2019-Q1 10Q

 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________

FORM 10-Q

_______________________________



(Mark One)



 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2019



or

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For transition period from                      to                     .



Commission File Number: 001-37841



Kadmon Holdings, Inc.

(Exact name of registrant as specified in its charter)

_______________________________





 

 

Delaware

(State or other jurisdiction of
incorporation or organization)

 

27‑3576929

(I.R.S. Employer
Identification No.)



 

 

450 East 29th Street, New York, NY

(Address of principal executive offices)

 

10016

(Zip Code)



(212) 308‑6000

(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 (§232.405 of this chapter) 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 an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:



 

 

 

 

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

Non-accelerated filer 

 

Smaller reporting company 

 

Emerging growth company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No 



Securities registered pursuant to Section 12(b) of the Act:



Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.001 per share

KDMN

The New York Stock Exchange



The number of shares of the registrant’s common stock outstanding as of May 3, 2019 was 129,479,895.  







 

 


 

Table of Contents

Kadmon Holdings, Inc.

Form 10-Q

Table of Contents





 

 



 

Page

PART I – Financial Information

 

Item 1

Consolidated financial statements:



Consolidated balance sheets as of March, 31, 2019 (unaudited) and December 31, 2018 



Consolidated statements of operations 
    for the three months ended March 31, 2019 and 2018 (unaudited) 



Consolidated statements of stockholders’ equity
    for the three months ended March 31, 2019 (unaudited) and the year ended December 31, 2018



Consolidated statements of cash flows 
    for the three months ended March 31, 2019 and 2018 (unaudited)



Notes to consolidated financial statements (unaudited) 

Item 2

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

25 

Item 3

Quantitative and Qualitative Disclosures About Market Risk 

32 

Item 4

Controls and Procedures 

32 



 

 

PART II – Other Information

 

Item 1

Legal Proceedings 

32 

Item 1A

Risk Factors 

32 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds 

33 

Item 3

Defaults Upon Senior Securities 

33 

Item 4

Mine Safety Disclosures 

33 

Item 5

Other Information 

33 

Item 6

Exhibits 

33 



 

 

Signatures

35 



 

2


 

Table of Contents





FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q may be forward-looking statements. Statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, including, among others, statements regarding future capital expenditures and debt service obligations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “targets,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions.

Forward-looking statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. We believe that these factors include, but are not limited to, the following:

·

the initiation, timing, progress and results of our preclinical studies and clinical trials, and our research and development programs;

·

our ability to advance product candidates into, and successfully complete, clinical trials;

·

our reliance on the success of our product candidates;

·

the timing or likelihood of regulatory filings and approvals;

·

our ability to expand our sales and marketing capabilities;

·

the commercialization of our product candidates, if approved;

·

the pricing and reimbursement of our product candidates, if approved;

·

the implementation of our business model, strategic plans for our business, product candidates and technology;

·

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;

·

our ability to operate our business without infringing, misappropriating or otherwise violating the intellectual property rights and proprietary technology of third parties;

·

cost associated with defending or enforcing, if any, intellectual property infringement, misappropriation or

·

other intellectual property violation, product liability and other claims;

·

regulatory and governmental policy developments in the United States, Europe and other jurisdictions;

·

estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

·

the potential benefits of strategic collaboration agreements and our ability to enter into strategic arrangements;

·

our ability to maintain and establish collaborations or obtain additional grant funding;

·

the rate and degree of market acceptance, if any, of our product candidates, if approved;

·

developments relating to our competitors and our industry, including competing therapies;

·

our ability to effectively manage our anticipated growth;

·

our ability to attract and retain qualified employees and key personnel;

·

our ability to achieve cost savings and benefits from our efforts to streamline our operations and to not harm our business with such efforts;

·

our expectations regarding the period during which we qualify as an emerging growth company under the Jumpstart Our Business Startups Act (JOBS Act);

·

statements regarding future revenue, hiring plans, expenses, capital expenditures, capital requirements and share performance;

·

litigation, including costs associated with prosecuting or defending pending or threatened claims and any adverse outcomes or settlements not covered by insurance;

·

our expected use of cash and cash equivalents and other sources of liquidity;

·

our ability to amend or refinance the 2015 Credit Agreement due July 1, 2020;

·

the future trading price of the shares of our common stock and impact of securities analysts’ reports on these prices;

·

the future trading price of our investments and our potential inability to sell those securities;  

·

our ability to apply unused federal and state net operating loss carryforwards against future taxable income; and

·

other risks and uncertainties, including those listed under the caption “Risk Factors.”

The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions, and we may not actually achieve the plans, intentions or expectations included in our forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.

3


 

Table of Contents

PART I. FINANCIAL INFORMATION



Kadmon Holdings, Inc.

Consolidated balance sheets

(in thousands, except share amounts)

 





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,

  

 

2019

 

2018



 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

99,358 

  

$

94,740 

Accounts receivable, net

 

 

1,501 

  

 

1,690 

Inventories, net

 

 

936 

  

 

925 

Prepaid expenses and other current assets

 

 

1,969 

  

 

1,581 

Total current assets

 

 

103,764 

  

 

98,936 

Fixed assets, net

 

 

3,566 

  

 

3,654 

Right of use lease asset

 

 

22,006 

 

 

 —

Goodwill

 

 

3,580 

  

 

3,580 

Restricted cash

 

 

2,116 

  

 

2,116 

Investment, equity securities

 

 

60,903 

  

 

34,075 

Investment, at cost

 

 

2,300 

  

 

2,300 

Total assets

 

$

198,235 

  

$

144,661 



 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

8,657 

  

$

9,986 

Accrued expenses

 

 

11,280 

  

 

13,508 

Lease liability - current

 

 

3,742 

  

 

 —

Fair market value of financial instruments

 

 

748 

  

 

524 

Secured term debt – current

 

 

2,250 

  

 

 —

Total current liabilities

 

 

26,677 

  

 

24,018 

Lease liability - noncurrent

 

 

22,610 

  

 

 —

Deferred rent

 

 

  

 

4,290 

Deferred tax liability

 

 

415 

  

 

415 

Other long term liabilities

 

 

 —

  

 

47 

Secured term debt – net of current portion and discount

 

 

25,325 

 

 

27,480 

Total liabilities

 

 

75,027 

  

 

56,250 

Commitments and contingencies (Note 15 and 16)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Convertible Preferred Stock, $0.001 par value; 10,000,000 shares authorized at March 31, 2019 and December 31, 2018; 30,000 shares issued and outstanding at March 31, 2019 and December 31, 2018

 

 

42,746 

  

 

42,231 

Common Stock, $0.001 par value; 200,000,000 shares authorized at March 31, 2019 and December 31, 2018; 126,909,522 and 113,130,817 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

127 

  

 

113 

Additional paid-in capital

 

 

346,901 

  

 

315,710 

Accumulated deficit

 

 

(266,566)

 

 

(269,643)

Total stockholders’ equity

 

 

123,208 

 

 

88,411 

Total liabilities and stockholders’ equity

 

$

198,235 

 

$

144,661 

 

See accompanying notes to consolidated financial statements

4


 

Table of Contents

Kadmon Holdings, Inc.

Consolidated statements of operations (unaudited)

(in thousands, except share and per share amounts)







 

 

 

 

 

 



 

 

 

 

 

 

   

 

Three Months Ended



 

March 31,



 

2019

 

2018

Revenues

 

 

 

 

 

 

Net sales

 

$

67 

 

$

274 

Other revenue

 

 

174 

 

 

159 

Total revenue

 

 

241 

 

 

433 

Cost of sales

 

 

31 

 

 

199 

Write-down of inventory

 

 

 —

 

 

147 

Gross profit

 

 

210 

 

 

87 

Operating expenses:

 

 

 

 

 

 

Research and development

 

 

14,991 

 

 

9,780 

Selling, general and administrative

 

 

7,946 

 

 

8,250 

Total operating expenses

 

 

22,937 

 

 

18,030 

Loss from operations

 

 

(22,727)

 

 

(17,943)

Other (income) expense:

 

 

 

 

 

 

Interest income

 

 

(656)

 

 

(69)

Interest expense

 

 

932 

 

 

1,465 

Change in fair value of financial instruments

 

 

224 

 

 

(141)

Loss on equity method investment

 

 

 —

 

 

1,242 

Unrealized gain on equity securities

 

 

(26,828)

 

 

 —

Other expense

 

 

 

 

Total other (income) expense

 

 

(26,319)

 

 

2,498 

Income (loss) before income tax expense

 

 

3,592 

 

 

(20,441)

Income tax expense

 

 

 —

 

 

 —

Net income (loss)

 

$

3,592 

 

$

(20,441)

Deemed dividend on convertible preferred stock

 

 

515 

 

 

490 

Net income (loss) attributable to common stockholders

 

$

3,077 

 

$

(20,931)



 

 

 

 

 

 

Basic net income (loss) per share of common stock

 

$

0.02 

 

$

(0.27)

Diluted net income (loss) per share of common stock

 

$

0.02 

 

$

(0.27)

Weighted average basic shares of common stock outstanding

 

 

126,330,788 

 

 

78,650,143 

Weighted average diluted shares of common stock outstanding

 

 

126,406,039 

 

 

78,650,143 



See accompanying notes to consolidated financial statements

 

5


 

Table of Contents

Kadmon Holdings, Inc.

Consolidated statements of stockholders’ equity (unaudited)

(in thousands, except share amounts)









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Preferred stock

 

Common stock

 

Additional
paid-in

 

Accumulated

 

 

 



 

Shares

 

Amount

 

Shares

 

Amount

 

capital

 

Deficit

 

Total

Balance, December 31, 2017

 

30,000 

 

$

40,220 

 

78,643,954 

 

$

79 

 

$

198,856 

 

$

(237,397)

 

$

1,758 

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,572 

 

 

 —

 

 

2,572 

Common stock issued for warrant exercises

 

 —

 

 

 —

 

8,195 

 

 

 —

 

 

26 

 

 

 —

 

 

26 

Cumulative effect of change in accounting principle - ASC 606 adoption

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

24,017 

 

 

24,017 

Beneficial conversion feature on convertible preferred stock

 

 —

 

 

98 

 

 —

 

 

 —

 

 

 —

 

 

(98)

 

 

 —

Accretion of dividends on convertible preferred stock

 

 —

 

 

392 

 

 —

 

 

 —

 

 

 —

 

 

(392)

 

 

 —

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(20,441)

 

 

(20,441)

Balance, March 31, 2018

 

30,000 

 

$

40,710 

 

78,652,149 

 

$

79 

 

$

201,454 

 

$

(234,311)

 

$

7,932 

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,023 

 

 

 —

 

 

3,023 

Common stock issued in public offering, net

 

 —

 

 

 —

 

34,303,030 

 

 

34 

 

 

105,727 

 

 

 —

 

 

105,761 

Common stock issued for warrant exercises

 

 —

 

 

 —

 

123,639 

 

 

 —

 

 

562 

 

 

 —

 

 

562 

Common stock issued under ESPP plan

 

 —

 

 

 —

 

22,958 

 

 

 —

 

 

65 

 

 

 —

 

 

65 

Beneficial conversion feature on convertible preferred stock

 

 —

 

 

98 

 

 —

 

 

 —

 

 

 —

 

 

(98)

 

 

 —

Accretion of dividends on convertible preferred stock

 

 —

 

 

393 

 

 —

 

 

 —

 

 

 —

 

 

(393)

 

 

 —

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

21,505 

 

 

21,505 

Balance, June 30, 2018

 

30,000 

 

$

41,201 

 

113,101,776 

 

$

113 

 

$

310,831 

 

$

(213,297)

 

$

138,848 

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,833 

 

 

 —

 

 

2,833 

Beneficial conversion feature on convertible preferred stock

 

 —

 

 

103 

 

 —

 

 

 —

 

 

 —

 

 

(103)

 

 

 —

Accretion of dividends on convertible preferred stock

 

 —

 

 

412 

 

 —

 

 

 —

 

 

 —

 

 

(412)

 

 

 —

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(13,799)

 

 

(13,799)

Balance, September 30, 2018

 

30,000 

 

$

41,716 

 

113,101,776 

 

$

113 

 

$

313,664 

 

$

(227,611)

 

$

127,882 

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,963 

 

 

 —

 

 

1,963 

Common stock issued under ESPP plan

 

 —

 

 

 —

 

29,041 

 

 

 —

 

 

83 

 

 

 —

 

 

83 

Beneficial conversion feature on convertible preferred stock

 

 —

 

 

103 

 

 —

 

 

 —

 

 

 —

 

 

(103)

 

 

 —

Accretion of dividends on convertible preferred stock

 

 —

 

 

412 

 

 —

 

 

 —

 

 

 —

 

 

(412)

 

 

 —

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(41,517)

 

 

(41,517)

Balance, December 31, 2018

 

30,000 

 

$

42,231 

 

113,130,817 

 

$

113 

 

$

315,710 

 

$

(269,643)

 

$

88,411 

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,156 

 

 

 —

 

 

2,156 

Common stock issued in public offering, net

 

 —

 

 

 —

 

13,778,705 

 

 

14 

 

 

29,035 

 

 

 —

 

 

29,049 

Beneficial conversion feature on convertible preferred stock

 

 —

 

 

103 

 

 —

 

 

 —

 

 

 —

 

 

(103)

 

 

 —

Accretion of dividends on convertible preferred stock

 

 —

 

 

412 

 

 —

 

 

 —

 

 

 —

 

 

(412)

 

 

 —

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

3,592 

 

 

3,592 

Balance, March 31, 2019

 

30,000 

 

$

42,746 

 

126,909,522 

 

$

127 

 

$

346,901 

 

$

(266,566)

 

$

123,208 



See accompanying notes to consolidated financial statements





















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Table of Contents

Kadmon Holdings, Inc.

Consolidated statements of cash flows (unaudited)

(in thousands)







 

 

 

 

 

 

   

 

Three Months Ended



 

March 31,



 

2019

 

2018

Cash flows from operating activities:

 

 

 

 

 

 

Net income (loss)

 

$

3,592 

 

$

(20,441)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

Depreciation and amortization of fixed assets

 

 

467 

  

 

349 

Amortization of right of use lease asset

 

 

818 

 

 

Write-down of inventory

 

 

 —

  

 

147 

Amortization of deferred financing costs

 

 

  

 

127 

Amortization of debt discount

 

 

95 

  

 

575 

Amortization of debt premium

 

 

 

 

(188)

Share-based compensation

 

 

2,156 

 

 

2,572 

Change in fair value of financial instruments

 

 

224 

 

 

(141)

Loss on equity method investment

 

 

 

 

1,242 

Unrealized gain on equity securities

 

 

(26,828)

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

189 

 

 

643 

Inventories, net

 

 

(11)

 

 

(412)

Prepaid expenses and other assets

 

 

(388)

 

 

(424)

Accounts payable

 

 

(1,311)

 

 

285 

Lease liability

 

 

(908)

 

 

 —

Accrued expenses, other liabilities and deferred rent

 

 

(2,228)

 

 

(1,443)

Net cash used in operating activities

 

 

(24,133)

 

 

(17,109)



 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of fixed assets

 

 

(298)

 

 

(127)

Net cash used in investing activities

 

 

(298)

 

 

(127)



 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

 

29,049 

 

 

 —

Principal payments on secured term debt

 

 

 —

 

 

(1,140)

Proceeds from exercise of warrants

 

 

 —

 

 

26 

Net cash provided by (used in) financing activities

 

 

29,049 

 

 

(1,114)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

4,618 

 

 

(18,350)

Cash, cash equivalents and restricted cash, beginning of period

 

 

96,856 

  

 

69,633 

Cash, cash equivalents and restricted cash, end of period

 

$

101,474 

  

$

51,283 



 

 

 

 

 

 

Components of cash, cash equivalents, and restricted cash

 

 

 

 

 

 

Cash and cash equivalents

 

 

99,358 

  

 

49,167 

Restricted cash

 

 

2,116 

  

 

2,116 

Total cash, cash equivalents, and restricted cash

 

 

101,474 

 

 

51,283 



 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

Cash paid for interest

 

$

836 

  

$

961 

Non-cash investing and financing activities:

 

 

 

 

 

 

Beneficial conversion feature on convertible preferred stock

 

 

103 

  

 

98 

Accretion of dividends on convertible preferred stock

 

 

412 

  

 

392 

Unpaid fixed asset additions

 

 

81 

 

 

 —

Operating lease liabilities arising from obtaining right-of-use assets

 

 

31 

 

 

 —

Cumulative effect of change in accounting principle - ASC 842 adoption

 

 

27,083 

  

 

 —

Cumulative effect of change in accounting principle - ASC 606 adoption

 

 

 —

  

 

24,017 



See accompanying notes to consolidated financial statements

 

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Table of Contents

 

Kadmon Holdings, Inc.

Notes to consolidated financial statements (unaudited)

1. Organization

Nature of Business

Kadmon Holdings, Inc. (together with its subsidiaries, “Kadmon” or “Company”) is a fully integrated biopharmaceutical company engaged in the discovery, development and commercialization of small molecules and biologics to address disease areas of significant unmet medical needs, with a near-term clinical focus on inflammatory and fibrotic diseases as well as immuno-oncology.  The Company leverages its multi-disciplinary research and clinical development team members to identify and pursue a diverse portfolio of novel product candidates, both through in-licensing products and employing its small molecule and biologics platforms. By retaining global commercial rights to its lead product candidates, the Company believes that it has the ability to develop these candidates while maintaining flexibility for commercial and licensing arrangements. The Company expects to continue to progress its clinical candidates and have further clinical trial events throughout 2019.

Liquidity

The Company maintained cash and cash equivalents of $99.4 million at March 31, 2019. The Company had an accumulated deficit of $266.6 million and working capital of $77.1 million at March 31, 2019.  The Company entered into a Sales Agreement with Cantor Fitzgerald & Co. in August 2017 under which the Company may sell up to $40.0 million in shares of its common stock in one or more placements at prevailing market prices for its common stock (the “ATM Offering”). Any such sales would be effected pursuant to the Company’s registration statement on Form S-3 (File No. 333-222364), declared effective by the Securities Exchange Commission (“SEC”) on January 10, 2018. As of December 31, 2018, the Company had not sold any shares of common stock under the ATM Offering. In January 2019, the Company sold 13,778,705 shares of common stock at a weighted average price of $2.17 per share through the ATM Offering and received total gross proceeds of $29.9 million ($29.0 million net of $0.9 million of commissions payable by the Company).  In  April 2019, the Company sold 2,538,100 shares of common stock at a price of $2.70 per share through the ATM Offering and received total gross proceeds of $6.9 million ($6.7 million net of $0.2 million of commissions payable by the Company) (Note 19). The Company’s existing cash and cash equivalents are expected to enable it to advance its planned Phase 2 clinical studies for KD025 and advance certain of its other pipeline product candidates and provide for other working capital purposes.

Management’s plans include continuing to finance operations through the issuance of additional equity securities and expanding the commercial portfolio through the development of the current pipeline or through strategic collaborations. Any transactions which occur may contain covenants that restrict the ability of management to operate the business or may have rights, preferences or privileges senior to the Company’s common stock and may dilute current stockholders of the Company. 

Going Concern

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern. The Company has not established a source of revenues sufficient to cover its operating costs, and as such, has been dependent on funding operations through the issuance of debt and sale of equity securities. Since inception, the Company has experienced significant loses and incurred negative cash flows from operations. The Company expects to incur further losses over the next several years as it develops its business. The Company has spent, and expects to continue to spend, a substantial amount of funds in connection with implementing its business strategy, including its planned product development efforts, preparation for its planned clinical trials, performance of clinical trials and its research and discovery efforts.

The Company’s cash and cash equivalents are not expected to be sufficient to enable the Company to meet its long-term expected plans, including commercialization of clinical pipeline products, if approved, or initiation or completion of future registrational studies. The Company has no commitments for any additional financing and may not be successful in its efforts to raise additional funds or achieve profitable operations, and there can be no assurance that additional financing will be available to the Company on commercially acceptable terms or at all. Any amounts raised will be used for further development of the Company’s product candidates, for marketing and promotion, to secure additional property and equipment and for other working capital purposes.

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If the Company is unable to obtain additional capital, its long-term business plan may not be accomplished and the Company may be forced to curtail or cease operations. Further, the 2015 Credit Agreement contains certain developmental milestones that must be achieved by December 31, 2019, which are considered to be outside of the Company’s control, as well as a minimum liquidity covenant. As such, if achievement of the developmental milestones does not occur as anticipated by December 31, 2019 or the Company violates its minimum liquidity covenant, the Company may need to use cash and cash equivalents to fund certain repayment commitments, as any such non-compliance could, under the remedies set forth in the 2015 Credit Agreement, trigger a termination of the Commitments (as defined in the 2015 Credit Agreement) or a declaration by the Lender that the Loan (as defined in the 2015 Credit Agreement) be due and payable in whole or part, together with any applicable fees and/or interest thereon. These factors individually and collectively continue to raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments or classifications that may result from the possible inability of the Company to continue as a going concern.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company operates in one segment considering the nature of the Company’s products and services, class of customers, methods used to distribute the products and the regulatory environment in which the Company operates.

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with GAAP. The consolidated financial statements include the accounts of Kadmon Holdings, Inc. and its domestic and international subsidiaries, all of which are wholly owned.

Interim Financial Statements

 The accompanying financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion the financial statements include all adjustments (consisting of normal recurring accruals) necessary in order to make the financial statements not misleading. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the final results that may be expected for the year ended December 31, 2019. These unaudited financial statements should be read in conjunction with the audited financial statements included in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.

Critical Accounting Policies

The Company’s significant accounting policies are disclosed in the audited financial statements included in Item 8 of the Annual Report on Form 10-K as of and for the year ended December 31, 2018. Since the date of such financial statements, there have been no changes to the Company’s significant accounting policies, other than those described below.

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Accounting for Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016 02, “Leases” (ASC 842) 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 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. Prior to January 1, 2019, GAAP did not require lessees to recognize assets and liabilities related to operating leases on the balance sheet. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement as well as the reduction of the right of use asset. The Company has adopted the standard effective January 1, 2019 and has chosen to use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2019. The new standard provides a number of optional practical expedients in transition. The Company has elected to apply the ‘package of practical expedients’ which allow us to not reassess (i) whether existing or expired arrangements contain a lease, (ii) the lease classification of existing or expired leases, or (iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. The Company has also elected to apply (i) the practical expedient which allows us to not separate lease and non-lease components, for new leases entered into after adoption and (ii) the short-term lease exemption for all leases with an original term of less than 12 months, for purposes of applying the recognition and measurements requirements in the new standard. In preparation for adoption of the standard, the Company implemented internal controls to enable the preparation of financial information including the assessment of the impact of the standard. For the impact to the Company’s consolidated financial statement upon adoption of the new leasing standard, see Note 8 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on specific facts and circumstances, the existence of an identified asset(s), if any, and the Company’s control over the use of the identified asset(s), if applicable. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of future lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company will utilize the 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. As of the ASC 842 effective date, the Company’s incremental borrowing rate ranges from approximately 4.0%-5.6% based on the remaining lease term of the applicable leases.

The Company has elected to combine lease and non-lease components as a single component. Operating leases are recognized on the balance sheet as ROU lease assets, lease liabilities current and lease liabilities non-current. Fixed rents are included in the calculation of the lease balances while variable costs paid for certain operating and pass-through costs are excluded. Lease expense is recognized over the expected term on a straight-line basis.

Revenue Recognition

The Company adopted FASB ASC 606, Revenue from Contracts with Customers (ASC 606), on January 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption– i.e. by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of stockholders equity at January 1, 2018. The Company recognizes revenue in accordance with ASC 606, the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. To achieve this core principle, five basic criteria must be met before revenue can be recognized: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to performance obligations in the contract; and (5) recognize revenue when or as the Company satisfies a performance obligation.

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Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the three months ended March 31, 2019 and 2018:





 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended

 

Three Months Ended



 

March 31, 2019

 

March 31, 2018

Product sales

 

$

67 

 

$

274 

Other revenue

 

 

174 

 

 

159 

Total revenue

 

$

241 

 

$

433 

Product Sales

The Company markets and distributes a  portfolio of products, including ribavirin and tetrabenazine. These contracts typically include a single promise to deliver a fixed amount of product to the customer with payment due within 30 days of shipment. Revenues are recognized when control of the promised goods is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods.

As is typical in the pharmaceutical industry, gross product sales are subject to a variety of deductions, primarily representing rebates, chargebacks, returns, and discounts to government agencies, wholesalers, and managed care organizations. These deductions represent management’s best estimates of the related reserves and, as such, judgment is required when estimating the impact of these sales deductions on gross sales for a reporting period. If estimates are not representative of the actual future settlement, results could be materially affected.

Other Revenue

The other revenue generated by the Company is primarily related to a transition services agreement and sublease agreement with MeiraGTx Holdings plc (“MeiraGTx”) (Note 11). The Company performed various professional services under a transition services agreement (“TSA”) that supported MeiraGTx until the expiration of the agreement in April 2018. The Company continues to provide office space to MeiraGTx under a sublease agreement. The Company recognizes revenue related to transition services and sublease agreements as they are performed.

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services or when our right to consideration is unconditional. The Company has not recognized any assets for costs to obtain or fulfill a contract with a customer as of March 31, 2019

Transaction Price Allocated to Future Performance Obligations

ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of March 31, 2019. The guidance provides certain practical expedients that limit this requirement. The Company has various contracts that meet the following practical expedients provided by ASC 606:

1. The performance obligation is part of a contract that has an original expected duration of one year or less.

2. Revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer.

3. The variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation.

The Company does not have any performance obligations that have not yet been satisfied as of March 31, 2019 and therefore there is no transaction price allocated to future performance obligations under ASC 606.

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Recent Accounting Pronouncements

In November 2018, the FASB issued ASU No. 2018-18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606”, which requires transactions in collaborative arrangements to be accounted for under ASC 606 if the counterparty is a customer for a good or service (or bundle of goods and services) that is a distinct unit of account. The amendments also preclude entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. The ASU is effective for annual or interim periods beginning after December 15, 2019. Early adoption is permitted for entities that have adopted ASC 606. The Company is evaluating the impact of adopting this standard.

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)”,  which requires customers in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to capitalize as assets. This ASU is effective for annual or any interim periods beginning after December 15, 2019. The Company does not expect the standard to have a significant impact on its consolidated financial statements, as the Company’s cloud computing contracts are not material.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation”, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees, except for specific exceptions. This ASU is effective for annual or any interim periods beginning after December 15, 2018. The Company adopted this standard on January 1, 2019, which did not have a significant impact on its consolidated financial statements as the fair value of the Company’s awards to nonemployees is immaterial.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other”, which simplifies the subsequent measurement of goodwill by eliminating “Step 2” from the goodwill impairment test. Instead of performing Step 2 to determine the amount of an impairment charge, the fair value of a reporting unit will be compared with its carrying amount and an impairment charge will be recognized for the value by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the standard to have a significant impact on its consolidated financial statements. 

3. Stockholders’ Equity

5% Convertible Preferred Stock

The Company had 30,000 shares of 5% convertible preferred stock outstanding at March 31, 2019, which converts into shares of the Company’s common stock at a 20% discount to the price per share of common stock in the Company’s initial public offering (“IPO”) of $12.00 per share. The Company accrued dividends on the 5% convertible preferred stock of $0.4 million during each of the three months ended March 31, 2019 and 2018. The Company calculated a deemed dividend of $0.1 million on the $0.4 million of accrued dividends during each of the three months ended March 31, 2019 and 2018, which is a beneficial conversion feature. The stated liquidation preference amount on the 5% convertible preferred stock totaled $33.0 million at March 31, 2019.



Common Stock

The Company’s certificate of incorporation authorizes the issuance of up to 200,000,000 shares of the Company’s common stock, par value $0.001 per share.



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4. Net Income (Loss) per Share Attributable to Common Stockholders

Basic net income (loss) attributable to common stockholders per share is computed by dividing the net income (loss) attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Shares issued during the period are weighted for the portion of the period that they were outstanding. Because the Company has reported a net loss for the three months ended March 31, 2018, diluted net loss per common share is the same as basic net loss per common share for that period. For the three months ended March 31, 2019, diluted net income per share is calculated in a manner consistent with that of basic net income per share while giving effect to all potentially dilutive common shares that were outstanding during the period. The following table summarizes the computation of basic and diluted net income (loss) per share attributable to common stockholders of the Company (in thousands, except share and per share amounts):



 

 

 

 

 

 

   

 

Three Months Ended



 

March 31,



 

2019

 

 

2018

Numerator – basic and diluted:

 

 

 

 

 

 

Net income (loss) available to common stockholders - basic and diluted

 

$

3,077 

 

$

(20,931)



 

 

 

 

 

 

Denominator – basic and diluted:

 

 

 

 

 

 

Weighted average common shares outstanding used to compute basic net income (loss) per share

 

 

126,330,788 

 

 

78,650,143 

Effect of dilution:

 

 

 

 

 

 

         Options to purchase common stock

 

 

75,251 

 

 

 —

Weighted average common shares outstanding used to compute diluted net income (loss) per share

 

 

126,406,039 

 

 

78,650,143 



 

 

 

 

 

 

Net income (loss) per share, basic

 

$

0.02 

 

$

(0.27)

Net income (loss) per share, diluted

 

$

0.02 

 

$

(0.27)



The amounts in the table below were excluded from the calculation of diluted net income (loss) per share, due to their anti-dilutive effect:



 

 

 

 

 

 

   

 

 

Three Months Ended



 

 

March 31,



 

 

2019

 

 

2018

Options to purchase common stock

 

 

8,816,778 

 

 

8,374,489 

Warrants to purchase common stock

 

 

11,999,852 

 

 

14,713,790 

Convertible preferred stock

 

 

3,562,221 

 

 

3,392,592 

Total shares of common stock equivalents

 

 

24,378,851 

 

 

26,480,871 

 



5. Debt

The Company is a party to one credit agreement in the following amount (in thousands):





 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2019

 

2018



 

 

 

 

 

 

Secured term debt due July 1, 2020

 

$

28,046 

 

$

28,046 

    Total debt before debt discount

 

 

28,046 

 

 

28,046 

Less: Debt discount

 

 

(471)

 

 

(566)

    Total debt payable

 

$

27,575 

 

$

27,480 



 

 

 

 

 

 

Debt payable, current portion

 

$

2,250 

 

$

 —

Debt payable, long-term

 

$

25,325 

 

$

27,480 



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Secured Term Debt

August 2015 Secured Term Debt

In August 2015, the Company entered into a secured term loan in the amount of $35.0 million with two lenders (“2015 Credit Agreement”). The interest rate on the loan is LIBOR plus 9.375% with a 1% floor. As of March 31, 2019, there were five amendments to the 2015 Credit Agreement, which, among other things, have extended the maturity date and due date of principal payments under the 2015 Credit Agreement,  repaid all amounts due to one of the lenders, revised terms of certain warrants issued in connection with the 2015 Credit Agreement (Note 6), and amended certain covenants, including adding non-financial developmental milestones which must be met by December 31, 2019. As amended, the basic terms of the loan require monthly payments of interest only through December 31, 2019, with principal payments in the amount of $750,000 payable monthly beginning on January 31, 2020. Any outstanding balance of the loan and accrued interest is to be repaid on July 1, 2020, the maturity date. The secured term loan is collateralized by a first priority perfected security interest in all the tangible and intangible property of the Company.

The Company entered into a sixth waiver agreement to the 2015 Credit Agreement in March 2019 under which the lenders under the 2015 Credit Agreement agreed to refrain from exercising certain rights under the 2015 Credit Agreement, including the declaration of a default and to forbear from acceleration of any repayment rights with respect to existing covenants. The report and opinion of our independent registered public accounting firm, BDO USA, LLP, for the year ended December 31, 2018 contains an explanatory paragraph regarding our ability to continue as a going concern, which is an event of default under the 2015 Credit Agreement.

The minimum payments required on the outstanding balances of the 2015 Credit Agreement at March 31, 2019 are (in thousands):



 

 

 



 

 

 



 

2015 Credit Agreement

2019

 

$

 —

2020

 

 

28,046 



 

$

28,046 



The following table provides components of interest expense and other related financing costs (in thousands):





 

 

 

 

 

 



 

 

 

 

 

 

   

 

Three Months Ended



 

March 31,



 

2019

 

2018

Interest expense and other financing costs

 

$

837 

 

$

951 

Amortization of deferred financing costs, debt discount and debt premium

 

 

95 

 

 

514 

    Interest expense

 

$

932 

 

$

1,465 

 



6. Financial Instruments

Equity Issued Pursuant to Credit Agreements

In connection with the 2015 Credit Agreement (Note 5), as fees to the lenders thereunder, the Company issued warrants to purchase an aggregate of $6.3 million of the Company’s Class A units, which were exchanged for 617,651 warrants with a strike price of $10.20 per share to purchase the same number of shares of the Company’s common stock upon consummation of the Company’s IPO in August 2016 (“2015 Warrants”).

As of March 31, 2019, the exercise price of a portion of the 2015 Warrants to purchase an aggregate of 529,413 shares of the Company’s common stock is $3.30 per warrant share and the exercise price of the remaining 2015 Warrants to purchase an aggregate of 88,238 shares of the Company’s common stock is $4.50 per warrant share. Since these warrants are exercisable and are redeemable at the option of the holder upon the occurrence of, and during the continuance of, an event of default, the fair value of the warrants is recorded as a short-term liability of $0.7 million and $0.5 million at March 31, 2019 and December 31, 2018, respectively.

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The Company used the Black-Scholes pricing model to value the warrant liability at March 31, 2019 with the following assumptions: risk-free interest rate of 2.2%, expected term of 3.4 years, expected volatility of 74.2% and a dividend rate of 0%. The change in fair value of the warrants was $0.2 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively. None of these instruments have been exercised as of March 31, 2019 and December 31, 2018.

Other Warrants

In connection with the sale of common stock in March 2017, warrants to purchase 2,707,138 shares of common stock were issued at an exercise price of $4.50 per share. During April 2018, warrants to purchase 119,047 shares of common stock were exercised for which the Company received proceeds of $0.5 million. The remaining 2,588,091 warrants expired in April 2018. These warrants included a cash settlement option requiring the Company to record a liability for the fair value of the warrants at the time of issuance and at each reporting period with any change in the fair value reported as other income or expense. During the three months ended March 31, 2018, the decline in the fair value of these warrants was $(0.4) million.

Fair Value of Long-term Debt

The Company maintained a long-term secured debt balance of $25.3 million and $27.5 million at March 31, 2019 and December 31, 2018, respectively. As the secured debt becomes due on July 1, 2020 and monthly principal payments of $750,000  are due starting January 31, 2020, it has been recorded as long-term secured debt at December 31, 2018. At March 31, 2019,  $2.3 million of principal payments due in the first quarter of 2020 have been recorded as short-term secured debt and the remaining balance is recorded as long-term secured debt.  The underlying agreements for these balances were negotiated with third parties on an arms-length basis, at an interest rate which is considered to be in line with over-arching market conditions. Based on these factors, management considers the carrying value of the debt to approximate fair value at March 31, 2019.

Fair Value Classification

The Company held certain liabilities that are required to be measured at fair value on a recurring basis. Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These
tiers include:

·

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

·

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·

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.



The table below represents the values of the Company’s financial instruments at March 31, 2019 and December 31, 2018 (in thousands):



 

 

 

 

 

 



 

 

 

 

 

 



 

Fair Value Measurement Using Significant Other Observable Inputs (Level 2)



 

March 31,

 

December 31,

Description

 

2019

 

2018

Warrants

 

$

748 

 

$

524 

Total

 

$

748 

 

$

524 



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The table below represents a rollforward of the Level 2 financial instruments from January 1, 2018 to March 31, 2019 (in thousands):



 

 

 



 

 

 



 

Significant Other Observable Inputs



 

(Level 2)

Balance at January 1, 2018

 

$

1,952 

Change in fair value of financial instruments

 

 

(1,525)

Fair value of warrants modified in the Fifth Amendment

 

 

111 

Exercise of warrants recorded as liability

 

 

(14)

Balance at December 31, 2018

 

$

524 

Change in fair value of financial instruments

 

 

224 

Balance at March 31, 2019

 

$

748 



The Level 2 inputs used to value our financial instruments were determined using prices that can be directly observed or corroborated in active markets. Although the fair value of this obligation is calculated using the observable market price of Kadmon Holdings Inc. common stock, an active market for this financial instrument does not exist and therefore the Company has classified the fair value of this liability as a Level 2 liability in the table above.



Warrants Outstanding

The following table summarizes information about warrants outstanding at March 31, 2019 and December 31, 2018:





 

 

 

 

 



 

 

 

 

 



 

Warrants

 

Weighted Average
Exercise Price

Balance, December 31, 2018

 

11,999,852 

 

$

5.97 

Granted

 

 —

 

 

 —

Exercised

 

 —

 

 

 —

Forfeited

 

 —

 

 

 —

Balance, March 31, 2019

 

11,999,852 

 

$

5.97 







7. Inventories

Inventories are stated at the lower of cost or net realizable value (on a first-in, first-out basis) using standard costs. Standard costs include an allocation of overhead rates, which include those costs attributable to managing the supply chain and are evaluated regularly. Variances are expensed as incurred.

The Company regularly reviews the expiration dates of its inventories and maintains a reserve for inventories that are probable to expire before shipment. Inventories recorded on the Company’s consolidated balance sheets are net of a reserve for expirable inventory of $2.1 million and $2.2 million at March 31, 2019 and December 31, 2018, respectively. The Company expensed inventory that it believes will not be sold prior to reaching its expiration date totaling $0.1 million during March 31, 2018, while no such expense was recorded for the March 31, 2019. If the amount and timing of future sales differ from management’s assumptions, adjustments to the estimated inventory reserves may be required.

Inventories Produced in Preparation for Product Launches



The Company capitalizes inventories produced in preparation for product launches sufficient to support estimated initial market demand. Typically, capitalization of such inventory begins when positive results have been obtained for the clinical trials that the Company believes are necessary to support regulatory approval, uncertainties regarding ultimate regulatory approval have been significantly reduced and the Company has determined it is probable that these capitalized costs will provide some future economic benefit in excess of capitalized costs. The material factors considered by the Company in evaluating these uncertainties include the receipt and analysis of positive clinical trial results for the underlying product candidate, results from meetings with the relevant regulatory authorities prior to the filing of regulatory applications, and the compilation of the regulatory application. The Company closely monitors the status of each respective product within the regulatory approval process, including all relevant communication with regulatory authorities. If the Company is aware of any specific material risks or contingencies other than the normal regulatory review and approval process or if there are any specific issues identified relating to safety, efficacy, manufacturing, marketing or labeling, the related inventory would generally not be capitalized.

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For inventories that are capitalized in preparation of product launch, anticipated future sales, expected approval date and shelf lives are evaluated in assessing realizability. The shelf life of a product is determined as part of the regulatory approval process; however in evaluating whether to capitalize pre-launch inventory production costs, the Company considers the product stability data of all of the pre-approval production to date to determine whether there is adequate expected shelf life for the capitalized pre-launch production costs.

The Company has concluded that KD034, its generic version of trientine hydrochloride, is commercially viable since it is the chemical equivalent of the original drug approved by the U.S. Food and Drug Administration (“FDA”). The Company has submitted two ANDAs with the FDA, and economic benefits of the pre-launch inventory recorded at March 31, 2019 are probable. Accordingly, the pre-launch costs are realizable as the Company expects the inventory will be sold or used prior to expiration. An assessment of likelihood that regulatory approval will not be obtained will be made at each reporting period. If at any time regulatory approval is deemed to not be probable, the inventory will be written down to its net realizable value, which is presumably zero, as the product would have no alternative future use. The Company maintained $0.9 million and $0.9 million of work-in-process inventory related to KD034 at March 31, 2019 and December 31, 2018, respectively.

Inventories are comprised of the following (in thousands):











 

 

 

 

 

 



 

 

 

 

 

 



 

March 31,

 

December 31,



 

2019

 

2018

Raw materials

 

$

 —

 

$

 —

Work-in-process

 

 

892 

 

 

886 

Finished goods, net

 

 

44 

 

 

39 

Total inventories

 

$

936 

 

$

925 











8. Leases

On January 1, 2019, the Company adopted ASC 842 using the modified retrospective transition approach allowed under ASU 2018-11 which releases companies from presenting comparative periods and related disclosures under ASC 842 and requires a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption (Note 2). The Company is party to six operating leases for office or laboratory space and three finance leases for office IT equipment.  The Company’s finance leases are immaterial both individually and in the aggregate. The Company has elected to apply the short-term lease exception to all leases of one year or less. As of March 31, 2019, this exception applies to two operating leases for office space, which are for a term of one year. Further, the Company has applied the guidance in ASC 842 to our corporate office and laboratory leases and have determined that these should be classified as operating leases. Consequently, as a result of the adoption of ASC 842, we recognized a ROU lease asset of approximately $22.7 million with a corresponding lease liability of approximately $27.0 million based on the present value of the minimum rental payments of such leases. In accordance with ASC 842, the beginning balance of the ROU lease asset was reduced by the existing deferred rent liability at inception of approximately $4.3 million. In the consolidated balance sheets at March 31, 2019, the Company has a ROU asset balance of $22.0 million and a current and non-current lease liability of $3.7 million and $22.6 million, respectively, relating to the ROU lease asset. The balance of both the ROU lease asset and the lease liabilities primarily consists of future payments under the Company’s office lease in New York, New York. 

The Company is party to an operating lease in New York, New York for office and laboratory space for its headquarters. The lease commenced in October 2010 with the initial term set to expire in February 2021 and opened a secured letter of credit with a third party financial institution in lieu of a security deposit for $2.0 million which is included in restricted cash at March 31, 2019. As of March 31, 2019, there were six amendments to this lease agreement, which altered office and laboratory capacity and extended the lease term through October 2025, with total lease cost of $1.2 million for the three months ended March 31, 2019. This office lease contains the ability to extend portions of the lease at fair market value but does not have any renewal options.

The Company is party to an operating lease in Warrendale, Pennsylvania (the Company’s specialty-focused commercial operation). In March 2019, the Company entered into an amendment to this lease which extended the lease term to September 30, 2022, with two five-year renewal options which would extend the term to September 30, 2032, if exercised. Rental payments under the renewal period would be at market rates determined from the average rentals of similar tenants in the same industrial park. The option to renew this office lease was not considered when assessing the value of the ROU asset because the Company was not reasonably certain that it will assert its option to renew the lease. Total lease cost for this lease was $0.2 million for the three months ended March 31, 2019.

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In August 2015, the Company entered into an operating office lease agreement in Cambridge, Massachusetts (the Company’s clinical office) effective January 2016 and expiring in April 2023. The Company opened a secured letter of credit with a third party financial institution in lieu of a security deposit for $0.1 million, which is included in restricted cash at March 31, 2019.  The Company is also party to an operating lease for laboratory space in Princeton, NJ, which expires in February 2021. Neither of these office leases contain any renewal options. Total lease cost for these leases was $0.1 million for the three months ended March 31, 2019.

Quantitative information regarding the Company’s leases for the three months ended March 31, 2019 is as follows (in thousands):



 

 

 

 

 

 



 

 

 

 

Three Months Ended

Lease Cost

 

Classification

March 31, 2019

Operating lease cost (a)

 

SG&A Expenses

 

$

1,168 

Variable lease cost

 

SG&A Expenses

 

 

369 

Sublease income (b)

 

Other Revenue

 

 

(173)

Net Lease Cost

 

 

 

 

$

1,364 



 

 

 

 

 

 

Other Information

 

 

 

 

 

 

Operating cash flows paid for amounts included in the measurement of lease liabilities

 

 

 

 

$

1,150 

Operating lease liabilities arising from obtaining right-of-use assets

 

 

 

 

 

31 



 

 

 

 

 

 

Weighted average remaining lease term (years)

 

 

 

 

 

6.2 

Weighted average discount rate

 

 

 

 

 

4.1% 



(a)

Includes short-term lease costs and finance lease costs, which are immaterial.

(b)

Includes sublease income related to MeiraGTx (Note 11)



Future lease payments under noncancellable leases are as follows (in thousands) at March 31, 2019:  





 

 

 

 

 

 

Future Lease Payments

 

Operating Leases

 

Finance Leases

2019

 

$

3,489 

 

$

67 

2020

 

 

4,753 

 

 

48 

2021

 

 

4,861 

 

 

2022

 

 

4,823 

 

 

 —

2023

 

 

4,153 

 

 

 —

Thereafter

 

 

7,732 

 

 

 —

Total Lease Payments

 

$

29,811 

 

$

121 



 

 

 

 

 

 

Less: Imputed Interest

 

 

(3,567)

 

 

(13)

Total Lease Liabilities

 

$

26,244 

 

$

108 

Note: As most of the Company’s leases do not provide an implicit rate, we use the Company’s incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date.

Future minimum rental payments under noncancellable leases are as follows (in thousands) at December 31, 2018: 



 

 

 



 

 

 

Year ending December 31,

 

Amount

2019

 

$

4,672 

2020

 

 

4,204 

2021

 

 

4,177 

2022

 

 

4,286 

2023

 

 

4,153 

Thereafter

 

 

7,731 

Total

 

$

29,223 







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9. Fixed Assets

Fixed assets consisted of the following (in thousands):





 

 

 

 

 

 

 



 

 

 

 

 

 

 



Useful Lives

 

March 31,

 

December 31,



(Years)

 

2019

 

2018



 

 

 

 

 

 

 

Leasehold improvements

4-8

 

$

10,217 

 

$

10,187 

Office equipment and furniture

3-15

 

 

1,289 

 

 

1,529 

Machinery and laboratory equipment

3-15

 

 

3,438 

 

 

3,247 

Software

1-5

 

 

3,960 

 

 

3,831 

Construction-in-progress

̶̶̶̶

 

 

202 

 

 

45 



 

 

 

19,106 

 

 

18,839 

Less accumulated depreciation and amortization

 

 

 

(15,540)

 

 

(15,185)

    Fixed assets, net

 

 

$

3,566 

 

$

3,654 



Depreciation and amortization of fixed assets totaled $0.5 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively. The construction-in-progress balance is related to costs of leasehold improvements not yet placed in service and still under development. Unamortized computer software costs were $0.6 million and $0.7 million at March 31, 2019 and December 31, 2018, respectively. The amortization of computer software costs amounted to $0.1 million for each of the three months ended March 31, 2019 and 2018.

10. Goodwill

The Company’s goodwill relates to the 2010 acquisition of Kadmon Pharmaceuticals, LLC, a Pennsylvania limited liability company that was formed in April 2000. There were no changes in the carrying amount of goodwill for three months ended March 31, 2019 and the year ended December 31, 2018.  



11. Investment in MeiraGTx

On June 12, 2018, MeiraGTx completed its initial public offering (the “MeiraGTx IPO”) whereby it sold 5,000,000 shares of common stock at $15.00 per share. MeiraGTx, a limited company under the laws of the Cayman Islands, is a clinical-stage biotech company developing novel gene therapy treatments for a wide range of inherited and acquired disorders for which there are no effective treatments available. The shares began trading on the Nasdaq Global Select Market on June 7, 2018 under the symbol “MGTX.”

Prior to the MeiraGTx IPO, for the period beginning January 1, 2018 through June 12, 2018, the Company recorded its share of MeiraGTx’s net loss under the equity method of accounting of $1.2 million. The Company had no remaining basis in any of the investments held in MeiraGTx prior to the MeiraGTx IPO. Upon completion of the MeiraGTx IPO, the Company’s investment was diluted to a 13.0% ownership in MeiraGTx common stock and the Company no longer has the ability to exert significant influence over MeiraGTx. The Company discontinued the equity method of accounting for the investment in MeiraGTx on June 12, 2018 and determined the remaining investment to be an equity security accounted for in accordance with ASC 321 at the date the investment no longer qualifies for the equity method of accounting. ASC 321 requires the investments to be recorded at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. As the Company’s investment in MeiraGTx common stock had a readily determinable market value, the Company recorded an unrealized gain of $40.5 million in June 2018 related to the fair value of its ownership of common stock of MeiraGTx. As of March 31, 2019 and December 31, 2018, the Company maintained a 10.7% and 12.9% ownership, respectively, in the common stock of MeiraGTx with a fair value of $60.9 million and $34.1 million, respectively, recorded as a noncurrent investment in equity securities as depending on certain circumstances, the Company may, at times, be deemed to be an affiliate of MeiraGTx. The Company has recorded an unrealized gain on the MeiraGTx common stock investment of $26.8 million for the three months ended March 31, 2019. The investment in MeiraGTx is valued using Level 1 inputs which includes quoted prices in active markets for identicial assets in accordance with the fair value hierarchy (Note 6). The Company has not realized any gains related to the investment in common stock of MeiraGTx.

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The Company was party to a TSA with MeiraGTx which expired in April 2018. Upon expiration of the TSA, the Company continued to provide office space to MeiraGTx. On October 1, 2018, the Company and MeiraGTx entered into a sublease agreement which is effective from October 1, 2018 for a period of two months and will automatically be renewed on a monthly basis unless MeiraGTx provides 30 days prior written notice. The Company’s accounting for this sublease as a lessor was not impacted by the adoption of the new leasing standard ASC 842 (Note 2). As part of the TSA and sublease agreement with MeiraGTx, the Company recognized $0.1 million to other revenue during each of the three months ended March 31, 2019 and 2018. The Company received cash payments of $0.1 million and $1.0 million million from MeiraGTx for the three months ended March 31, 2019 and 2018.  The Company has no amounts receivable from MeiraGTx at March 31, 2019 or December 31, 2018.

12. License Agreements

The Company has entered into several license agreements for products currently under development. The Company’s license agreements are disclosed in the audited financial statements included in Item 8 of the Annual Report on Form 10-K as of and for the year ended December 31, 2018. Since the date of such financial statements, there have been no significant changes to the Company’s license agreements.

Contingent License Agreement Milestones

The Company may be obligated in future periods to make additional payments, which would become due and payable only upon the achievement of certain research and development, regulatory and approval milestones. The specific timing of such milestones cannot be predicted and depends upon future discretionary clinical developments as well as regulatory agency actions which cannot be predicted with certainty (including action which may never occur). These additional contingent milestone payments aggregate to $215.9 million at March 31, 2019. Any payments made prior to FDA approval will be expensed as research and development. Payments made after FDA approval will be capitalized.



Further, under the terms of certain licensing agreements, the Company may be obligated to pay commercial milestones contingent upon the realization of sales revenues and sublicense revenues. Due to the long-range nature of such commercial milestones, they are neither probable at this time nor predictable, and consequently are not included in the additional contingent milestone payment amount.



13. Share-based Compensation

2016 Equity Incentive Plan

A total of 11,668,905 shares of the Company’s common stock were authorized and reserved for issuance under the Company’s 2016 Equity Incentive Plan, as amended (the “2016 Equity Plan”) at December 31, 2018. This reserve automatically increased to 16,194,138 on January 1, 2019 and will automatically increase each subsequent anniversary through January 1, 2025, by an amount equal to the smaller of (a) 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or (b) an amount determined by the board of directors. At March 31, 2019, there were options to purchase an aggregate of 9,881,148 shares of common stock outstanding at a weighted average price of $6.05 per share under the 2016 Equity Plan.

Total unrecognized compensation expense related to unvested options granted under the Company’s share-based compensation plan was $6.2 million and $6.8 million at March 31, 2019 and December 31, 2018, respectively. That expense is expected to be recognized over a weighted average period of 1.4 years and 1.5 years as of March 31, 2019 and December 31, 2018, respectively. The Company recorded share-based compensation expense under the 2016 Equity Plan of $2.2 million and $2.6 million for the three months ended March 31, 2019 and 2018, respectively.

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The following table summarizes information about stock options outstanding, not including performance stock options,  at March 31, 2019 and December 31, 2018:



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

Options Outstanding



 

Number of Options

 

Weighted
Average
Exercise
Price

 

Weighted Average
Remaining
Contractual
Term (years)

 

Aggregate
Intrinsic
Value (in
thousands)

Balance, December 31, 2018

 

9,764,539 

 

$

6.24 

 

7.84 

 

$

 —

Granted

 

529,870 

 

 

2.19 

 

 

 

 

 

Exercised

 

 —

 

 

 —

 

 

 

 

 

Forfeited