KALA BIO, Inc. - Quarter Report: 2018 September (Form 10-Q)

 

 

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, 2018

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)

 

 

 

 

 

(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 every Interactive Data File required to be submitted  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 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 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.

 

 

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 33,795,656 shares of Common Stock, $0.001 par value per share, outstanding as of November 6, 2018.

 

 

 

 

 

TABLE OF CONTENTS

 

 

PART I – FINANCIAL INFORMATION

Item  1 Financial Statements

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share amounts)

 

See accompanying notes to these unaudited condensed consolidated financial statements.

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 

KALA PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 

(In thousands)

 

See accompanying notes to these unaudited condensed consolidated 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 therapeutics using its AMPPLIFY™ mucus-penetrating particle (“MPP”) Drug Delivery Technology (“AMPPLIFY”), with an initial focus on the treatment of eye diseases. The Company has applied the AMPPLIFY technology to loteprednol etabonate, (“LE”), a corticosteroid designed for ocular applications, resulting in the U.S. Food and Drug Administration’s (the “FDA”), approval of INVELTYS™ (loteprednol etabonate ophthalmic suspension) 1% as a twice-daily ocular corticosteroid for treatment of post-operative inflammation and pain following ocular surgery on August 22, 2018, and its lead product candidate KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease. On October 16, 2018, the Company submitted a New Drug Application (“NDA”) to the FDA for KPI-121 0.25%. In addition, based upon the recommendation of the FDA, the Company initiated an additional Phase 3 clinical trial (“STRIDE 3”) ( STRIDE- S  hort T  erm R  elief I  n  D  ry E  ye), in the third quarter of 2018 evaluating KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease. The Company expects to receive top-line results for STRIDE 3 in the fourth quarter of 2019. 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 Company is engaged in commercializing a product, 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 and launching a product for the first time. 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 and future research and development, obtain regulatory approval of its product candidates, successfully commercialize its products, generate revenue, meet its obligations, and, ultimately, attain profitable operations.

Initial Public Offering—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 $94.0 million after deducting underwriting discounts and commissions of $7.3 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.

October 2018 Financings— On August 9, 2018, the Company filed a shelf registration statement on Form S-3 with the SEC, which was declared effective on August 27, 2018 (the “Shelf”). Under the Shelf, the Company 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 Shelf becoming effective. Under the Shelf, the Company 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. In

connection with the filing of the Shelf, the Company entered into a sales agreement with Jefferies, LLC (the “Sales Agreement”) pursuant to which the Company may issue and sell, from time to time, up to an aggregate of $50.0 million of its common stock in an at-the-market equity offering (“ATM Offering”) through Jefferies, LLC., as sales agent.

On October 1, 2018, the Company entered into a credit agreement (the “Athyrium Credit Facility”), with Athyrium Opportunities III Acquisition LP (“Athyrium”).  The Athyrium Credit Facility provides for a term A loan in the aggregate principal amount of $75.0 million (the “Term A Loan”), and a term B loan in the aggregate principal amount of $35.0 million (the “Term B Loan”). On October 1, 2018, the Company borrowed the entire principal amount of the Term A Loan. The Company may draw down the Term B Loan upon either (i) FDA approval of KPI-121 0.25% for a dry eye disease indication or (ii) reaching certain net product revenues for INVELTYS, in each case on or prior to June 30, 2020.

On October 5, 2018, the Company sold 7,500,000 shares of the Company’s common stock (the “Shares”) in an underwritten offering pursuant to the Shelf 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 (the “Overallotment Shares”). On October 11, 2018, the underwriters exercised in full their option to purchase the Overallotment Shares. The total number of Shares and Overallotment Shares sold by the Company in the offering was 8,625,000 shares, resulting in net proceeds to the Company, after underwriting discounts and offering expenses, of approximately $66.4 million.

Between September 30, 2018 and November 8, 2018, the Company issued 518,135 shares of its common stock under the ATM Offering resulting in net proceeds to the Company of approximately $4.7 million.

Liquidity— Since inception, we have incurred significant losses from operations and negative cash flows from operations. As of September 30, 2018, we had an accumulated deficit of $175.9 million. The Company has not generated any revenues to date from product sales and has financed operations primarily through the IPO, private placements of preferred stock, convertible debt financings, borrowings under credit facilities, warrants and public common stock offerings and to a lesser extent, payments received in connection with various feasibility studies. The Company has devoted substantially all of its financial resources and efforts to research and development, including preclinical studies and clinical trials. The Company expects to continue to incur significant expenses and operating losses over the next several years. Net losses may fluctuate significantly from quarter-to-quarter and year-to-year.

The Company believes that its existing cash on hand as of September 30, 2018, together with the procceds from the October 2018 Financings, will enable it to fund its planned operating expenses, debt service obligations and capital expenditure requirements for at least twelve months from the date these condensed consolidated financial statements were issued and through at least early 2020. This evaluation is based on relevant conditions and events that are known and reasonably knowable at the date that the condensed consolidated financial statements are issued. As a result, the Company could deplete its available capital resources sooner than it currently expects.

Use of Estimates—The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. 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 condensed consolidated financial statements relate to, but are not limited to, the present value of lease liabilities and the corresponding right-of-use assets, the fair value of 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.

Net Loss per Share—Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including the assumed exercise of stock options and warrants.

The Company applies the two-class method to calculate basic and diluted net loss per share attributable to common stockholders as its warrants to purchase common stock are participating securities.

The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. However, the two-class method does not impact the net loss per share of common stock as the Company has been in a net loss position and the warrant holders do not participate in losses.

Basic and diluted shares outstanding are the same for each period presented as all common stock equivalents would be antidilutive due to the net losses incurred.

Unaudited Interim Financial Information—The condensed consolidated financial statements of the Company included herein have been prepared, without audit, pursuant to the rules and regulations of the SEC. Certain information and 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 consolidated 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 condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “Annual Report”).

The unaudited condensed consolidated financial statements include the accounts of Kala Pharmaceuticals, Inc. and its wholly owned subsidiary, Kala Pharmaceuticals Security Corporation, which was established in November 2017. All intercompany transactions and balances have been eliminated in consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies are described in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in the Annual Report. There have been no material changes to the significant accounting policies during the period ended September 30, 2018 other than those noted below.

Inventory

Inventory is stated at the lower of cost or net realizable value, on a first-in, first-out (“FIFO”) method. Costs include amounts related to third party manufacturing, transportation, internal labor and overhead. Capitalization of costs as inventory begins when the product has received regulatory approval in the U.S. We expense inventory costs related to product candidates as research and development expenses prior to regulatory approval in the respective territory, even if this inventory may later be sold. For INVELTYS, capitalization of costs as inventory began upon U.S. regulatory approval on August 22, 2018.

Leases

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present. Most leases with a term greater than one-year are recognized on the

balance sheet as right-of-use assets, lease liabilities and, if applicable, long-term lease liabilities. The Company has elected not to recognize on the balance sheet leases with terms of one-year or less. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.

The components of a lease should be split into three categories: lease components (e.g., land, building, etc.), non-lease components (e.g., common area maintenance, maintenance, consumables, etc.), and non-components (e.g., property taxes, insurance, etc.). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components.

Although separation of lease and non-lease components is required, certain practical expedients are available to entities. Entities electing the practical expedient would not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. The Company’s facilities operating leases have lease and non-lease components which the Company has elected to account for as one single lease component. The lease component results in a right-of-use asset being recorded on the balance sheet and amortized as lease expense on a straight-line basis to the statements of operations.

Recently Adopted Accounting Pronouncements

In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 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 has prospectively adopted this new standard as of January 1, 2018. The adoption of this standard did not have a material impact on the Company’s condensed consolidated 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 has adopted this new standard as of January 1, 2018. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which provides guidance to enhance the transparency and comparability of financial reporting related to leasing arrangements. Under this new lease standard, most leases are required to be recognized on the balance sheet as right-of-use assets and corresponding lease liabilities. Disclosure requirements have been enhanced with the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company elected to early adopt ASU 2016-02, effective January 1, 2018, as permitted in the guidance. The standard has been implemented using the required modified retrospective approach and the Company has also elected to utilize the available practical expedients. In using the modified retrospective approach, the Company was required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented. Prior period results have been restated resulting in adjustments to the condensed consolidated balance sheets

and the condensed consolidated statement of cash flows. The adoption of this standard did not have a material impact on the condensed consolidated statement of operations. The impact on the consolidated balance sheet as of December 31, 2017 and the condensed consolidated statement of cash flows for the nine months ended September 30, 2017 is shown below.

Impact to Previously Reported Results

From December 31, 2017 consolidated balance sheet (in thousands):

 

For the nine months ended September 30, 2017 condensed consolidated statement of cash flows (in thousands):

 

3. INVENTORY

Inventory consists of the following (in thousands):

 

4. ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

 

5. LEASES

The Company entered into a three‑year lease agreement for its headquarters on September 30, 2013, with a commencement date of February 1, 2014. On June 30, 2016, the lease was amended to extend the term from January 31, 2017 to January 31, 2019. In connection with the lease agreement, the Company issued a letter of credit to the landlord for $84,000. The Company secured the letter of credit for the full amount of the letter with cash on deposit, which is reported as restricted cash. With the adoption of ASU 2016-02, the Company has recorded a right-of-use asset and corresponding lease liability.

On February 28, 2018, the Company entered into a lease agreement with 480 Arsenal Group LLC (the “Arsenal Group”) for the lease of a portion of the building located at 490 Arsenal Way Watertown, Massachusetts (the “Watertown Lease”). The initial term of the Watertown Lease is eight years with an option to extend for an additional five years. The Company expects to occupy the premises in early 2019. The Company plans to use the premises as its new corporate headquarters and for research and development. The Company has not yet occupied this space as it is being renovated for the Company’s use. The Company has concluded that it does not control the space as defined in ASU 2016-02 during the construction period and does not expect to gain control of the space until on or near construction completion and, as such, a right-of-use asset and corresponding lease liability have not been recorded.

In connection with the Watertown Lease, the Company issued a letter of credit to the Arsenal Group for $2.0 million. The Company secured the letter of credit for the full amount of the letter with cash on deposit, which is reported as restricted cash.

On March 15, 2018, the Company entered into a lease agreement with Duffy Associates, LLC for the lease of a portion of the building located at 465 Waverley Oaks Road, Suite 301, Waltham, Massachusetts (the “Waverley Oaks Lease”). The term of the Waverley Oaks Lease is one-year, and as such a right-of-use asset and corresponding lease liability has not been recorded. The Company plans to use this location for additional corporate offices before moving to its new corporate headquarters in Watertown, Massachusetts.

The components of lease expense and related cash flows were as follows (in thousands):

 

 

As of September 30, 2018, and December 31, 2017, the remaining lease term on the operating lease was 0.33 years and 1.08 years, respectively. As of September 30, 2018, and December 31, 2017, the discount rate was 6.50%.

Future minimum commitments due under these lease agreements as of September 30, 2018 are as follows (in thousands):

6. 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. On November 22, 2017, the Company entered into a Second Amendment to the 2014 Debt Facility to account for the formation of the Company’s wholly-owned subsidiary. On March 29, 2018, the Company entered into a Third Amendment to the 2014 Debt Facility the (“Third Amendment”), which reaffirmed the initial commitment to a total of $20.0 million of funding (“Term Loan A”), increased the Company’s total borrowing capacity by an additional $5.0 million and extended the interest-only end date for 12 months following the execution of the Third Amendment. The maturity date of the 2014 Debt Facility was also extended from October 13, 2020 to March 29, 2022. 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 8.25% as of September 30, 2018 and 7.50% as of December 31, 2017.

The unpaid principal balance under the 2014 Debt Facility was $20.0 million and $18.9 million as of September 30, 2018 and December 31, 2017, respectively. The unamortized discount was $210,000 and $235,000 as of September 30, 2018 and December 31, 2017, respectively. During the three months ended September 30, 2018 and 2017, the Company recognized interest expense of $432,000 and $212,000, respectively, which consisted of amortization of the debt discount of $23,000 and $29,000, respectively and the contractual coupon interest of $409,000 and $183,000, respectively. During the nine months ended September 30, 2018 and 2017, the Company recognized interest expense of $1,214,000 and $618,000, respectively, which consisted of amortization of the debt discount of $74,000 and $86,000, respectively, and the contractual coupon interest of $1,138,000 and $532,000, respectively.

The 2014 Debt Facility, as amended, is senior debt and is secured by substantially all of the assets of the Company other than intellectual property. The Company’s ability to pay cash dividends is currently restricted by the terms of the 2014 Debt Facility. In the event the Company is determined to be in default under the 2014 Debt Facility, the outstanding balance accrues interest at five percentage points above the interest rate applicable immediately prior to the occurrence of the event of default and the lender has the right to declare all outstanding principal and interest payable. Under the terms of the 2014 Debt Facility, certain events including but not limited to, the Company’s failure to pay obligations when due, failure to perform obligations under the agreement, insolvency or the occurrence of any circumstance that could reasonably be expected to have a material adverse effect on the Company, constitute events of default.

In connection with its borrowings under the 2014 Debt Facility, the Company issued preferred stock warrants. Upon each issuance of such preferred stock warrants, the Company estimated the fair value using the Black‑Scholes option‑pricing model, and recorded the estimated fair value as a liability separate from the loan balance, and an 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 all issuances of such preferred stock warrants on an aggregate basis was $365,000. Upon the closing of the Company's IPO on July 25, 2017, all of the underlying preferred stock warrants were converted into warrants for common stock (see Note 7), and the warrant liability was re-measured to fair value and reclassified to additional paid-in capital.

The future annual principal payments due under the 2014 Debt Facility as of September 30, 2018 were as follows (in thousands):

 

Athyrium Credit Facility

On October 1, 2018, the Company entered into the Athyrium Credit Facility. The Athyrium Credit Facility provides for a Term A loan in the aggregate principal amount of $75.0 million, and a Term B loan in the aggregate principal amount of $35.0 million . On October 1, 2018, the Company borrowed the entire principal amount of the Term A Loan. The Company may draw down the Term B Loan upon either (i) FDA approval of KPI-121 0.25% for a dry eye disease indication or (ii) reaching certain net product revenues for INVELTYS, in each case on or prior to June 30, 2020.

The Athyrium Credit Facility has a six-year term and bears interest at a rate of 9.875% per annum. A portion of the proceeds from the Term A Loan was used to replace and repay in full the 2014 Debt Facility scheduled to mature on March 29, 2022. In connection with the Company’s repayment of the 2014 Debt Facility, the Company paid a prepayment fee of $180,000.

7. WARRANTS

The Company has issued warrants in connection with debt transactions that were completed prior to 2017. Upon the completion of the IPO, the Company’s outstanding warrants to purchase preferred stock converted into warrants to purchase common stock.

The following table summarizes the common stock warrants outstanding as of September 30, 2018 and December 31, 2017, each exercisable into the number of shares of common stock set forth below as of the specified dates:

 

In connection with and in consideration for the commitment of the Athyrium Credit Facility, on October 1, 2018, the Company issued to Athyrium a warrant (“Warrant”), to purchase up to 270,835 shares of the Company’s common stock, at an exercise price per share of $12.18456.  The Warrant is immediately exercisable as to 184,660 shares and will become exercisable as to the remaining 86,175 shares only upon the Company’s draw of the Term B

Loan. The Warrant expires and is no longer exercisable on October 1, 2025, the seven-year anniversary of the closing of the Athyrium Credit Facility.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company classifies fair value based measurements using a three-level hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows: Level 1, quoted market prices in active markets for identical assets or liabilities; Level 2, observable inputs other than quoted market prices included in Level 1 such as quoted market prices for markets that are not active or other inputs that are observable or can be corroborated by observable market data; and Level 3, unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including estimates and assumptions developed by the Company, reflective of those that a market participant would use, as inputs to certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

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 6) 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. There were no transfers between fair value measurement levels during the nine months ended September 30, 2018 or September 30, 2017.

The Company has historically classified the value of the warrant liability as a Level 3 measurement 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 2014 Term Loans drawn down or the probability that the Company would draw down on the 2014 Debt facility. Upon the completion of the IPO, the Company’s outstanding warrants to purchase preferred stock converted into warrants to purchase common stock and the Company reclassified the fair value of the warrant liability to additional paid-in capital. All warrants are currently classified as equity and their fair value is not recorded or re-measured.

The following table provides a summary of changes in the fair value of the Company’s warrant liability, which is included as a component of other (income) expense (in thousands) which was subsequently remeasured to the fair value at the date of the IPO and reclassified to additional paid-in capital at that time:

 

 

9. STOCK‑BASED COMPENSATION

Stock Incentive Plans—In December 2009, the Board of Directors (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.

In July 2017, the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) became effective, as a result, and no further stock options or other awards will be made under the 2009 Plan. The 2017 Plan was established to provide equity based ownership opportunities for employees, officers, directors, consultants, and advisors. As of September 30, 2018, there were 1,050,649 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, are forfeited, or are otherwise surrendered, without having been fully exercised or resulting in any common stock being issued will become available for issuance under the 2017 Plan, up to an additional 2,649,952 shares, which is the number of shares issuable pursuant to outstanding awards granted under the 2009 Plan.

Also approved under the 2017 Plan is an annual increase for each of the years through December 31, 2027, equal to the least of (i) 3,573,766 shares of common stock, (ii) 4% of the shares of common stock outstanding on December 31 of the prior year and (iii) an amount determined by the Board. 

Under the plans, the Board determines 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 plans expire 10 years after the grant date, unless the Board sets a shorter term. Options granted under the plans generally vest over a four‑year period. 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.

In the past, the Company had granted 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. As of September 30, 2018 there were no performance-based awards outstanding.

For the three months ended September 30, 2018 and 2017, the Company did not grant any stock options to non-employee consultants. For the nine months ended September 30, 2018 and 2017, the Company granted 0 and 4,224 stock options to non‑employee consultants, respectively. During the three months ended September 30, 2018 and 2017, the Company recognized $0 and $46,000, respectively, in stock compensation expense related to non‑employee consultants. During the nine months ended September 30, 2018 and 2017, the Company recognized $11,000 and $83,000, respectively, in stock compensation expense related to non‑employee consultants.

Inducement Stock Option Awards—During the three months ended September 2018, the Company granted non-statutory stock options to purchase an aggregate of 69,500 shares of the Company’s common stock to seven new employees. During the nine months ended September 2018, the Company granted non-statutory stock options to purchase 219,500 shares of Company’s common stock to a total of eight new employees. These stock options will vest over a four-year period, with 25% of the shares underlying each option award vesting on the one-year anniversary of the applicable employees’ new hire date and the remaining 75% of the shares underlying each award vesting monthly thereafter for three-years. Vesting of each option is subject to such employee’s continued service with the Company through the applicable vesting dates. These stock options were granted outside of the 2017 Plan as an inducement material to each employee’s acceptance of employment with the Company in accordance with Nasdaq Listing Rule 5635(c)(4).

A summary of option activity for employee and non‑employee awards under the 2009 Plan, the 2017 Plan and inducement grants for the nine months ended September 30, 2018 is as follows (in thousands, except share and per share amounts):

 

The Company records stock‑based compensation related to stock options granted at fair value. The Company utilizes the Black‑Scholes option‑pricing model to estimate the fair value of stock option grants and to determine the related compensation expense. The assumptions used in calculating the fair value of stock‑based payment awards represent management’s best estimates. There were 747,892 options granted during the nine months ended September 30, 2017. The assumptions used in determining fair value of the stock options granted in the nine months ended September 30, 2018 and 2017 are as follows:

 

The Company derived the risk‑free interest rate assumption from the U.S. Treasury rates for U.S. Treasury zero‑coupon bonds with maturities similar to those of the expected term of the awards being valued. The Company based the assumed dividend yield on its expectation of not paying dividends in the foreseeable future. The Company calculated the weighted‑average expected term of options using the simplified method, as the Company lacks relevant historical data due to the Company’s limited operating experience. The estimated volatility is based upon the historical volatility of comparable companies with publicly available share prices. The impact of forfeitures on compensation expense is recorded as they occur.

During the three months ended September 30, 2018 and 2017, the weighted average grant‑date fair value of options granted was $8.83 and $14.74, respectively. During the nine months ended September 30, 2018 and 2017, the weighted average grant‑date fair value of options granted was $9.99 and $13.19, respectively. The fair value is being expensed over the vesting period of the options on a straight‑line basis as the services are being provided. As of September 30, 2018, there was $22.7 million of unrecognized compensation cost related to the stock options granted, which is expected to be expensed over a weighted‑average period of 2.98 years.

Employee Stock Purchase Plan—In 2017, the Company approved the 2017 Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, participating employees can authorize the Company to withhold a portion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock. At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lesser of the closing price of the common stock on (i) the first business day of the plan period or (ii) the exercise date. The initial six-month period will not commence until January 1, 2019.

Reserved Shares—As of September 30, 2018 and December 31, 2017, the Company had reserved the following shares of common stock issuable upon exercise of rights under equity compensation plans and inducement stock option awards:

 

Stock-based Compensation Expenses—Stock‑based compensation expense was classified in the statements of operations as follows (in thousands):

 

For three and nine months ended September 30, 2018, stock-based compensation expense for the Company’s manufacturing employees related to INVELTYS manufactured since the FDA approval of $66,000, has been capitalized into inventory as a component of overhead expense.

10. INCOME TAXES

The Company did not record a provision or benefit for income taxes during the three and nine months ended September 30, 2018 and 2017. The Company continues to maintain a full valuation allowance for its U.S. federal and state deferred tax assets.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its

lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Management reevaluates the positive and negative evidence at each reporting period.

Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period. Under the provisions of Section 382 of the Internal Revenue Code of 1986, certain substantial changes in the Company’s ownership, including a sale of the Company, or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of net operating loss carryforwards, which could be used annually to offset future taxable income. The Company files its corporate income tax returns in the United States and Massachusetts, California, Kentucky, Pennsylvania, New Hampshire, New York, North Carolina and Texas. All tax years since the date of incorporation remain open to examination by the major taxing jurisdictions (state and federal) to which the Company is subject, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service (“IRS”) or other authorities if they have or will be used in a future period. The Company is not currently under examination by the IRS or any other jurisdictions for any tax year.

As of September 30, 2018 and 2017, the Company had no uncertain tax positions. The Company’s policy is to recognize interest and penalties related to income tax matters as a component of income tax expense, of which no interest or penalties were recorded for the nine months ended September 30, 2018 and 2017.

11. COMMITMENTS AND CONTINGENCIES

License Agreement—In 2009, the Company entered into an exclusive license agreement with The Johns Hopkins University (“JHU”), as amended in November 2012, May 2014, August 2014, October 2014 and June 2018, which licensed to the Company a portfolio of specified patent rights and remains in full force and effect. Pursuant to the terms of the agreement, as amended, the Company agreed to pay an initial license fee, minimum annual payments beginning in 2017, certain development and commercial milestone payments, royalties on product sales and reimburse all or a portion of the costs associated with the preparation, filing, prosecution and maintenance of the agreed‑upon patents and patent applications to JHU.

After 2016 and until the first commercial sale of product, the minimum annual payment will be $38,000. If the Company achieves the first commercial sale of the product in the United States, European Union, or Japan, the annual minimum payment will increase to $113,000. The Company is obligated to pay JHU low single‑digit running royalties based upon a percentage of net sales of the licensed products. The Company also has an obligation to pay JHU certain one‑time development and commercial milestone payments.

The Company recorded research and development expenses related to the JHU agreement of $100,000 and $97,000, respectively, for the three months ended September 30, 2018 and 2017 and $300,000 and $108,000, respectively, for the nine months ended September 30, 2018 and 2017.

Litigation—The Company is not currently subject to any material legal proceedings.

12. SUBSEQUENT EVENTS

Underwritten Equity Offering— On October 5, 2018, the Company sold 7,500,000 shares of the Company’s Shares in an underwritten offering pursuant to the Shelf at an underwritten 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 the Company in the offering was 8,625,000 shares, resulting in net proceeds to the Company, after underwriting discounts and offering expenses, of approximately $66.4 million.

ATM OFFERING - Between September 30, 2018 and November 8, 2018, the Company issued 518,135 shares of its common stock under the ATM Offering resulting in net proceeds to the Company of approximately $4.7 million.

Athyrium Credit Facility— On October 1, 2018, the Company entered into the Athyrium Credit Facility. The Athyrium Credit Facility provides for a Term A loan in the aggregate principal amount of $75.0 million, and a Term B loan in the aggregate principal amount of $35.0 million . On October 1, 2018, the Company borrowed the entire principal amount of the Term A Loan. The Company may draw down the Term B Loan upon either (i) FDA approval of KPI-121 0.25% for a dry eye disease indication or (ii) reaching certain net product revenues for INVELTYS, in each case on or prior to June 30, 2020.

The Athyrium Credit Facility has a six-year term and bears interest at a rate of 9.875% per annum. A portion of the proceeds from the Term Loan A was used to replace and repay in full the 2014 Debt Facility scheduled to mature on March 29, 2022. In connection with the Company’s repayment of the 2014 Debt Facility, the Company paid a prepayment fee of $180,000.

Warrants— In connection with the Athyrium Credit Facility and in consideration for the commitment of the Athyrium Credit Facility, on October 1, 2018, the Company issued to Athyrium a Warrant to purchase up to 270,835 shares of the Company’s common stock, at an exercise price per share of $12.18456.  The Warrant is immediately exercisable as to 184,660 shares and will become exercisable as to the remaining 86,175 shares only upon the Company’s draw of the Term B Loan. The Warrant expires and is no longer exercisable on October 1, 2025, the seven-year anniversary of the closing of the Athyrium Credit Facility.

 

 

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, 2017, which was filed with the Securities and Exchange Commission on April 2, 2018.

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. 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. 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 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  

We are a biopharmaceutical company focused on the development and commercialization of therapeutics using our AMPPLIFY™ mucus-penetrating particle (MPP) Drug Delivery Technology, or AMPPLIFY, with an initial focus on the treatment of eye diseases. Our MPPs are selectively-sized nanoparticles and have proprietary coatings. 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 U.S. Food and Drug Administration, or FDA, approved INVELTYS™ (loteprednol etabonate ophthalmic suspension) 1% for the treatment of inflammation and pain following ocular surgery, and our lead product candidate KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease.

In August 2018, the FDA approved our new drug application, or NDA, for INVELTYS, our topical twice-a-day product candidate, for the treatment of inflammation and pain following ocular surgery. 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 four times a day. INVELTYS is indicated for the treatment of post-operative inflammation and pain following ocular surgery, with an approved dosage of one to two drops twice daily beginning the day after surgery and continuing throughout the first two weeks of the post-operative period. As indicated on its approved label, the most common adverse drug reactions to INVELTYS in clinical trials were eye pain (1%) and posterior capsular opacification (1%). These reactions may have been the consequence of the surgical procedure.

We have retained worldwide commercial rights for INVELTYS. We expect to commercialize INVELTYS in the United States, and have started to build a commercial infrastructure to do so. We plan to hire a specialty sales force that will focus on eye care professionals in the United States. We expect to launch INVELTYS early in 2019. We further expect our commercial organization for INVELTYS will initially consist of approximately 75 sales and marketing personnel.

KPI-121 0.25% is our product candidate for patients with dry eye disease utilizing a two-week course of therapy. In January 2018, we announced topline results from two completed Phase 3 clinical trials of KPI-121 0.25%, which we refer to as STRIDE 1 and STRIDE 2 (STRIDE—  S hort  T erm  R elief  I  n  D ry  E ye), evaluating the safety and efficacy of KPI-121 0.25% versus placebo (vehicle) in patients with dry eye disease. In STRIDE 1, statistical significance was achieved for the primary sign endpoint of conjunctival hyperemia at day 15 and the primary symptom endpoint of ocular discomfort severity change from baseline to day 15 in the intent to treat, or ITT, population; in addition, statistical significance was also achieved in STRIDE 1 for a second pre-specified primary symptom endpoint of

ocular discomfort severity change from baseline to day 15 in patients with more severe baseline ocular discomfort. In STRIDE 2, statistical significance was achieved for the primary sign endpoint of conjunctival hyperemia at day 15, but statistical significance was not achieved for the primary symptom endpoint of ocular discomfort severity change from baseline to day 15. KPI-121 0.25% was generally well tolerated in both STRIDE 1 and STRIDE 2, with no clinically significant treatment-related adverse events observed during the course of either trial, and with elevations in intraocular pressure, or IOP, in both trials similar to placebo.

In May 2018, we met with the FDA to discuss the results of our dry eye clinical trials and potential next steps for our dry eye disease program. On October 16, 2018 we submitted the NDA to the FDA for KPI-121 0.25%. The NDA included data from three clinical trials studying approximately 2,000 patients, including one Phase 2 trial and two Phase 3 efficacy and safety trials (STRIDE 1 and STRIDE 2).

In addition, based upon the recommendation of the FDA, we initiated an additional Phase 3 clinical trial, STRIDE 3, in the third quarter of 2018 evaluating KPI-121 0.25% for the temporary relief of the signs and symptoms of dry eye disease. We expect to receive top-line results for STRIDE 3 in the fourth quarter of 2019. The STRIDE 3 trial is a multicenter, randomized, double-blind, placebo controlled, parallel-arm study comparing KPI-121 0.25% to placebo, each with four times a day dosing for 14 days, in approximately 900 patients with dry eye disease. The primary endpoint, day 15 ocular discomfort severity, is based upon a patient diary in which ocular discomfort is recorded daily over the entire course of the trial using a visual analog grading scale. We have conducted a comprehensive analysis of data generated in the previous three clinical trials and we believe we have identified key factors that contributed to the differences observed in the results from STRIDE 2 compared to those of STRIDE 1 and Phase 2.  Based on this analysis, we have made changes to the inclusion/ exclusion criteria of STRIDE 3, which we believe will improve the probability of success for the trial.

If approved, KPI-121 0.25% could be the first FDA-approved product for the short-term treatment of dry eye disease.

For KPI-121 0.25%, we are seeking FDA approval under Section 505(b)(2) of the U.S. Federal Food, Drug and Cosmetic Act, or the FDCA, which is the same regulatory pathway we used for the approval of INVELTYS. We have retained worldwide commercial rights for KPI-121 0.25%. If KPI-121 0.25% receives marketing approval, we expect to further expand our sales force by up to approximately an additional 100 personnel. We also expect to commercialize in the United States any of our other product candidates that receive marketing approval. In anticipation of the potential to commercialize our product candidates in other global markets, we will continue evaluating a variety of collaboration, distribution and other marketing arrangements with one or more third parties.

We are 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. We also are evaluating compounds in our 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.

Financial Operations Overview

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:

We expense research and development costs as they are incurred. Research and development costs that are paid in advance of 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 tables under “Results of Operations”.

We expect our research and development expenses to increase for the foreseeable future as we advance our product candidate, KPI-121 0.25%, toward regulatory approval, pursue other products candidates and conduct additional 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.

Our research and development programs are at various stages of development. Successful development and completion of clinical trials is uncertain and may not result in approved products. Completion dates and completion costs can vary significantly for each 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 our ability to enter into collaborations with respect to each product candidate, the scientific and clinical success of each product candidate as well as ongoing assessments as to the commercial potential of product candidates. We will 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.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related benefits, including stock‑based compensation, related to our executive, finance, legal, commercial, business development and support functions. Other general and administrative expenses include travel expenses, professional fees for auditing, tax, consultants and legal services and allocated facility‑related costs not otherwise included in research and development expenses.

We anticipate general and administrative expenses to increase for the foreseeable future as we increase our headcount to support our continued research and development activities for our product candidates and continue to build our commercial infrastructure to support the continued development and launch of INVELTYS or any other product candidates for which we obtain marketing approval. In addition, we anticipate increased expenses related to supporting a larger organization.

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, amortization of debt discounts and debt issuance costs recognized on our debt facility.

Change in Fair Value of Warrant Liability

Prior to our IPO, we issued warrants for the purchase of preferred stock. These warrants were classified as liabilities as they were financial instruments that were issuable for contingently redeemable securities. We recognized gains and losses on the change in the fair value of outstanding warrants and these gains and losses are recorded as a component of other income (expense). Upon the closing of our IPO, the underlying preferred stock was converted into common stock, the preferred stock warrants were converted into warrants for common stock, and the fair value of the warrant liability at that time was reclassified to additional paid‑in capital.

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, or U.S. GAAP. 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 except for the adoption of ASU No. 2016‑02, Leases (Topic 842), or ASU 2016‑02 on January 1, 2018 as discussed below. 

We elected to early adopt ASU 2016-02, effective January 1, 2018, as permitted. Under this new lease standard, most leases are required to be recognized on the balance sheet as right-of-use assets and corresponding lease liabilities. The standard has been implemented using the required modified retrospective approach and we have also elected to utilize the available practical expedients. In using the modified retrospective approach, we were required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented. Prior period results have been restated resulting in a material impact on the condensed consolidated balance sheet and condensed consolidated statement of cash flows. The adoption of this standard did not have a material impact on our condensed consolidated statements of operations.

Results of Operations

Comparison of the Three Months Ended September 30, 2018 and 2017

The following table summarizes the results of our operations for the three months ended September 30, 2018 and 2017:

Research and Development Expenses

The following table summarizes the research and development expenses incurred during the three months  ended September 30, 2018 and 2017:

 

Research and development expenses were $7.0 million for the three months ended September 30, 2018 compared to $7.0 million for the three months ended September 30, 2017, representing a change of $0. This was primarily the result of a $1.7 million decrease in KPI‑121 development costs due to the decrease in external costs associated with the completion of our Phase 3 clinical trials of INVELTYS for the treatment of inflammation and pain following cataract surgery and STRIDE 1 and STRIDE 2, our Phase 3 trials of KPI-121 0.25% for the treatment of dry eye disease offset by 0.6 million increase in STRIDE 3, our additional Phase 3 clinical trial of KPI-121 0.25% beginning during the three months ended September 30, 2018. An additional decrease of $0.1 million in other research and development costs was offset by a $1.2 million increase in employee‑related costs due to the additional hiring of personnel, overall merit increases and an increase in stock compensation expense related to stock option grants.

We expect that our research and development costs will increase as we advance our product candidate, KPI-121 0.25%, pursue other product candidates and conduct additional clinical trials.

General and Administrative Expenses

General and administrative expenses were $8.5 million for the three months ended September 30, 2018 compared to $2.5 million for the three months ended September 30, 2017, an increase of $6.0 million.