10-Q 1 c142-20160930x10q.htm 10-Q 2016-Q3 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 September 30, 2016



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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





 

 



Large accelerated filer   

Accelerated filer   



Non-accelerated filer     (Do not check if a smaller reporting company)

Smaller reporting company   



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 8, 2016 was 45,078,666.







 



 

 


 

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, 2016 (unaudited) and December 31, 2015 



Consolidated statements of operations 
    for the three months and nine months ended September 30, 2016 and 2015 (unaudited) 



Consolidated statements of stockholders’ deficit 
    for the nine months ended September 30, 2016 (unaudited) 



Consolidated statements of cash flows 
    for the nine months ended September 30, 2016 and 2015 (unaudited)



Notes to consolidated financial statements (unaudited) 

10 

Item 2

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

39 

Item 3

Quantitative and Qualitative Disclosures About Market Risk 

51 

Item 4

Controls and Procedures 

52 



 

 

PART II – Other Information

 

Item 1

Legal Proceedings 

53 

Item 1A

Risk Factors 

53 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds 

96 

Item 3

Defaults Upon Senior Securities 

96 

Item 4

Mine Safety Disclosures 

96 

Item 5

Other Information 

96 

Item 6

Exhibits 

96 



 

 

Signatures

97 



 

2


 



REFERENCES TO KADMON



In this Quarterly Report on Form 10-Q, unless otherwise stated or the context otherwise requires:



·

references to the “Company,” “Kadmon,” “we,” “us” and “our” following the date of the Corporate Conversion (July 26, 2016) refer to Kadmon Holdings, Inc. and its consolidated subsidiaries;

·

references to the “Company,” “Kadmon,” “we,” “us” and “our” prior to the date of the Corporate Conversion refer to Kadmon Holdings, LLC and its consolidated subsidiaries; and

·

references to the “Corporate Conversion” or “corporate conversion” refer to all of the transactions related to the conversion of Kadmon Holdings, LLC into Kadmon Holdings, Inc., including the conversion of all of the outstanding membership units of Kadmon Holdings, LLC into shares of common stock of Kadmon Holdings, Inc. effected on July 26, 2016. See note 1 to our unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q “Organization and Basis of Presentation—Corporate Conversion, Initial Public Offering and Debt Conversion” for more information.



3


 



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 the intellectual property rights and proprietary technology of third parties;

·

cost associated with defending intellectual property infringement, product liability and other claims;

·

regulatory 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 of our product candidates;

·

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 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 proceeds from our initial public offering (“IPO”);

·

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

4


 

Kadmon Holdings, Inc. and Subsidiaries

Consolidated balance sheets

(in thousands, except unit and share amounts)

 





 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,

  

 

2016

 

2015



 

(unaudited)

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

55,001 

  

$

21,498 

Accounts receivable, net

 

 

1,056 

  

 

2,410 

Accounts receivable from affiliates

 

 

610 

 

 

985 

Inventories, net

 

 

2,280 

  

 

3,468 

Deferred offering costs

 

 

  

 

890 

Prepaid expenses and other current assets

 

 

930 

  

 

3,490 

Total current assets

 

 

59,877 

  

 

32,741 

Fixed assets, net

 

 

5,972 

  

 

6,938 

Intangible assets, net

 

 

2,753 

  

 

15,223 

Goodwill

 

 

3,580 

  

 

3,580 

Restricted cash

 

 

2,116 

  

 

2,116 

Investment, at cost

 

 

3,542 

  

 

2,300 

Investment, equity method

 

 

8,954 

 

 

21,224 

Other noncurrent assets

 

 

  

 

15 

Total assets

 

$

86,801 

  

$

84,137 



 

 

 

 

 

 

Liabilities, Redeemable Convertible Units and Stockholders’ Deficit

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

8,962 

  

$

5,902 

Related party loan

 

 

3,000 

  

 

3,000 

Accrued expenses

 

 

12,437 

  

 

11,843 

Other short term liabilities

 

 

 

 

10,377 

Deferred revenue

 

 

4,424 

  

 

4,500 

Other milestone payable

 

 

  

 

3,875 

Fair market value of financial instruments

 

 

  

 

8,289 

Secured term debt - current

 

 

4,940 

  

 

1,900 

Total current liabilities

 

 

33,763 

  

 

49,686 

Deferred revenue

 

 

25,117 

  

 

28,417 

Deferred rent

 

 

4,350 

  

 

3,865 

Deferred tax liability

 

 

1,349 

  

 

1,349 

Fair market value of financial instruments - non current

 

 

4,534 

  

 

Other long term liabilities

 

 

1,511 

  

 

3,152 

Secured term debt – net of current portion and discount

 

 

24,939 

  

 

26,264 

Convertible debt, net of discount

 

 

  

 

183,457 

Total liabilities

 

 

95,563 

  

 

296,190 

Commitments and contingencies (Note 13 and 14)

 

 

 

 

 

 

Class E redeemable convertible units: 0 and 4,969,252 units issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

  

 

58,856 

Stockholders’ deficit:

 

 

 

 

 

 

Class A units, no par value: 0 and 53,946,001 units issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

  

 

Class B units, no par value: 0 and 1 unit issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

  

 

Class C units, no par value: 0 and 1 unit issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

  

 

Class D units, no par value: 0 and 4,373,674 units issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

  

 

Convertible Preferred Stock, $0.001 par value; 10,000,000 and 0 shares authorized at September 30, 2016 and December 31, 2015, respectively; 30,000 and 0 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively.

 

 

37,833 

  

 

 —

Common Stock, $0.001 par value; 200,000,000 and 0 shares authorized at September 30, 2016 and December 31, 2015, respectively; 45,078,666 and 0 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively.

 

 

45 

  

 

 —

Additional paid-in capital

 

 

84,375 

  

 

372,936 

Accumulated deficit

 

 

(131,015)

  

 

(643,845)

Total stockholders’ deficit

 

 

(8,762)

 

 

(270,909)

Total liabilities, redeemable convertible units, and stockholders’ deficit

 

$

86,801 

 

$

84,137 

 

See accompanying notes to consolidated financial statements

5


 

Kadmon Holdings, Inc. and Subsidiaries

Consolidated statements of operations (unaudited)

(in thousands,  except share amounts)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

   

 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2016

 

2015

 

2016

 

2015

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

4,345 

 

$

9,802 

 

$

15,504 

 

$

23,576 

License and other revenue

 

 

1,350 

 

 

1,482 

 

 

6,274 

 

 

4,205 

Total revenue

 

 

5,695 

 

 

11,284 

 

 

21,778 

 

 

27,781 

Cost of sales

 

 

880 

 

 

1,304 

 

 

2,845 

 

 

3,142 

Write-down of inventory

 

 

129 

 

 

1,143 

 

 

266 

 

 

2,069 

Gross profit

 

 

4,686 

 

 

8,837 

 

 

18,667 

 

 

22,570 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

9,550 

 

 

8,439 

 

 

27,134 

 

 

23,344 

Selling, general and administrative

 

 

48,311 

 

 

39,408 

 

 

90,580 

 

 

82,419 

Impairment of intangible asset

 

 

 —

 

 

31,269 

 

 

 

 

31,269 

Gain on settlement of payable

 

 

(256)

 

 

 

 

(4,131)

 

 

Total operating expenses

 

 

57,605 

 

 

79,116 

 

 

113,583 

 

 

137,032 

Loss from operations

 

 

(52,919)

 

 

(70,279)

 

 

(94,916)

 

 

(114,462)

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

(14)

 

 

(1)

 

 

(21)

 

 

(4)

Interest expense

 

 

54,023 

 

 

8,956 

 

 

71,016 

 

 

19,796 

Loss on extinguishment of debt

 

 

11,176 

 

 

2,934 

 

 

11,176 

 

 

2,934 

Change in fair value of financial instruments

 

 

(2,878)

 

 

(659)

 

 

(3,151)

 

 

(1,568)

Gain on deconsolidation of subsidiary

 

 

 

 

 —

 

 

 

 

(24,000)

Loss on equity method investment

 

 

1,741 

 

 

533 

 

 

12,270 

 

 

1,121 

Other loss (income)

 

 

 

 

37 

 

 

 

 

(129)

Total other expense (income)

 

 

64,049 

 

 

11,800 

 

 

91,293 

 

 

(1,850)

Loss before income tax expense

 

 

(116,968)

 

 

(82,079)

 

 

(186,209)

 

 

(112,612)

Income tax expense

 

 

 —

 

 

 —

 

 

315 

 

 

 —

Net loss

 

$

(116,968)

 

$

(82,079)

 

$

(186,524)

 

$

(112,612)

Deemed dividend on convertible preferred stock and Class E redeemable convertible units

 

 

21,264 

 

 

 —

 

 

21,264 

 

 

 —

Net loss attributable to common stockholders

 

$

(138,232)

 

$

(82,079)

 

$

(207,788)

 

$

(112,612)



 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share of common stock

 

$

(4.23)

 

$

(9.94)

 

$

(12.60)

 

$

(13.95)

Weighted average basic and diluted shares of common stock outstanding

 

 

32,678,259 

 

 

8,255,011 

 

 

16,487,715 

 

 

8,070,165 



See accompanying notes to consolidated financial statements

 

 

6


 

Kadmon Holdings, Inc. and Subsidiaries

Consolidated statements of stockholders’ deficit (unaudited)

(in thousands,  except share amounts)













 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Convertible units

 

Stockholders' deficit



 

Class E redeemable
convertible units

 

Class A

 

Class B

 

Class C

 

Class D

 

Preferred stock

 

Common stock

 

Additional
paid-in

 

Accumulated

 

 

 



 

Units

 

Amount

 

Units

 

Units

 

Units

 

Units

 

Shares

 

Amount

 

Shares

 

Amount

 

capital

 

Deficit

 

Total

Balance, December 31, 2015

 

4,969,252 

 

$

58,856 

 

53,946,001 

  

 

 

4,373,674 

 

 

$

 

 

$

 

$

372,936 

 

$

(643,845)

 

$

(270,909)

Issuance of Class A units to settle obligation

 

 

 

 

25,000 

  

 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

125 

 

 

 

 

125 

Issuance of Class E units to settle obligation

 

1,170,437 

 

 

13,460 

 

 

 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 

 

 

 

 —

Equity raised through issuance of Class E units, net

 

478,266 

 

 

5,500 

 

 

 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 

 

 

 

 —

Accretion of Class E units fee discount and repayment premium

 

 

 

5,812 

 

 

 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(5,812)

 

 

 

 

(5,812)

Share-based compensation expense

 

 

 

 

  

 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

41,416 

 

 

 

 

41,416 

Issuance of Class A units related to option exercises

 

 

 

 

7,200 

  

 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

41 

 

 

 

 

41 

Issuance of common stock to settle obligation

 

 

 

 

 —

  

 

 

 

 —

 

 

 —

 

208,334 

 

 

 

 

2,499 

 

 

 

 

2,500 

Common stock issued in initial public offering, net of commissions and underwriting discounts

 

 —

 

 

 —

 

 —

  

 —

 

 —

 

 —

 

 —

 

 

 —

 

6,250,000 

 

 

 

 

69,744 

 

 

 

 

69,750 

Initial public offering costs

 

 —

 

 

 —

 

 —

  

 —

 

 —

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(3,739)

 

 

 

 

(3,739)

Beneficial conversion feature on Class E units

 

 —

 

 

 —

 

 —

  

 —

 

 —

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

13,431 

 

 

(13,431)

 

 

 —

Corporate conversion from Kadmon Holdings, LLC to Kadmon Holdings, Inc.

 

 —

 

 

 —

 

 —

  

 —

 

 —

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(720,618)

 

 

720,618 

 

 

 —

Corporate conversion to common stock

 

(6,617,955)

 

 

(83,628)

 

(53,978,201)

  

(1)

 

(1)

 

(4,373,674)

 

 —

 

 

 —

 

19,585,865 

 

 

19 

 

 

83,607 

 

 

 

 

83,626 

Conversion of convertible debt to common stock

 

 —

 

 

 —

 

 —

  

 —

 

 —

 

 —

 

 —

 

 

 —

 

19,034,467 

 

 

19 

 

 

182,712 

 

 

 

 

182,731 

Beneficial conversion feature on convertible debt

 

 —

 

 

 —

 

 —

  

 —

 

 —

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

45,683 

 

 

 

 

45,683 

Conversion of convertible debt to convertible preferred stock

 

 —

 

 

 —

 

 —

  

 —

 

 —

 

 —

 

30,000 

 

 

30,000 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

30,000 

Beneficial conversion feature on convertible preferred stock

 

 —

 

 

 —

 

 —

  

 —

 

 —

 

 —

 

 —

 

 

7,567 

 

 —

 

 

 —

 

 

 —

 

 

(7,567)

 

 

 —

Accretion of dividends on convertible preferred stock

 

 —

 

 

 —

 

 —

  

 —

 

 —

 

 —

 

 —

 

 

266 

 

 —

 

 

 —

 

 

 —

 

 

(266)

 

 

 —

Reclassification of warrants to equity

 

 —

 

 

 —

 

 —

  

 —

 

 —

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,716 

 

 

 —

 

 

1,716 

Beneficial conversion feature on warrants

 

 —

 

 

 —

 

 —

  

 —

 

 —

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 

634 

 

 

 —

 

 

634 

Net loss

 

 

 

 

  

 

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 

 

(186,524)

 

 

(186,524)

Balance, September 30, 2016

 

 —

 

$

 —

 

 —

  

 —

 

 —

 

 —

 

30,000 

 

$

37,833 

 

45,078,666 

 

$

45 

 

$

84,375 

 

$

(131,015)

 

$

(8,762)













See accompanying notes to consolidated financial statements

7


 

Kadmon Holdings, Inc. and Subsidiaries

Consolidated statements of cash flows (unaudited)

(in thousands)







 

 

 

 

 

 



 

 

 

 

 

 

   

 

Nine Months Ended



 

September 30,



 

2016

 

2015

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$

(186,524)

  

 

(112,612)

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

 

 

 

 

 

 

Depreciation and amortization of fixed assets

 

 

1,727 

  

 

1,741 

Amortization of intangible asset

 

 

12,470 

  

 

22,180 

Impairment of intangible asset

 

 

 —

  

 

31,269 

Write-down of inventory

 

 

266 

  

 

2,069 

Write-down of capitalized computer software development costs

 

 

 —

  

 

61 

Gain on purchase commitment

 

 

 —

  

 

(225)

Loss on extinguishment of debt / conversion of debt

 

 

11,176 

  

 

2,934 

Write-off of deferred financing costs and debt discount

 

 

3,820 

  

 

2,752 

Amortization of deferred financing costs

 

 

1,176 

  

 

841 

Amortization of debt discount

 

 

2,548 

  

 

2,911 

Accretion of repayment premium on secured term debt

 

 

 —

  

 

(345)

Share-based compensation

 

 

41,416 

  

 

4,749 

Gain on settlement of payable

 

 

(4,131)

  

 

 —

Bad debt expense

 

 

  

 

Gain on deconsolidation of subsidiary

 

 

 —

  

 

(24,000)

Change in fair value of financial instruments

 

 

(3,151)

  

 

(1,568)

Beneficial conversion feature expense on warrants

 

 

1,745 

  

 

 —

Beneficial conversion feature expense on convertible debt

 

 

44,170 

  

 

 —

Fair value of units issued to consultants

 

 

3,000 

  

 

3,750 

Fair value of shares / units issued in settlement of obligation

 

 

4,360 

  

 

7,647 

Accrued legal settlement

 

 

 —

  

 

10,350 

Paid-in-kind interest

 

 

14,695 

  

 

6,202 

Loss on equity method investment

 

 

12,270 

  

 

1,121 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Restricted cash

 

 

 —

  

 

(89)

Accounts receivable, net

 

 

480 

  

 

(4,145)

Inventories, net

 

 

922 

  

 

1,873 

Prepaid expenses and other assets

 

 

(432)

  

 

(564)

Accounts payable

 

 

2,593 

  

 

(2,969)

Accrued expenses, other liabilities and deferred rent

 

 

981 

  

 

3,589 

Deferred revenue

 

 

(3,376)

  

 

(6,136)

Net cash used in operating activities

 

 

(37,792)

 

 

(46,609)



See accompanying notes to consolidated financial statements

 

8


 

Kadmon Holdings, Inc.and Subsidiaries

Consolidated statements of cash flows (unaudited, continued)

(in thousands)







 

 

 

 

 

 



 

 

 

 

 

 

   

 

Nine Months Ended



 

September 30,



 

2016

 

2015

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of fixed assets

 

 

(531)

 

 

(89)

Net cash used in investing activities

 

 

(531)

 

 

(89)



 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock in IPO, net

 

 

69,750 

 

 

 —

Payments of initial public offering costs

 

 

(2,551)

 

 

 —

Payment of financing costs related to debt exchange agreements

 

 

(534)

 

 

 —

Proceeds from issuance of secured term debt

 

 

 —

 

 

35,000 

Proceeds from issuance of convertible debt

 

 

 —

 

 

92,000 

Payment of financing costs

 

 

 —

 

 

(1,945)

Principal payments on secured term debt

 

 

(380)

 

 

(107,204)

Proceeds from related party loans

 

 

 —

 

 

2,000 

Repayment of related party loans

 

 

 —

 

 

(2,000)

Proceeds from issuance of Class A units, net

 

 

 —

 

 

15,000 

Proceeds from issuance of Class E redeemable convertible units, net

 

 

5,500 

 

 

558 

Proceeds from exercise of stock options

 

 

41 

 

 

 —

Net cash provided by financing activities

 

 

71,826 

 

 

33,409 

Net increase (decrease) in cash and cash equivalents

 

 

33,503 

 

 

(13,289)

Cash and cash equivalents, beginning of period

 

 

21,498 

  

 

20,991 

Cash and cash equivalents, end of period

 

$

55,001 

  

$

7,702 



 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

 

Cash paid for interest

 

$

2,798 

  

$

7,090 

Cash paid for taxes

 

 

327 

  

 

135 

Non-cash investing and financing activities:

 

 

 

 

 

 

Settlement of related party loan

 

 

 —

  

 

500 

Units issued in settlement of obligation

 

 

11,725 

  

 

9,063 

Capitalized lease obligations

 

 

230 

  

 

20 

Unpaid financing/offering costs

 

 

743 

  

 

2,741 

Equity method investment related to deconsolidation

 

 

 —

  

 

24,000 

Financing costs paid with convertible notes

 

 

 —

  

 

2,260 

Fair value of warrants issued to lenders

 

 

 —

  

 

6,300 

Cost method investment in affiliate

 

 

1,242 

  

 

 —

Beneficial conversion feature on convertible preferred stock

 

 

7,567 

  

 

 —

Accretion of dividends on convertible preferred stock

 

 

266 

  

 

 —

Beneficial conversion feature on Class E units at IPO

 

 

13,431 

  

 

 —

Conversion of Class E units into common stock

 

 

83,628 

  

 

 —

Conversion of convertible debt into common stock

 

 

176,615 

  

 

 —

Conversion of convertible debt into convertible preferred stock

 

 

30,000 

  

 

 —



See accompanying notes to consolidated financial statements





 

9


 

Kadmon Holdings, Inc. and Subsidiaries

Notes to consolidated financial statements (unaudited)

1. Organization and Basis of Presentation

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. The Company is actively developing product candidates in a number of indications within autoimmune and fibrotic disease, oncology and genetic diseases. 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 progress 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 2016 and 2017.

Corporate Conversion, Initial Public Offering and Debt Conversion

On July 26, 2016, in connection with the pricing of the Company’s IPO, Kadmon Holdings, LLC filed a certificate of conversion, whereby Kadmon Holdings, LLC effected a corporate conversion from a Delaware limited liability company to a Delaware corporation and changed its name to Kadmon Holdings, Inc. As a result of the corporate conversion, accumulated deficit was reduced to zero on the date of the corporate conversion, and the corresponding amount was credited to additional paid-in capital. In connection with this corporate conversion, the Company filed a certificate of incorporation and adopted bylaws, all of which were previously approved by the Company’s board of managers and members. Pursuant to the Company’s certificate of incorporation, the Company is authorized to issue up to 200,000,000 shares of common stock $0.001 par value per share and 10,000,000 shares of preferred stock $0.001 par value per share. All references in the unaudited interim consolidated financial statements to the number of shares and per-share amounts of common stock have been retroactively restated to reflect this conversion.

On August 1, 2016, the Company completed its IPO whereby it sold 6,250,000 shares of common stock at $12.00 per share. The aggregate net proceeds received by the Company from the offering were $66.0 million, net of underwriting discounts and commissions of $5.3 million and offering expenses of $3.7 million. Upon the closing of the IPO, 45,078,666 shares of common stock were outstanding, which includes 19,034,467 shares of common stock as a result of the conversion of the Company’s Senior Convertible Term Loan and Second Lien Convert (See Note 6). The shares began trading on the New York Stock Exchange on July 27, 2016 under the symbol “KDMN.”

Liquidity

The Company had an accumulated deficit of $131.0 million and working capital of $26.1 million at September 30, 2016. For the nine months ended September 30, 2016, the Company earned a $2.0 million milestone payment pursuant to a license agreement entered into with Jinghua to develop products using human monoclonal antibodies and raised $5.5 million through the issuance of Class E redeemable convertible units in June 2016. Additionally, the Company raised $66.0 million, net of underwriting discounts and commissions and offering expenses, in its IPO which is expected to enable the Company to advance its planned Phase 2 clinical studies for KD025 and tesevatinib, complete its planned clinical studies for KD034, advance certain of its other pipeline product candidates and fund its operating expenses and capital expenditure requirements into the fourth quarter of 2017. 

On November 4, 2016, the Company executed a second amendment to the 2015 Credit Agreement. Pursuant to this amendment, the Company deferred further principal payments owed under the 2015 Credit Agreement in the amount of $380,000 per month until August 31, 2017. Additionally, the parties amended various clinical development milestones and added a covenant pursuant to which the Company is required to raise $40.0 million of additional equity capital by the end of the second quarter of 2017. All other material terms of the 2015 Credit Agreement, including the maturity date, remain the same. The Company maintained cash and cash equivalents of $55.0 million at September 30, 2016.  

Management’s plans include continuing to finance operations through the issuance of additional equity instruments and securities and increasing the commercial portfolio through the development of the current pipeline or through the acquisition of a third party or license agreement. 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

10


 

may dilute current stockholders of the Company. Engaging in a transaction with a third party is contingent on negotiations among the parties; therefore, there is no certainty that the Company will enter into such an agreement should the Company so desire.

 

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. For the 2015 period presented, research and development expenses, and selling, general and administrative expenses were revised to conform to the current presentation with regard to the Company’s method of allocating a portion of facility-related expenses to research and development expenses to more accurately reflect the effort spent on research and development. For the three and nine months ended September 30, 2015, the Company reclassified $1.0 million and $2.9 million, respectively, from selling, general and administrative expenses to research and development expenses

Principles of Consolidation

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“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 GAAP 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 and nine months ended September 30, 2016 are not necessarily indicative of the final results that may be expected for the year ended December 31, 2016. These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2015 included in the Company’s final prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended (the “Securities Act”) with the Securities and Exchange Commission (the “SEC”) on July 27, 2016 (the “Final Prospectus”).

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 as of and for the year ended December 31, 2015 included in the Final Prospectus. Since the date of such financial statements, there have been no changes to the Company’s significant accounting policies, other than those described below.

Inventories

Inventories are stated at the lower of cost or market (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.

Deferred Offering Costs

Deferred offering costs, which consisted primarily of direct costs related to the IPO, were being capitalized in other current assets until the consummation of the IPO. These offering costs were reclassified to additional paid‑in capital upon the closing of the IPO, which occurred on August 1, 2016. There were no deferred offering costs capitalized as of September 30, 2016 and $0.9 million of deferred offering costs capitalized as of December 31, 2015.

11


 

Recent Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016‑09, “Compensation—Stock Compensation”. This ASU simplifies several aspects of the accounting for share‑based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016‑08, “Revenue from Contracts with Customers” (“ASU 2016‑08”). This ASU amends the existing accounting guidance for principal versus agent considerations when recognizing revenue from contracts with customers. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2017, with early adoption permitted. In May 2014, the FASB issued ASU No. 2014‑09, “Revenue from Contracts with Customers.” Under this guidance, an entity is required to recognize revenue upon transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. As such, an entity will need to use more judgment and make more estimates than under the current guidance. The Company is currently evaluating the appropriate transition method and any impact of this guidance on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016‑06, “Derivatives and Hedging” (“ASU 2016‑06”). This ASU clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2016, with early adoption permitted. An entity should apply the amendments in this ASU on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016‑02, “Leases” (“ASU 2016‑02”). This ASU amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. This guidance is effective for annual and interim reporting periods of public entities beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015‑17, “Income Taxes (Topic 740)”  (“ASU 2015-17”) which simplifies the presentation of deferred income taxes. It requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This standard is effective for annual reporting periods beginning after December 15, 2016 with early adoption permitted as of the beginning of an interim or annual reporting period. The new guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted ASU 2015‑17 in fiscal year 2015 and applied the guidance retrospectively to all periods presented. The adoption of ASU 2015‑17 did not have a significant impact on the Company’s consolidated financial statements or related disclosures.

In August 2015, the FASB issued ASU No. 2015‑15, “Interest—imputation of interest (Subtopic 835‑30)” (“ASU 2015-15”) which updated the accounting guidance related to the balance sheet presentation of debt issuance costs specific to line of credit arrangements. The updated accounting guidance allows the option of presenting deferred debt issuance costs related to line‑of‑credit arrangements as an asset, and subsequently amortizing over the term of the line‑of‑credit arrangement, regardless of whether there are any outstanding borrowings. The Company adopted ASU No. 2015‑15 in fiscal year 2015, which had no impact on its consolidated financial statements or related disclosures.

In July 2015, the FASB issued ASU No. 2015‑11, “Inventory (Topic 330)” which simplifies the subsequent measurement of inventory. It replaces the current lower of cost or market test with a lower of cost or net realizable value test. The standard is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods therein. Early adoption is permitted. The new guidance must be applied prospectively. The Company does not expect the standard to impact its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015‑03, “Interest—Imputation of Interest (Subtopic 835‑30). This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company adopted this standard on its consolidated financial

12


 

statements during 2015 and retroactively adjusted the prior year’s presentations to conform to the current presentation. These reclassifications had no effect on previously reported net income.

In August 2014, the FASB issued ASU No. 2014‑15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” (“ASU 2014-15”) to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. The Company adopted ASU 2014‑15 in fiscal year 2016 which did not have a significant impact on its consolidated financial statements or related disclosures.

 

3. Members’ Capital

Conversion Event

The Class B, C and D units were required to automatically convert into Class A units pursuant to the Company’s Second Amended and Restated Limited Liability Company Operating Agreement, as amended (the “Operating Agreement”) upon certain defined conversion events including, but not limited to, dissolution of the Company or an underwritten IPO of the Company’s equity (each, a “Conversion Event”). The Conversion Event occurred on August 1, 2016, upon consummation of the Company’s IPO. The valuation of the Company at the Conversion Event was greater than $45.8 million, which resulted in the Class B and C units receiving $41.7 million of the proceeds of the Conversion Event in the form of equivalent Class A units. The Class D units converted into Class A units such that the holders thereof received $4.2 million of such proceeds. The proceeds in excess of $45.8 million were shared ratably by the other holders of Class A units.

Class A Units

Class A units represent the Company’s common stock equivalents. As of September 30, 2016 Kadmon I, LLC (“Kadmon I”) holds approximately 12.1% of the total outstanding common stock of the Company and as of December 31, 2015 Kadmon I held approximately 66% of the total outstanding Class A units. Kadmon I is a Delaware limited liability company that was formed in August 2009 and is an affiliate of the Company (Note 15). Kadmon I’s funds were raised through a private offering of 80% of Kadmon I’s total membership interests, the other 20% being owned by certain other members, including members of the Company’s board of managers and an executive officer at the time of such offering.

Once each Kadmon I investor has received aggregate distributions equal to four times the amount of their initial investment, their collective ownership percentage in additional distributions will decrease from 80% to 50%, and the collective ownership percentage for the members of the Company’s board of managers, an executive officer and members in Kadmon I, and certain other members who received units will increase from 20% to 50%. The change in ownership percentages will require the Company to evaluate whether such changes will result in additional compensation expense. As of September 30, 2016 and December 31, 2015, the Kadmon I investors had not received any distributions. Accordingly, no additional compensation expense was recognized.

During the year ended December 31, 2015, the Company raised $15.0 million in net proceeds through the issuance of 1,250,000 Class A units. The Company also issued 1,500,000 Class A units pursuant to an advisory agreement entered into in April 2015. The Company recorded a deferred charge of $9.0 million related to the issuance of these units which was classified as a prepaid expense on the Company’s balance sheet and was expensed over the one year term in the advisory agreement. The Company expensed $2.3 million and $3.8 million during the three and nine months ended September 30, 2015, respectively, related to the advisory agreement. The Company issued 5,011 Class A units as the result of stock option exercises during 2015. The Company also issued 308,334 Class A units to settle third party obligations, for which the Company expensed $1.5 million related to these settlements during the year ended December 31, 2015.

During the nine months ended September 30, 2016, the Company issued 25,000 Class A units to settle third party obligations, for which the Company expensed $0.1 million related to these settlements during the nine months ended September 30, 2016 and issued 7,200 Class A units as the result of stock option exercises. The Company also recorded an expense of $3.0 million during the nine months ended September 30, 2016 related to the advisory agreement entered into in April 2015. No expense was recorded for this agreement during the three months ended September 30, 2016. 

The Class A units converted into common stock at the Conversion Event resulting in no Class A units outstanding at September 30, 2016.

13


 

Class B Unit

The Class B unit did not participate in distributions from the Company, did not have any preferences in relation to the Class A units, was non‑voting, and was non‑redeemable. The only right afforded to the Class B unit was the right to convert into Class A units pursuant to the Company’s Operating Agreement (see “Conversion Event”). One Class B unit was issued and outstanding as of December 31, 2015. The Class B unit converted into common stock at the Conversion Event resulting in no Class B units outstanding at September 30, 2016.

Class C Unit

The Class C unit did not participate in distributions from the Company, does not have any preferences in relation to the Class A units, is non‑voting, and is non‑redeemable. The only right afforded to the Class C unit was the right to convert into Class A units pursuant to the Operating Agreement (see “Conversion Event”). One Class C unit was issued and outstanding as of December 31, 2015. The Class C unit converted into common stock at the Conversion Event resulting in no Class C units outstanding at September 30, 2016.

Class D Units

The Class D units did not participate in distributions from the Company, did not have any preferences in relation to the Class A units, were non‑voting, and were non‑redeemable. The only right afforded to the Class D unit was the right to convert into Class A units pursuant to the Company’s Operating Agreement (see “Conversion Event”). There were 4,373,674 Class D units issued and outstanding as of December 31, 2015. The Class D units converted into common stock at the Conversion Event resulting in no Class D units outstanding at September 30, 2016.

Class E Redeemable Convertible Units

One series of Class E redeemable convertible units, the Class E Series E‑1 units (the “Class E redeemable convertible units”), was authorized. The Company was able to issue Class E redeemable convertible units with an aggregate Class E original issue price of up to $85 million, calculated in accordance with the terms of the Operating Agreement, of any series without being subject to preemptive rights. The Class E redeemable convertible units had voting rights and powers equal to the Class A units on an as‑if converted basis, had a liquidation preference for liquidating distributions and participated in distributions from the Company on an as‑converted basis on non‑liquidating distributions. In the case of a qualified IPO, the Class E redeemable convertible units automatically converted into Class A units at a conversion price of the lower of 85% of the value of Class A units (or the price per share of common stock of the corporate successor to the Company) or $11.50 per unit. Prior to a qualified IPO, the Class E redeemable convertible units could be converted at $11.50 per unit. A qualified IPO was defined as an offering of the Company’s equity interests with gross proceeds to the Company of at least $75 million. At any time after December 31, 2017, Class E redeemable convertible units were redeemable for cash at the option of the holders of at least 80% of all Class E redeemable convertible units at a redemption price equal to 125% of the liquidation preference. After January 1, 2016 all Class E redeemable convertible units began to accrue a liquidation preference (payable in connection with such liquidating distribution from the Company) at a rate of 5% per annum, compounding annually, with such liquidation preference rate increasing by 100 basis points every six months to a maximum of 10%. Redemption was subject to the Company’s ability to make such payment under then‑existing debt obligations.

Based on the terms of the Class E redeemable convertible units, the fair value of the Class E redeemable convertible units issued was classified as mezzanine capital on the Company’s consolidated balance sheet. The Company accreted changes in the redemption value of the Class E redeemable convertible units to paid‑in capital using the interest method, as the Company did not have available retained earnings, from the date of issuance to the earliest redemption date.

During the year ended December 31, 2015, the Company raised $10.9 million in gross proceeds, $10.8 million net of $40,000 in transaction costs, through the issuance of 945,441 Class E redeemable convertible units. The Company raised $10.0 million through the issuance of Class E redeemable convertible units in October 2015 pursuant to a license agreement entered into with Jinghua to develop products using human monoclonal antibodies (Note 10) and $0.9 million through the issuance of Class E redeemable convertible units to other third party investors. The Company also issued 574,392 Class E redeemable convertible units to settle certain obligations totaling $6.6 million, of which $6.1 million was expensed in the third quarter of 2015 and $500,000 related to the settlement of a related party loan entered into in 2014 (Note 15).

During the nine months ended September 30, 2016, the Company raised $5.5 million in gross proceeds, with no transaction costs, through the issuance of 478,266 Class E redeemable convertible units. Harlan W. Waksal, M.D., the Company’s President and Chief Executive Officer, certain entities affiliated with GoldenTree Asset Management LP, Bart M.

14


 

Schwartz, Esq., the Company’s then Chairman of the board of managers, and D. Dixon Boardman, a member of the Company’s then board of managers subscribed for 86,957,  43,479,  21,740 and 21,740 Class E redeemable convertible units, respectively.

The Company calculated a deemed dividend on the Class E redeemable convertible units of $13.4 million in August 2016, which equals a 15% discount to the IPO price of the Company’s common stock of $12.00 per share upon conversion to common stock at the Conversion Event, a beneficial conversion feature.  There were 4,969,252 Class E redeemable convertible units issued and outstanding as of December 31, 2015. The Class E redeemable convertible units converted into common stock at the Conversion Event resulting in no Class E redeemable convertible units outstanding at September 30, 2016.

5% Convertible Preferred Stock

Our certificate of incorporation permitted the Company’s board of directors to issue up to 10,000,000 shares of preferred stock from time to time in one or more classes or series. Concurrently with the closing of the Company’s IPO and pursuant to the terms of the exchange agreement entered into with the holders of the Company’s Senior Convertible Term Loan, the Company issued to such holders 30,000 shares of 5% convertible preferred stock, designated as the convertible preferred stock. Each share of convertible preferred stock was issued for an amount equal to $1,000 per share, which is referred to as the original purchase price. Shares of convertible preferred stock with an aggregate original purchase price and initial liquidation preference of $30.0 million were issued to the holders of the Senior Convertible Term Loan in exchange for an equivalent principal amount of the Senior Convertible Term Loan pursuant to the terms of an exchange agreement dated as of June 8, 2016, between the Company and those holders, which is referred to as the exchange agreement.

The shares of convertible preferred stock are entitled to receive dividends, when and as declared by the board of directors and to the extent of funds legally available for the payment of dividends, at an annual rate of 5% of the sum of the original purchase price per share of convertible preferred stock plus any dividend arrearages. Dividends on the convertible preferred stock shall, at the Company’s option, either be paid in cash or added to the stated liquidation preference amount for purposes of calculating dividends at the 5% annual rate (until such time as the Company declares and pays the missed dividend in full and in cash, at which time that dividend will no longer be part of the stated liquidation preference amount). Dividends shall be payable annually on June 30 of each year and shall be cumulative from the most recent dividend payment date on which the dividend has been paid or, if no dividend has ever been paid, from the original date of issuance of the convertible preferred stock and shall accumulate from day to day whether or not declared until paid.

The convertible preferred stock converts into shares of the Company’s common stock at a 20% discount to the price per share of common stock in the IPO. The Company calculated a deemed dividend on the convertible preferred stock of $7.5 million in August 2016, which equals the 20% discount to the IPO price of the Company’s common stock of $12.00 per share, a beneficial conversion feature.  The Company accrued dividends on the convertible preferred stock of $0.3 million for the three and nine months ended September 30, 2016.



Common Stock

Prior to the IPO, there were no shares outstanding of the Company’s common stock, par value $0.001 per share, and no stockholders of record. The Company’s certificate of incorporation authorizes the issuance of up to 200,000,000 shares of the Company’s common stock. On August 1, 2016, the Company completed its IPO whereby it sold 6,250,000 shares of common stock at $12.00 per share. The aggregate net proceeds received by the Company from the offering were $66.0 million, net of underwriting discounts and commissions of $5.3 million and offering expenses of $3.7 million. Upon the closing of the IPO, 45,078,666 shares of common stock were outstanding, which includes 19,034,467 shares of common stock issued upon the conversion of the Company’s Senior Convertible Term Loan and Second Lien Convert (See Note 6).

Valuation

Prior to the IPO, to estimate certain expenses and record certain transactions, it was necessary for the Company to estimate the fair value of its membership units. Given the absence of a public trading market, and in accordance with the American Institute of Certified Public Accountants’ Practice Guide, “Valuation of Privately‑Held‑Company Equity Securities Issued as Compensation,” the Company exercised reasonable judgment and considered numerous objective and subjective factors to determine its best estimate of the fair value of its membership units. Factors considered included:

·

recent equity financings and the related valuations;

·

the estimated present value of the Company’s future cash flows;

·

industry information such as market size and growth;

15


 

·

market capitalization of comparable companies and the estimated value of transactions such companies have engaged in; and

·

macroeconomic conditions.

The Company updated the valuation of Class A units as of September 30, 2015 using a  methodology consistent with prior valuations. At the time of the valuation, the Company had issued $92.0 million in second‑lien convertible debt, and it was deemed appropriate to place additional weighting on this consideration, as compared to prior valuations. The Company also considered equity raised through the issuance of $15.0 million in Class A units during 2015. The Company assigned no value to the Ribasphere products to reflect changes in market conditions that have resulted in lower sales of the Ribasphere products. As a result of the revised inputs to the analysis, the estimated fair value of each Class A unit was decreased from $39.00 to $32.50 as of September 30, 2015. 



4. Net Loss per Share Attributable to Common Stockholders

Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock outstanding for the period. Because the Company has reported a net loss for all periods presented, diluted net loss per common share is the same as basic net loss per common share for those periods. The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the Company:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

   

 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2016

 

2015

 

2016

 

2015

Numerator – basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to common stockholders

 

$

(138,232)

 

$

(82,079)

 

$

(207,788)

 

$

(112,612)

Denominator – basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

32,678,259 

 

 

8,255,011 

 

 

16,487,715 

 

 

8,070,165 

Net loss per share, basic and diluted

 

$

(4.23)

 

$

(9.94)

 

$

(12.60)

 

$

(13.95)



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,



 

2016

 

2015

 

2016

 

2015

Convertible preferred stock

 

$

3,159,688 

 

$

3,159,688 

 

$

3,159,688 

 

$

3,159,688 

Options to purchase common stock

 

 

3,245,743 

 

 

579,304 

 

 

3,245,743 

 

 

579,304 

Warrants to purchase common stock

 

 

1,328,452 

 

 

1,328,452 

 

 

1,328,452 

 

 

1,328,452 

Total shares of common stock equivalents

 

$

7,733,883 

 

$

5,067,444 

 

$

7,733,883 

 

$

5,067,444 

 

5. Commercial Partnership

On June 17, 2013, the Company entered into a series of agreements with a commercial partner, AbbVie, Inc. (“AbbVie”), whereby the Company issued a non‑exclusive license for the domestic sale of Ribasphere and also sold certain intellectual property and marketing rights related to the international sale of Ribasphere. The Company received upfront payments totaling $64.0 million, and could receive additional contingent payments totaling $51.0 million based on the achievement of certain milestones. The Company did not earn any such milestones during the nine months ended September 30, 2016.

Of the $64.0 million upfront payment, $44.0 million was considered allocable to the non‑exclusive domestic licensing arrangement and was recorded as deferred revenue to be recognized over the 10 year term of the agreement. The Company will recognize the upfront payment to revenue on a straight‑line basis over the life of the agreement. The Company recognized $3.3 million of the upfront consideration to license revenue during each of the nine months ended September 30, 2016 and 2015 and $1.1 million during each of the three months ended September 30, 2016 and 2015. As of September 30, 2016 and December 31, 2015,  $29.5 million and $32.8 million is recorded as deferred revenue, respectively, of which $4.4 million is short‑term.

16


 

In October 2014, the Company entered into a series of amendments with AbbVie whereby the Company agreed to eliminate all potential future unearned and unpaid milestones and also agreed to a revised royalty structure for the sale of Ribasphere under the domestic license agreement. The Company received upfront payments of $6.0 million in consideration of future royalties payable resulting from the resale of Ribasphere by AbbVie during 2015 and 2016. At the time of receipt the balance was recorded to deferred revenue, $3.0 million of which was recorded as short‑term as it related to prepaid royalties for 2015 and $3.0 million of which was recorded as long‑term as it related to prepaid royalties for 2016. The Company will recognize portions of the deferred revenue to income as Ribasphere is sold by AbbVie. The Company is entitled to receive additional compensation from AbbVie for any royalties earned in excess of the annual prepayment. If royalties earned do not exceed the annual prepayment the Company is required to refund the excess to AbbVie.

Since the royalties earned from the resale of Ribasphere by AbbVie under the domestic license agreement did not exceed the $3.0 million annual prepayment in 2015, the Company refunded approximately $2.1 million of the prepaid royalty to AbbVie as a credit against future purchases during the nine months ended September 30, 2016. The Company had recorded this amount as an accrued expense at December 31, 2015. Furthermore, the Company expects to refund approximately $2.9 million of the prepaid royalty to AbbVie resulting from the resale of Ribasphere by AbbVie during 2016. Therefore, the Company has recorded this amount as an accrued expense at September 30, 2016 and other long term liability at December 31, 2015, as the refund is payable in March 2017.

The Company has a continuing obligation to supply Ribasphere, maintain the marketing authorization for Ribasphere and maintain the intellectual property for Ribasphere through the term of the agreements ending December 31, 2020.

 

6. Debt

Concurrent with the closing of the IPO on August 1, 2016, the Company’s Senior Convertible Term Loan and Second Lien Convert converted into 19,034,467 shares of common stock.



The Company is a party to three credit agreements in the following amounts (in thousands):







 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

December 31,



 

2016

 

2015



 

 

 

 

 

 

Senior convertible term loan due June 17, 2018 (A)

 

$

 —

 

$

58,500 

Secured term debt due June 17, 2018 (B)

 

 

34,620 

 

 

35,000 

Second-lien convertible debt due August 28, 2019 (C)