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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM
_______________________________
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For transition period from ___________ to ___________.
Commission File Number:
(Exact name of registrant as specified in its charter)
_______________________________
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(State or other jurisdiction of |
| (I.R.S. Employer |
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(Address of principal executive offices) |
| (Zip Code) |
(
(Registrant’s telephone number, including area code)
_______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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.:
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Large accelerated Filer ¨ |
| Accelerated Filer ¨ |
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| Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No
The number of shares of the registrant’s common stock outstanding as of November 1, 2021 was
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Kadmon Holdings, Inc.
Quarterly Report Form 10-Q
Table of Contents
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| Page |
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4 | ||
| Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020 | 4 |
| 5 | |
| 6 | |
| 8 | |
| 9 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27 | |
35 | ||
35 | ||
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36 | ||
36 | ||
38 | ||
38 | ||
38 | ||
38 | ||
38 | ||
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40 |
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 expenditures, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “would,” “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:
our ability to commercialize REZUROCK™ (belumosudil) and execute on our marketing plans for any other drugs or indications that may be approved in the future;
risks that REZUROCK revenue, expenses and costs may not be as expected;
risks relating to REZUROCK’s market acceptance, competition, reimbursement and regulatory actions;
our ability to obtain and maintain reimbursement for REZUROCK and any approved product and the extent to which patient assistance programs and copay programs are utilized;
our ability to manage our reliance on sole-source third parties such as our third party drug substance and drug product contract manufacturers;
the inherent uncertainty in estimates of patient populations and incidence and prevalence estimates;
our ability to advance product candidates into, and successfully complete, clinical trials;
the impact of the COVID-19 pandemic on our business, workforce, patients, collaborators and suppliers, including delays in anticipated timelines and milestones of our clinical trials, on various government agencies who we interact with and/or are governed by and commercial and clinical drug supply chain continuity and the commercial launch of REZUROCK;
the timing or likelihood of regulatory filings and approvals, especially in light of the COVID-19 pandemic;
the benefits of U.S. Food and Drug Administration (“FDA”) designations such as the Orphan Drug Designation;
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 and product candidates and technology;
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;
our ability to maintain and establish strategic agreements and collaborations and their potential benefits;
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;
statements and estimates regarding future revenue, hiring plans, operating expenses, capital expenditures, capital requirements, needs for additional financing 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, cash equivalents and marketable debt securities and other sources of liquidity;
our ability to manage our liquidity needs, including our ability to raise additional capital, to fund our operations or repay our debt obligations;
the future trading price of the shares of our common stock;
our ability to apply unused federal and state net operating loss carryforwards against future taxable income; and/or
other risks and uncertainties, including those listed under the caption “Risk Factors.”
In addition to the above factors, the risks and uncertainties related to the Merger (described elsewhere in this Quarterly Report on Form 10-Q) include, but are not limited to: risks related to the Company’s ability to complete the Merger on the proposed terms or on the proposed timeline, including the receipt of required regulatory approvals; the possibility that competing offers will be made; and other risks associated with executing business combination transactions, such as disruption from the proposed acquisition making it more difficult to conduct business as usual or to maintain relationships with customers, employees, manufacturers, suppliers or patient groups. 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. Except as required by law, we disclaim any duty to update any forward looking statements, whether as a result of new information, future events or otherwise.
PART I. FINANCIAL INFORMATION
Kadmon Holdings, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
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| September 30, |
| December 31, | ||
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| 2021 |
| 2020 | ||
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Assets |
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Current assets: |
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Cash and cash equivalents |
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Marketable debt securities, available-for-sale |
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Accounts receivable, net |
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Inventories, net |
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Prepaid expenses and other current assets |
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Investment, equity securities |
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Total current assets |
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Fixed assets, net |
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Right of use lease asset |
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Goodwill |
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Restricted cash |
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Investment, at cost |
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Other noncurrent assets |
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Total assets |
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| $ | |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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| $ | |
Accrued expenses |
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PPP loan - current |
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Lease liability - current |
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Warrant liabilities |
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Total current liabilities |
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Lease liability - noncurrent |
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Deferred tax liability |
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PPP loan - noncurrent |
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Convertible notes, net |
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Total liabilities |
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Commitments and contingencies (Note 12) |
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Stockholders’ equity: |
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Convertible preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
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Noncontrolling interest |
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Accumulated other comprehensive loss |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
| $ | |
| $ | |
See accompanying notes to consolidated financial statements (unaudited)
Kadmon Holdings, Inc.
Consolidated Statements of Operations and Comprehensive Loss (unaudited)
(in thousands, except share and per share amounts)
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, | ||||||||
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| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Revenues: |
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Net sales |
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| $ | |
| $ | |
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Other revenue |
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Total revenue |
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Cost of sales |
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Write-down of inventory |
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Gross profit |
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Operating expenses: |
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Research and development |
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Selling, general and administrative |
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Total operating expenses |
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Loss from operations |
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Other (expense) income: |
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Interest income |
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Interest expense |
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Realized gain on equity securities |
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Unrealized loss on equity securities |
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PPP Loan forgiveness |
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Gain on extinguishment of obligations |
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Change in fair value of warrant liabilities |
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| ( |
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Other expense |
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Total other (expense) income |
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Loss before income tax expense |
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Income tax expense |
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Net loss |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
Less: Net income attributable to noncontrolling interest |
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Less: Deemed dividend on convertible preferred stock |
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Net loss attributable to common stockholders |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
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Basic and diluted net loss per share of common stock |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
Weighted average basic and diluted shares of common stock outstanding |
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Other comprehensive (income) loss: |
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Net unrealized (gain) loss on available-for-sale securities |
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Other comprehensive (income) loss |
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Comprehensive loss attributable to common stockholders |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
See accompanying notes to consolidated financial statements (unaudited)
Kadmon Holdings, Inc.
Consolidated Statements of Stockholders’ Equity (unaudited)
(in thousands, except share amounts)
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For the Three Months Ended September 30, 2021 | |||||||||||||||||||||||||
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| Preferred stock |
| Common stock |
| Additional |
| Accumulated Other |
| Noncontrolling |
| Accumulated |
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| Shares |
| Amount |
| Shares |
| Amount |
| capital |
| Comprehensive Loss |
| Interest |
| Deficit |
| Total | |||||||
Balance, July 1, 2021 |
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| $ | |
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| $ | |
| $ | |
| $ | ( |
| $ | — |
| $ | ( |
| $ | |
Share-based compensation expense |
| — |
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| — |
| — |
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Common stock issued for option and warrant exercises |
| — |
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| — |
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Beneficial conversion feature on convertible preferred stock |
| — |
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| — |
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| — |
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| — |
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| — |
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| — |
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| ( |
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Accretion of dividends on convertible preferred stock |
| — |
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| — |
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| — |
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Other comprehensive income |
| — |
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| — |
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Net loss |
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| — |
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| ( |
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Balance, September 30, 2021 |
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| $ | |
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| $ | |
| $ | |
| $ | ( |
| $ | |
| $ | ( |
| $ | |
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For the Three Months Ended September 30, 2020 | |||||||||||||||||||||||||
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| Preferred stock |
| Common stock |
| Additional |
| Accumulated Other |
| Noncontrolling |
| Accumulated |
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| Shares |
| Amount |
| Shares |
| Amount |
| capital |
| Comprehensive Loss |
| Interest |
| Deficit |
| Total | |||||||
Balance, July 1, 2020 |
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| $ | |
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| $ | |
| $ | |
| $ | — |
| $ | — |
| $ | ( |
| $ | |
Share-based compensation expense |
| — |
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Common stock issued for option exercises |
| — |
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Beneficial conversion feature on convertible preferred stock |
| — |
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| — |
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Accretion of dividends on convertible preferred stock |
| — |
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Other comprehensive loss |
| — |
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| ( |
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Net loss |
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| ( |
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Balance, September 30, 2020 |
| |
| $ | |
| |
| $ | |
| $ | |
| $ | ( |
| $ | — |
| $ | ( |
| $ | |
See accompanying notes to consolidated financial statements (unaudited)
Kadmon Holdings, Inc.
Consolidated Statements of Stockholders’ Equity (unaudited)
(in thousands, except share amounts)
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For the Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||
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| Preferred stock |
| Common stock |
| Additional |
| Accumulated Other |
| Noncontrolling |
| Accumulated |
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| Shares |
| Amount |
| Shares |
| Amount |
| capital |
| Comprehensive Loss |
| Interest |
| Deficit |
| Total | |||||||
Balance, January 1, 2021 |
| |
| $ | |
| |
| $ | |
| $ | |
| $ | ( |
| $ | — |
| $ | ( |
| $ | |
Share-based compensation expense |
| — |
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| — |
| — |
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| — |
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| — |
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| — |
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Common stock issued under ESPP plan |
| — |
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| — |
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| — |
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| — |
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| — |
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Common stock issued for option and warrant exercises |
| — |
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| — |
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| — |
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Payments for capped call transactions |
| — |
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| — |
| — |
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| — |
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| ( |
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| — |
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| — |
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| — |
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| ( |
Beneficial conversion feature on convertible preferred stock |
| — |
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| |
| — |
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| — |
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| — |
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| — |
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| — |
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| ( |
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Accretion of dividends on convertible preferred stock |
| — |
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| — |
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Other comprehensive loss |
| — |
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| — |
| — |
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| ( |
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| ( |
Net loss |
| — |
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| — |
| — |
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| — |
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| — |
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| — |
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| 580 |
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| ( |
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| ( |
Balance, September 30, 2021 |
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| $ | |
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| $ | |
| $ | |
| $ | ( |
| $ | 580 |
| $ | ( |
| $ | |
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For the Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||
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| Preferred stock |
| Common stock |
| Additional |
| Accumulated Other |
| Noncontrolling |
| Accumulated |
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| Shares |
| Amount |
| Shares |
| Amount |
| capital |
| Comprehensive Loss |
| Interest |
| Deficit |
| Total | |||||||
Balance, January 1, 2020 |
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| $ | |
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| $ | |
| $ | |
| $ | — |
| $ | — |
| $ | ( |
| $ | |
Share-based compensation expense |
| — |
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| — |
| — |
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| — |
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| — |
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| — |
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| — |
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Common stock issued in public offering, net |
| — |
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| — |
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| — |
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Common stock issued under ESPP plan |
| — |
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Common stock issued for warrant exercises |
| — |
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| — |
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| — |
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| — |
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Common stock issued for option exercises |
| — |
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| — |
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| — |
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| |
|
| — |
|
| — |
|
| — |
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| |
Beneficial conversion feature on convertible preferred stock |
| — |
|
| |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| ( |
|
| — |
Accretion of dividends on convertible preferred stock |
| — |
|
| |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| ( |
|
| — |
Other comprehensive loss |
| — |
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| — |
| — |
|
| — |
|
| — |
|
| (25) |
|
| — |
|
| — |
|
| (25) |
Net loss |
| — |
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| — |
| — |
|
| — |
|
| — |
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| — |
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| — |
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| ( |
|
| ( |
Balance, September 30, 2020 |
| |
| $ | |
| |
| $ | |
| $ | |
| $ | ( |
| $ | — |
| $ | ( |
| $ | |
See accompanying notes to consolidated financial statements (unaudited)
Click or tap here to enter text.
Kadmon Holdings, Inc.
Consolidated Statements of Cash Flows (unaudited)
(in thousands)
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| Nine Months Ended | ||||
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| September 30, | ||||
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| 2021 | 2020 | ||
Cash flows from operating activities: |
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Net loss |
| $ | ( |
| $ | ( |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Amortization of premium and discounts on available-for-sale securities |
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Amortization of debt discount |
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| — |
Depreciation and amortization of fixed assets |
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Non-cash operating lease cost |
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Write-down of inventory |
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| — |
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Share-based compensation |
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Change in fair value of warrant liabilities |
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| ( |
Net unrealized loss on equity securities |
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Gain on settlement of obligations |
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| ( |
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| ( |
Changes in operating assets and liabilities: |
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Accounts receivable, net |
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| ( |
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Inventories, net |
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| ( |
Prepaid expenses and other assets |
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| ( |
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| ( |
Accounts payable |
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Lease liability |
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| ( |
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| ( |
Accrued expenses |
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| ( |
Net cash used in operating activities |
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| ( |
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| ( |
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Cash flows from investing activities: |
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Purchases of investment debt securities |
|
| ( |
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| ( |
Maturities of investment debt securities |
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| |
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| — |
Purchases of fixed assets |
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| ( |
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| ( |
Proceeds from sale of equity securities |
|
| — |
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Net cash used in investing activities |
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| ( |
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| ( |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock, net |
|
| — |
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| |
Proceeds from issuance of term debt |
|
| — |
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Proceeds from issuance of convertible notes, net of issuance costs |
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| |
|
| — |
Payments for capped call transactions |
|
| ( |
|
| — |
Proceeds from exercise of options and warrants |
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Proceeds from issuance of ESPP shares |
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Net cash provided by financing activities |
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Net decrease in cash, cash equivalents and restricted cash |
|
| ( |
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| ( |
Cash, cash equivalents and restricted cash, beginning of period |
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Cash, cash equivalents and restricted cash, end of period |
| $ | |
| $ | |
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Components of cash, cash equivalents and restricted cash |
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Cash and cash equivalents |
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Restricted cash |
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Total cash, cash equivalents and restricted cash |
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Supplemental cash flow disclosures: |
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Cash paid for interest |
| $ | |
| $ | — |
Non-cash investing and financing activities: |
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Beneficial conversion feature on convertible preferred stock |
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| |
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Accretion of dividends on convertible preferred stock |
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| |
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| |
PPP loan forgiveness |
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| |
|
| — |
Operating lease liabilities arising from obtaining right-of-use assets |
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| |
|
| — |
Operating cash flows paid for amounts included in the measurement of lease liabilities |
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| |
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| |
Unpaid fixed asset additions |
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| — |
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| |
See accompanying notes to consolidated financial statements (unaudited)
Kadmon Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)
The Company
Kadmon Holdings, Inc. (together with its subsidiaries, “Kadmon” or the “Company”) is a biopharmaceutical company engaged in the discovery, development and commercialization of small molecules and biologics to address significant unmet medical needs, with a near-term clinical focus on immune and fibrotic diseases as well as immuno-oncology. The Company leverages its multi-disciplinary research and 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.
In July 2021, the U.S. Food and Drug Administration (“FDA”) approved REZUROCK™ (belumosudil) 200 mg once daily (“QD”) for the treatment of adult and pediatric patients 12 years and older with chronic graft-versus-host disease (“cGVHD”) after failure of at least two prior lines of systemic therapy. REZUROCK was made available in the United States in August 2021.
Pending Acquisition by Sanofi
On September 7, 2021, Kadmon entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sanofi, a French société anonyme (“Sanofi”), and Latour Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Sanofi (“Merger Subsidiary”), providing for the merger of Merger Subsidiary with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Sanofi (the “Parent”). Capitalized terms not otherwise defined in this section “Pending Acquisition by Sanofi” have the meanings set forth in the Merger Agreement.
The Company’s board of directors (the “Board”) has unanimously approved the Merger and the Merger Agreement and recommended that the stockholders of the Company adopt the Merger Agreement. At the Effective Time of the Merger:
each share of common stock, par value $
each share of
all unvested options to purchase Company Common Stock (“Company Options”) which are outstanding immediately prior to the Effective Time will fully vest and become exercisable and, to the extent not exercised prior to the Effective Time, be canceled at the Effective Time with the former holder of such canceled Company Option becoming entitled to receive an amount in cash (without interest and subject to any applicable withholding or other taxes, or other amount as required by law) equal to (1) the number of shares of Company Common Stock subject to such Company Option multiplied by (2) the excess, if any, of the Common Stock Merger Consideration over the exercise price per share of such Company Option; provided that each Company Option with an exercise price per share equal to or greater than the Common Stock Merger Consideration will be canceled without consideration;
all unvested stock appreciation rights granted by the Company (“Company SARs”) which are outstanding as of immediately prior to the Effective Time will fully vest and, to the extent not exercised prior to the Effective Time, be canceled at the Effective Time, with the former holder of such canceled Company SAR becoming entitled to receive an amount in cash (without interest and subject to any applicable withholding or other taxes, or other amount as required by law) equal to (A) the excess, if any, of the Common Stock Merger Consideration over the exercise price per share of such Company SAR multiplied by (B) the number of shares of Company Common Stock underlying such Company SAR; provided that each Company SAR with an exercise price per share equal to or greater than the Common Stock Merger Consideration will be canceled without consideration; and
all unvested equity appreciation rights granted by the Company (“Company EARs”) which are outstanding as of immediately prior to the Effective Time will fully vest and be canceled at the Effective Time, with the former holder of such canceled Company EAR becoming entitled to receive an amount in cash (without interest and subject to any applicable withholding or other taxes, or other amount as required by law) equal to (A) the excess of the Common Stock Merger Consideration over the base price per share of such Company EAR multiplied by (B) the number of shares of Common Stock underlying such Company EAR; provided that each Company EAR with a base price per share equal to or greater than the Common Stock Merger Consideration will be canceled without consideration.
Consummation of the Merger is subject to customary closing conditions, including, without limitation, the absence of certain legal impediments and approval by the holders of a majority of the voting power of the outstanding shares of Company Common Stock and Company Preferred Stock, voting on an as converted to Company Common Stock basis, entitled to vote on such matter.
The Company has made representations and warranties in the Merger Agreement and has agreed to covenants regarding the operation of the business of the Company and the Company Subsidiaries prior to the Effective Time. The Company is also subject to customary restrictions on its ability to solicit alternative acquisition proposals from third parties and to provide non-public information to, and participate in discussions and engage in negotiations with, third parties regarding alternative acquisition proposals. The Merger Agreement also contains customary covenants requiring the Board, subject to certain exceptions, to recommend that the Company’s stockholders approve the Merger. Prior to the approval of the Merger by the Company’s stockholders, the Board may withhold, withdraw, qualify, or modify its recommendation that the Company’s stockholders approve the Merger because of a Company Intervening Event or may adopt, approve or recommend any Superior Proposal, subject to complying with notice and other specified conditions.
The Merger Agreement contains certain termination rights for both the Company and Parent, including that, subject to certain limitations, (i) the Company or Parent may terminate the Merger Agreement if the Merger is not consummated by March 7, 2022, (ii) the Company and Parent may mutually agree to terminate the Merger Agreement, (iii) the Company may terminate the Merger Agreement to accept a Superior Proposal and (iv) Parent may terminate the Merger Agreement because the Board changes its recommendation to the Company stockholders with respect to approval of the Merger.
The Company will be required to pay a termination fee of $
The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of the Merger Agreement, which is attached as an exhibit to our Current Report on Form 8-K filed with the SEC on September 8, 2021 and incorporated herein by reference.
In connection with the approval of the Merger Agreement, the Board approved certain amendments to the employment agreements between the Company and each of Harlan W. Waksal, M.D., the Company’s President and Chief Executive Officer, Steven Meehan, the Company’s Executive Vice President and Chief Financial Officer, and Gregory S. Moss, the Company’s Executive Vice President, General Counsel and Corporate Secretary, Chief Compliance Officer (the “Employment Agreement Amendments”). The Employment Agreement Amendments provide for the payment of retention bonuses in the amount of $
The Company incurred transaction-related costs of approximately $
COVID-19 Update
The ongoing COVID-19 pandemic has severely impacted global economic activity and caused significant volatility in financial markets. While the Company’s financial condition, results of operations, cybersecurity and liquidity have not been materially impacted by the direct effects of the pandemic, the COVID-19 pandemic continues to evolve. The Company is continuing to monitor developments with respect to the COVID-19 pandemic and to make adjustments as needed to assist in protecting the safety of the Company’s employees and communities while continuing business activities. To date, implementation of these measures has not required material expenditures or significantly impacted these unaudited financial statements. The Company is continuing to monitor the potential impacts of COVID-19 on its operations and those of its partners, suppliers, customers, and regulators, including commercial and clinical drug supply chain continuity and commercial launch of REZUROCK.
Notwithstanding the foregoing, the Company cannot precisely predict the impact that the COVID-19 pandemic will have in the future due to numerous uncertainties, including the severity of the disease and its variants, the duration of the pandemic, actions that may be taken by governmental authorities, the impact to the business of potential variations or disruptions in the Company’s supply chain. The Company will continue to closely monitor and evaluate the nature and extent of the impact of the COVID-19 pandemic to its business, consolidated results of operations, and financial condition.
Liquidity
The Company maintained cash, cash equivalents and marketable debt securities of $
Based on the Company’s expectations for revenue, operating expenses, and its cash, cash equivalents and marketable debt securities available on hand at September 30, 2021, the Company believes it will continue to be able to advance its commercial launch efforts for REZUROCK ™ (belumosudil), advance certain of its other pipeline product candidates, including KD033, and provide for other working capital purposes. Although cash, cash equivalents and marketable debt securities available at September 30, 2021 is expected to execute the Company’s current business plans, it may not be sufficient to enable the Company to meet its long-term expected plans. The Company has sustained operating losses for the majority of its corporate history and the Company expects to continue to incur operating losses and negative cash flows until revenues reach a level sufficient to support ongoing operations.
The Company’s future liquidity needs and ability to address those needs will be largely determined by the success of operations in regard to the successful commercialization of REZUROCK and the progression of its product candidates in the future, scope and magnitude of its commercial expenses and key development and regulatory events in the future. Management’s plans may include continuing to finance operations through the issuance of debt and sale 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. The Company has no commitments for any additional financing and may not be successful in its efforts to raise additional funds or achieve profitable operations. Any transactions that occur may contain covenants that restrict the ability of management to operate the business or may have rights, preferences or privileges senior to the Company’s common stock and may dilute current stockholders of the Company.
The Company filed a shelf registration statement on Form S-3 (File No. 333-238969) on June 5, 2020, which was declared effective by the U.S. Securities and Exchange Commission (“SEC”) on June 16, 2020. Under this registration statement, the Company may sell, in one or more transactions, up to $
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, 2020, filed with the SEC on March 4, 2021.
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, 2020, filed with the SEC on March 4, 2021. Since the date of such financial statements, there have been no changes or updates to the Company’s significant accounting policies, other than those described below.
The Company considers all highly liquid securities with an original or remaining maturity of three months or less at the time of acquisition to be cash equivalents. The Company determines the appropriate classification of its investments in debt securities at the time of purchase. All of the Company’s debt securities are classified as available-for-sale and are reported as short-term or long-term based on maturity dates and whether such assets are available for use in current operations and are reasonably expected to be realized in cash or consumed during the normal cycle of business. Our available-for-sale debt securities generally have contractual maturity dates between and months.
The following tables summarize the Company’s cash, cash equivalents and marketable debt securities as of September 30, 2021 and December 31, 2020 (in thousands):
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| September 30, 2021 | ||||||||||
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| Amortized Cost |
| Gross Unrealized Gains |
| Gross Unrealized Losses |
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| Fair Value | |||
Cash and cash equivalents: |
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Cash and money market funds |
| $ | |
| $ | — |
| $ | — |
|
| |
Total cash and cash equivalents |
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| |
|
| — |
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| — |
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| |
Marketable debt securities: |
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Corporate debt securities |
|
| |
|
| |
|
| ( |
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| |
Total marketable debt securities |
|
| |
|
| |
|
| ( |
|
| |
Total cash, cash equivalents and marketable debt securities |
| $ | |
| $ | |
| $ | ( |
| $ | |
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| December 31, 2020 | ||||||||||
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| Amortized Cost |
| Gross Unrealized Gains |
| Gross Unrealized Losses |
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| Fair Value | |||
Cash and cash equivalents: |
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Cash and money market funds |
| $ | |
| $ |
|
| $ |
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| |
Corporate debt securities |
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| |
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| | ||
Total cash and cash equivalents |
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| |
Marketable debt securities: |
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Corporate debt securities |
|
| |
|
| |
|
| ( |
|
| |
Total marketable debt securities |
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| |
|
| |
|
| ( |
|
| |
Total cash, cash equivalents and marketable debt securities |
| $ | |
| $ | |
| $ | ( |
| $ | |
At September 30, 2021, the Company had invested in
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, “Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in Entity’s Own Equity” (“ASU 2020-06”) to address the complexity associated with applying GAAP to certain financial instruments with characteristics of liabilities and equity. This ASU includes amendments to the guidance on convertible instruments and the derivative scope exception for contracts in an entity’s own equity and simplifies the accounting for convertible instruments by eliminating the cash conversion accounting model for convertible instruments. The Company early adopted ASU 2020-06 effective January 1, 2021, and the standard did not have a significant impact on its consolidated financial statements. By adopting ASU 2020-06, the Company eliminates the separation model for convertible debt and the requirement to separately present in equity an embedded conversion feature in such debt.
In February 2021, the Company issued $
The Company accounts for derivative financial instruments as either equity or liabilities in accordance with ASC 815, based on the characteristics and provisions of each instrument. Embedded derivatives are required to be bifurcated from the host instruments and recorded at fair value if the derivatives are not clearly and closely related to the host instruments on the date of issuance. The Company’s convertible notes (Note 5) contain certain features that, in accordance with ASC 815, are not clearly and closely related to the host instrument and represent derivatives that are required to be re-measured at fair value each reporting period. The Company determined that the estimated fair value of the derivatives at issuance and as of September 30, 2021 were not material based on a scenario-based cash flow model that uses unobservable inputs that reflect the Company’s own assumptions. Should the Company’s assessment of the probabilities around these scenarios change, including due to changes in market conditions, there could be a change to the fair value.
The Company recognizes revenue in accordance with FASB ASC 606, Revenue from Contracts with Customers, 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.
Disaggregation of Revenue
The Company’s revenues have primarily been generated through product sales, collaborative research, development and commercialization license agreements, and other service agreements. The following table summarizes revenue from contracts with customers for the three and nine months ended September 30, 2021 and 2020 (in thousands):
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Product sales, net |
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REZUROCK |
| $ | |
| $ | — |
| $ | |
| $ | — |
Other |
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Total product sales, net |
| $ | |
| $ | |
| $ | |
| $ | |
License revenue |
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| — |
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Other revenue |
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Total revenue |
| $ | |
| $ | |
| $ | |
| $ | |
Product Sales
These contracts typically include a single promise to deliver a fixed amount of product to a customer with payment due within
On July 16, 2021, the FDA approved REZUROCK for the treatment of adult and pediatric patients 12 years and older with cGVHD after failure of at least two prior lines of systemic therapy. The Company expects REZUROCK to be its principal source of product sales in the future. For REZUROCK, the Company will classify payments to its customers for certain services provided by its customers as reductions to revenue.
The Company sells REZUROCK to patients through a limited distribution network of specialty pharmacy and specialty distributors in the United States. Net revenue from sales of REZUROCK will be recorded at net selling price (transaction price), which includes estimates of variable consideration for which reserves are established for (i) estimated government rebates, such as Medicaid and Medicare Part D reimbursements, and estimated managed care rebates, (ii) estimated chargebacks, (iii) estimated costs of co-payment assistance programs and (iv) product returns. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable or as a current liability. Where appropriate, these estimates take into consideration items such as the Company’s current contractual and statutory requirements and forecasted customer buying and payment patterns. Overall, these reserves reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the applicable contract. The amount of variable consideration included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Company's estimates. If actual results in the future vary from estimates, the Company will adjust these estimates, which would affect net product revenue and earnings in the period such variances become known.
Government and Managed Care Rebates. The Company contracts with government agencies and managed care organizations or, collectively, third-party payors, so that REZUROCK will be eligible for purchase by, or partial or full reimbursement from, such third-party payors. The Company estimates the rebates it will provide to third-party payors and deducts these estimated amounts from total gross product revenues at the time the revenues are recognized. These reserves are recorded in the same period in which the revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability. The Company estimates the rebates that it will provide to third-party payors based upon (i) the Company's contracts with these third-party payors, (ii) the government mandated discounts applicable to government-funded programs, (iii) a range of possible outcomes that are probability-weighted for the estimated payor mix, and (iv) product distribution information obtained from the Company's distribution network of specialty pharmacy and specialty distributors. During the three and nine months ended September 30, 2021, the Company recognized $
Chargebacks. Chargebacks are discounts that occur when certain contracted customers, pharmacy benefit managers, insurance companies, government programs and group purchasing organizations purchase directly from the Company’s specialty distributors. These customers purchase the Company’s product under contracts negotiated between them and the Company’s specialty distributors. The specialty distributor, in turn, charges back to the Company the difference between the price the specialty distributor paid and the negotiated price paid by the contracted customers, which may be higher or lower than the specialty distributor’s purchase price from the Company. The Company estimates chargebacks and adjusts gross product revenues and accounts receivable based on the estimates at the time revenues are recognized. During the three and nine months ended September 30, 2021, the Company recognized $
Co-payment assistance and patient assistance programs. Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. Based upon the terms of the program and co-payment assistance utilization reports received from the Company’s hub services provider, the Company is able to estimate the co-payment assistance amounts, which are recorded in the same period in which the related revenue is recognized, resulting in a reduction of product revenue. The Company also offers a patient assistance program that provides free drug product, for a limited period of time, to allow a patient’s insurance coverage to be established. Based on patient assistance program utilization reports provided by the Company’s hub services provider, the Company records gross revenue of the product provided and a full reduction of the revenue amount for the free drug discount. During the three and nine months ended September 30, 2021, the Company recognized $
Product returns. The Company provides contractual return rights to its customers, based on product dating and in instances where the product is damaged or defective. Non-acceptance of shipped drug product is reflected as a reversal of sales in the period in which the sales were originally recorded. Reserves for estimated returns are recorded as a reduction of revenue in the period that the related revenue is recognized, as well as a liability. Estimates of returns are based on third party analogs of recent drug product launches and quantitative information provided by the Company's distribution network of specialty pharmacies and specialty distributors. During the three and nine months ended September 30, 2021, the Company recognized $
License Revenue
License revenue in 2021 consists of a milestone payment earned pursuant to a strategic partnership entered into with BioNova Pharmaceuticals Ltd. to develop belumosudil (KD025) in China. The transaction price of $
Other Revenue
The other revenue generated by the Company is primarily related to a sublease agreement with MeiraGTx Holdings plc (“MeiraGTx”). The Company recognizes revenue related to sublease agreements as they are performed.
Cost of product sales includes the cost of producing and distributing inventories that are related to product revenue during the respective period, including royalties owed under license agreements (Note 9). In addition, shipping and handling costs for product shipments are recorded as incurred.
Risks from Third-Party Manufacturing and Distribution Concentration
The Company relies on single source manufacturers for active pharmaceutical ingredient and finished drug product manufacturing of product candidates in development and on a limited number of distributors for distribution of approved drug products. Delays in the manufacture or distribution of any product could adversely impact the commercial revenue and future inventory procurement of the Company’s product candidates.
Credit Risk
The Company’s receivables from sales of REZUROCK are primarily due from six customers, accounting for approximately
Aditionally, the Company’s receivables include approximately $
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes”, which removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The Company adopted this standard on January 1, 2021, and the standard did not have a significant impact on its consolidated financial statements.
5% Convertible Preferred Stock
The Company had
Common Stock
The Company’s restated certificate of incorporation authorizes the issuance of up to
Basic net loss attributable to common stockholders per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Because the Company has reported a net loss for each period presented, diluted net loss per share of common stock is the same as basic net loss per share of common stock for the three and nine months ended September 30, 2021 and 2020.
The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the Company (in thousands, except share and per share amounts):
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2021 |
| 2020 |
| 2021 |
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| 2020 | |||
Numerator – basic and diluted: |
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Net loss available to common stockholders - basic and diluted |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
Denominator – basic and diluted: |
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Weighted average shares of common stock outstanding used to compute basic and diluted net loss per share |
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| |
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| |
|
| |
|
| |
Net loss per share, basic and diluted |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
The amounts in the table below were excluded from the calculation of diluted net loss per share, due to their anti-dilutive effect:
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| Three and Nine Months Ended | |||
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| September 30, | |||
|
|
| 2021 |
|
| 2020 |
Options to purchase common stock |
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| |
|
| |
Warrants to purchase common stock |
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| |
|
| |
Convertible preferred stock |
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| |
|
| |
Convertible notes |
|
| |
|
| — |
Total shares of common stock equivalents |
|
| |
|
| |
3.625% Convertible Senior Notes Due in 2027
In February 2021, the Company issued $
The Notes, governed by an indenture between the Company and a trustee, are senior, unsecured obligations and do not include financial and operating covenants nor any restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by Kadmon or any of its subsidiaries. Interest on the Notes is payable semi-annually in cash in arrears at a rate of
Upon conversion, the Notes may be settled in shares of Kadmon common stock, cash or a combination thereof, at the Company’s election. The initial conversion rate is shares of common stock per $1,000 in principal amount of Notes, which represents an initial conversion price of approximately $
The Company may redeem all or any portion of the Notes, at its option, on or after February 20, 2024 and on or before the
Holders of Notes may require the Company to repurchase their Notes upon the occurrence of certain events that constitute a fundamental change under the indenture governing the Notes at a fundamental change repurchase price equal to
The following table summarizes the carrying value of the Notes at September 30, 2021 (in thousands):
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|
| September 30, 2021 |
|
| December 31, 2020 |
Gross proceeds |
| $ | |
| $ | - |
Unamortized debt discount |
|
| ( |
|
| - |
Carrying value |
| $ | |
| $ | - |
The following table summarizes the interest expense recognized related to the Notes for the three and nine months ended September 30, 2021 (in thousands):
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|
|
| Three Months Ended |
|
| Nine Months Ended |
|
|
| September 30, 2021 |
|
| September 30, 2021 |
Stated interest |
| $ | |
| $ | |
Amortized debt discount |
|
| |
|
| |
Interest expense |
| $ | |
| $ | |
Capped Call Transactions
Separately, the Company entered into privately negotiated capped call options with financial institutions. The capped call options cover, subject to customary anti-dilution adjustments, the number of shares of the Company’s common stock that initially underlie the Notes. The cap price of the capped call options is $
Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act.
On April 15, 2020, the Company received the proceeds from a loan in the amount of approximately $
The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. The fair value hierarchy defines three levels and prioritizes valuation inputs based on the observable nature of those inputs. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of investments and is not a measure of investment credit quality.
Items classified as Level 1 within the valuation hierarchy consist of the Company’s cash equivalents held in money market funds and its ownership of MeiraGTx. The Company measures these investments at fair value determined based on Level 1 observable quoted price market inputs.
Items classified as Level 2 within the valuation hierarchy consist of the Company’s marketable debt securities, warrant liabilities and convertible notes. The Company estimates the fair values of the marketable debt securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for the same or similar securities, issuer credit spreads, benchmark yields, and other observable inputs. The Level 2 inputs used to value the Company’s warrant liabilities were determined using prices that can be directly observed. 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. The fair value of the Notes, which differs from their carrying value, is influenced by interest rates, stock price and stock price volatility and is determined by prices observed in market trading. The market for trading of the Notes is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs. The estimated fair value of the Notes was approximately $
The following table presents the Company’s financial assets and liabilities that have been measured at fair value at September 30, 2021 and the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):
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| Fair Value Measurements Using | |||||||
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Description | Total |
| Quoted Prices in Active Markets (Level 1) |
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) | ||||
Financial assets |
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Cash equivalents: |
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Money market funds |
| $ | |
| $ | |
| $ | — |
| $ | — |
Short-term investments: |
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Corporate debt securities |
|
| |
|
| — |
|
| |
|
| — |
Ownership of MeiraGTx |
|
| |
|
| |
|
| — |
|
| — |
|
| $ | |
| $ | |
| $ | |
| $ | — |
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Financial liabilities |
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Warrant liabilities |
| $ | |
| $ | — |
| $ | |
| $ | — |
The following table presents the Company’s financial assets and liabilities that have been measured at fair value at December 31, 2020 and the fair value hierarchy of the valuation inputs utilized to determine such fair value (in thousands):
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| Fair Value Measurements Using | |||||||
Description | Total |
| Quoted Prices in Active Markets (Level 1) |
| Significant Other Observable Inputs (Level 2) |
|
| Significant Unobservable Inputs (Level 3) | ||||
Financial assets |
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Cash equivalents: |
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|
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Money market funds |
| $ | |
| $ | |
| $ | — |
| $ | — |
Corporate debt securities |
|
| |
|
| — |
|
| |
|
| — |
Short-term investments: |
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|
|
Corporate debt securities |
|
| |
|
| — |
|
| |
|
| — |
Ownership of MeiraGTx |
|
| |
|
| |
|
| — |
|
| — |
|
| $ | |
| $ | |
| $ | |
| $ | — |
|
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Financial liabilities |
|
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Warrant liabilities |
| $ | |
| $ | — |
| $ | |
| $ | — |
The Company has not recognized any material gross realized gains or losses on sales of available-for-sale marketable debt securities.
Ownership of MeiraGTx
The Company maintained a
Warrant Liabilities
In connection with the 2015 credit agreement, as fees to the lenders thereunder, the Company issued warrants to purchase an aggregate of $
As of September 30, 2021, the exercise price of a portion of the 2015 Warrants to purchase an aggregate of
The Company used the Black-Scholes pricing model to value the liability related to the 2015 Warrants at September 30, 2021 with the following assumptions: risk-free interest rate of
The table below represents a roll-forward of warrant liabilities measured using Level 2 inputs from January 1, 2021 to September 30, 2021 (in thousands):
|
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|
|
|
| Significant Other Observable Inputs | |
|
| (Level 2) | |
Balance at January 1, 2021 |
| $ | |
Change in fair value of warrant liabilities |
|
| |
Balance at September 30, 2021 |
| $ | |
The following table represents a roll-forward of warrants outstanding from January 1, 2021 to September 30, 2021:
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| Warrants |
| Weighted Average | |
Balance, January 1, 2021 |
| |
| $ | |
Exercised |
| ( |
|
| |
Balance, September 30, 2021 |
| |
| $ | |
Inventories are stated at the lower of cost or net realizable value (on a first-in, first-out basis) using standard costs. Standard costs include an allocation of overhead rates, which include those costs attributable to managing the supply chain and are evaluated regularly. Variances are expensed as incurred. The Company capitalizes inventory costs associated with the Company’s products after regulatory approval, if ever, when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed as research and development. On July 16, 2021, REZUROCK received FDA approval and all subsequent inventory costs associated with REZUROCK are being capitalized. Raw materials and work-in-process include all inventory costs prior to packaging and labelling, including raw material, active product ingredient, and drug product. Finished goods include packaged and labelled products. The inventory balance as of September 30, 2021 does not include $
The Company periodically analyzes its inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value, and writes-down such inventories as appropriate. In addition, the Company’s product is subject to strict quality control and monitoring which the Company performs throughout the manufacturing process. If certain batches or units of product no longer meet quality specifications or the Company identifies excess, obsolete or unsalable inventory, its value is written down to net realizable value.
Inventories are comprised of the following (in thousands):
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|
|
| September 30, |
| December 31, | ||
|
| 2021 |
| 2020 | ||
Raw materials |
| $ |
|
| $ |
|
Finished goods, net |
|
| |
|
| |
Total inventories, net |
| $ | |
| $ | |
Fixed assets consisted of the following (in thousands):
|
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|
|
| Useful Lives |
| September 30, |
| December 31, | ||
| (Years) |
| 2021 |
| 2020 | ||
Leasehold improvements |
| $ | |
| $ | | |
Office equipment and furniture |
|
| |
|
| | |
Machinery and laboratory equipment |
|
| |
|
| | |
Software |
|
| |
|
| | |
|
|
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| |
|
| |
Less accumulated depreciation and amortization |
|
|
| ( |
|
| ( |
Fixed assets, net |
|
| $ | |
| $ | |
Depreciation and amortization of fixed assets totaled $
The Company has entered into several license agreements for products currently under development. The Company’s license agreements are disclosed in the audited financial statements included in “Note 11. License Agreements” of its Annual Report on Form 10-K for the year ended December 31, 2020. Since the date of such financial statements, there have been no significant changes to the Company’s license agreements.
Nano Terra, Inc.
On April 8, 2011, the Company entered into a series of transactions with Nano Terra, Inc. (“Nano Terra”) and entered into a joint venture with Surface Logix, Inc. (“SLx”) (Nano Terra’s wholly-owned subsidiary) through the formation of NT Life Sciences, LLC (“NTLS”), which had no material operations prior to 2021, and entered into a sub-licensing arrangement with NTLS and SLx. Pursuant to the sub-licensing arrangement, the Company was granted a worldwide, exclusive license under certain intellectual property owned by SLx to three clinical-stage product candidates, including belumosudil, each of which were licensed by SLx to NTLS. NTLS is a research and development company, which independently maintains intellectual property for the purpose of pursuing medical discoveries. The Company is represented on the board of managers of NTLS and is a party to decisions which influence the direction of the organization.
The Company must pay to the previous shareholders of SLx from which Nano Terra acquired SLx, royalties on net sales in the amount of
Since inception, the Company has continuously assessed the applicability of FASB ASC 810, “Consolidation”, based on the corporate structure, voting rights and contributions of the various parties in connection with these agreements. The Company consolidates entities where the Company has a direct or indirect controlling financial interest based on either a variable interest model or voting interest modeltity. As such, the Company will consolidate an entity that is concluded to be a variable interest entity (“VIE”) for which the Company is deemed to be the primary beneficiary and any entity in which the Company holds a majority voting interest or has majority ownership and control over the operational, financial and investing decisions of that entity.
With the approval of REZUROCK, NTLS has started to operationalize its structure and there was no activity of the joint venture prior to August 2021. NTLS does not meet any of the criteria for VIE classification, however, NTLS is subject to consolidation by the Company under the voting interest model as the Company has majority control over the operational, financial and investing decisions of NTLS. The Company controls the board of managers of NTLS and any major operational decisions. The Company has recorded a noncontrolling interest in the activity of NTLS based on its
During the three and nine months ended September 30, 2021, the Company accrued royalties of approximately $
2016 Equity Incentive Plan
A total of
The following table summarizes share-based compensation expense under the 2016 Equity Plan for the three and nine months ended September 30, 2021 and 2020.
|
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|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
General and administrative |
| $ | |
| $ | |
| $ | |
| $ | |
Research and development |
|
| |
|
| |
|
| |
|
| |
Total stock-based compensation expense |
| $ | |
| $ | |
| $ | |
| $ | |
Total unrecognized compensation expense related to unvested options granted under the Company’s share-based compensation plan was $
The following table summarizes information about stock options outstanding, not including performance stock options, from January 1, 2021 to September 30, 2021:
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|
|
|
|
|
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| Options Outstanding | ||||||||
|
| Number of Options |
| Weighted |
| Weighted Average |
| Aggregate | ||
Balance, January 1, 2021 |
| |
| $ | |
| |
| $ | |
Granted |
| |
|
| |
|
|
|
|
|
Exercised |
| ( |
|
| |
|
|
|
| |
Forfeited |
| ( |
|
| |
|
|
|
|
|
Balance, September 30, 2021 |
| |
| $ | |
| |
| $ | |
Options vested and exercisable, September 30, 2021 |
| |
| $ | |
| |
| $ | |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value calculated as the difference between the fair value of the Company’s common stock at September 30, 2021 ($
The fair value of each stock option award, not including performance stock options, was estimated at the date of grant using the Black-Scholes option-pricing model and the assumptions noted in the following table:
|
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|
|
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|
|
|
|
|
|
|
| Nine Months Ended |
|
| Nine Months Ended |
|
| September 30, 2021 |
|
| September 30, 2020 |
Options granted |
| |
|
| |
Weighted average exercise price |
| $ |
|
| $ |
Weighted average fair value of grants |
| $ |
|
| $ |
Expected volatility |
|
|
| ||
Risk-free interest rate |
|
|
| ||
Expected life (years) |
|
|
| ||
Expected dividend yield |
|
|
|
Performance Options
A total of
Stock Appreciation Rights
A total of
2014 Long-term Incentive Plan (the “LTIP”)
A total of
2016 Employee Stock Purchase Plan
Short-term accrued expenses at September 30, 2021 and December 31, 2020 include the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2021 |
| 2020 | ||
Compensation and benefits |
| $ | |
| $ | |
Research and development |
|
| |
|
| |
Interest |
|
| |
|
| |
Other |
|
| |
|
| |
Total accrued expenses |
| $ | |
| $ | |
Compensation and benefits
Compensation and benefits primarily represents earned and unpaid employee wages and bonuses.
Research and development
The Company has contracts with third parties for the development of the Company’s product candidates. The timing of the expenses varies depending upon the timing of initiation of clinical trials and enrollment of patients in clinical trials.
Interest
The Company’s commitments are disclosed in the audited financial statements included in “Note 15. Commitments and Contingencies” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Since the date of such financial statements, there have been no material changes to the Company’s commitments or contingencies, including leases, other than the legal proceedings described below.
Contingent License Agreement Milestones
The Company has entered into several license agreements for products currently under development (Note 9). The Company may be obligated in future periods to make additional payments, which would become due and payable only upon the achievement of certain research and development, regulatory and approval milestones. The specific timing of such milestones cannot be predicted and depends upon future discretionary clinical developments as well as regulatory agency actions which cannot be predicted with certainty (including action which may never occur). These additional contingent milestone payments aggregate to $
Under the terms of certain licensing agreements, the Company may be obligated to pay commercial milestones contingent upon the realization of sales revenues and sublicense revenues. Due to the long-range nature of such commercial milestones, they are neither probable at this time nor predictable, and consequently are not included in the additional contingent milestone payment amount.
Legal Proceedings
The Company is subject to various legal proceedings that arise from time to time in the ordinary course of its business. Although the Company believes that the various proceedings brought against it are without merit, and that it has adequate product liability and other insurance to cover any claims, litigation is subject to many factors which are difficult to predict and there can be no assurance that the Company will not incur material costs in the resolution of legal matters. Should the Company determine that any future obligations will exist, the Company will record expense equal to the amount which is deemed probable and estimable.
GoldenTree Master Fund, Ltd. v. Kadmon Holdings, Inc.
On April 21, 2021, GoldenTree Master Fund, Ltd (“GoldenTree”) filed suit in the Supreme Court of New York bringing claims for breach of contract, unjust enrichment, and fraudulent inducement. On October 18, 2021, the Supreme Court of New York signed a stipulation filed by the parties whereby the parties have agreed, subject to certain terms and conditions, that this suit should be stayed in its entirety pending the outcome of the vote of Kadmon stockholders to approve or disapprove the Sanofi Merger, and that the action should be voluntarily discontinued upon approval and closing of the Sanofi Merger and the cancellation of the preferred shares in exchange for the applicable Liquidation Value as defined in the applicable Certificate of Designations of the securities that form the subject matter of the dispute.
The Company files a consolidated tax return for Kadmon Holdings, Inc. and its domestic subsidiaries and the required information returns for its international subsidiaries, all of which are wholly owned. Where permitted, the Company files combined state returns, but in some instances separate company returns for certain subsidiaries on a stand-alone basis are required.
There was
Legal Proceedings
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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” refer to Kadmon Holdings, Inc. and its consolidated subsidiaries. You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing in this Quarterly Report on Form 10-Q and those in included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” and “Forward-Looking Statements” sections of this Quarterly Report on Form 10-Q and our most recent Annual Report on Form 10-K, our actual results could differ materially from the results described in, or implied by, the forward-looking statements contained in the following discussion and analysis.
Overview
We are a biopharmaceutical company engaged in the discovery, development and commercialization of small molecules and biologics to address significant unmet medical needs. Our clinical pipeline includes developmental treatments for immune and fibrotic diseases as well as immuno-oncology therapies. Our operations to date have been focused on developing first-in-class innovative therapies for indications with significant unmet medical needs while leveraging our commercial infrastructure. We believe that we have the ability to progress these candidates ourselves while maintaining flexibility for commercial and licensing arrangements. In addition to these discovery and development efforts, our business strategy includes the efficient commercialization of these drugs in the U.S. and certain other regions upon regulatory approval. By focusing on rare disease markets, we believe that we can more effectively control the costs of, and our strategic allocation of financial resources toward, post-approval commercialization.
Our revenues are difficult to predict and depend on several factors. For example, our revenues depend, in part, on regulatory approval decisions for our product and product candidates, the effectiveness of our and our collaborative partners’ commercialization efforts, market acceptance of our products, particularly REZUROCK™ (belumosudil), the resources dedicated to our products and product candidates by us and our collaborative partners, and our ability to enter into or modify licensing agreements for our product candidates. We have never been profitable and had an accumulated deficit of $538.1 million at September 30, 2021.
Our operating expenses are also difficult to predict and depend on several factors, including commercialization expenses, research and development expenses, drug manufacturing, and clinical research activities, the ongoing requirements of our development programs and the availability of capital. As our commercialization activities for REZUROCK and research and development programs continue to advance, we expect our operating costs will increase. Management may be able to control the timing and level of research and development and selling, general and administrative expenses, but many of these expenditures will occur irrespective of our actions due to contractually committed activities and/or payments.
As a result of these factors, we believe that period-to-period comparisons are not necessarily meaningful and you should not rely on them as an indication of future performance. The Company has sustained operating losses for the majority of its corporate history and the Company expects to continue to incur operating losses and negative cash flows until revenues reach a level sufficient to support ongoing operations. Due to all of the foregoing factors, it is possible that our operating results will be below the expectations of market analysts and investors. In such event, the prevailing market price of our common stock could be materially adversely affected.
Recent Corporate Highlights
Pending Acquisition by Sanofi
On September 7, 2021, Kadmon entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sanofi, a French société anonyme (“Sanofi”), and Latour Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Sanofi (“Merger Subsidiary”), providing for the merger of Merger Subsidiary with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Sanofi (the “Parent”). Capitalized terms not otherwise defined in this section “Pending Acquisition by Sanofi” have the meanings set forth in the Merger Agreement.
The Company’s board of directors (the “Board”) has unanimously approved the Merger and the Merger Agreement and recommended that the stockholders of the Company adopt the Merger Agreement. At the Effective Time of the Merger:
each share of common stock, par value $0.001 per share, of the Company (the “Company Common Stock”) issued and outstanding as of immediately prior to the Effective Time (other than Dissenting Shares, Company Common Stock held by the Company as treasury stock or owned by Parent, Merger Subsidiary or any Subsidiary of the Company or Parent) will be cancelled and cease to exist and automatically convert into the right to receive cash in an amount equal to $9.50, without interest (the “Common Stock Merger Consideration”);
each share of 5% convertible preferred stock, par value $0.001 per share, of the Company (“Company Preferred Stock”) issued and outstanding as of immediately prior to the Effective Time (other than Dissenting Shares) will be cancelled and cease to exist and automatically convert into the right to receive cash in an amount equal to the greater of (i) the Stated Liquidation Preference Amount (as defined in the Company’s Certificate of Designation dated July 26, 2016) plus any dividends (whether or not earned or declared) accrued and unpaid thereon from the last Dividend Payment Date (as defined in the Certificate of Designation) through the closing date of the Merger and (ii) the amount that would be payable per share of Company Preferred Stock if such share of Company Preferred Stock had been converted to Company Common Stock immediately prior to the effective time of the Merger (the “Preferred Stock Merger Consideration”);
all unvested options to purchase Company Common Stock (“Company Options”) which are outstanding immediately prior to the Effective Time will fully vest and become exercisable and, to the extent not exercised prior to the Effective Time, be canceled at the Effective Time with the former holder of such canceled Company Option becoming entitled to receive an amount in cash (without interest and subject to any applicable withholding or other taxes, or other amount as required by law) equal to (1) the number of shares of Company Common Stock subject to such Company Option multiplied by (2) the excess, if any, of the Common Stock Merger Consideration over the exercise price per share of such Company Option; provided that each Company Option with an exercise price per share equal to or greater than the Common Stock Merger Consideration will be canceled without consideration;
all unvested stock appreciation rights granted by the Company (“Company SARs”) which are outstanding as of immediately prior to the Effective Time will fully vest and, to the extent not exercised prior to the Effective Time, be canceled at the Effective Time, with the former holder of such canceled Company SAR becoming entitled to receive an amount in cash (without interest and subject to any applicable withholding or other taxes, or other amount as required by law) equal to (A) the excess, if any, of the Common Stock Merger Consideration over the exercise price per share of such Company SAR multiplied by (B) the number of shares of Company Common Stock underlying such Company SAR; provided that each Company SAR with an exercise price per share equal to or greater than the Common Stock Merger Consideration will be canceled without consideration; and
all unvested equity appreciation rights granted by the Company (“Company EARs”) which are outstanding as of immediately prior to the Effective Time will fully vest and be canceled at the Effective Time, with the former holder of such canceled Company EAR becoming entitled to receive an amount in cash (without interest and subject to any applicable withholding or other taxes, or other amount as required by law) equal to (A) the excess of the Common Stock Merger Consideration over the base price per share of such Company EAR multiplied by (B) the number of shares of Common Stock underlying such Company EAR; provided that each Company EAR with a base price per share equal to or greater than the Common Stock Merger Consideration will be canceled without consideration.
Consummation of the Merger is subject to customary closing conditions, including, without limitation, the absence of certain legal impediments, the expiration or termination of the required waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and approval by the holders of a majority of the voting power of the outstanding shares of Company Common Stock and Company Preferred Stock, voting on an as converted to Company Common Stock basis, entitled to vote on such matter.
The Company has made representations and warranties in the Merger Agreement and has agreed to covenants regarding the operation of the business of the Company and the Company Subsidiaries prior to the Effective Time. The Company is also subject to customary restrictions on its ability to solicit alternative acquisition proposals from third parties and to provide non-public information to, and participate in discussions and engage in negotiations with, third parties regarding alternative acquisition proposals. The Merger Agreement also contains customary covenants requiring the Board, subject to certain exceptions, to recommend that the Company’s stockholders approve the Merger. Prior to the approval of the Merger by the Company’s stockholders, the Board may withhold, withdraw, qualify, or modify its recommendation that the Company’s stockholders approve the Merger because of a Company Intervening Event or may adopt, approve or recommend any Superior Proposal, subject to complying with notice and other specified conditions.
The Merger Agreement contains certain termination rights for both the Company and Parent, including that, subject to certain limitations, (i) the Company or Parent may terminate the Merger Agreement if the Merger is not consummated by March 7, 2022, (ii) the Company and Parent may mutually agree to terminate the Merger Agreement, (iii) the Company may terminate the Merger Agreement to accept a Superior Proposal and (iv) Parent may terminate the Merger Agreement because the Board changes its recommendation to the Company stockholders with respect to approval of the Merger.
The Company will be required to pay a termination fee of $60.1 million in the event that the Company terminates the Merger Agreement to accept a Superior Proposal or if Parent terminates the Merger Agreement because the Board changes its recommendation to the Company’s stockholders to approve the Merger. In addition, the Company will be required to pay the termination fee under specified circumstances if, within 12 months after the termination of the Merger Agreement, the Company enters into or consummates a Competing Acquisition Transaction.
The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of the Merger Agreement, which is attached as an exhibit to our Current Report on Form 8-K filed with the SEC on September 8, 2021 and incorporated herein by reference.
COVID-19 Update
The ongoing COVID-19 pandemic has severely impacted global economic activity and caused significant volatility in financial markets. While our financial condition, results of operations, cybersecurity and liquidity have not been materially impacted by the direct effects of the pandemic, the COVID-19 pandemic continues to evolve. We are continuing to monitor developments with respect to the COVID-19 pandemic and to make adjustments as needed to assist in protecting the safety of our employees and communities while continuing our business activities. To date, implementation of these measures has not required material expenditures or significantly impacted our ability to operate our business or our internal control over financial reporting and disclosure controls and procedures. We are continuing to monitor the potential impacts of COVID-19 on our operations and those of our partners, suppliers, customers, and regulators, including commercial and clinical drug supply chain continuity and commercial launch of REZUROCK.
Notwithstanding the foregoing, we cannot precisely predict the impact that the COVID-19 pandemic will have in the future due to numerous uncertainties, including the severity of the disease and its variants, the duration of the pandemic, actions that may be taken by governmental authorities, the impact to the business of potential variations or disruptions in our supply chain, and other factors identified in Part I, Item 1A. “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2020. We will continue to closely monitor and evaluate the nature and extent of the impact of the COVID-19 pandemic to our business, consolidated results of operations, and financial condition.
REZUROCK ™ (belumosudil)
REZUROCK is an oral tablet developed by Kadmon for the treatment of cGVHD. REZUROCK was approved by the FDA on July 16, 2021 for the treatment of adult and pediatric patients 12 years and older with cGVHD after failure of at least two prior lines of systemic therapy. REZUROCK was made available in the United States in August 2021.
We began generating revenue from sales of REZUROCK in the third quarter of 2021. Revenue from sales of REZUROCK in future periods is subject to uncertainties and will depend on several factors, including the success of our and our partners’ commercialization efforts in the U.S., the number of new patients switching to REZUROCK, patient retention and demand, the number of physicians prescribing REZUROCK, the rate of monthly prescriptions, reimbursement from third-party payors, the conversion of patients from our clinical trials to commercial customers, and market trends. We will monitor and analyze this data during the initial launch period.
Financial Outlook for 2022
In the launch period for REZUROCK, expected to be through 2022, the Company is not providing specific revenue or operating guidance. Based on our expectations for revenue and operating expenses, we believe our current cash runway takes us into 2023.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reporting amounts of assets, liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements. We evaluate our estimates, judgments and the policies underlying these estimates on a periodic basis, as situations change, and regularly discuss financial events, policies, and issues with members of our audit committee. In particular, we routinely evaluate our estimates and policies regarding revenue recognition, share-based compensation and the accrual of research and development and clinical trial expenses. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
See our significant accounting policies disclosed in “Note 2. Summary of Significant Accounting Policies” in our audited financial statements for the year ended December 31, 2020 included in our Annual Report on Form 10-K for a description of accounting policies that we believe are the most critical to aid you in fully understanding and evaluating our reported financial results and that affect the more significant judgments and estimates that we use in the preparation of our financial statements. Since the date of such financial statements, there have been no changes to our significant accounting policies other than those described in Note 2 of the notes to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
See Note 2 of the notes to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a summary of recently issued and adopted accounting pronouncements.
Results of Operations
Three and nine months ended September 30, 2021 and 2020
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
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| (unaudited) | ||||||||||
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| (in thousands) | ||||||||||
Revenues |
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Net sales |
| $ | 12,223 |
| $ | 339 |
| $ | 12,607 |
| $ | 1,227 |
Other revenue |
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| 2,483 |
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| 151 |
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| 2,859 |
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| 6,446 |
Total revenue |
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| 14,706 |
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| 490 |
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| 15,466 |
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| 7,673 |
Cost of sales |
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| 643 |
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| 214 |
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| 750 |
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| 704 |
Write-down of inventory |
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| — |
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| 148 |
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| — |
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| 1,054 |
Gross profit |
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| 14,063 |
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| 128 |
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| 14,716 |
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| 5,915 |
Operating expenses: |
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Research and development |
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| 18,850 |
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| 17,268 |
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| 52,649 |
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| 46,658 |
Selling, general and administrative |
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| 21,599 |
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| 10,865 |
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| 47,852 |
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| 30,299 |
Total operating expenses |
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| 40,449 |
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| 28,133 |
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| 100,501 |
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| 76,957 |
Loss from operations |
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| (26,386) |
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| (28,005) |
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| (85,785) |
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| (71,042) |
Total other (expense) income |
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| (6,657) |
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| 3,399 |
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| (5,981) |
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| (10,013) |
Income tax expense |
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| — |
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| — |
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| — |
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| — |
Net loss |
| $ | (33,043) |
| $ | (24,606) |
| $ | (91,766) |
| $ | (81,055) |
Less: Net income attributable to noncontrolling interest |
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| 580 |
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| — |
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| 580 |
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| — |
Less: Deemed dividend on convertible preferred stock |
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| 571 |
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| 543 |
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| 1,657 |
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| 1,578 |
Net loss attributable to common stockholders |
| $ | (34,194) |
| $ | (25,149) |
| $ | (94,003) |
| $ | (82,633) |
Revenues
The increase in total revenue for the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020 was primarily attributable to FDA approval of REZUROCK in the third quarter of 2021 resulting in net sales of $12.2 million. The decrease in other revenue for the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020 was primarily attributable to a $6.0 million milestone payment earned in the first quarter of 2020 pursuant to a joint venture and license agreement entered into with Meiji Seika Pharma Co., Ltd to develop belumosudil in Japan. Other revenue for the three and nine months ended September 30, 2021 includes a $2.0 million milestone payment earned pursuant to a strategic partnership with BioNova Pharmaceuticals Ltd. to develop belumosudil (KD025) in China.
Cost of Sales and inventory write-down
The increase in cost of sales for the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020 was primarily attributable to the increase in REZUROCK net sales revenue.
The inventory write-down during the three and nine months ended September 30, 2020 related to write-downs of our CLOVIQUE inventory based on our expectation that such inventory will not be sold prior to reaching its product expiration date.
Research and development expenses
The increase in research and development expenses for the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020 was primarily related to an increase in direct external costs of developing our preclinical product candidates from our immuno-oncology platform.
Selling, general and administrative expenses
The increase in selling, general and administrative expenses for the three and nine months ended September 30, 2021 as compared to the three and nine months ended September 30, 2020 was primarily attributable to increased expenses related to the launch of REZUROCK, as well as employee stock compensation and certain fees related to the pending acquisition with Sanofi.
Total other (expense) income
The following table provides components of other (expense) income:
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
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| (unaudited) |
| (unaudited) | ||||||||
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| (in thousands) |
| (in thousands) | ||||||||
Interest income |
| $ | 1,246 |
| $ | 208 |
| $ | 2,966 |
| $ | 802 |
Interest expense |
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| (2,492) |
|
| (8) |
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| (6,218) |
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| (13) |
Unrealized loss on equity securities |
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| (1,619) |
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| (3,254) |
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| (1,368) |
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| (32,759) |
Realized gain on equity securities |
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| — |
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| 4,274 |
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| — |
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| 19,784 |
Gain on extinguishment of obligations |
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| — |
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| 1,626 |
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| 458 |
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| 1,754 |
PPP loan forgiveness |
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| — |
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| — |
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| 3,091 |
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| — |
Change in fair value of warrant liabilities |
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| (2,674) |
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| 602 |
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| (2,326) |
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| 469 |
Other expense |
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| (1,118) |
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| (49) |
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| (2,584) |
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| (50) |
Total other (expense) income |
| $ | (6,657) |
| $ | 3,399 |
| $ | (5,981) |
| $ | (10,013) |
The decrease in other expense for nine months ended September 30, 2021 as compared to nine months ended September 30, 2020 was primarily attributable to the fluctuations in our ownership of MeiraGTx ordinary shares and PPP loan forgiveness in June 2021 of approximately $3.1 million, offset by the increase in interest expense related to our convertible notes issued in February 2021. The increase in other expense for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was primarily attributable to the fluctuations in our ownership of MeiraGTx ordinary shares and other financial instruments.
Deemed dividend on convertible preferred stock
We have 28,708 shares of 5% convertible preferred stock outstanding at September 30, 2021, which accrue dividends at a rate of 5% and convert into shares of our common stock at a 20% discount to the initial public offering price per share of common stock in our IPO of $12.00 per share, or $9.60 per share. The stated liquidation preference amount on the 5% convertible preferred stock totaled $36.5 million at September 30, 2021.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception through September 30, 2021, we have raised net proceeds from the issuance of equity and debt. We maintained cash, cash equivalents and marketable debt securities of $251.6 million at September 30, 2021. We expect that our cash, cash equivalents and marketable debt securities as of September 30, 2021 will enable us to fund our operating expenses and capital expenditure requirements into 2023, based on our current business plan.
The following table sets forth the primary sources and uses of cash, cash equivalents and restricted cash for each period set forth below:
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| Nine Months Ended | ||||
| September 30, | ||||
| 2021 |
| 2020 | ||
| (unaudited) | ||||
| (in thousands) | ||||
Net cash (used in) provided by: |
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Operating activities | $ | (80,380) |
| $ | (61,129) |
Investing activities |
| (136,293) |
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| (25,168) |
Financing activities |
| 211,076 |
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| 52,650 |
Net decrease in cash, cash equivalents and restricted cash | $ | (5,597) |
| $ | (33,647) |
Operating Activities
The net cash used in operating activities was $80.4 million for the nine months ended September 30, 2021, and consisted primarily of a net loss of $(91.8) million adjusted for $18.1 million in net non-cash items, primarily including share-based compensation expense of $11.1 million and depreciation and amortization of fixed assets and noncash operating lease cost of $3.4 million, as well as a net increase in operating assets and liabilities of $6.7 million. Once adjusted for the non-cash items above, the cash used in operating activities for the nine months ended September 30, 2021 was primarily driven by selling, general and administrative expenses of $36.6 million and research and development expense of $49.6 million related to the advancement of our clinical product candidates.
The net cash used in operating activities was $61.1 million for the nine months ended September 30, 2020, and consisted primarily of a net loss of $(81.1) million adjusted for $22.8 million in net non-cash items, including unrealized loss on equity securities of $13.0 million, change in fair value of warrant liabilities of $(0.5) million, gain on settlement of obligation of $(1.8) million and share-based compensation expense of $7.1 million, offset by the depreciation and amortization of fixed assets and noncash operating lease cost of $3.9 million and write-down of inventory of $1.1 million, as well as a net decrease in operating assets and liabilities of $3.0 million. Once adjusted for the non-cash items above, the cash used in operating activities for the nine months ended September 30, 2020 was primarily driven by selling, general and administrative expenses of $21.5 million and research and development expense of $44.5 million related to the advancement of our clinical product candidates.
Investing Activities
Net cash used in investing activities was $136.3 million for the nine months ended September 30, 2021, consisting primarily of net purchases of investment debt securities of $136.0 million.
Net cash used in investing activities was $25.2 million for the nine months ended September 30, 2020, consisting primarily of purchases of investment debt securities of $44.6 million, offset by proceeds from the sale of a portion of our investment in MeiraGTx of $19.8 million.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2021 was $211.1 million, consisting primarily of net proceeds from the issuance of our convertible notes of $232.4 million in Februrary 2021, offset by the payments for capped call transactions in connection with the convertible notes of $33.0 million. For more information, please refer to Note 5 of the notes to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Net cash provided by financing activities for the nine months ended September 30, 2020 was $52.7 million, consisting primarily of net proceeds from the issuance of common stock in our ATM Offering of $48.5 million.
Future Funding Requirements
Our operations have principally been funded through the issuance of equity and debt securities. As our commercialization activities and our planned research and development programs continue to advance, we expect our costs will increase. Furthermore, given the uncertain economic conditions caused by the COVID-19 pandemic, we will continue to monitor the nature and extent of the impact of the COVID-19 pandemic on our liquidity and capital resources. As a result, our management will retain broad discretion over the allocation of our existing cash, cash equivalents and marketable debt securities.
The expected use of our cash, cash equivalents and marketable debt securities at September 30, 2021 represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. Additional funding, whether through additional sales of equity or debt securities, collaborative or other arrangements with corporate partners or from other sources, may not be available when needed or on terms acceptable to us. Insufficient funds may require us to delay, scale back or eliminate certain of our research and development programs.
Our future working capital requirements, including the need for additional working capital, will be largely determined by the advancement of our portfolio of product candidates and commercialization of REZUROCK. More specifically, our working capital requirements will be dependent on:
the timing, magnitude and scope of commercial spending and our development programs;
regulatory approval of our product candidates;
the costs of obtaining patent protection for our product candidates;
the timing and terms of business development activities;
the rate of technological advances relevant to our operations;
the efficiency of manufacturing processes developed on our behalf by third parties; and
the level of required administrative support for our daily operations.
Contractual Obligations and Commitments
There have been no material changes in our contractual obligations and commitments during the nine months ended September 30, 2021 from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 4, 2021.
Off-balance Sheet Arrangements
During the periods presented we did not have, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules. We may be obligated in future periods to make contingent payments, which would become due and payable only upon the achievement of certain research and development, regulatory and approval milestones (see Note 12 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q).
Item 3. Quantitative and Qualitative Disclosures about Market Risk
As a “smaller reporting company”, we are not required to provide the information required by this item.
Item 4. Controls and Procedures
Management’s Evaluation of our Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to allow timely decisions regarding required disclosure.
As of September 30, 2021, our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our CEO and CFO have concluded based upon the evaluation described above that, as of September 30, 2021, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended), occurred during the fiscal quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. Please refer to Note 12 of the notes to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion related to our legal proceedings.
Item 1A. Risk Factors
Investing in our securities involves a high degree of risk. In addition to the other information contained elsewhere in this report, you should carefully consider the factors discussed in “Part I, Item 1A. Risk Factors” in our most recent Annual Report on Form 10-K for the year ended December 31, 2020, which could materially and adversely affect our business, financial condition or future results. These risks and uncertainties are not the only ones we face. You should recognize that other significant risks and uncertainties may arise in the future, which we cannot foresee at this time. Also, the risks that we now foresee might affect us to a greater or different degree than expected. Certain risks and uncertainties, including ones that we currently deem immaterial or that are similar to those faced by other companies in our industry or business in general, may also affect our business. If any of the risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. The risk factors described below update the risk factors disclosed in Part I, Item 1A. in our 2020 10-K to include additional information, and should be read in conjunction with the risk factors in our Annual Report on Form 10-K for the year ended December 31, 2020.
If the Merger contemplated by the Merger Agreement does not occur, it could have a material adverse effect on our business, results of operations, financial condition and stock price.
On September 7, 2021, we entered into the Merger Agreement with Sanofi. Completion of the proposed Merger is subject to the satisfaction of various conditions, including the receipt of approvals from our stockholders and from government or regulatory agencies. There is no assurance that all of the various conditions will be satisfied, or that the Merger will be completed on the proposed terms, within the expected timeframe, or at all. The proposed Merger gives rise to inherent risks that include:
the amount of the cash to be paid under the Merger agreement is fixed and will not be adjusted for changes in our business, assets, liabilities, prospects, outlook, financial condition or results of operations or in the event of any change in the market price of, analyst estimates of, or projections relating to, our common stock;
legal or regulatory proceedings, including regulatory approvals from governmental entities (including any conditions, limitations or restrictions placed on these approvals) and the risk that one or more governmental entities may delay or deny approval, or other matters that affect the timing or ability to complete the transaction as contemplated;
the ability of Sanofi to obtain the necessary funds to complete the Merger;
the possibility of disruption to our business, including increased costs and diversion of management time and resources;
difficulties maintaining business and operational relationships, including relationships with clients, vendors, suppliers, distributors, resellers and other business partners;
the inability to attract and retain key personnel pending consummation of the proposed Merger;
potential stockholder litigation relating to the Merger could prevent or delay the Merger or otherwise negatively impact our business and operations;
the inability to pursue alternative business opportunities or make changes to our business pending the completion of the proposed Merger;
the requirement to pay a termination fee of $60.125 million if we terminate the Merger Agreement under certain circumstances;
developments beyond our control including, but not limited to, changes in domestic or global economic conditions that may affect the timing or success of the proposed Merger; and
the risk that if the proposed Merger is not completed, the market price of our common stock could decline, investor confidence could decline, stockholder litigation could be brought against us, relationships with clients, suppliers and other business partners may be adversely impacted, we may be unable to retain key personnel, and profitability may be adversely impacted due to costs incurred in connection with the proposed Merger.
The announcement and pendency of our agreement to be acquired by Sanofi could adversely affect our business.
Uncertainty about the effect of the proposed acquisition on our customers, employees, partners and other parties may adversely affect our business. Our employees may experience uncertainty about their roles or seniority following the acquisition. There can be no assurance that our employees, including key personnel, can be retained, or that we will be able to attract and retain employees to the same extent that we have previously been able to. Any loss or distraction of such employees could adversely affect our business and operations. In addition, we have diverted, and will continue to divert, significant management resources toward the completion of the acquisition, which could adversely affect our business and operations. Parties with which we do business may experience uncertainty associated with the acquisition, including with respect to current or future business relationships with us. Uncertainty may cause customers to refrain from doing business with us, which could adversely affect our business, results of operations, financial condition and stock price.
The failure to complete the acquisition by Sanofi could adversely affect our business.
Consummation of the acquisition by Sanofi is subject to several conditions beyond our control that may prevent, delay, or otherwise adversely affect its completion, including our need to obtain stockholder approval of the acquisition. If any of these conditions are not satisfied or waived, it is possible that the acquisition will not be consummated in the expected time frame (or at all) or that the definitive agreement may be terminated. If the proposed acquisition is not completed, the share price of our common stock may decrease to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under circumstances specified in the Merger Agreement, we may be required to pay a termination fee of $60.125 million to Sanofi. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community. Any disruption to our business resulting from the announcement and pendency of the transaction and from intensifying competition from our competitors, including any adverse changes in our relationships with our customers, employees, partners and other parties, could continue or accelerate in the event of a failed transaction. There can be no assurance that our business, relationships with other parties, liquidity or financial condition will not be adversely affected, as compared to the condition prior to the announcement of the acquisition, if the acquisition is not consummated.
The Merger Agreement limits our ability to pursue alternatives to the acquisition.
The Merger Agreement contains provisions that make it more difficult for us to enter into alternative transactions. The Merger Agreement contains certain provisions that restrict our ability to, among other things, solicit, initiate or knowingly encourage or knowingly facilitate the submission of inquiries, proposals or offers relating to or that would reasonably be expected to lead to any acquisition proposal from a third party. The Merger Agreement also provides that our board of directors will not change its recommendation that our stockholders adopt the Merger Agreement and will not approve any agreement with respect to an acquisition proposal, subject to limited exceptions.
In addition, upon adoption of the Merger Agreement by our stockholders, our right to terminate the Merger Agreement in response to a superior proposal will be eliminated. While we believe these provisions are reasonable, customary and not preclusive of other offers, the provisions might discourage a third party that has an interest in acquiring all or a significant part of us from considering or proposing such acquisition, even if such party were prepared to pay consideration with a higher per-share value than the currently proposed merger consideration. Furthermore, the requirement to pay a termination fee under certain circumstances may result in a third party proposing to pay a lower per-share price to acquire us than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable by us in certain circumstances.
Litigation has and may arise in connection with the acquisition by Sanofi, which could be costly, prevent consummation of the acquisition, divert management’s attention and otherwise materially harm our business.
In October 2021, ten alleged stockholders of the Company filed actions in federal courts located in the states of New York, Delaware, and Pennsylvania against the Company and the members of its Board of Directors, which claims generally allege that the Company and its Board of Directors failed to disclose allegedly material information in the definitive proxy statement on Schedule 14A, filed with the SEC on October 4, 2021 related to the Merger. The case is still pending. See Note 14 of the notes to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion related to our legal proceedings . Regardless of the outcome of this or any future litigation related to the acquisition by Sanofi, such litigation may be time-consuming and expensive and may distract our management from running the day-to-day operations of our business. The litigation costs and diversion of management’s attention and resources to address the claims and counterclaims in any litigation related to the acquisition by Sanofi may materially adversely affect our business, financial condition and operating results. Further, if the acquisition is not consummated for any reason, litigation could be filed in connection with the failure to consummate the acquisition. Any litigation related to the acquisition may result in negative publicity or an unfavorable impression of us, which could adversely affect the price of our common stock, impair our ability to recruit or retain employees, damage our relationships with our customers and suppliers, or otherwise materially harm our operations and financial performance.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which is incorporated herein by reference.
EXHIBIT INDEX
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Exhibit | Description of Exhibit |
2.1 | |
10.2 | |
10.3 | |
10.4 | |
31.1* | |
31.2* | |
32.1** | |
32.2** | |
101.INS* | Inline XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH* | Inline XBRL Taxonomy Extension Schema |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase Document |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104* | Cover Page Interactive Data (formatted as Inline XBRL and contained in Exhibit 101) |
* | Filed herewith. |
** | Furnished herewith. The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, irrespective of any general incorporation language contained in such filing. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Kadmon Holdings, Inc.
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Date: November 4, 2021 | By: | /s/ Harlan W. Waksal Harlan W. Waksal (Principal Executive Officer) |
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Date: November 4, 2021 | By: | /s/ Steven Meehan Steven Meehan (Principal Financial Officer)
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Date: November 4, 2021 | By: | /s/ Kyle Carver |
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| Kyle Carver |
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| (Principal Accounting Officer) |