2019-Q2 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 June 30, 2019


☐	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 July 29, 2019 was 129,634,540.

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Kadmon Holdings, Inc.

Form 10-Q

Table of Contents


		Page
PART I – Financial Information
Item 1	Consolidated financial statements:	5
	Consolidated balance sheets as of June 30, 2019 (unaudited) and December 31, 2018	5
	Consolidated statements of operations for the three and six months ended June 30, 2019 and 2018 (unaudited)	6
	Consolidated statements of stockholders’ equity for the six months ended June 30, 2019 and the year ended December 31, 2018 (unaudited)	7
	Consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 (unaudited)	8
	Notes to consolidated financial statements (unaudited)	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4	Controls and Procedures	34

PART II – Other Information
Item 1	Legal Proceedings	35
Item 1A	Risk Factors	35
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3	Defaults Upon Senior Securities	35
Item 4	Mine Safety Disclosures	35
Item 5	Other Information	35
Item 6	Exhibits	35

Signatures		37

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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 investments and our potential inability to sell those securities;

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

other risks and uncertainties, including those listed in this report 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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PART I. FINANCIAL INFORMATION

Kadmon Holdings, Inc.

Consolidated balance sheets

(in thousands, except share amounts)



	June 30,		December 31,
	2019		2018
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	86,182	$	94,740
Accounts receivable, net		699		1,690
Inventories, net		228		925
Prepaid expenses and other current assets		1,449		1,581
Total current assets		88,558		98,936
Fixed assets, net		3,160		3,654
Right of use lease asset		21,231		—
Goodwill		3,580		3,580
Restricted cash		2,116		2,116
Investment, equity securities		95,013		34,075
Investment, at cost		2,300		2,300
Total assets	$	215,958	$	144,661

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	6,892	$	9,986
Accrued expenses		13,967		13,508
Lease liability - current		3,825		—
Fair market value of financial instruments		468		524
Secured term debt – current		4,500		—
Total current liabilities		29,652		24,018
Lease liability - noncurrent		21,666		—
Deferred rent		—		4,290
Deferred tax liability		415		415
Other long term liabilities		—		47
Secured term debt – net of current portion and discount		23,168		27,480
Total liabilities		74,901		56,250
Commitments and contingencies (Notes 15 and 16)
Stockholders’ equity:
Convertible preferred stock, $0.001 par value; 10,000,000 shares authorized at June 30, 2019 and December 31, 2018; 28,708 and 30,000 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		41,398		42,231
Common stock, $0.001 par value; 400,000,000 and 200,000,000 shares authorized at June 30, 2019 and December 31, 2018, respectively; 129,634,540 and 113,130,817 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		130		113
Additional paid-in capital		357,443		315,710
Accumulated deficit		(257,914)		(269,643)
Total stockholders’ equity		141,057		88,411
Total liabilities and stockholders’ equity	$	215,958	$	144,661

See accompanying notes to consolidated financial statements (unaudited)

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Kadmon Holdings, Inc.

Consolidated statements of operations (unaudited)

(in thousands, except share and per share amounts)



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Revenues:
Net sales	$	47	$	161	$	114	$	435
Other revenue		179		198		353		357
Total revenue		226		359		467		792
Cost of sales		45		103		76		302
Write-down of inventory		932		98		932		245
Gross profit		(751)		158		(541)		245
Operating expenses:
Research and development		15,108		10,178		30,099		19,958
Selling, general and administrative		8,981		8,812		16,927		17,062
Total operating expenses		24,089		18,990		47,026		37,020
Loss from operations		(24,840)		(18,832)		(47,567)		(36,775)
Other income (expense):
Interest income		548		139		1,204		208
Interest expense		(936)		(1,338)		(1,868)		(2,803)
Change in fair value of financial instruments		280		463		56		604
Loss on equity method investment		—		—		—		(1,242)
Unrealized gain on equity securities		34,110		40,508		60,938		40,508
Other (expense) income		(2)		3		(11)		2
Total other income		34,000		39,775		60,319		37,277
Income before income tax benefit		9,160		20,943		12,752		502
Income tax benefit		—		562		—		562
Net income	$	9,160	$	21,505	$	12,752	$	1,064
Deemed dividend on convertible preferred stock		508		491		1,023		981
Net income attributable to common stockholders	$	8,652	$	21,014	$	11,729	$	83

Basic net income per share of common stock	$	0.07	$	0.25	$	0.09	$	0.00
Diluted net income per share of common stock	$	0.07	$	0.24	$	0.09	$	0.00
Weighted average basic shares of common stock outstanding		129,080,221		85,004,107		127,713,099		81,844,677
Weighted average diluted shares of common stock outstanding		129,090,983		90,164,248		127,750,765		82,216,399

See accompanying notes to consolidated financial statements (unaudited)

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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		3		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

See accompanying notes to consolidated financial statements (unaudited)

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Kadmon Holdings, Inc.

Consolidated statements of cash flows (unaudited)

(in thousands)


	Six Months Ended
	June 30,
	2019		2018
Cash flows from operating activities:
Net income	$	12,752	$	1,064
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of fixed assets		907		702
Amortization of right of use lease asset		1,648		—
Write-down of inventory		932		245
Amortization of deferred financing costs		—		228
Amortization of debt discount		188		1,030
Amortization of debt premium		—		(345)
Share-based compensation		4,125		5,595
Change in fair value of financial instruments		(56)		(604)
Loss on equity method investment		—		1,242
Unrealized gain on equity securities		(60,938)		(40,508)
Deferred tax liability		—		(562)
Changes in operating assets and liabilities:
Accounts receivable, net		991		652
Inventories, net		(235)		(709)
Prepaid expenses and other assets		132		(499)
Accounts payable		(2,995)		(2,092)
Lease liability		(1,824)		—
Accrued expenses, other liabilities and deferred rent		459		(784)
Net cash used in operating activities		(43,914)		(35,345)

Cash flows from investing activities:
Purchases of fixed assets		(413)		(528)
Net cash used in investing activities		(413)		(528)

Cash flows from financing activities:
Proceeds from issuance of common stock, net		35,696		105,761
Principal payments on secured term debt		—		(6,574)
Proceeds from issuance of ESPP shares		73		65
Proceeds from exercise of warrants		—		574
Net cash provided by financing activities		35,769		99,826
Net increase (decrease) in cash, cash equivalents and restricted cash		(8,558)		63,953
Cash, cash equivalents and restricted cash, beginning of period		96,856		69,633
Cash, cash equivalents and restricted cash, end of period	$	88,298	$	133,586

Components of cash, cash equivalents and restricted cash
Cash and cash equivalents		86,182		131,470
Restricted cash		2,116		2,116
Total cash, cash equivalents and restricted cash		88,298		133,586

Supplemental cash flow disclosures:
Cash paid for interest	$	1,678	$	1,899
Non-cash investing and financing activities:
Beneficial conversion feature on convertible preferred stock		205		196
Accretion of dividends on convertible preferred stock		818		785
Unpaid fixed asset additions		—		115
Operating lease liabilities arising from obtaining right-of-use assets		85		—
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 “Company”) is a fully integrated biopharmaceutical company engaged in the discovery, development and commercialization of small molecules and biologics to address disease areas of significant unmet medical needs, with a near-term clinical focus on inflammatory and fibrotic diseases as well as immuno-oncology. The Company leverages its multi-disciplinary research and clinical development team members to identify and pursue a diverse portfolio of novel product candidates, both through in-licensing products and employing its small molecule and biologics platforms. By retaining global commercial rights to its lead product candidates, the Company believes that it has the ability to develop these candidates while maintaining flexibility for commercial and licensing arrangements. The Company expects to continue to progress its clinical candidates and have further clinical trial events in the second half of 2019 and in 2020.

Liquidity

The Company maintained cash and cash equivalents of $86.2 million at June 30, 2019. The Company had an accumulated deficit of $257.9 million and working capital of $58.9 million at June 30, 2019. The Company entered into a Sales Agreement with Cantor Fitzgerald & Co. in August 2017 under which the Company may sell up to $40.0 million in shares of its common stock in one or more placements at prevailing market prices for its common stock (the “ATM Offering”). Any such sales would be effected pursuant to the Company’s registration statement on Form S-3 (File No. 333-222364), declared effective by the Securities Exchange Commission (“SEC”) on January 10, 2018. As of December 31, 2018, the Company had not sold any shares of common stock through the ATM Offering. In January 2019, the Company sold 13,778,705 shares of common stock at a weighted average price of $2.17 per share through the ATM Offering and received total gross proceeds of $29.9 million ($29.0 million net of $0.9 million of commissions payable by the Company). In April 2019, the Company sold 2,538,100 shares of common stock at a price of $2.70 per share through the ATM Offering and received total gross proceeds of $6.9 million ($6.7 million net of $0.2 million of commissions payable by the Company). The Company’s existing cash and cash equivalents are expected to 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.

Going Concern

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

The Company’s cash and cash equivalents are not expected to be sufficient to enable the Company to meet its long-term expected plans, including commercialization of clinical pipeline products, if approved, or initiation or completion of future registrational studies. The Company has no 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.

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If the Company is unable to obtain additional capital, its long-term business plan may not be accomplished and the Company may be forced to curtail or cease operations. Further, the 2015 Credit Agreement contains certain developmental milestones, as well as a minimum liquidity covenant. The Company’s failure to achieve these milestones as anticipated by December 31, 2019 or its 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. The Company considers some of these developmental milestones to be outside of its control. As a result, if an event of default arises under the 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.

Principles of Consolidation

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

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 the Company’s 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 six months ended June 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 conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates.

Critical Accounting Policies

The Company’s significant accounting policies are disclosed in the audited financial statements included in Item 8 of the 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.

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Accounting for Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016 02, “Leases” (“ASC 842”) to enhance the transparency and comparability of financial reporting related to leasing arrangements. Under this new lease standard, most leases are required to be recognized on the balance sheet as right-of-use (“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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Disaggregation of Revenue

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



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Product sales	$	47	$	161	$	114	$	435
Other revenue		179		198		353		357
Total revenue	$	226	$	359	$	467	$	792

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

Contract Balances

The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period 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 June 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 June 30, 2019. The guidance provides certain practical expedients that limit this requirement. The Company has various contracts that meet the following practical expedients provided by ASC 606:

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

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

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

The Company does not have any performance obligations that have not yet been satisfied as of June 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, which 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.

3. Stockholders’ Equity

5% Convertible Preferred Stock

The Company had 28,708 shares of 5% convertible preferred stock outstanding at June 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. In May 2019, the 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 $0.8 million during the three and six months ended June 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 June 30, 2019 and 2018, and $0.2 million on the $0.8 million of accrued dividends during each of the six months ended June 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 June 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.

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4. Net Income per Share Attributable to Common Stockholders

Basic net income attributable to common stockholders per share is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Shares issued during the period are weighted for the portion of the period during which they were outstanding. Diluted net income per share is calculated in a manner consistent with basic net income per share while giving effect to all potentially dilutive common shares that were outstanding during the period. The following table summarizes the computation of basic and diluted net income per share attributable to common stockholders of the Company (in thousands, except share and per share amounts):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019			2018
Numerator – basic and diluted:
Net income available to common stockholders - basic	$	8,652	$	21,014	$	11,729		83
Effect of dilution:
Warrants to purchase common stock		—		(179)		—		—
Convertible preferred stock		—		491		—		—
Net income available to common stockholders - basic and diluted	$	8,652	$	21,326	$	11,729	$	83

Denominator – basic and diluted:
Weighted average common shares outstanding used to compute basic net income per share		129,080,221		85,004,107		127,713,099		81,844,677
Effect of dilution:
Options to purchase common stock		10,762		152,400		37,666		257,297
Stock appreciation rights		—		69,333		—		114,425
Warrants to purchase common stock		—		1,504,941		—		—
Convertible preferred stock		—		3,433,467		—		—
Weighted average common shares outstanding used to compute diluted net income per share		129,090,983		90,164,248		127,750,765		82,216,399

Net income per share, basic	$	0.07	$	0.25	$	0.09	$	0.00
Net income per share, diluted	$	0.07	$	0.24	$	0.09	$	0.00

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


	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2019	2018	2019	2018
Options to purchase common stock	11,468,920	7,395,342	10,574,947	5,795,842
Warrants to purchase common stock	11,999,852	1,328,452	11,999,852	11,999,852
Convertible preferred stock	3,285,596	—	3,285,596	3,433,467
Total shares of common stock equivalents	26,754,368	8,723,794	25,860,395	21,229,161

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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):



	June 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		(378)		(566)
Total debt payable	$	27,668	$	27,480

Debt payable, current portion	$	4,500	$	—
Debt payable, long-term	$	23,168	$	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 June 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. 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.

The 2015 Credit Agreement contains certain developmental milestones, as well as a minimum liquidity covenant. The Company’s failure to achieve these milestones as anticipated by December 31, 2019 or its 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. The Company considers some of these developmental milestones to be outside of its control. As a result, if an event of default arises under the Credit Agreement, the Company may need to use cash and cash equivalents on hand to fund certain repayment commitments under the 2015 Credit Agreement.

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



	2015 Credit Agreement
2019	$	—
2020		28,046
	$	28,046

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



	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2019		2018		2019		2018
Interest expense and other financing costs	$	843	$	939	$	1,680	$	1,890
Amortization of deferred financing costs, debt discount and debt premium		93		399		188		913
Interest expense	$	936	$	1,338	$	1,868	$	2,803

6. Financial Instruments

Equity Issued Pursuant to Credit Agreements

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

As of June 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 warrants is recorded as a short-term liability of approximately $0.5 million at both June 30, 2019 and December 31, 2018.

The Company used the Black-Scholes pricing model to value the warrant liability at June 30, 2019 with the following assumptions: risk-free interest rate of 1.7%, expected term of 3.2 years, expected volatility of 73.4% and a dividend rate of 0%. The change in fair value of the warrants was approximately $(0.3) million and $(0.1) million for three and six months ended June 30, 2019, respectively, and approximately $(0.2) million and $0.1 million for the three and six months ended June 30, 2018, respectively. None of these instruments have been exercised as of June 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 $(0.3) million and $(0.7) million for the three and six months ended June 30, 2018, respectively. As these warrants expired in April 2018, no change in fair value was recorded for these warrants in 2019.

Fair Value of Long-term Debt

The Company maintained a long-term secured debt balance of $23.2 million and $27.5 million at June 30, 2019 and December 31, 2018, respectively. As the secured debt becomes 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 June 30, 2019, $4.5 million of principal payments due in the first and second quarter of 2020 have been recorded as short-term secured debt and the remaining balance is recorded as long-term secured debt. The underlying agreements for these balances were negotiated with third parties on an arms-length basis, at an interest rate which is considered to be in line with overall market conditions. Based on these factors, management considers the carrying value of the debt to approximate fair value at June 30, 2019.

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



	Fair Value Measurement Using Significant Other Observable Inputs (Level 2)
	June 30,		December 31,
Description	2019		2018
Warrants	$	468	$	524
Total	$	468	$	524

The table below represents a roll-forward of Level 2 financial instruments from January 1, 2018 to June 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		(56)
Balance at June 30, 2019	$	468

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 June 30, 2019 and December 31, 2018: