 

$

154

 

 

4. ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2017

    

2016

 

 

 

 

 

 

 

Development costs

 

$

2,350

 

$

2,280

Compensation and benefits

 

 

1,140

 

 

1,480

Professional fees

 

 

194

 

 

171

Common stock offering costs

 

 

111

 

 

 —

Other

 

 

143

 

 

62

Accrued expenses

 

$

3,938

 

$

3,993

 

 

 

5. DEBT

2014 Debt Facility

In November 2014, the Company entered into a venture debt facility (“2014 Debt Facility”) for a total loan commitment of $10.0 million. On October 13, 2016, the Company entered into a First Amendment to the 2014 Debt Facility the (“First Amendment”), which reaffirmed the initial commitment to a total of $10.0 million of funding (“Term Loan A”) and increased the Company’s total borrowing capacity by an additional $10.0 million (“Term Loan B” and together with Term Loan A, “Term Loans”). On September 28, 2017, the Company drew the additional $10.0 million available under Term Loan B. Under the terms of the facility, the borrowings accrue interest at an annual rate equal to 3.00% above the Prime Rate then in effect. The interest rate was 6.50% as of December 31, 2016 and 7.25% as of September 30, 2017.

The unpaid principal balance under the 2014 Debt Facility was $20.0 million and $10.0 million as of September 30, 2017 and December 31, 2016, respectively. The unamortized discount was $260,000 and $346,000 as of September 30, 2017 and December 31, 2016, respectively. During the three months ended September 30, 2017 and 2016, the

11


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

 

Company recognized interest expense of $212,000 and $186,000, respectively, which consisted of amortization of the debt discount of $29,000 and $31,000 and the contractual coupon interest of $183,000 and $155,000, respectively. During the nine months ended September 30, 2017 and 2016, the Company recognized interest expense of $618,000 and $566,000, respectively, which consisted of amortization of the debt discount of $86,000 and $83,000 and the contractual coupon interest of $532,000 and $483,000, respectively.

In connection with the 2014 Debt Facility and the initial borrowing of $5.0 million under Term Loan A, the Company issued warrants to the lender to purchase 138,889 shares of Series B Preferred Stock at an exercise price of $1.44 per share (the “2014 Warrants”). During 2015 the Company borrowed an additional $5.0 million under Term Loan A and the number of exercisable shares underlying the 2014 Warrants increased to 277,778 shares of Series B Preferred Stock or 53,333 shares of common stock at an exercise price of $7.50 per share on an as-converted basis after giving effect to the reverse stock split (see Note 1). Upon executing the First Amendment, the Company issued warrants to purchase up to 251,951 shares of Series C Preferred Stock at an exercise price of $1.59 per share (the “2016 Warrants”), or 48,374 shares of common stock at an exercise price of $8.27 per share on an as-converted basis after giving effect to the reverse stock split (see Note 1). Consistent with the warrants issued under the original 2014 Debt Facility, the number of shares of Series C Preferred Stock that become exercisable would increase in proportion to the amount of Term Loan B borrowings. Upon the September 28, 2017 draw down of Term B Loan, the 2016 Warrants became exercisable into 48,374 shares of common stock. The 2016 Warrants were not exercisable into shares as of the First Amendment date or December 31, 2016, as the Company had not borrowed under the Term B Loan during 2016.

Upon issuance of the 2014 Warrants and 2016 Warrants, the Company estimated the fair value of the warrants using the Black‑Scholes option‑pricing model (see Note 6), and recorded the estimated fair value of the warrants as a liability separate from the loan balance, resulting in additional debt discount included within long‑term debt that is amortized to interest expense over the term of the loan using the effective interest method. The initial fair value of the 2014 Warrants and 2016 Warrants was $140,000 and $225,000, respectively. The warrants were subsequently re‑measured to fair value at every reporting date prior to the reporting period ending September 30, 2017 with changes in fair value recorded in the statement of operations as a component of other income (expense), as the shares underlying the warrants are exercisable into contingently redeemable shares. Upon the Company’s IPO on July 25, 2017 all of the underlying preferred stock warrants were converted into warrants for common stock, and the fair value of the warrant liability was reclassified to additional paid-in capital. As such, there was no warrant liability associated with the Term Loans as of September 30, 2017.

As of December 31, 2016, the estimated fair value of the warrant liability associated with the original 2014 Debt Facility was $274,000 and the estimated fair value of the warrant liability associated with the First Amendment was $263,000.

The future annual principal payments due under the Term Loans as of September 30, 2017 are as follows (in thousands):

 

 

 

 

Years Ending December 31,

    

 

 

2017

 

$

1,111

2018

 

 

6,666

2019

 

 

6,666

2020

 

 

5,557

Total

 

$

20,000

 

 

 

 

 

 

12


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

 

6. PREFERRED STOCK WARRANTS

The Company has issued warrants in connection with debt transactions that were completed prior to 2014, all of which were classified as liabilities as of December 31, 2016. The warrants were remeasured at fair value at each reporting period prior to the reporting period ending September 30, 2017, as the warrants were exercisable into contingently redeemable shares. As of December 31, 2016, warrants outstanding to acquire Series C Preferred Stock were not exercisable into shares of Series C Preferred Stock. As part of the draw down of Term Loan B on September 28, 2017, warrants to acquire 48,374 shares of common stock became exercisable.

The following table summarizes the warrants outstanding at each of the dates identified:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Exercisable at

 

 

    

 

    

Exercise

    

Expiration

    

September 30, 

    

December 31, 

 

Issued

 

Exercisable for

 

Price

 

Date

 

2017

 

2016

 

2011 and 2012

 

Series Seed Preferred Stock

 

$

1.00

 

July 2019

 

 —

 

80,000

(1)

2013

 

Series B Preferred Stock

 

$

1.44

 

April 2021

 

 —

 

694,444

(1)

2014

 

Series B Preferred Stock

 

$

1.44

 

November 2024

 

 —

 

277,778

(1)

2016

 

Series C Preferred Stock

 

$

1.59

 

October 2026

 

 —

(2)

 —

(2)

 

 

(1)

As of December 31, 2016, the preferred stock warrants to purchase Series Seed Preferred Stock issued in 2011 and 2012, Series B Preferred Stock issued in 2013 and Series B Preferred Stock issued in 2014 were exercisable, and on a converted basis would have represented warrants to purchase common stock of 15,360, 133,334 and 53,333 shares, respectively.  As of September 30, 2017 there were no preferred stock warrants outstanding (See Note 1). As of September 30, 2017 all of the underlying preferred stock warrants were converted into warrants for common stock, of which 149,327 were outstanding.

(2)

As of December 31, 2016, the preferred stock warrants to purchase Series C Preferred Stock were not exercisable and as of September 30, 2017, there were no preferred stock warrants outstanding (See Note 1).  Upon the September 2017 $10.0 million draw down of the Term B Loan, the warrants became exercisable for 48,374 shares of common stock, which for comparative purposes represents 251,951 shares of Series C Preferred Stock on a pre-converted basis. As of September 30, 2017, all 48,374 warrants were outstanding.

 

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

Certain assets and liabilities are carried at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Observable inputs (other than Level 1 quoted prices), such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.

13


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.

The Company’s preferred stock warrant liability is carried at fair value determined according to the fair value hierarchy and classified as a Level 3 measurement. The carrying value of accounts payable and accrued expenses approximate their fair value due to the short‑term nature of these assets and liabilities. Management believes that the Company’s long‑term debt (See Note 5) bears interest at the prevailing market rate for instruments with similar characteristics and, accordingly, the carrying value of long‑term debt, including the current portion, also approximates its fair value. The fair value of the outstanding debt was estimated using a discounted cash flow analysis based on current market interest rates for debt issuances with similar remaining years to maturity, adjusted for credit risk, which represents a Level 3 measurement.

Upon the Company’s IPO on July 25, 2017, all of the underlying preferred stock warrants became exercisable for common stock instead of preferred stock and the $2,883,000 fair value of the warrant liability as measured immediately prior to the IPO was charged to additional paid in capital with the reclassification of the warrants as equity, not a liability.  There was no warrant liability as of September 30, 2017 and, as such, there were no assets and liabilities measured at fair value on a recurring basis of September 30, 2017. As of December 31, 2016, the Company’s preferred stock warrants associated with the issuances of the 2014 Debt Facility and the First Amendment, as well as debt transactions entered into prior to 2014, were recorded at fair value. The assets and liabilities measured at fair value on a recurring basis as of December 31, 2016, and the input categories associated with those assets and liabilities are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

 

 

 Assets

 

Inputs

 

Inputs

 

    

Carrying Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

2011 and 2012  Series Seed Warrants

 

$

39

 

$

 —

 

$

 —

 

$

39

2013 Series B Warrants

 

 

463

 

 

 —

 

 

 —

 

 

463

2014 Series B Warrants

 

 

274

 

 

 —

 

 

 —

 

 

274

2016 Series C Warrants

 

 

263

 

 

 —

 

 

 —

 

 

263

Total warrant liability

 

$

1,039

 

$

 —

 

$

 —

 

$

1,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company has historically classified the value of the warrants as Level 3 measurements within the fair value hierarchy because the fair value is derived using significant unobservable inputs, which included the estimated volatility, the estimated fair value of the underlying preferred stock, and to the extent that the number of exercisable shares underlying the warrants were adjustable based on the amount of the Term Loans drawn down or the probability that the Company would draw down on the debt facility.

14


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

 

The following table provides a summary of changes in the fair value of the Company’s derivative liability, which is included as a component of other (income) expense (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

September 30, 

 

 

 

2017

 

2016

 

 

 

Warrant

 

Warrant

 

 

    

Liability

 

Liability

 

 

 

 

 

 

 

 

 

Fair value - June 30,

 

$

2,260

 

$

965

 

Change in fair value of warrant liability

 

 

623

 

 

(206)

 

Reclassification of preferred warrant liability

 

 

(2,883)

 

 

 —

 

Fair value - September 30,

 

$

 —

 

$

759

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

September 30, 

 

 

 

2017

 

2016

 

 

 

Warrant

 

Warrant

 

 

    

Liability

 

Liability

 

 

 

 

 

 

 

 

 

Fair value - December 31,

 

$

1,039

 

$

936

 

Change in fair value of warrant liability

 

 

1,844

 

 

(177)

 

Reclassification of preferred warrant liability

 

 

(2,883)

 

 

 —

 

Fair value - September 30,

 

$

 —

 

$

759

 

 

The Company determined the fair values of the warrants at December 31, 2016 and on an interim basis on July 19, 2017, using the Black‑Scholes option‑pricing model.  The July 19, 2017 valuation was performed as a basis for the anticipated reclassification of the preferred warrant liability to equity in connection with the IPO and conversion of the preferred stock and warrants.  The following assumptions were used for the respective measurement date(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2011 and

 

 

 

 

 

 

 

 

 

 

 

 

2012 Series

 

2013

 

2014

 

 

 

 

 

 

Seed

 

Series B

 

Series B

 

Series C

 

 

    

Warrants

    

Warrants

    

Warrants

    

Warrants

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Volatility

 

 

100.00

%  

 

87.00

%  

 

114.00

%  

 

58.30

%

Risk-free interest rate

 

 

1.30

%  

 

1.80

%  

 

2.30

%  

 

2.40

%

Estimated fair value of underlying shares

 

$

0.89

 

$

1.11

 

$

1.11

 

 

1.54

 

Remaining contractual term (years)

 

 

2.6

 

 

4.3

 

 

7.9

 

 

9.8

 

Expected dividend yield

 

 

 —

%  

 

 —

%  

 

 —

%  

 

 —

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 19, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Volatility

 

 

119.00

%  

 

112.00

%  

 

114.00

%  

 

116.00

%

Risk-free interest rate

 

 

1.40

%  

 

1.60

%  

 

2.10

%  

 

2.20

%

Estimated fair value of underlying shares

 

$

13.50

 

$

13.50

 

$

13.50

 

$

13.50

 

Remaining contractual term (years)

 

 

2.0

 

 

3.7

 

 

7.3

 

 

9.2

 

Expected dividend yield

 

 

 —

%  

 

 —

%  

 

 —

%  

 

 —

%


(1)

For purposes of determining the fair value of the warrants to purchase Series C Preferred Stock as of December 31, 2016 and July 19, 2017, the Company estimated that there was a 100% probability that it would draw down on the

15


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

 

remaining $10.0 million available under the 2014 Debt Facility as of the measurement date, and as such, assumed that the warrants would be exercisable into the maximum number of shares stipulated in the First Amendment.

 

 

8. CONVERTIBLE PREFERRED STOCK

Upon the closing of the Company’s IPO on July 25, 2017, all outstanding shares of convertible preferred stock converted into 16,101,970 shares of the Company’s common stock.  As such, there were no outstanding shares of convertible preferred stock as of September 30, 2017.

Convertible preferred stock consisted of the following as of December 31, 2016 (in thousands, except share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock

 

 

 

 

 

 

Shares Issued

 

 

 

 

 

 

 

Issuable

 

 

Designated

 

 

 

and

 

Liquidation

 

Carrying

 

Upon

 

    

Shares

    

Issuance Dates

    

Outstanding

    

Value

    

Value

    

Conversion (1)

Series Seed

 

11,323,209

 

December 2009

 

2,000,001

 

 

 

 

 

 

 

 

 

 

 

 

October 2010

 

2,000,003

 

 

 

 

 

 

 

 

 

 

 

 

February 2012

 

7,243,205

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,243,209

 

 

$ 11,243

 

 

$ 11,065

 

2,158,708

Series A

 

9,583,432

 

February 2013

 

4,791,716

 

 

 

 

 

 

 

 

 

 

 

 

July 2013

 

4,791,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,583,432

 

 

$ 11,500

 

 

$ 10,736

 

1,840,029

Series B

 

16,597,221

 

April 2014

 

15,624,999

 

 

$ 22,500

 

 

$ 22,185

 

3,000,017

Series B-1

 

4,629,629

 

August 2015

 

4,629,629

 

 

$ 7,000

 

 

$ 6,885

 

888,894

Series C

 

43,034,639

 

April 2016

 

42,782,688

 

 

$ 67,922

 

 

$ 67,520

 

8,214,322

(1)

No fractional shares of Common Stock were issuable upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Company paid cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Board of Directors of the Company. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock issuable upon such conversion.

Series Seed Convertible Preferred Stock

In December 2009, the Company issued an aggregate of 2,000,001 shares of Series Seed Preferred Stock for gross proceeds of $2.0 million or $1.00 per share. In October 2010, the Company issued an aggregate of 2,000,003 shares of Series Seed Preferred Stock to existing investors for gross proceeds of $2.0 million or $1.00 per share. In February 2012, the Company issued an aggregate of 7,243,205 shares of Series Seed Preferred Stock to existing and new investors, which included 6,150,000 shares for gross proceeds of $6.2 million and 1,093,205 shares converted from convertible debt of $1.0 million principal and $93,000 accrued interest. Costs incurred in connection with each of the individual issuances of Series Seed Preferred Stock were $124,000, $39,000 and $15,000 respectively, which have been recorded as a reduction to the carrying amount of the Series Seed Preferred Stock.  On July 25, 2017, upon the closing of the Company’s IPO, all outstanding shares of Series Seed Convertible Stock converted into 2,158,708 shares of the Company’s common stock. As such, there were no outstanding shares of Series Seed Convertible Preferred Stock as of September 30, 2017.

16


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

 

Series A Convertible Preferred Stock

In February 2013, the Company issued 4,791,716 shares of Series A Preferred Stock, at a purchase price of $1.20 per share for gross proceeds of $5.8 million.

Additionally, in accordance with the terms of the Series A Preferred Stock Purchase Agreement, investors were granted the right to purchase up to an additional 4,791,716 shares of Series A Preferred Stock, at a price of $1.20 per share, upon the Company meeting certain milestone criteria by December 31, 2013, approval of the Board and approval of the investors holding a majority of the outstanding shares of Series A Preferred Stock.

In June 2013, the Board approved waiving one of the milestone events provided for in the Series A Preferred Stock Purchase Agreement. Accordingly, the second tranche of Series A Preferred Stock closed on July 15, 2013 and the Company issued 4,791,716 shares of Series A Preferred Stock for gross proceeds of $5.8 million, or $1.20 per share. Costs incurred in connection with the issuance of the Series A Preferred Stock were $93,000, which have been recorded as a reduction in the carrying amount of the Series A Preferred Stock. On July 25, 2017, upon the closing of the Company’s IPO, all outstanding shares of Series A Convertible Stock converted into 1,840,029 shares of the Company’s common stock. As such, there were no outstanding shares of Series A Convertible Preferred Stock as of September 30, 2017.

Series B Convertible Preferred Stock

In April 2014, the Company issued 15,624,999 shares of Series B Preferred Stock for gross proceeds of $22.5 million or $1.44 per share which included conversion of the outstanding principal and interest on the 2013 Notes (See Note 7) of $5.1 million, which converted into 3,562,785 shares of Series B Preferred Stock pursuant to the terms of the Notes. Costs incurred in connection with the issuance of the Series B Preferred Stock were $315,000, which have been recorded as a reduction in the carrying amount of the Series B Preferred Stock. On July 25, 2017, upon the closing of the Company’s IPO, all outstanding shares of Series B Convertible Stock converted into 3,000,017 shares of the Company’s common stock. As such, there were no outstanding shares of Series B Convertible Preferred Stock as of September 30, 2017.

Series B‑1 Convertible Preferred Stock

On August 17, 2015, the Company issued 4,629,629 shares of Series B‑1 Senior Convertible Preferred Stock (“Series B‑1 Preferred Stock”) for gross proceeds of $7.0 million or $1.512 per share. Costs incurred in connection with the issuance of the Series B‑1 Preferred Stock were $115,000, which have been recorded as a reduction in the carrying amount of the Series B‑1 Preferred Stock. On July 25, 2017, upon the closing of the Company’s IPO, all outstanding shares of Series B-1 Convertible Stock converted into 888,894 shares of the Company’s common stock. As such, there were no outstanding shares of Series B-1 Convertible Preferred Stock as of September 30, 2017.

Series C Convertible Preferred Stock

On April 5, 2016, the Company issued 42,782,688 shares of Series C Preferred Stock for gross proceeds of $67.9 million or $1.5876 per share. Costs incurred in connection with the issuance of the Series C Preferred Stock were $402,000, which have been recorded as a reduction in the carrying amount of the Series C Preferred Stock. On July 25, 2017, upon the closing of the Company’s IPO, all outstanding shares of Series C Convertible Stock converted into 8,214,322 shares of the Company’s common stock. As such, there were no outstanding shares of Series C Convertible Preferred Stock as of September 30, 2017.

17


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

 

Treatment of Preferred Stock Generally

The rights, preferences, and privileges of the Series Seed, Series A, Series B, Series B-1 and Series C (collectively the “Preferred Stock”) are included in the Prospectus.

As described in Note 1, on July 7, 2017, the Company effected an amendment to its Amended and Restated Certificated of the Incorporation, as amended. This amendment eliminated the minimum price per share of Common Stock for an underwritten public offering that would result in the automatic conversion of all outstanding shares of the Company’s Series Seed, Series A, Series B, Series B‑1 and Series C Preferred Stock.

As described in Note 1, on July 7, 2017, the Company effected a one-for-5.2083 reverse stock split of the Company’s issued and outstanding shares of common stock and a proportional adjustment to the existing conversion ratios for the Company’s convertible preferred stock.

9. COMMON STOCK AND PREFERRED STOCK

COMMON STOCK

The Company was authorized to issue up to 120,000,000 and 110,251,951 shares of common stock with a $0.001 par value per share as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017 and December 31, 2016, the Company had 24,347,150 and 1,181,429 shares of common stock issued and outstanding, respectively.

The rights, preferences, and privileges of the Company’s common stock are included in the Prospectus.  There were no changes to the rights, preferences, and privileges of the common stock during the nine months ended September 30, 2017.

PREFERRED STOCK

Upon completion of the Company’s IPO, all outstanding shares of the Company’s preferred stock automatically converted into an aggregate of 16.1 million shares of the Company’s common stock. The Company also is authorized to issue 5.0 million shares of undesignated preferred stock in one or more series. As of September 30, 2017, no shares of preferred stock were issued or outstanding.

18


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

 

Reserved Shares—As of September 30, 2017, the Company had reserved the following shares of common stock issuable upon exercise of rights under warrants and exercise of stock options, and as of December 31, 2016, the Company had reserved the following shares of common stock issuable upon conversion of then outstanding convertible preferred stock, convertible preferred stock issuable upon exercise of rights under warrants and exercise of stock options (See Note 8):

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2017

    

2016

 

 

 

 

 

Convertible preferred stock

 

 —

 

16,101,970

2013 Warrant rights to acquire Series B Preferred Stock

 

 —

 

133,327

2014 Warrant rights to acquire Series B Preferred Stock

 

 —

 

53,333

2016 Warrant rights to acquire Series C Preferred Stock

 

 —

 

48,374

2011 Warrant rights to acquire Series Seed Preferred Stock

 

 —

 

15,360

Warrant rights to acquire Common Stock

 

197,701

 

 —

2009 stock option plan

 

3,001,752

 

3,533,726

2017 stock option plan

 

2,011,203

 

 

Total

 

5,210,656

 

19,886,090

 

 

 

10. STOCK‑BASED COMPENSATION

Stock Incentive Plan—On December 11, 2009, the Board adopted the 2009 Employee, Director and Consultant Equity Incentive Plan (the “2009 Plan”) for the issuance of common stock and stock options to employees, officers, directors, consultants, and advisors. Under the 2009 Plan, the Board determined the number of shares of common stock to be granted pursuant to the awards, as well as the exercise price and terms of such awards. The exercise price of incentive stock options could not be less than the fair value of the common stock on the date of grant. Stock options awarded under the 2009 Plan expire 10 years after the grant date, unless the Board sets a shorter term. Options granted under the plan generally vest over a four‑year period. As of December 31, 2016, there were 338,256 shares of common stock available for future grant under the 2009 Plan. 

On July 19, 2017, the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) became effective and no further stock options or other awards will be made under the 2009 Plan. As of September 30, 2017, there were 1,366,324 shares of common stock available for grant under the 2017 Plan. In addition, any shares of common stock subject to awards under the 2009 Plan that expire, terminate, or are otherwise surrendered, cancelled, forfeited or repurchased without having been fully exercised or resulting in any common stock being issued will become available for issuance under the 2017 Plan, up to 3,533,757 shares through December 31, 2017 and an annual increase to be added on the first day of each fiscal year, beginning with the fiscal year ending December 31, 2018 and continuing for each fiscal year until, and including, the fiscal year ending December 31, 2027, equal to the least of (i) 3,573,766 shares of Common Stock, (ii) 4% of the outstanding shares on such date and (iii) an amount determined by the Board.  Upon the exercise of stock options, the Company issues new shares of common stock. The Company does not hold any treasury shares.

Prior to the IPO, the Company had granted 86,056 stock options which contain performance‑based vesting criteria. These criteria were milestone events that were specific to the Company’s corporate goals. Stock‑based compensation expense associated with performance‑based stock options is recognized if the achievement of the performance condition is considered probable using management’s best estimates. The milestones were not deemed probable as of December 31, 2016 and were not met and had expired as of September 30, 2017.

The Company granted 0 stock options to non‑employee consultants for the three months ended September 30, 2017 and 2016, and 4,224 and 0 stock options for the nine months ended September 30, 2017 and 2016, respectively.

19


 

Table of Contents

KALA PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (Continued)

 

During the three months ended September 30, 2017 and 2016, the Company recognized $46,000 and $6,000, respectively, in stock compensation expense related to non‑employee consultants. During the nine months ended September 30, 2017 and 2016, the Company recognized $83,000, and $34,000, respectively, in stock compensation expense related to non‑employee consultants.

A portion of the unvested stock options will vest upon the sale of all or substantially all of the stock or assets of the Company.

A summary of option activity for employee and non‑employee awards under the 2009 Plan and the 2017 Plan for the nine months ended September 30, 2017 is as follows (in thousands, except share and per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

Number of

 

Exercise

 

Contractual

 

Intrinsic

 

    

Shares

    

Price

    

Term

    

Value

 

 

 

 

 

 

 

(Years)

 

 

 

Outstanding at January 1,2017

 

3,195,469

 

$

3.26

 

8.6

 

$

1,200

Granted

 

747,892

 

 

16.06

 

 

 

 

 

Exercised

 

(129,461)

 

 

1.46

 

 

 

 

 

Forfeited

 

(167,269)

 

 

2.72

 

 

 

 

 

Outstanding at September 30, 2017

 

3,646,631

 

$

5.97