KALA BIO, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission on February 12, 2020. This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. The words “anticipate,” “believe,” “continue” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “would,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by forward-looking statements. 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 section entitled “Risk Factors” in Part II, Item 1A 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 that we may make. We are a biopharmaceutical company focused on the discovery, development and commercialization of innovative therapies for diseases of the eye. Our innovative mucus-penetrating particle, or MPP, drug delivery technology, which we refer to as our AMPPLIFY ® technology, uses selectively-sized nanoparticles that each have a proprietary coating. We believe that these two key attributes enable even distribution of drug particles on mucosal surfaces and significantly increase drug delivery to target tissues by enhancing mobility of drug particles through mucus and preventing drug particles from becoming trapped and eliminated by mucus. We have applied the AMPPLIFY technology to loteprednol etabonate, or LE, a corticosteroid designed for ocular applications, resulting in the October 2020 approval of EYSUVIS TM (loteprednol etabonate ophthalmic suspension) 0.25%, for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease and the August 2018 approval of INVELTYS ® (loteprednol etabonate ophthalmic suspension) 1%, our topical twice-a-day ocular steroid for the treatment of inflammation and pain following ocular surgery, by the U.S. Food and Drug Administration, or the FDA. We commercially launched INVELTYS in January 2019 and expect to begin shipping EYSUVIS to wholesalers in the U.S. by the end of 2020 and for the full promotional launch to begin in January of 2021. EYSUVIS is the first and only FDA-approved prescription product with an indication for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease. The FDA approved EYSUVIS based on results from four clinical trials, including three Phase 3 clinical trials and one Phase 2 clinical trial, which demonstrated significant improvements in both the signs and symptoms of dry eye disease. Specifically, statistical significance was achieved after two weeks of dosing for the sign endpoint of conjunctival hyperemia in all three Phase 3 clinical trials. Statistical significance was observed in two of the three Phase 3 clinical trials for the symptom endpoints of ocular discomfort severity in both the overall intent-to-treat, or ITT, population and in a predefined subgroup of ITT patients with more severe ocular discomfort at baseline. EYSUVIS was well-tolerated across the four trials, with adverse events and intraocular pressure, or IOP, increases comparable to that observed with vehicle. We believe EYSUVIS could become the preferred first-line prescription therapy for the short-term (up to two weeks) treatment of the signs and symptoms of dry eye disease, including the treatment of dry eye flares that affect the vast majority of dry eye patients. INVELTYS is the first and only FDA-approved ocular corticosteroid product with a twice-a-day dosing regimen for the treatment of post-operative inflammation and pain. Other approved topical ocular corticosteroid products for this indication are dosed three or four times a day. In clinical trials, INVELTYS showed statistical significance in the primary efficacy endpoints of complete resolution of inflammation at day eight maintained through day 15 with no need for rescue medication compared to placebo and complete resolution of pain at day eight maintained through day 15 with no need for rescue medications compared to placebo. 26 ​ We are also evaluating other opportunities for MPP compounds in our receptor Tyrosine Kinase Inhibitor program, or rTKI program, that inhibit the vascular endothelial growth factor pathway, for the potential treatment of a number of retinal diseases and novel next-generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action with the goal of eliminating the risk of interocular pressure, or IOP, increase and cataract formation. We have retained worldwide commercial rights for EYSUVIS, INVELTYS and our current product candidates. Since FDA approval of INVELTYS, we have built a commercial infrastructure with our own focused, specialty sales force which includes 56 territory sales managers, seven regional sales leaders, and three directors of national accounts. As a result of the recent FDA approval of EYSUVIS, during the fourth quarter of 2020 we plan to increase our sales force from 56 sales representatives to approximately 90 sales representatives and from seven regional sales leaders to 14 sales leaders, and in 2021, we plan to further increase our sales force to approximately 125 sales representatives, in each case pending the status of the COVID-19 pandemic. Our sales representatives will promote both EYSUVIS and INVELTYS. We expect to commercialize in the United States any of our product candidates that receive marketing approval as well. We also expect to explore commercialization of EYSUVIS for the treatment of dry eye disease in certain markets outside the United States, including the European Union, or EU, utilizing a variety of collaboration, distribution and other marketing arrangements with one or more third parties. Since the initial public offering of our common stock, or IPO, we have financed our operations primarily through common stock offerings pursuant to a shelf registration statement on Form S-3 that was declared effective by the SEC on August 27, 2018, or the 2018 Shelf Registration, and sales of our common stock pursuant to a sales agreement, or the 2018 Sales Agreement, with Jefferies, LLC, or Jefferies, under which we were able to issue and sell, from time to time, common stock in at-the-market offerings, or the ATM Offering, through Jefferies, as a sales agent. On March 10, 2020 , we notified Jefferies that we were suspending and terminating the prospectus related to the 2018 Sales Agreement. Through September 30, 2020, we have issued an aggregate of 30,549,976 shares of common stock under our 2018 Shelf Registration, including the ATM Offering , resulting in aggregate gross proceeds to us of $231.7 million. ​ On May 7, 2020, we filed a shelf registration statement on Form S-3 with the SEC, which was declared effective on May 19, 2020, or the 2020 Shelf Registration. Under the 2020 Shelf Registration, we may offer and sell up to $350.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities or units during the three-year period the commenced upon the 2020 Shelf Registration becoming effective. In connection with the filing of the 2020 Shelf Registration, we entered into an amended and restated sales agreement with Jefferies pursuant to which we may issue and sell, from time to time, up to an aggregate of $75.0 million of our common stock under our ATM Offering through Jefferies, as a sales agent. Through September 30, 2020, we have not issued any shares of common stock under our 2020 Shelf Registration. ​ We also have an aggregate amount of $75.0 million of indebtedness outstanding under our credit facility, or the Athyrium Credit Facility, with Athyrium Opportunities III Acquisition LP, or Athyrium. ​ Since inception, we have incurred significant losses from operations and negative cash flows from operations. Our net losses were $73.2 million for the nine months ended September 30, 2020 and $94.3 million for the year ended December 31, 2019. As of September 30, 2020, we had an accumulated deficit of $368.7 million. As we commercially launched our first product, INVELTYS, in January 2019, and are planning full promotional launch of our second product, EYSUVIS, to begin in January of 2021, we have had only limited revenues to date from product sales and have financed our operations primarily through proceeds from our IPO, public common stock offerings and sales of our common stock under our ATM Offering, private placements of preferred stock, convertible debt financings, borrowings under credit facilities and warrants. We have devoted substantially all of our financial resources and efforts to research and development, including preclinical studies and clinical trials and engaging in activities to launch and commercialize EYSUVIS and INVELTYS. Although we expect to continue to generate revenue from sales of INVELTYS and to begin to generate revenue from EYSUVIS following its commercial launch, there can be no assurance as to the amount or timing of any such revenue, and we expect to continue to incur significant expenses and operating losses. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year. 27 ​ Business Impact of COVID-19 Pandemic The ongoing COVID-19 pandemic, which began in December 2019, has spread worldwide, causing federal, state and local governments to implement measures to slow the spread of the pandemic through quarantines, strict travel restrictions and bans, heightened border scrutiny and other measures. In order to safeguard the health of our employees, we follow, and will continue to follow, recommendations from the U.S. Centers for Disease Control and Prevention, as well as federal, state, and local governments, regarding working-from-home practices for non-essential employees. As a result, all office-based personnel have been instructed to work from home, and our laboratory facilities, that support our early-stage research activities, are being utilized as necessary. In addition, we previously suspended our sales force from substantially all in-person interactions with physicians and customers and were limited to conducting educational and promotional activities virtually. If we suspend all or some in-person interactions with physicians and customers in the future, we will again be limited to conducting educational and promotional activities virtually, which has hampered, and may continue to hamper, our ability to market INVELTYS. The effects of COVID-19 may also disrupt the launch and commercialization of EYSUVIS. In addition, government restrictions have at times led to moratoria on elective ocular surgeries in many jurisdictions, which has significantly reduced, and may in the future continue to significantly reduce, the demand for INVELTYS, which is indicated for the treatment of inflammation and pain following ocular surgery. The extent of the impact of COVID-19 on our commercialization efforts and our operational and financial performance will depend on certain developments, including the length and severity of this pandemic and the impact on our customers, employees, vendors, and government agencies, all of which are uncertain and cannot be predicted. Management is actively monitoring the COVID-19 pandemic and its possible effects on our financial condition, liquidity, operations, customers, sales force, contractors, and workforce. For additional information on risks posed by the COVID-19 pandemic, please see Part II, Item 1A – “Risk Factors” of this Quarterly Report, including the risk factor entitled “The ongoing novel coronavirus pandemic and the efforts to prevent its spread have adversely impacted our operations and the market for INVELTYS, could impact the launch of EYSUVIS and may continue to adversely affect our business, results of operations and financial condition.” Financial Operations Overview Product Revenues, Net As a result of the commercial launch of INVELTYS in the United States in early January 2019, we commenced generating product revenues from sales of INVELTYS. Our product revenues are recorded net of provisions relating to estimates for (i) trade discounts and allowances, such as discounts for prompt payment and distributor fees, (ii) estimated rebates, chargebacks and co-pay assistance program, and (iii) reserves for expected product returns. These estimates reflect current contractual and statutory requirements, known market events and trends, industry data and forecasted customer buying and payment patterns. Actual amounts may ultimately differ from these estimates. If actual results vary, estimates may be adjusted in the period such change in estimate becomes known, which could have an impact on earnings in the period of adjustment. Beginning in March 2020 and continuing through most of the second quarter of 2020, prescriptions of INVELTYS and revenue had been adversely affected by the ongoing COVID-19 pandemic as federal, state and local governments implemented restrictions on elective procedures, which include most ocular surgeries during the second quarter. While many deferred ocular surgeries have been rescheduled as individual states have released restrictions on elective procedures, and INVELTYS prescriptions have returned to growth, we are unable to project the specific timing or potential impact on future revenues given the continued uncertainty around the impact and duration of the restrictions related to COVID-19 . Cost of product revenues Cost of product revenues consists primarily of materials, third-party manufacturing costs, freight and distribution costs, royalty expense, allocation of labor, quality control and assurance, reserves for defective inventory, reserves for excess and obsolete inventory, and other manufacturing overhead costs. We expensed cost of product 28 ​ revenues related to INVELTYS as research and development expenses prior to regulatory approval which we received on August 22, 2018. With respect to the ongoing COVID-19 pandemic, we expect that the cost of product revenues will be impacted consistent with the negative impact to product revenues, net. However, we are unable to predict the specific timing or specific impact on cost of product revenues given the continued uncertainty around the impact and duration of the restrictions related to COVID-19. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of salaries, benefits, commissions, stock-based compensation and travel expenses related to our commercial infrastructure and our executive, finance, human resources, legal, information technology and business development functions. Selling, general and administrative expenses also includes external costs related to marketing, samples and professional fees for auditing, tax, information technology, consultants, legal services and allocated facility-related costs not otherwise included in research and development expenses. We anticipate that our selling, general and administrative expenses will increase in the future as we continue to build our commercial infrastructure to support the commercialization of EYSUVIS, which was approved by the FDA on October 26, 2020, INVELTYS or of any product candidates for which we obtain marketing approval, and if and as we increase our administrative headcount to support our continued research activities and development of our product candidates. With respect to the ongoing COVID-19 pandemic, certain selling, general and administrative expenses were favorably impacted during the three and nine months ended September 30, 2020 by the restriction in the activities of our sales force, which had previously suspended substantially all in-person interactions with physicians and customers. Our sales force has resumed in-person interactions in the field. If we are forced to suspend all or some in-person sales force interactions again in the future as a result of the COVID-19 pandemic, selling, general and administrative expenses could again be favorably impacted by a reduction in certain expenses associated with the restriction in activities for our sales force. We are unable to predict the specific amount of this impact if we are forced to resume such restrictions. Research and Development Expenses Research and development expenses consist of costs associated with our research activities, including compensation and benefits for full-time research and development employees, an allocation of facilities expenses, overhead expenses, payments to universities under our license agreements and other outside expenses. Our research and development expenses include: ● employee-related expenses, including salaries, related benefits, travel and stock-based compensation; ● expenses incurred for the preclinical and clinical development of our product candidates and under agreements with contract research organizations, or CROs, including costs of manufacturing product candidates prior to the determination that FDA approval of a drug candidate is probable and before the future economic benefit from the sale of the drug is expected to be realized; ● facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities and supplies; and ● payments made under our third-party licensing agreements, including the annual minimum royalty and reimbursable expenses for defense of agreed upon patents under a license agreement with Johns Hopkins University, or JHU. We expense research and development costs as they are incurred. Prior to regulatory approval, we expense costs relating to the production of inventory for our product candidates, as research and development expenses within our condensed consolidated statements of operations and comprehensive loss in the period incurred, unless we believe regulatory approval and subsequent commercialization of the product candidate is probable and we expect the future economic benefit from sales of the drug to be realized. Research and development costs that are paid in advance of 29 ​ performance are capitalized as a prepaid expense until incurred. We track outsourced development costs by development program but do not allocate personnel costs, payments made under our license agreements or other costs to specific product candidates or development programs. These costs are included in Employee-related costs and Other research and development costs in the line items in the tables under “Results of Operations”. We expect that our total research and development costs in 2020 will decrease as compared to the year ended December 31, 2019 as a result of the completion of our Phase 3 clinical trial of EYSUVIS, which we refer to as STRIDE 3 (STRIDE- S hort T erm R elief I n D ry E ye), and as a result of the capitalization of EYSUVIS manufacturing costs to inventory beginning in the third quarter of 2020. We expect that research and development costs will increase if and as we continue to advance our product candidates and conduct preclinical studies and clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time-consuming. We may never succeed in obtaining marketing approval for any of our product candidates. The probability of success for each product candidate may be affected by numerous factors, including preclinical data, clinical data, competition, manufacturing capability and commercial viability. With respect to the ongoing COVID-19 pandemic, we may incur reduced research and development costs resulting from any limitations that may be placed on our laboratory facilities that support our early-stage research. However, we are unable to predict the specific amount of this impact, nor are we able to predict the additional costs, if any, associated with personnel safely resuming their full activities. Our research and development programs are at the early stage of development. Successful development and completion of preclinical studies and clinical trials is uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each product candidate and future product candidate and are difficult to predict. We will continue to make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the scientific and clinical success of each product candidate as well as ongoing assessments as to the commercial potential of product candidates and our ability to enter into collaborations with respect to each product candidate. We may need to raise additional capital and may seek collaborations in the future to advance our various product candidates. Additional private or public financings may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy. Interest Income Interest income consists of interest earned on our cash balance held in a deposit account. Interest Expense Interest expense primarily consists of contractual coupon interest expense, amortization of debt discounts and debt issuance costs recognized on our debt facility. Critical Accounting Policies and Significant Judgments and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates—which also would have been reasonable—could have been used. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There have been no material changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. 30 ​ Results of Operations Comparison of the Three Months Ended September 30, 2020 and 2019 The following table summarizes the results of our operations for the three months ended September 30, 2020 and 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ ​ September 30, ​ ​ ​ ​ ​ ​ 2020 ​ 2019 ​ Change ​ ​ ​ (in thousands) ​ ​ ​ ​ Product revenues, net $ 2,220 $ 1,451 $ 769 Costs and expenses: ​ ​ ​ ​ ​ ​ Cost of product revenues ​ 701 ​ ​ 668 ​ 33 Selling, general and administrative ​ ​ 23,893 ​ ​ 15,280 ​ ​ 8,613 ​ Research and development ​ 3,468 ​ ​ 7,070 ​ (3,602) Total operating expenses ​ 28,062 ​ 23,018 ​ 5,044 Loss from operations ​ (25,842) ​ (21,567) ​ (4,275) Other income (expense) ​ ​ ​ Interest income ​ 51 ​ 571 ​ (520) Interest expense ​ (2,157) ​ (2,180) ​ 23 Net loss ​ $ (27,948) ​ $ (23,176) ​ $ (4,772) Product revenues, net Product revenues, net was $2.2 million for the three months ended September 30, 2020 compared to $1.5 million for the three months ended September 30, 2019. The increase in product revenues, net of $0.7 million was driven primarily by an increase in total units of INVELTYS sold in the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Also contributing to this increase was a $0.6 million reduction in revenue included in product revenues, net for the three months ended September 30, 2019 relating to the first two quarters of 2019 as a result of an adjustment to the estimated number of prescriptions reported by our third-party data provider, which resulted in a change in the estimated payor mix for INVELTYS. INVELTYS was our first product to receive regulatory approval, which we launched in the United States in January 2019. We expect product revenues to increase if and as we increase our market share, and obtain and maintain coverage and adequate reimbursement for INVELTYS from third-party payors; however, we expect full-year product revenues to be negatively impacted for 2020 and revenues could continue to be negatively impacted into 2021 as a result of the COVID-19 pandemic. In addition, we expect to begin shipping EYSUVIS to wholesalers in the U.S. by the end of 2020 and for the full promotional launch to begin in January of 2021, which we expect to result in an increase in product revenues. Cost of product revenues Cost of product revenues was $0.7 million for the three months ended September 30, 2020 consistent with the three months ended September 30, 2019. The three months ended September 30, 2019 included an additional $0.1 million in write offs of damaged inventory compared to the same period in 2020. Offsetting this amount are higher overall cost of product revenues due to an increase in the total units of INVELTYS sold in the three months ended September 30, 2020 compared to the same period in 2019. We expect cost of product revenues to increase as we continue to commercialize INVELTYS and as a result of the planned launch of EYSUVIS, which we expect to begin shipping to wholesalers in the U.S. by the end of 2020 and for the full promotional launch to begin in January of 2021. Selling, general and administrative expenses Selling, general and administrative expenses were $23.9 million for the three months ended September 30, 2020 compared to $15.3 million for the three months ended September 30, 2019, which was an increase of $8.6 million. The increase was driven by a $5.3 million increase in external sales and marketing costs related to preparation for the launch 31 ​ of EYSUVIS, a $1.5 million increase in stock-based compensation expense, of which $1.4 million was a result of the issuance of restricted stock units, or RSUs, and performance-based restricted stock units, or PSUs, in June 2020, a $1.0 million increase in costs for administrative and professional service fees and a $0.8 million increase in other selling, general and administrative costs, which include facility related costs and certain medical affairs costs. We anticipate that our selling, general and administrative expenses will increase in the future as we begin to commercialize EYSUVIS and if and as we increase our administrative headcount to support our continued research activities and seek marketing approval for our product candidates. Research and development expenses The following table summarizes the research and development expenses incurred during the three months ended September 30, 2020 and 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ September 30, ​ ​ ​ ​ 2020 2019 Change ​ ​ (in thousands) ​ ​ ​ ​ KPI-121 development costs ​ $ 953 ​ $ 3,061 ​ $ (2,108) Employee‑related costs ​ 1,820 ​ 3,023 ​ (1,203) Other research and development costs ​ 695 ​ 986 ​ (291) Total research and development ​ $ 3,468 ​ $ 7,070 ​ $ (3,602) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Research and development expenses were $3.5 million for the three months ended September 30, 2020 compared to $7.1 million for the three months ended September 30, 2019, a $3.6 million decrease. The decrease was primarily the result of a $2.1 million decrease in EYSUVIS development costs, $1.8 million of which related to a decrease in external spend on STRIDE 3, our Phase 3 clinical trial of EYSUVIS, a $1.2 million decrease in employee-related costs largely due to the capitalization of manufacturing employees’ time dedicated to EYSUVIS production to inventory in the third quarter of 2020 and a $0.3 million decrease in o ther research and development costs, which include other facility related costs, preclinical studies, certain medical affairs and associated regulatory costs. We expect research and development costs to increase if and as we conduct any necessary preclinical studies and clinical trials and other development activities for our product candidates. Interest income Interest income decreased by $0.5 million to $0.1 million for the three months ended September 30, 2020 compared to $0.6 million for the three months ended September 30, 2019. Interest income consists of interest earned on our cash balance held in an interest-bearing deposit account. The decrease was attributable to a lower interest rate during the three months ended September 30, 2020 as well as having less cash in interest bearing deposit accounts during the three months ended September 30, 2020 compared to the three months ended September 30, 2019 as a result of purchases of cash equivalents and short-term investments in 2020. Interest expense We incurred interest expense of $2.2 million for the three months ended September 30, 2020, which remained consistent with interest expense of $2.2 million for the three months ended September 30, 2019. Interest expense was comprised of the contractual coupon interest expense and the amortization of the debt discount associated with our Athyrium Credit Facility during the three months ended September 30, 2020 and 2019. During the three months ended September 30, 2019, $75.0 million of indebtedness was outstanding under the Athyrium Credit Facility and remained outstanding during the three months ended September 30, 2020. 32 ​ Comparison of the Nine Months Ended September 30, 2020 and 2019 The following table summarizes the results of our operations for the nine months ended September 30, 2020 and 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ ​ September 30, ​ ​ ​ ​ ​ 2020 2019 Change ​ ​ ​ (in thousands) ​ ​ ​ ​ Product revenues, net $ 4,124 $ 4,894 $ (770) ​ Costs and expenses: ​ ​ ​ ​ ​ ​ Cost of product revenues ​ 1,814 ​ 1,261 ​ 553 Selling, general and administrative ​ ​ 54,602 ​ ​ 50,523 ​ ​ 4,079 ​ Research and development ​ 14,955 ​ 21,137 ​ (6,182) Total costs and expenses ​ 71,371 ​ 72,921 ​ (1,550) Loss from operations ​ (67,247) ​ (68,027) ​ 780 Other income (expense) ​ ​ ​ Interest income ​ 451 ​ 1,973 ​ (1,522) Interest expense ​ (6,419) ​ (6,335) ​ (84) Net loss ​ $ (73,215) ​ $ (72,389) ​ $ (826) Product revenues, net Product revenues, net was $4.1 million for the nine months ended September 30, 2020 compared to $4.9 million for the nine months ended September 30, 2019. The decrease in product revenues, net of $0.8 million was driven by a decrease in the total units of INVELTYS sold in the nine months ended September 30, 2020 as compared to those sold during the nine months ended September, 30 2019, which we attribute to the reductions in elective surgeries as a result of the restrictions related to COVID-19. INVELTYS was our first product to receive regulatory approval, which we launched in the United States in January 2019. We expect product revenues to increase if and as we increase our market share, and obtain and maintain coverage and adequate reimbursement for INVELTYS from third-party payors; however, we expect full-year product revenues to be negatively impacted for 2020 and revenues could continue to be negatively impacted into 2021 as a result of the COVID-19 pandemic. In addition, we expect to begin shipping EYSUVIS to wholesalers in the U.S. by the end of 2020 and for the full promotional launch to begin in January of 2021, which we expect to result in an increase in product revenues. Cost of product revenues Cost of product revenues was $1.8 million for the nine months ended September 30, 2020, a $0.5 million increase compared to $1.3 million for the nine months ended September 30, 2019. The primary driver of this increase was a reserve for excess inventory of $0.5 million during the nine months ended September 30, 2020. Also contributing to the increase in cost of product revenues was an increase in the product cost per unit as a result of a portion of units sold during the nine months ended September 30, 2019 partially manufactured prior to FDA approval and previously expensed as research and development expenses, partially offset by a decrease in total units sold compared to the nine months ended September 30, 2019 for a net increase of $0.1 million. We expect cost of product revenues to increase as we continue to commercialize INVELTYS and as a result of the planned launch of EYSUVIS, which we expect to begin shipping to wholesalers in the U.S. by the end of 2020 and for the full promotional launch to begin in January of 2021. Selling, general and administrative expenses Selling, general and administrative expenses were $54.6 million for the nine months ended September 30, 2020 compared to $50.5 million for the nine months ended September 30, 2019, an increase of $4.1 million. Selling, general and administrative expenses for the nine months ended September 30, 2020 include a $2.7 million increase in external sales and marketing costs related to preparation for the launch of EYSUVIS. External sales and marketing costs incurred during the nine-months ended September 30, 2019 primarily related to the commercial launch of INVELTYS. Also 33 ​ contributing to the increase in selling, general and administrative expenses for the nine months ended September 30, 2020 was a $2.0 million increase in costs for administrative and professional service fees, a $1.6 million increase in stock-based compensation costs, of which $1.4 million was a result of the issuance of RSUs and PSUs in June 2020, and a $0.4 million increase in other selling, general and administrative costs, which includes facility related costs and certain medical affairs. These costs were offset by lower employee-related expenses of $2.6 million for the nine months ended September 30, 2020 primarily attributable to reduced travel due to COVID-19, lower overall headcount throughout the period and reduced variable compensation associated with lower unit sales of INVELTYS due to COVID-19, partially offset by increased recruiting costs related to hiring efforts as we prepare for the launch of EYSUVIS. We anticipate that our selling, general and administrative expenses will increase in the future as we prepare for the launch of EYSUVIS and if and as we increase our administrative headcount to support our continued research activities and seek marketing approval for our product candidates. Research and development expenses The following table summarizes the research and development expenses incurred during the nine months ended September 30, 2020 and 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ September 30, ​ ​ ​ ​ 2020 2019 Change ​ ​ (in thousands) ​ ​ ​ ​ KPI-121 development costs ​ $ 4,668 ​ $ 9,710 ​ $ (5,042) Employee‑related costs ​ 8,054 ​ 8,788 ​ (734) Other research and development costs ​ 2,233 ​ 2,639 ​ (406) Total research and development ​ $ 14,955 ​ $ 21,137 ​ $ (6,182) ​ ​ Research and development expenses were $15.0 million for the nine months ended September 30, 2020 compared to $21.1 million for the nine months ended September 30, 2019, a $6.1 million decrease. The decrease was primarily the result of a $5.0 million decrease in EYSUVIS development costs related to a decrease in external spend on STRIDE 3, our Phase 3 clinical trial of EYSUVIS, a $0.7 million decrease in employee-related costs largely due to reduced travel due to COVID-19 and the capitalization of manufacturing employees’ time dedicated to EYSUVIS production to inventory in the third quarter of 2020 and a $0.4 million decrease in other research and development costs, which include other facility related costs, preclinical studies, certain medical affairs and associated regulatory costs. We expect research and development costs to increase if and as we conduct any necessary preclinical studies and clinical trials and other development activities for our product candidates. Interest income Interest income decreased by $1.5 million to $0.5 million for the nine months ended September 30, 2020 compared to $2.0 million for the nine months ended September 30, 2019. Interest income consists of interest earned on our cash balance held in an interest-bearing deposit account. The decrease was attributable to a lower interest rate during the nine months ended September 30, 2020 as well as having less cash in interest bearing deposit accounts during the third quarter of 2020 compared to the third quarter of 2019 as a result of purchases of short-term investments in 2020. Interest expense We incurred interest expense of $6.4 million for the nine months ended September 30, 2020, compared to $6.3 million for the nine months ended September 30, 2019. Interest expense was comprised of the contractual coupon interest expense and the amortization of the debt discount associated with our Athyrium Credit Facility during the nine months ended September 30, 2020 and 2019. During the nine months ended September 30, 2019, $75.0 million of indebtedness was outstanding under the Athyrium Credit Facility and remained outstanding during the nine months ended September 30, 2020. 34 ​ Liquidity and Capital Resources Since our inception, we have incurred significant operating losses. As we commercially launched our first product, INVELTYS, in January 2019, we have had limited revenues to date from product sales and have financed our operations primarily through proceeds from our IPO, public common stock offerings and sales of our common stock under our ATM Offering, private placements of preferred stock, borrowings under credit facilities, convertible promissory notes and warrants. In July 2017, we completed an IPO pursuant to which we issued and sold 6,900,000 shares of our common stock, which included 900,000 shares sold pursuant to the exercise of the underwriters’ option to purchase additional shares, at a price of $15.00 per share. We received net proceeds of $94.0 million after deducting underwriting discounts and commission of $7.3 million and offering costs incurred in 2017 of $2.2 million. On August 9, 2018, we filed our 2018 Shelf Registration, under which we may offer and sell up to $250.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities, purchase contracts, purchase units or any combination of such securities during the three-year period that commenced upon the 2018 Shelf Registration becoming effective. Under the 2018 Shelf Registration, we may periodically offer one or more types of securities in amounts, at prices and on terms announced, if and when the securities are ever offered. We initially designated $50.0 million of our 2018 Shelf Registration to be offered under our ATM Offering. There was $18.3 million of securities available to be issued under the 2018 Shelf Registration as of September 30, 2020. ​ On October 1, 2018, we entered into the Athyrium Credit Facility with Athyrium for up to $110.0 million. The Athyrium Credit Facility provided for a Term Loan A in the aggregate principal amount of $75.0 million, and a Term Loan B in the aggregate principal amount of $35.0 million. On October 1, 2018, we borrowed the entire principal amount of the Term Loan A. We did not satisfy the conditions to draw down any of the Athyrium Term Loan B funds, and as a result, the Term Loan B funds are no longer available. The maturity date of the Athyrium Credit Facility is October 1, 2024, the six-year anniversary of the close. The Term Loan A bears interest at a rate of 9.875% per annum, with quarterly, interest-only payments until the fourth anniversary of the Term Loan A. The unpaid principal amount of the Term Loan A is due and payable in quarterly installments starting at the end of the fourth anniversary of the loan. On October 5, 2018, we sold 7,500,000 shares of common stock in an underwritten offering pursuant to the 2018 Shelf Registration at a public offering price of $8.25 per share, before underwriting discounts and commissions. In addition, the underwriters were granted an overallotment option to purchase an additional 1,125,000 shares of the common stock at the same public offering price, less underwriting discounts and commissions. On October 11, 2018, the underwriters exercised in full their option to purchase the overallotment shares. The total number of shares sold by us in the offering was 8,625,000 shares, resulting in net proceeds to us, after underwriting discounts and offering expenses, of $66.1 million. On March 11, 2020, we sold 16,000,000 shares of our common stock in an underwritten offering pursuant to the 2018 Shelf Registration at a public offering price of $7.89 per share, before underwriting discounts, commissions, and offering expenses, resulting in net proceeds of $118.2 million. In addition, the underwriters of the offering were granted the option for a period of 30 days to purchase up to an additional 2,400,000 shares of common stock offered in the public offering at the public offering price, less underwriting discounts and commissions. On April 3, 2020, the underwriters exercised their option and purchased an additional 979,371 shares of common stock at $7.89 per share, before underwriting discounts, commissions, and offering expenses, resulting in net proceeds to us of $7.2 million. The total number of shares sold by us in the offering was 16,979,371, resulting in total net proceeds to us, after underwriting discounts and offering expenses, of $125.4 million. In connection with the filing of the 2018 Shelf Registration, we entered into a sales agreement with Jefferies, pursuant to which we could issue and sell, from time to time, up to an aggregate of $50.0 million of our common stock in an ATM Offering, through Jefferies, as sales agent. As of December 31, 2019, we had issued an aggregate of 2,592,934 shares of our common stock under the ATM Offering, resulting in net proceeds to us of $13.1 million. During the first quarter of 2020, we issued an aggregate of 2,352,671 shares of our common stock under the ATM Offering, 35 ​ resulting in net proceeds to us of $12.5 million. On March 10, 2020 , we suspended and terminated the prospectus related to the ATM Offering . ​ On May 7, 2020, we filed our 2020 Shelf Registration, under which we may offer and sell up to $350.0 million of a variety of securities including common stock, preferred stock, warrants, depositary shares, debt securities or units during the three-year period that commenced upon the 2020 Shelf Registration becoming effective. ​ In connection with the filing of the 2020 Shelf Registration, we entered into an amended and restated sales agreement with Jefferies, pursuant to which we may issue and sell, from time to time, up to an aggregate of $75.0 million of our common stock under our ATM Offering. ​ Cash Flows As of September 30, 2020, we had $159.1 million in cash, cash equivalents and short-term investments and $75.0 million in indebtedness. The following table summarizes our sources and uses of cash for the nine months ended September 30, 2020 and 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ September 30, ​ 2020 2019 ​ ​ (in thousands) ​ Net cash used in operating activities ​ $ (64,775) ​ $ (74,508) ​ Net cash used in investing activities ​ (115,051) ​ (1,147) ​ Net cash provided by financing activities ​ 139,906 ​ 2,687 ​ Decrease in cash and restricted cash ​ $ (39,920) ​ $ (72,968) ​ Net Cash Used in Operating Activities Net cash used in operating activities for the nine months ended September 30, 2020 was $64.8 million compared to $74.5 million for the nine months ended September 30, 2019, a decrease of $9.7 million, primarily due to the timing of working capital fluctuations which accounted for $8.7 million of the decrease and a $1.0 million increase in the net loss adjusted for non-cash charges. Notable working capital fluctuations include a decrease to accounts receivable in the nine months ended September 30, 2020 by $4.1 million driven by a decrease in sales of INVELTYS as a result of COVID-19, whereas accounts receivable had increased by $7.2 million in the nine months ended September 30, 2019 driven by the launch of INVELTYS. Inventory increased by a greater amount during the nine months ended September 30, 2019 due to an increase in manufacturing activity for INVELTYS. Offsetting these increases was a decrease in accrued expenses and other current liabilities during the nine months ended September 30, 2020 by $4.9 million mainly driven by a decrease in accrued revenue reserves and a decrease in external spend on STRIDE 3, our clinical trial for EYSUVIS, as compared to an increase in accrued expenses and other current liabilities in the nine months ended September 30, 2019 of $3.5 million. Net Cash Used in Investing Activities Net cash used in investing activities for the nine months ended September 30, 2020 was $115.0 million compared to $1.1 million for the same period in 2019, an increase of $113.9 million, largely due to purchases of short-term investments in 2020 of $113.6 million. Additionally, we used an additional $0.3 million in cash for capital expenditures in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Net Cash Provided by Financing Activities Net cash provided by financing activities for the nine months ended September 30, 2020 was $139.9 million, an increase of $137.2 million compared to $2.7 million in the nine months ended September 30, 2019, due to $125.4 million of net proceeds from the sale of shares of our common stock in an underwritten offering under the 2018 Shelf 36 ​ Registration, $12.5 million of net proceeds from the sale of shares of our common stock under the ATM Offering, and $2.0 million of proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan in 2020. Net cash provided by financing activities for the nine-months ended September 30, 2019 consisted of $2.1 million of net proceeds from the sale of shares of our common stock under the ATM Offering and $0.6 million of proceeds from the exercise of stock options and the issuance of common stock under our employee stock purchase plan. Funding Requirements We anticipate that our expenses will increase substantially as compared to prior periods as we continue to commercialize INVELTYS in the United States and engage in activities to prepare for the launch and commercialization of our lead product, EYSUVIS, which was approved by the FDA on October 26, 2020, as a result of increased headcount, including management personnel to support our clinical, manufacturing and commercialization activities, expanded infrastructure, increased legal, compliance, accounting and investor and public relations expenses associated with being a public company and increased insurance premiums, among other factors. The anticipated increase in expenses from an increase in headcount includes our plan to increase, pending the status of the COVID-19 pandemic, our sales force from 56 sales representatives to approximately 90 sales representatives and from seven regional sales leaders to 14 regional sales leaders during the fourth quarter of 2020 and then to approximately 125 sales representatives in 2021. Our expenses will also increase if and as we: ● continue to grow our sales, marketing and distribution capabilities in connection with the commercialization of EYSUVIS, INVELTYS and any product candidates; ● conduct any necessary clinical trials and other development activities and/or seek marketing approvals for any product candidates; ● in-license or acquire the rights to other products, product candidates or technologies; ● pursue the clinical development of KPI-121 for the treatment of other additional indications or for use in other patient populations; ● pursue the preclinical and clinical development of product candidates, including our rTKI program, for use in the treatment of retinal diseases, and novel next-generation anti-inflammatories designed to exhibit steroid-like anti-inflammatory action with the goal of eliminating the risk of IOP increase and cataract formation; ● seek regulatory approval for EYSUVIS, INVELTYS or any other product candidate outside of the United States; ● continue to scale up our manufacturing processes and capabilities to support commercialization of EYSUVIS, INVELTYS, and any of our product candidates for which we seek and/or obtain marketing approval ; ● leverage our proprietary AMPPLIFY technology to advance additional potential high-value therapeutics into preclinical and clinical development ; ● maintain, expand and protect our intellectual property portfolio; ● hire additional clinical, quality control, scientific, manufacturing, commercial and management personnel ; 37 ​ ● expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company ; and ● increase our product liability insurance coverage as we expand our commercialization efforts for EYSUVIS and INVELTYS. We expect to continue to incur significant expenses and operating losses. Net losses may fluctuate significantly from quarter-to-quarter and year-to-year. We anticipate that our existing cash, cash equivalents, and short-term investments as of September 30, 2020, along with anticipated revenue from INVELTYS, will enable us to fund our operations, lease and debt service obligations, and capital expenditure requirements into at least the third quarter of 2022. We expect revenue anticipated to be generated from sales of EYSUVIS to provide additional cash runway. We have based this estimate on assumptions that may prove to be wrong, and our operating plan may change as a result of many factors currently unknown to us. As a result, we could deplete our available capital resources sooner or later than we currently expect. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Our expenses will increase from what we anticipate if: ● we elect or are required by the FDA or non-U.S. regulatory agencies to perform clinical trials or studies in addition to those expected; ● there are any delays in enrollment of patients in or completing our clinical trials or the development of our product candidates; or ● there are any third-party challenges to our intellectual property portfolio, or the need arises to defend against intellectual property-related claims or enforce our intellectual property rights. Our ability to become and remain profitable depends on our ability to generate revenue. While we began to generate revenue from the sales of INVELTYS in January 2019 and expect to begin shipping EYSUVIS to wholesalers in the U.S. by the end of 2020 and for the full promotional launch to begin in January of 2021, there can be no assurance as to the amount or timing of any such revenue from INVELTYS and EYSUVIS, and we may not achieve profitability. Achieving and maintaining profitability will require us to be successful in a range of challenging activities, including: ● successfully growing INVELTYS revenues ; ● successfully launching EYSUVIS; ● obtaining marketing approval for any product candidates; ● achieving an adequate level of market acceptance and obtaining and maintaining coverage and adequate reimbursement from third-party payors for EYSUVIS, INVELTYS and any other products we commercialize ; ● manufacturing at commercial scale, marketing, selling and distributing EYSUVIS and INVELTYS or any product candidates for which we obtain marketing approval; ● maintaining regulatory and marketing approvals for EYSUVIS and INVELTYS and for any product candidates for which we obtain marketing approval; ● hiring and building a full commercial organization required for marketing, selling and distributing those products for which we obtain marketing approval; 38 ​ ● obtaining, maintaining and protecting our intellectual property rights; and ● adapting our business in response to the current pandemic health event resulting from COVID-19 and its collateral consequences . EYSUVIS and INVELTYS are our only products that have been approved for sale, and they have only been approved in the United States. Our ability to generate revenue from operations will depend, in part, on the success of commercial sales of INVELTYS, which we commercially launched in the United States in January 2019, and the success of commercial sales of EYSUVIS, which we expect to begin shipping to wholesalers in the U.S. by the end of 2020 and for the full promotional launch to begin in January of 2021. However, the successful commercialization of EYSUVIS and INVELTYS in the United States is subject to many risks. As a company, we have limited experience commercializing products, and we may not be able to do so successfully. There are numerous examples of unsuccessful product launches and failures to meet expectations of market potential, including by pharmaceutical companies with more experience and resources than us. We do not anticipate our revenue from sales of EYSUVIS and INVELTYS alone will be sufficient for us to become profitable in the near future, if at all. In addition, our recent commercialization efforts have been hampered by the operational restrictions on our sales force from quarantines, travel restrictions and bans and other governmental restrictions related to COVID-19. As a result of these restrictions, we previously suspended our sales force from substantially all in-person interactions with physicians and customers and were limited to conducting educational and promotional activities virtually, and we may be forced to suspend all or some in-person interactions again in the future. To the extent we restrict in-person interactions with physicians and customers, we will again be limited to conducting educational and promotional activities virtually, which has hampered, and may continue to hamper, our ability to market INVELTYS and could adversely affect our ability to launch and market EYSUVIS. In addition, government restrictions have at times led to moratoria on elective ocular surgeries in many jurisdictions, which has significantly reduced, and may in the future continue to significantly reduce, the demand for INVELTYS, which is indicated for the treatment of inflammation and pain following ocular surgery. The extent of the impact of COVID-19 on our commercialization efforts will depend on the length and severity of this pandemic and the impact on our customers, employees, vendors, and government agencies, which is uncertain and cannot be predicted. We may never succeed in these activities and may never generate revenue that is sufficient to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product offerings or even continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment. Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through a combination of equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements, royalty agreements, and marketing and distribution arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include pledging of assets as collateral, covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Our pledge of our assets as collateral to secure our obligations under our Athyrium Credit Facility may limit our ability to obtain additional debt financing. Under our Athyrium Credit Facility, we are also restricted from paying dividends on our common stock and limited with respect to certain other uses of our cash without the lenders’ consent. We may need to raise additional capital in the future to advance our business. Additional private or public financings may not be available to us on acceptable terms, or at all. Additionally, the COVID-19 pandemic has already caused significant disruptions in the financial markets, and may continue to cause such disruptions, which could impact our ability to raise additional funds. The COVID-19 pandemic has also impacted, and may continue to impact, the volatility of our stock price and trading in our stock. Even after the COVID-19 pandemic has subsided, we may continue 39 ​ to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future. Our failure to raise capital as and when needed would have a material adverse effect on our financial condition and our ability to pursue our business strategy. If we raise additional funds through collaborations, strategic alliances, licensing arrangements, royalty agreements, or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or current or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves. Off-Balance Sheet Arrangements We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.