2019-Q3 10Q

Table of Contents









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 September 30, 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.



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



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



The number of shares of the registrant’s common stock outstanding as of November 4, 2019 was 129,690,886.  









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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 September 30, 2019 (unaudited) and December 31, 2018 



Consolidated statements of operations 
    for the three and nine months ended September 30, 2019 and 2018 (unaudited) 



Consolidated statements of stockholders’ equity
    for the nine months ended September 30, 2019 and the year ended December 31, 2018 (unaudited)



Consolidated statements of cash flows 
    for the nine months ended September 30, 2019 and 2018 (unaudited)



Notes to consolidated financial statements (unaudited) 

Item 2

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

28 

Item 3

Quantitative and Qualitative Disclosures About Market Risk 

33 

Item 4

Controls and Procedures 

33 



 

 

PART II – Other Information

 

Item 1

Legal Proceedings 

34 

Item 1A

Risk Factors

34 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds 

34 

Item 3

Defaults Upon Senior Securities 

34 

Item 4

Mine Safety Disclosures 

34 

Item 5

Other Information 

34 

Item 6

Exhibits 

35 



 

 

Signatures

37 



 

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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, 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;

·

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 repay, amend or refinance our credit agreement with Perceptive Credit Opportunities Fund, L.P., as amended, due July 1, 2020 (the 2015 Credit Agreement”);

·

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

·

the future trading price of our investment securities 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 in this Quarterly Report on Form 10-Q and in our most recent Annual Report on Form 10-K.

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.

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Table of Contents

PART I. FINANCIAL INFORMATION



Kadmon Holdings, Inc.

Consolidated balance sheets

(in thousands, except share and per share amounts)

 





 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,

  

 

2019

 

2018



 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

66,132 

  

$

94,740 

Accounts receivable, net

 

 

687 

  

 

1,690 

Inventories, net

 

 

214 

  

 

925 

Investment, equity securities

 

 

56,379 

 

 

 

Prepaid expenses and other current assets

 

 

1,048 

  

 

1,581 

Total current assets

 

 

124,460 

  

 

98,936 

Fixed assets, net

 

 

2,728 

  

 

3,654 

Right of use lease asset

 

 

20,510 

 

 

 

Goodwill

 

 

3,580 

  

 

3,580 

Restricted cash

 

 

2,116 

  

 

2,116 

Investment, equity securities

 

 

 

  

 

34,075 

Investment, at cost

 

 

2,300 

  

 

2,300 

Other noncurrent assets

 

 

187 

 

 

 

Total assets

 

$

155,881 

  

$

144,661 



 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

8,484 

  

$

9,986 

Accrued expenses

 

 

13,578 

  

 

13,508 

Lease liability - current

 

 

3,905 

  

 

 

Fair market value of financial instruments

 

 

594 

  

 

524 

Secured term debt – current

 

 

27,763 

  

 

 

Total current liabilities

 

 

54,324 

  

 

24,018 

Lease liability - noncurrent

 

 

20,774 

  

 

 —

Deferred rent

 

 

  

 

4,290 

Deferred tax liability

 

 

415 

  

 

415 

Other long term liabilities

 

 

244 

  

 

47 

Secured term debt – net of current portion and discount

 

 

 

 

 

27,480 

Total liabilities

 

 

75,757 

  

 

56,250 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Convertible preferred stock, $0.001 par value; 10,000,000 shares authorized at September 30, 2019 and December 31, 2018; 28,708 and 30,000 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

41,915 

  

 

42,231 

Common stock, $0.001 par value; 400,000,000 and 200,000,000 shares authorized at September 30, 2019 and December 31, 2018, respectively; 129,634,540 and 113,130,817 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively

 

 

130 

  

 

113 

Additional paid-in capital

 

 

358,905 

  

 

315,710 

Accumulated deficit

 

 

(320,826)

 

 

(269,643)

Total stockholders’ equity

 

 

80,124 

 

 

88,411 

Total liabilities and stockholders’ equity

 

$

155,881 

 

$

144,661 

 

See accompanying notes to consolidated financial statements (unaudited)

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Table of Contents

Kadmon Holdings, Inc.

Consolidated statements of operations (unaudited)

(in thousands, except share and per share amounts)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

   

 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2019

 

2018

 

2019

 

2018

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

50 

 

$

198 

 

$

164 

 

$

633 

Other revenue

 

 

176 

 

 

174 

 

 

529 

 

 

531 

Total revenue

 

 

226 

 

 

372 

 

 

693 

 

 

1,164 

Cost of sales

 

 

73 

 

 

59 

 

 

149 

 

 

361 

Write-down of inventory

 

 

 —

 

 

20 

 

 

932 

 

 

265 

Gross profit

 

 

153 

 

 

293 

 

 

(388)

 

 

538 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

13,227 

 

 

11,918 

 

 

43,326 

 

 

31,876 

Selling, general and administrative

 

 

10,174 

 

 

9,668 

 

 

27,101 

 

 

26,730 

Total operating expenses

 

 

23,401 

 

 

21,586 

 

 

70,427 

 

 

58,606 

Loss from operations

 

 

(23,248)

 

 

(21,293)

 

 

(70,815)

 

 

(58,068)

Other (expense) income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

418 

 

 

534 

 

 

1,622 

 

 

742 

Interest expense

 

 

(931)

 

 

(877)

 

 

(2,799)

 

 

(3,680)

Change in fair value of financial instruments

 

 

(126)

 

 

198 

 

 

(70)

 

 

802 

Loss on equity method investment

 

 

 

 

 —

 

 

 —

 

 

(1,242)

Unrealized (loss) gain on equity securities

 

 

(38,634)

 

 

7,564 

 

 

22,304 

 

 

48,072 

Other income

 

 

126 

 

 

75 

 

 

115 

 

 

77 

Total other (expense) income

 

 

(39,147)

 

 

7,494 

 

 

21,172 

 

 

44,771 

Loss before income tax benefit

 

 

(62,395)

 

 

(13,799)

 

 

(49,643)

 

 

(13,297)

Income tax benefit

 

 

 —

 

 

 —

 

 

 —

 

 

562 

Net loss

 

$

(62,395)

 

$

(13,799)

 

$

(49,643)

 

$

(12,735)

Deemed dividend on convertible preferred stock

 

 

517 

 

 

515 

 

 

1,540 

 

 

1,496 

Net loss attributable to common stockholders

 

$

(62,912)

 

$

(14,314)

 

$

(51,183)

 

$

(14,231)



 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share of common stock

 

$

(0.49)

 

$

(0.13)

 

$

(0.40)

 

$

(0.15)

Weighted average basic and diluted shares of common stock outstanding

 

 

128,225,469 

 

 

113,101,776 

 

 

128,360,618 

 

 

92,378,205 



See accompanying notes to consolidated financial statements (unaudited)

 

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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 

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,969 

 

 

 —

 

 

1,969 

Common stock issued in public offering, net

 

 —

 

 

 —

 

2,538,100 

 

 

 

 

6,644 

 

 

 —

 

 

6,647 

Common stock issued under ESPP plan

 

 —

 

 

 —

 

32,273 

 

 

 —

 

 

73 

 

 

 —

 

 

73 

Beneficial conversion feature on convertible preferred stock

 

 —

 

 

102 

 

 —

 

 

 —

 

 

 —

 

 

(102)

 

 

 —

Accretion of dividends on convertible preferred stock

 

 —

 

 

406 

 

 —

 

 

 —

 

 

 —

 

 

(406)

 

 

 —

Common stock issued upon conversion of convertible preferred stock

 

(1,292)

 

 

(1,856)

 

154,645 

 

 

 —

 

 

1,856 

 

 

 —

 

 

 —

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

9,160 

 

 

9,160 

Balance, June 30, 2019

 

28,708 

 

$

41,398 

 

129,634,540 

 

$

130 

 

$

357,443 

 

$

(257,914)

 

$

141,057 

Share-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,462 

 

 

 —

 

 

1,462 

Beneficial conversion feature on convertible preferred stock

 

 —

 

 

103 

 

 —

 

 

 —

 

 

 —

 

 

(103)

 

 

 —

Accretion of dividends on convertible preferred stock

 

 —

 

 

414 

 

 —

 

 

 —

 

 

 —

 

 

(414)

 

 

 —

Net loss

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(62,395)

 

 

(62,395)

Balance, September 30, 2019

 

28,708 

 

$

41,915 

 

129,634,540 

 

$

130 

 

$

358,905 

 

$

(320,826)

 

$

80,124 



See accompanying notes to consolidated financial statements (unaudited)





















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Table of Contents

Kadmon Holdings, Inc.

Consolidated statements of cash flows (unaudited)

(in thousands)







 

 

 

 

 

 

   

 

Nine Months Ended



 

September 30,



 

2019

 

2018

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(49,643)

 

$

(12,735)

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

 

 

 

 

 

 

Depreciation and amortization of fixed assets

 

 

1,356 

  

 

1,105 

Amortization of right of use lease asset

 

 

2,495 

 

 

Write-down of inventory

 

 

932 

  

 

265 

Amortization of deferred financing costs

 

 

  

 

228 

Amortization of debt discount

 

 

283 

  

 

1,077 

Amortization of debt premium

 

 

 

 

(345)

Share-based compensation

 

 

5,587 

 

 

8,428 

Change in fair value of financial instruments

 

 

70 

 

 

(802)

Loss on equity method investment

 

 

 —

 

 

1,242 

Unrealized gain on equity securities

 

 

(22,304)

 

 

(48,072)

Deferred tax liability

 

 

 —

 

 

(562)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable, net

 

 

1,003 

 

 

207 

Inventories, net

 

 

(221)

 

 

(1,127)

Prepaid expenses and other assets

 

 

346 

 

 

(1,109)

Accounts payable

 

 

(1,402)

 

 

(1,072)

Lease liability

 

 

(2,763)

 

 

 —

Accrued expenses, other liabilities and deferred rent

 

 

314 

 

 

686 

Net cash used in operating activities

 

 

(63,947)

 

 

(52,586)



 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of fixed assets

 

 

(430)

 

 

(811)

Net cash used in investing activities

 

 

(430)

 

 

(811)



 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

 

35,696 

 

 

105,761 

Payments of financing costs

 

 

 

 

(596)

Principal payments on secured term debt

 

 

 

 

(6,574)

Proceeds from issuance of ESPP shares

 

 

73 

 

 

65 

Proceeds from exercise of warrants

 

 

 

 

575 

Net cash provided by financing activities

 

 

35,769 

 

 

99,231 

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

 

 

(28,608)

 

 

45,834 

Cash, cash equivalents and restricted cash, beginning of period

 

 

96,856 

  

 

69,633 

Cash, cash equivalents and restricted cash, end of period

 

$

68,248 

  

$

115,467 



 

 

 

 

 

 

Components of cash, cash equivalents and restricted cash

 

 

 

 

 

 

Cash and cash equivalents

 

 

66,132 

  

 

113,351 

Restricted cash

 

 

2,116 

  

 

2,116 

Total cash, cash equivalents and restricted cash

 

 

68,248 

 

 

115,467 



 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

Cash paid for interest

 

$

2,514 

  

$

2,750 

Non-cash investing and financing activities:

 

 

 

 

 

 

Beneficial conversion feature on convertible preferred stock

 

 

308 

  

 

299 

Accretion of dividends on convertible preferred stock

 

 

1,232 

  

 

1,197 

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

 

 

212 

 

 

 —

Cumulative effect of change in accounting principle - ASC 842 adoption

 

 

27,083 

  

 

 —

Cumulative effect of change in accounting principle - ASC 606 adoption

 

 

  

 

24,017 

Common stock issued upon conversion of convertible preferred stock

 

 

1,856 

 

 

 —



See accompanying notes to consolidated financial statements (unaudited)

 

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Kadmon Holdings, Inc.

Notes to consolidated financial statements (unaudited)

1. Organization

Nature of Business

Kadmon Holdings, Inc. (together with its subsidiaries, “Kadmon” or the “Company”) is a biopharmaceutical company engaged in the discovery, development and commercialization of small molecules and biologics to address 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. 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 in the remainder of 2019 and in 2020.

Liquidity

The Company maintained cash and cash equivalents of $66.1 million at September 30, 2019. The Company had an accumulated deficit of $320.8 million and working capital of $70.1 million at September 30, 2019. Subsequently, in October 2019, the Company entered into a transaction pursuant to which it sold approximately 1.4 million ordinary shares of MeiraGTx Holdings plc (“MeiraGTx”) for gross proceeds of $22.0 million. Pursuant to the 2015 Credit Agreement, half of the proceeds received from the sale, or $11.0 million, were used to pay down part of the outstanding amounts owed under the 2015 Credit Agreement. After this repayment, approximately $17.0 million remained outstanding under the 2015 Credit Agreement (Note 5). The remaining $11.0 million in gross proceeds were added to the Company’s cash balances in October 2019. The Company expects that its cash and cash equivalents will enable it to advance its Phase 2 clinical studies of 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, monetization of assets and expanding the Company’s commercial portfolio through the development of its current pipeline or through strategic collaborations. Any transactions that 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.

The Company filed a shelf registration statement on Form S-3 (File No. 333-233766) on September 13, 2019, which was declared effective by the Securities Exchange Commission (“SEC”) on September 24, 2019. Under this registration statement, the Company may sell, in one or more transactions, up to $200.0 million of common stock, preferred stock, debt securities, warrants, purchase contracts and units, an amount which includes $50.0 million of shares of its common stock that may be issued in one or more “at-the-market” placements at prevailing market prices under the Company’s Controlled Equity OfferingSM Sales Agreement (the Sales Agreement”) with Cantor Fitzgerald & Co. (“Cantor Fitzgerald”).  The Company had not sold any securities pursuant to this registration statement as of September 30, 2019.



In April 2019, the Company sold 2,538,100 shares of common stock at a price of $2.70 per share and received total gross proceeds of $6.9 million ($6.7 million net of $0.2 million of commissions payable by the Company) and in January 2019, the Company sold 13,778,705 shares of common stock at a weighted average price of $2.17 per share and received total gross proceeds of $29.9 million ($29.0 million net of $0.9 million of commissions payable by the Company). These sales were effected pursuant to the Company’s registration statement on Form S-3 (File No. 333-222364), which was declared effective by the SEC on January 10, 2018. The Company completed these sales pursuant to its Sales Agreement with Cantor Fitzgerald under which the Company could sell up to $40.0 million in shares of its common stock in one or more “at-the-market” placements at prevailing market prices.



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Table of Contents

 

Going Concern

The accompanying financial statements have been prepared in accordance 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 losses 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 current commitments for 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.

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 a minimum liquidity covenant. The Company’s violation of its minimum liquidity covenant would constitute an event of default under the 2015 Credit Agreement. Upon an event of default, the lender may terminate the commitments under the 2015 Credit Agreement and declare the loans then outstanding under the 2015 Credit Agreement to be due and payable in whole or in part, together with any applicable fees and accrued interest thereon. If an event of default arises under the 2015 Credit Agreement, the Company may need to use cash and cash equivalents on hand to fund certain repayment commitments under the 2015 Credit Agreement.

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 its products and the regulatory environment in which the Company operates. The accompanying consolidated financial statements, which include the accounts of Kadmon Holdings, Inc. and its domestic and international subsidiaries, all of which are wholly owned by Kadmon Holdings, Inc., have been prepared in accordance with GAAP for interim financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the Company’s opinion, the financial statements include all adjustments (consisting of normal recurring adjustments)  and disclosures considered necessary in order to make the financial statements not misleading. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the final results that may be expected for the year ending 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 accordance 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. The most significant estimates are related to share-based compensation, the accrual of research and development and clinical trial expenses, and the valuation of the Company’s investment in MeiraGTx ordinary shares (Note 11). 

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Critical Accounting Policies

The Company’s significant accounting policies are disclosed in 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. Since the date of such financial statements, there have been no changes to the Company’s significant accounting policies, other than those described below.

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 (“ROU”) 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 ROU model 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 statement of operations 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 it 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 it 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 the 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 ROU 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 ranged 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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Table of Contents

 

Disaggregation of Revenue

The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2019 and 2018:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2019

 

2018

 

2019

 

2018

Product sales

 

$

50 

 

$

198 

 

$

164 

 

$

633 

Other revenue

 

 

176 

 

 

174 

 

 

529 

 

 

531 

Total revenue

 

$

226 

 

$

372 

 

$

693 

 

$

1,164 

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

Other revenue generated by the Company is primarily related to a  sublease agreement and an expired transition services agreement (the “TSA”) with MeiraGTx. The Company performed various professional services under the TSA that supported MeiraGTx until the expiration of the TSA in April 2018. No further services were performed or TSA revenue recognized after April 2018. The Company continues to provide office space to MeiraGTx under a sublease agreement. The Company recognizes sublease income on a straight-line basis over the term of the sublease arrangement.  

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 the Company delivers goods or provides services or when its 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 September 30, 2019

Transaction Price Allocated to Future Performance Obligations

ASC 606 requires that the Company disclose the aggregate amount of a transaction price that is allocated to performance obligations that have not yet been satisfied as of September 30, 2019. The guidance provides certain practical expedients that limit this requirement and the Company has various contracts that meet the practical expedients provided by ASC 606. The Company does not have any performance obligations that have not yet been satisfied as of September 30, 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 ASU also precludes 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 non-employees, subject to 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, and the standard did not have a significant impact on its consolidated financial statements as the fair value of the Company’s awards to non-employees is not material.

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. 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments, to require financial assets carried at amortized cost to be presented at the net amount expected to be collected based on historical experience, current conditions and forecasts. The ASU is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. Adoption of the ASU is on a modified retrospective basis. The Company does not expect this guidance to have a material impact on its financial statements.    

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3. Stockholders’ Equity

5% Convertible Preferred Stock

The Company had 28,708 shares of 5% convertible preferred stock outstanding at September 30, 2019, which shares convert into shares of the Company’s common stock at a 20% discount to the initial public offering price per share of common stock in the Company’s initial public offering (the “IPO”) of $12.00 per share,  or $9.60 per share. In May 2019, a holder of 1,292 shares of 5% convertible preferred stock exercised its right to convert such shares into 154,645 shares of the Company’s common stock. The Company accrued dividends on the 5% convertible preferred stock of $0.4 million and $1.2 million during the three and nine months ended September 30, 2019 and 2018, respectively. 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 September 30, 2019 and 2018, and $0.3 million on the $1.2 million of accrued dividends during each of the nine months ended September 30, 2019 and 2018, which is a beneficial conversion feature. The stated liquidation preference amount on the 5% convertible preferred stock totaled $33.1 million at September 30, 2019.



Common Stock

The Company’s restated certificate of incorporation authorizes the issuance of up to 400,000,000 shares of the Company’s common stock, par value $0.001 per share.



4. Net Loss per Share Attributable to Common Stockholders

Basic net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Shares issued during the period are weighted for the portion of the period during which they were outstanding. Because the Company has reported a net loss for all periods presented, diluted net loss per share of common stock is the same as basic net loss per share of common stock for those periods. The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the Company (in thousands, except share and per share amounts):



 

 

 

 

 

 

 

 

 

 

 

 

   

 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2019

 

2018

 

2019

 

 

2018

Numerator – basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss available to common stockholders - basic and diluted

 

$

(62,912)

 

$

(14,314)

 

$

(51,183)

 

$

(14,231)

Denominator – basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common stock outstanding used to compute basic and diluted net loss per share

 

 

128,225,469 

 

 

113,101,776 

 

 

128,360,618 

 

 

92,378,205 

Net loss per share, basic and diluted

 

$

(0.49)

 

$

(0.13)

 

$

(0.40)

 

$

(0.15)



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



 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

Three Months Ended

 

 

Nine Months Ended



 

 

September 30,

 

 

September 30,



 

 

2019

 

 

2018

 

 

2019

 

 

2018

Options to purchase common stock

 

 

11,999,752 

 

 

9,713,427 

 

 

11,999,752 

 

 

9,713,427 

Warrants to purchase common stock

 

 

11,999,852 

 

 

11,999,852 

 

 

11,999,852 

 

 

11,999,852 

Convertible preferred stock

 

 

3,493,002 

 

 

3,476,385 

 

 

3,493,002 

 

 

3,476,385 

Total shares of common stock equivalents

 

 

27,492,606 

 

 

25,189,664 

 

 

27,492,606 

 

 

25,189,664 



 



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5. Debt

The Company is a party to one credit agreement (the 2015 Credit Agreement) with outstanding indebtedness in the following amount (in thousands):





 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

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

 

 

(283)

 

 

(566)

    Total debt payable

 

$

27,763 

 

$

27,480 



 

 

 

 

 

 

Debt payable, current portion

 

$

27,763 

 

$

 —

Debt payable, long-term

 

$

 —

 

$

27,480 



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 (the “2015 Credit Agreement”). The interest rate on the loan is LIBOR plus 9.375% with a 1% floor. As of September 30, 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 certain non-financial developmental milestones that must be met by December 31, 2019. Each of these developmental milestones had been satisfied as of September 30, 2019. The 2015 Credit Agreement also contains a minimum liquidity covenant. As amended, the key 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 required 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.

In October 2019, the Company entered into a transaction pursuant to which it sold approximately 1.4 million ordinary shares of MeiraGTx for gross proceeds of $22.0 million (Note 11). Pursuant to the 2015 Credit Agreement, half of the proceeds received from the sale, or $11.0 million, were used to pay down part of the outstanding amounts owed under the 2015 Credit Agreement (Note 5). After this repayment, approximately $17.0 million of principal remained outstanding under the 2015 Credit Agreement.

The minimum payments required on the outstanding balances of the 2015 Credit Agreement at September 30, 2019 are (in thousands):



 

 

 



 

 

 



 

2015 Credit Agreement

2019

 

$

 —

2020

 

 

28,046 



 

$

28,046 



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Table of Contents

 

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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

   

 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2019

 

2018

 

2019

 

2018

Interest expense

 

$

836 

 

$

830 

 

$

2,516 

 

$

2,720 

Amortization of deferred financing costs, debt discount and debt premium

 

 

95 

 

 

47 

 

 

283 

 

 

960 

    Interest expense

 

$

931 

 

$

877 

 

$

2,799 

 

$

3,680 



 



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 with an expiration date of August 2022, 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 (the “2015 Warrants”).

As of September 30, 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 was $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 was $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 2015 Warrants was recorded as a short-term liability of approximately $0.6 million at September 30, 2019 and approximately $0.5 million at December 31, 2018.

The Company used the Black-Scholes pricing model to value the warrant liability at September 30, 2019 with the following assumptions: risk-free interest rate of 1.6%, expected term of 2.9 years, expected volatility of 71.0% and a dividend rate of 0%. The change in fair value of the 2015 Warrants was approximately $0.1 million for both the three and nine months ended September 30, 2019, and approximately $(0.2) million and $(0.1) million for the three and nine months ended September 30, 2018, respectively. None of these instruments had been exercised as of September 30, 2019 and December 31, 2018.

Other Warrants

In connection with a sale of common stock by the Company 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. The change in the fair value of these warrants was $(0.7) million for the nine months ended September 30, 2018. As these warrants expired in April 2018, no change in fair value was recorded for these warrants after April 2018.

Fair Value of Long-term Debt

The Company maintained a long-term secured debt balance of $27.5 million at December 31, 2018.  Because the secured debt will become due on July 1, 2020 and monthly principal payments of $750,000 will become due starting January 31, 2020, it has been recorded as long-term secured debt at December 31, 2018. At September 30, 2019,  the outstanding secured debt of $27.8 million due in the first and second quarter of 2020 was recorded as short-term secured debt. As such, the Company did not maintain a long-term secured debt balance at September 30, 2019.  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 overall market conditions.

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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 September 30, 2019 and December 31, 2018 (in thousands):



 

 

 

 

 

 



 

 

 

 

 

 



 

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



 

September 30,

 

December 31,

Description

 

2019

 

2018

Warrants

 

$

594 

 

$

524 

Total

 

$

594 

 

$

524 



The table below represents a roll-forward of Level 2 financial instruments from January 1, 2018 to September 30, 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

 

 

70 

Balance at September 30, 2019

 

$

594 



The Level 2 inputs used to value the Company’s 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 the Company’s 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 September 30, 2019 and December 31, 2018:





 

 

 

 

 



 

 

 

 

 



 

Warrants

 

Weighted Average
Exercise Price

Balance, December 31, 2018

 

11,999,852 

 

$

5.95 

Granted

 

 —

 

 

 —

Exercised

 

 —

 

 

 —

Forfeited

 

 —

 

 

 —

Balance, September 30, 2019

 

11,999,852 

 

$

5.95 







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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 $2.9 million and $2.2 million at September 30, 2019 and December 31, 2018, respectively. The Company expensed inventory that it believes will not be sold prior to reaching its expiration date totaling $0.9 million during the nine months ended September 30, 2019 and totaling less than $0.1 million and $0.3 million during the three and nine months ended September 30, 2018, respectively. The Company did not record any such expense during the three months ended September 30, 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 regulatory applications. The Company closely monitors the status of each 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.

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.

In September 2019, the U.S. Food and Drug Administration (“FDA”) approved the Company’s generic trientine hydrochloride capsules USP, 250 mg. In October 2019, the FDA approved CLOVIQUE™ (trientine hydrochloride capsules, USP), the Company’s room-temperature stable, branded generic product. Trientine hydrochloride is used for the treatment of Wilson's disease in patients who are intolerant of penicillamine. CLOVIQUE is the first FDA-approved trientine product in a portable blister pack that offers room temperature stability for up to 30 days, potentially providing patients more convenience. Accordingly, the pre-launch costs of these products are realizable as the Company expects the inventory will be sold or used prior to expiration. The Company maintained $0.2 million and $0.9 million of trientine hydrochloride inventory at September 30, 2019 and December 31, 2018, respectively.

Inventories are comprised of the following (in thousands):