In this section, "KindredBio," "we," "our," "ours," "us" and the "Company" refer toKindred Biosciences, Inc. and our wholly owned subsidiariesKindredBio Equine, Inc. andCentaur Biopharmaceutical Services, Inc. You should read the following discussion and analysis of our consolidated financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q consists of forward-looking statements such as statements regarding our expectations about the trials, regulatory approval, manufacturing, distribution and commercialization of our current and future product candidates and statements regarding our anticipated revenues, expenses, margins, profits and use of cash. In this Quarterly Report on Form 10-Q, the words "anticipates," "believes," "expects," "intends," "future," "could," "estimates," "plans," "would," "should," "potential," "continues" and similar words or expressions (as well as other words or expressions referencing future events, conditions or circumstances) often identify forward-looking statements. These forward-looking statements are based on our current expectations. These statements are not promises or guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results to be materially different from any future results expressed or implied by the forward-looking statements. These risks include, but are not limited to, the following: our limited operating history and expectations of losses for the foreseeable future; the absence of significant revenue from our products and our product candidates for the foreseeable future; the likelihood that our revenue will vary from quarter to quarter; our potential inability to obtain any necessary additional financing; our substantial dependence on the success of our products and our lead product candidates which may not be successfully commercialized even if they are approved for marketing; the effect of competition; our potential inability to obtain regulatory approval for our existing or future product candidates; our dependence on third parties to conduct some of our development activities; our dependence upon third-party manufacturers for supplies of our products and our product candidates and the potential inability of these manufacturers to deliver a sufficient amount of supplies on a timely basis; the uncertain effect of the COVID-19 pandemic on our business, results of operations and financial condition; uncertainties regarding the outcomes of trials regarding our product candidates; our potential failure to attract and retain senior management and key scientific personnel; uncertainty about our ability to enter into satisfactory agreements with third-party licensees of our biologic products or to develop a satisfactory sales organization for our equine small molecule products; our significant costs of operating as a public company; potential cyber-attacks on our information technology systems or on our third-party providers' information technology systems, which could disrupt our operations; our potential inability to repay the secured indebtedness that we have incurred from third-party lenders, and the restrictions on our business activities that are contained in our loan agreement with these lenders; the risk that our 2020 strategic realignment and restructuring plans will result in unanticipated costs or revenue shortfalls; uncertainty about the amount of royalties that we will receive from the sale of Mirataz® to Dechra Pharmaceuticals PLC; the risk that the revenue from our delivery of services or products under any contract may be less than we anticipate if the other party to the contract exercises its right to terminate the contract prior to the completion of the contract; our potential inability to obtain and maintain patent protection and other intellectual property protection for our products and our product candidates; potential claims by third parties alleging our infringement of their patents and other intellectual property rights; our potential failure to comply with regulatory requirements, which are subject to change on an ongoing basis; the potential volatility of our stock price; and the significant control over our business by our principal stockholders and management. For a further description of these risks and uncertainties and other risks and uncertainties that we face, please see the "Risk Factors" sections that are contained in our filings with theU.S. Securities and Exchange Commission (the "SEC"), including the "Risk Factors" section of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theSEC onMarch 16, 2020 , and any subsequent updates that may be contained in the "Risk Factors" sections of this Quarterly Report on Form 10-Q and our other Quarterly Reports on Form 10-Q filed with theSEC . As a result of the risks and uncertainties described above and in our filings with theSEC , actual results may differ materially from those indicated by the forward-looking statements made in this Quarterly Report on Form 10-Q. Forward -looking statements contained in this Quarterly Report on Form 10-Q speak only as of the date of this report and we undertake no obligation to update or revise these statements, except as may be required by law. 26 -------------------------------------------------------------------------------- Table of Contents Overview We are a commercial-stage biopharmaceutical company focused on saving and improving the lives of pets. Our mission is to bring to our pets the same kinds of safe and effective medicines that our human family members enjoy. Our core strategy is to identify compounds and targets that have already demonstrated safety and effectiveness in humans and to develop therapeutics based on these validated compounds and targets for pets, primarily dogs, cats and horses. We believe this approach will lead to shorter development times and higher approval rates than pursuing new, non-validated compounds and targets. Our current portfolio includes candidates in development consisting of primarily biologic pharmaceuticals. Our first product, Mirataz® (mirtazapine transdermal ointment) was approved inMay 2018 and became commercially available to veterinarians inthe United States inJuly 2018 . InNovember 2019 , our second product, Zimeta™ (dipyrone injection) for the control of fever in horses was approved by the FDA and became commercially available inDecember 2019 . In addition, we have multiple other product candidates, including several biologics, in various stages of development. OnMarch 16, 2020 , we entered into an Asset Purchase Agreement whereby we agreed to sell Mirataz, our transdermal drug for the management of weight loss in cats, toDechra for a cash purchase price of$43 million , of which$38.7 million will be paid on the closing date and$4.3 million will be paid out of escrow beginning in 12 months assuming no escrow claims, alongside an ongoing royalty on global net sales. The acquisition comprises worldwide marketing rights, intellectual property rights, marketing authorizations and associated regulatory documentation, third party supply contracts related to raw material and manufacture of the finished product, and certain product inventory. OnApril 15, 2020 , we completed the sale of Mirataz toDechra . Concurrent with the sale of Mirataz, we announced a strategic realignment of our business model whereby we plan to rely more on a partnership-based model for commercialization strategy similar to the traditional human biotech commercialization strategy whereby pipeline assets are partnered with larger commercial partners that can maximize product opportunity in return for upfront payments, contingent milestones, and royalties on future sales. Our focus will be on accelerating our deep pipeline of late-stage biologics candidates in canine and feline markets, while stopping small molecule development for these species. We believe monoclonal antibodies are the future of veterinary medicine, and represent the greatest opportunity for value creation, given large potential markets for our programs and our competitive advantage in biologics. Accordingly, the companion animal commercial infrastructure will be substantially reduced. In connection with this restructuring, we eliminated 53 positions, representing about one-third of our workforce. The eliminated positions primarily relate to the companion animal sales force and research and development for small molecule programs. OnJune 8, 2020 , we announced a second restructuring to eliminate an additional 24 positions to streamline our operations and reduce operating expenditures by prioritizing investment in our highest value, late stage programs, especially the interleukin-31 (IL-31) antibody, interleukin-4 receptor (IL-4R) antibody, and parvovirus antibody programs. We completed our restructuring by eliminating the last 5 remaining positions in the third quarter of 2020 and do not anticipate any further reductions in the foreseeable future.
Business and Development Updates
We recorded$1.0 million and$41.2 million in net revenues in the three and nine months endedSeptember 30, 2020 compared with$1.1 million and$2.9 million for the same periods of 2019. Substantially all of the revenues recorded were due to the sale of our Mirataz asset in the second quarter of 2020. We continued selling Mirataz untilApril 15, 2020 when we completed the sale of Mirataz toDechra , and in addition recorded Mirataz royalties in the second and third quarters of 2020. Revenues for Zimeta continue to be limited for the quarter as a result of COVID-19 and downturn in equine events and transportation. OnMay 19, 2020 , we entered into an agreement with Vaxart, Inc. for the manufacture of Vaxart's oral vaccine candidate for COVID-19. We recorded contract manufacturing revenue based on the percentage completion of specific milestones for the quarter. InOctober 2020 , we announced the expansion of our manufacturing agreement with Vaxart for COVID-19 and other vaccine candidates.
Biologic Product Candidates
On
27 -------------------------------------------------------------------------------- Table of Contents atopic dermatitis in dogs. Following the successful pilot efficacy study, we conducted a pilot field effectiveness study for our IL-31 antibody and reported positive topline results onJuly 29, 2019 . The manufacturing scale-up process proceeded as planned, and the pivotal efficacy study for KIND-016 is on track to start in the fourth quarter of 2020. OnMarch 24, 2020 , we announced positive results from our pilot field efficacy study of KIND-025, a canine fusion protein targeting interleukin-4 (IL-4) and interleukin-13 (IL-13), for the treatment of atopic dermatitis in dogs. A higher treatment success rate was observed in the KIND-025 group over the placebo group from week 1 through week 4. Positive efficacy signals were also detected with other endpoints including 20mm or higher reduction from baseline in PVAS score. Cell line development is being continued as we further evaluate this program. The IL-4 and IL-13 pathways are key drivers of the inflammation that underlies atopic dermatitis and other allergic diseases. The IL-4/13 SINK molecule binds to both IL-4 and IL-13 circulating in the blood and inhibits their interactions with their respective receptors, thereby modifying the clinical signs associated with atopic dermatitis. However, in line with ourJune 8 restructuring, we currently do not have plans to prioritize KIND-025 ahead of our other programs. InDecember 2019 , we announced the outcome of a positive pilot laboratory study of KIND-032, a fully caninized monoclonal antibody targeting interleukin-4 receptor, for the treatment of atopic dermatitis in dogs. The CADESI scores were assessed by board-certified veterinary dermatologists who were blinded to treatment assignments. The study demonstrated that KindredBio's antibody was well-tolerated. Although the study was a single-dose study designed primarily to assess safety and pharmacokinetics, evidence of positive efficacy and dose response was observed at Week 1, as measured by CADESI-04. A second pilot study to further assess dosing commenced in the third quarter of 2020. The KIND-032 program is advancing ahead of schedule and is being prioritized ahead of IL-4/13 SINK. Atopic dermatitis is an immune-mediated inflammatory skin condition in dogs. It is the leading reason owners take their dog to the veterinarian, and the current market size is over$700 million annually and growing rapidly. KindredBio is pursuing a multi-pronged approach toward atopic dermatitis, with a portfolio of promising biologics. We announced positive results from our pilot efficacy study of KIND-030, a chimeric, high-affinity monoclonal antibody targeting canine parvovirus (CVP) inAugust 2019 . OnSeptember 16, 2020 , we reported positive results from our pivotal efficacy study of KIND-030 in prevention of parvovirus infection in prophylactic treatment. In the randomized, blinded, placebo-controlled study, KIND-030 was administered to dogs as prophylactic therapy to prevent clinical signs of CPV infection. The primary objectives of the study were met. All of the placebo-control dogs developed parvovirus infection as predefined in the study protocol, while none of the KIND-030 treated dogs developed the disease. Furthermore, the parvovirus challenge resulted in 60% mortality rate in the control dogs compared to 0% mortality rate in the KIND-030 treated dogs. KIND-030 is being pursued for two indications in dogs: prophylactic therapy to prevent clinical signs of canine parvovirus infection and treatment of established parvovirus infection. The pivotal efficacy study for the treatment indication and pivotal safety study remain on track to be completed by year-end 2020, with approval expected by early 2021. Regulatory approval and review timeline are subject to the typical risks inherent in such a process. CVP is the most significant contagious viral cause of enteritis in dogs, especially puppies, with mortality rates reportedly as high as 91%. There are currently no FDA orUSDA approved treatments for CPV, nor any other available treatment. The pivotal efficacy study for KindredBio's feline recombinant erythropoietin (KIND-510a) was initiated in the fourth quarter of 2019. Those veterinary clinics that had suspended clinical trials due to COVID-19 have since resumed operations. We continue to implement practices consistent with guidance provided by theU.S. Food and Drug Administration on studies conducted during the COVID-19 pandemic to minimize the impact on timelines. The product candidate is being developed for the management of non-regenerative anemia in cats. It has been engineered by the company to have a prolonged half-life compared to endogenous erythropoietin, a protein that regulates and stimulates production of red blood cells. Anemia is a common condition that is estimated to afflict millions of older cats. It is often associated with chronic kidney disease, because kidneys produce erythropoietin and chronic kidney disease leads to decreased levels of endogenous erythropoietin. Chronic kidney disease affects approximately half of older cats, making it a leading cause of feline mortality. Human erythropoietins, which are multi-billion dollar products in the human market, have been shown to be immunogenic in many cats. 28 -------------------------------------------------------------------------------- Table of Contents The pilot field effectiveness study for KIND-509, KindredBio's anti-TNF antibody for canine inflammatory bowel disease (IBD) is underway and on track to complete by year-end 2020. Those veterinary clinics that had suspended clinical trials due to COVID-19 have since resumed operations. KindredBio continues to implement practices consistent with guidance provided by theU.S. Food and Drug Administration on studies conducted during the COVID-19 pandemic to minimize the impact on timelines. The majority of canine IBD cases involve chronic states of diarrhea, vomiting, gastroenteritis, inappetence, and other symptoms, certain of which are cited as among the most frequent disorders impacting dogs. For certain dog breeds, the prevalence of diarrhea exceeds 5%. Existing treatments can have significant drawbacks, including limited diets and excessive antibiotic use, which can lead to owner frustration, lapses in treatment adherence, or poor quality of life for the affected animal. Equine Product Candidates The pivotal field effectiveness study for KIND-012 (dipyrone oral gel) for the treatment of fever in horses has been completed with positive results. The target animal safety study is also complete, and KIND-012 was found to be well-tolerated. KIND-012, which is a proprietary oral gel, is expected to expand use of the drug and build upon the success of Zimeta. We have agreed on a path forward with the FDA. The pilot field effectiveness study of KIND-014 for the treatment of gastric ulcers in horses has been completed with positive results. The pivotal field efficacy study was initiated in the fourth quarter of 2019. Equine gastric ulcer syndrome (EGUS) is a common condition in horses. Prevalence estimates have been reported to range from 60 to 90 percent in adult horses, depending on age, performance, and evaluated populations. A variety of clinical signs are associated with EGUS, including poor appetite, poor condition, colic, and behavioral issues. Our strategic evaluation of the future of the equine franchise remains ongoing as a result of the strategic change we made in the second quarter of 2020 to discontinue small molecule development in favor of biologic programs..
Manufacturing
We have constructed a Good Manufacturing Practice, or GMP, biologics manufacturing plant inBurlingame, CA which is fully commissioned. We have proceeded to GMP manufacturing of our feline erythropoietin product candidate inJanuary 2018 . In addition, construction and commissioning of our biologics manufacturing lines in our manufacturing plant inElwood, Kansas have also been completed. TheElwood facility includes approximately 180,000 square feet with clean rooms, utility, equipment, and related quality documentation suitable for biologics and small molecule manufacturing. We are a commercial-stage company with two products approved for marketing and sale. OnApril 15, 2020 , we completed the sale of one of the products, Mirataz, toDechra . We have incurred significant net losses since our inception. We incurred cumulative net losses of$233,957,000 throughSeptember 30, 2020 . These losses have resulted principally from costs incurred in connection with investigating and developing our product candidates, research and development activities and general and administrative costs associated with our operations. Historically, our funding has been a combination of private and public offerings. From our initial public offering inDecember 2013 throughSeptember 30, 2020 , we raised approximately$269.5 million in net proceeds, after deducting underwriting discounts and commissions and offering expenses. OnApril 8, 2020 , we entered into an at the market offering agreement where we may offer and sell from time to time shares of our common stock, having an aggregate offering price of up to$25.0 million . OnSeptember 30, 2019 , we entered into the Loan Agreement with the Lenders. The Loan Agreement provides KindredBio with up to$50 million of borrowing capacity available in three tranches, each bearing interest at 1-Month LIBOR + 6.75% with a floor of 2.17%. Under the terms of the agreement, an initial tranche of$20 million was funded at closing. KindredBio is required to make interest only payments on a monthly basis throughOctober 2021 . An additional$30 million will be available in two tranches at our option, subject to certain conditions. The entire debt facility will mature onSeptember 30, 2024 . See Note 6 to our condensed consolidated financial statements for further details. 29
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As ofSeptember 30, 2020 , we had cash, cash equivalents and investments of$66,837,000 . Our sale of Mirataz toDechra was completed onApril 15, 2020 with proceeds of$38.7 million received and the balance of$4.3 million to be paid out from escrow beginning in 12 months assuming no escrow claims. For the foreseeable future, we expect to continue to incur losses as we continue our product development activities, seek regulatory approvals for our product candidates and begin to commercialize or partner them if they are approved by theCenter for Veterinary Medicine branch, or CVM, of the FDA, theU.S. Department of Agriculture , orUSDA , or theEuropean Medicines Agency , or EMA. If we are required to further fund our operations, we expect to do so through public or private equity offerings, debt financings, corporate collaborations and licensing arrangements. We cannot assure you that such funds will be available on terms favorable to us, if at all. The strategic realignment of our business model whereby we rely more on a partnership-based model for commercialization strategy similar to the traditional human biotech commercialization strategy whereby pipeline assets are partnered with larger commercial partners that can maximize product opportunity in return for upfront payments, contingent milestones, and royalties on future sales may require us to relinquish rights to certain of our technologies. In addition, we may never successfully complete development of, obtain adequate patent protection for, obtain necessary regulatory approval, or achieve commercial viability for any other product candidates besides Mirataz and Zimeta. If we are not able to raise additional capital on terms acceptable to us, or at all, as and when needed, we may be required to curtail our operations, and we may be unable to continue as a going concern. Critical Accounting Policies and Significant Judgments and Estimates Our management's discussion and analysis of financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States , orU.S. GAAP. The preparation of our unaudited condensed consolidated financial statements and related disclosures requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, and revenue, costs and expenses and related disclosures during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those described below. We base our estimates on historical experience and on various other factors that we believe are 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. Beginning with the second quarter of 2020, we included revenue from asset sale, partner royalties and contract manufacturing revenue (see Note 1 to our financial statements) as significant accounting policies. There have been no other significant changes to our critical accounting policies since the beginning of our fiscal year. Our critical accounting policies are described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , which was filed with theSEC onMarch 16, 2020 . 30 -------------------------------------------------------------------------------- Table of Contents Results of Operations InMarch 2020 , we announced a strategic realignment of our business model whereby we plan to rely more on a partnership-based model for commercialization strategy similar to the traditional human biotech commercialization strategy whereby pipeline assets are partnered with larger commercial partners that can maximize product opportunity in return for upfront payments, contingent milestones, and royalties on future sales. Our focus will be on accelerating our deep pipeline of late-stage biologics candidates in canine and feline markets, while stopping small molecule development for these species. We believe monoclonal antibodies are the future of veterinary medicine, and represent the greatest opportunity for value creation, given large potential markets for our programs and our competitive advantage in biologics. In connection with this restructuring, we eliminated 53 positions, representing about one-third of our workforce. The eliminated positions primarily relate to the companion animal sales force and research and development for small molecule programs. Restructuring expenses and retirement costs related to severance and health care benefits were approximately$1.7 million , exclusive of stock compensation. OnJune 8, 2020 , we announced a plan to strengthen our strategic position by, among other things, prioritizing our most attractive late stage programs and substantially reducing our expenses to best position the company for success with the previously announced business model. This restructuring reduced the company's workforce by approximately 24 employees and involved a restructuring charge of approximately$2.3 million related to severance payments and health care benefits, exclusive of stock compensation. We further eliminated another 5 positions and incurred a restructuring charge of approximately$0.3 million related to severance payments and health care benefits in the third quarter of 2020. We have completed our restructuring and do not expect any further reductions in our workforce for the foreseeable future. The following table summarizes the results of our operations for the periods indicated (in thousands): Three months ended September
30, Nine months ended
2020 2019 2020 2019 Revenues: Net product revenues $ 16$ 1,104 $ 782 $ 2,855 Revenue from asset sale - - 38,700 - Partner royalty revenue 255 - 413 - Contract manufacturing revenue 772 - 1,318 - Total revenues 1,043 1,104 41,213 2,855 Operating costs and expenses: Cost of product revenues (1) 5 139 3,609 400 Contract manufacturing costs 300 - 636 - Research and development 7,387 7,290 23,652 21,176 Selling, general and administrative 4,698 9,382 18,676 28,348 Restructuring costs 282 - 4,246 - Total operating costs and expenses 12,672 16,811 50,819 49,924 Loss from operations (11,629) (15,707) (9,606) (47,069) Interest and other income (expenses), net (554) 414 (1,292) 1,414 Net loss$ (12,183) $
(15,293)
(1) Includes
Revenues
We recorded$1.0 million and$41.2 million in net revenues in the three and nine months endedSeptember 30, 2020 compared with$1.1 million and$2.9 million for the same periods of 2019. The increase in revenue was primarily 31 -------------------------------------------------------------------------------- Table of Contents due to$38.7 million from the sale of our Mirataz asset which was completed onApril 15, 2020 . In addition, royalty revenues of$255,000 and$413,000 , and contract manufacturing revenues of$772,000 and$1,318,000 for the three and nine months in 2020 contributed to the increase. Of the$782,000 net product revenues recorded in the first nine months of 2020,$734,000 were for Mirataz. There were no Mirataz revenues for the quarter endedSeptember 30, 2020 as a result of the asset sale. Net product revenues for Zimeta were$4,000 and$19,000 for three and nine months endedSeptember 30, 2020 , reflecting a downturn in equine events and transportation as a result of COVID-19. In conjunction with Mirataz and Zimeta, we also recorded$12,000 and$29,000 in revenue derived from co-marketing products for our partners, Butterfly Networks and Astaria Global for the same periods in 2020. OnMay 19, 2020 , we entered into an agreement with Vaxart, Inc. for the manufacture of Vaxart's oral vaccine candidate for COVID-19. We recorded contract manufacturing revenue of$772,000 and$1,318,000 based on the percentage completion of specific milestones for the three and nine months endedSeptember 30, 2020 , respectively. Our net product revenue was generated entirely from sales withinthe United States . Our product sales to two large distributors, namely Covetrus andMidwest Veterinary Supply , and three large distributors, namelyMWI Animal Health , Covetrus andMidwest Veterinary Supply , each accounted for more than 10% of gross product revenues for the three and nine months endedSeptember 30, 2020 . Approximately 100% and 75% of our gross product revenues were to two and three distributors for the three and nine months endedSeptember 30, 2020 , respectively. Three distributors attributed to approximately 84% and 85% of our gross product revenues for the three and nine months endedSeptember 30, 2019 , respectively. Our accounts receivable from amounts billed for contract manufacturing services is derived from one customer. The contract requires an up-front payment and installment payments during the service period. We perform periodic evaluations of the financial condition of our customers and generally do not require collateral, but we can terminate any contract if a material default occurs. We currently estimate a 3% product return liability for Zimeta, using probability-weighted available industry data and data provided by our distributors such as the inventories remaining in the distribution channel (see Notes 1 and 2 to our financial statements). Previous product liability accrued for Mirataz will be re-assessed prior to the end of 2020 to determine if such liability is still necessary. To-date we did not have any product returns. We did not record an allowance for doubtful accounts as our analysis did not uncover any collection risks. Cost of Product Revenues Cost of product revenues consists primarily of the cost of direct materials, direct labor and overhead costs associated with manufacturing, inbound shipping and other third-party logistics costs. As a result of the sale of Mirataz, we determined that the remaining Mirataz product not included in the sale of transferred assets toDechra did not have any future use. Accordingly, we wrote-off approximately$3,494,000 Mirataz inventory upon the signing of the Asset Purchase Agreement onMarch 16, 2020 , due to the transition to proprietary Dechra brand labelling.
Contract Manufacturing Costs
Contract manufacturing costs consist primarily of the cost of direct materials, direct labor and overhead costs associated with manufacturing, rent, facility costs and related machinery depreciation. Research and Development Expense All costs of research and development are expensed in the period incurred. Research and development costs consist primarily of salaries and related expenses for personnel, stock-based compensation expense, fees paid to consultants, outside service providers, professional services, travel costs and materials used in clinical trials and research and development. We typically use our employee and infrastructure resources across multiple development programs. 32 -------------------------------------------------------------------------------- Table of Contents Research and development expense was as follows for the periods indicated (in thousands, except for percentages): Three months ended September Nine months ended September 30, % 30, % 2020 2019 Change 2020 2019 Change Payroll and related$ 2,108 $ 2,954 (29)%$ 8,730 $ 9,309 (6)% Consulting 203 627 (68)% 579 2,147 (73)% Field trial costs, including materials 472 1,559 (70)% 2,108 2,967 (29)% Biologics development and supplies 2,409 608 296% 5,200 2,077 150% Stock-based compensation 434 475 (9)% 1,496 1,408 6% Other 1,761 1,067 65% 5,539 3,268 69%$ 7,387 $ 7,290 1%$ 23,652 $ 21,176 12%
During the three and nine months ended
Research and development expenses for the three months endedSeptember 30, 2020 , increased by 1% to$7,387,000 compared with$7,290,000 for the same period in 2019. The$97,000 increase was primarily due to the inclusion of expenses from theKansas facility as it began to manufacture clinical trial material offset by lower costs as we stopped small molecule development and prioritize our focus on late stage biologic candidates. Prior to 2020, construction and commissioning expenditures associated with theKansas facility had been categorized as general and administrative expenses. Outsourced research and development expenses related to KIND-510a, KIND-014 and other product development programs for three months endedSeptember 30, 2020 were$447,000 ,$73,000 , and$46,000 , respectively. Outsourced research and development expense consists primarily of costs related to CMC, clinical trial costs and consulting. Research and development expenses for the nine months endedSeptember 30, 2020 , increased by 12% to$23,652,000 compared with$21,176,000 for the same period in 2019. The$2,476,000 increase was primarily due to the inclusion of expenses from theKansas facility as it began to manufacture clinical trial material offset by lower costs as we stopped small molecule development and prioritize our focus on late stage biologic candidates. Prior to 2020, construction and commissioning expenditures associated with theKansas facility had been categorized as general and administrative expenses. Outsourced research and development expenses related to KIND-510a, KIND-014, and other product development programs for nine months endedSeptember 30, 2020 were$1,000,000 ,$405,000 ,$795,000 , respectively. Outsourced research and development expense consists primarily of costs related to CMC, clinical trial costs and consulting. We expect research and development expense to decrease for the rest of the year due to our restructuring and prioritizing our most attractive late stage programs to reduce our expenses to best position the company for success. Due to the inherently unpredictable nature of our development, we cannot reasonably estimate or predict the nature, specific timing or estimated costs of the efforts that will be necessary to complete the development of our product candidates. 33 -------------------------------------------------------------------------------- Table of Contents Selling, General and Administrative Expense Selling, general and administrative expense was as follows for the periods indicated (in thousands, except for percentages): Three months ended September Nine months ended September 30, % 30, % 2020 2019 Change 2020 2019 Change Payroll and related$ 1,072 $ 3,557 (70)%$ 5,590 $ 11,415 (51)% Consulting, legal and professional services 1,014 905 12% 3,550 2,493 42% Stock-based compensation 1,660 1,351 23% 4,585 4,180 10% Corporate and marketing expenses 419 1,178 (64)% 2,295 3,953 (42)% Other 533 2,391 (78)% 2,656 6,307 (58)%$ 4,698 $ 9,382 (50)%$ 18,676 $ 28,348 (34)% Selling, general and administrative expenses for the three and nine months endedSeptember 30, 2020 decreased by 50% to$4,698,000 and 34% to$18,676,000 , when compared to the same periods in 2019. The$9,672,000 year-over-year decrease was mainly due to the re-categorization ofKansas plant expenditures as research and development expenses and lower payroll and related expenses as a result of the elimination of our companion animal sales force, offset by higher legal fees. We expect selling, general and administrative expense to decrease going forward due to the restructuring and elimination of our companion animal sales force. We plan to rely more on a partnership-based model for commercialization whereby our pipeline assets are partnered with larger commercial partners that can maximize product opportunity in return for upfront payments, contingent milestones, and royalties on future sales. Restructuring costs We recorded restructuring charges of$0.3 million and$4.2 million for three and nine months endedSeptember 30, 2020 . The restructuring charge of$1.7 million in the first quarter of 2020 was the result of the elimination of 53 positions due to the strategic realignment of our business model whereby we became a biologics-only company while stopping small molecule development. All charges pertaining to this restructuring have been paid. The restructuring charge of$2.3 million in the second quarter was the result of prioritizing our most attractive late stage programs and substantially reducing our expenses to best position the company for success with the new business model. Another 24 employees were impacted by the restructuring and all restructuring charges have been paid by the third quarter of 2020. We further eliminated another 5 positions in the third quarter and incurred a restructuring charge of approximately$0.3 million related to severance payments and health care benefits, exclusive of stock compensation. We do no anticipate any further reductions in the foreseeable future.
Interest and Other Income, Net
(In thousands) Three months ended Nine months ended September September 30, 30, 2020 2019 Change 2020 2019 Change Interest and other (expense) income, net$ (554) $ 414 $ (968) $ (1,292) $ 1,414 $ (2,706) The decrease of approximately$968,000 in the three months endedSeptember 30, 2020 compared to the same period in 2019 was the result of$359,000 lower interest income due to lower interest rate and cash balance. In addition, the change was further impacted by interest expense of approximately$451,000 and other loan amendment and amortization fees of approximately$88,000 . There were no borrowing expenses in the same quarter of 2019.
The decrease of approximately
34 -------------------------------------------------------------------------------- Table of Contents addition, the change was further impacted by interest expense of approximately$1,351,000 , and other loan amendment and amortization fees of approximately$375,000 . There were no borrowing expenses in the same periods of 2019. Income Taxes We have historically incurred operating losses and maintain a full valuation allowance against our net deferred tax assets. Our management has evaluated the factors bearing upon the realizability of our deferred tax assets, which are comprised principally of net operating loss carryforwards and concluded that, due to the uncertainty of realizing any tax benefits as ofSeptember 30, 2020 , a valuation allowance was necessary to fully offset our deferred tax assets.
Liquidity and Capital Resources
We have incurred losses and negative cash flows from operations since our inception inSeptember 2012 throughSeptember 30, 2020 . As ofSeptember 30, 2020 , we had an accumulated deficit of$234.0 million . Since inception and throughSeptember 30, 2020 , we raised approximately$269.5 million in net proceeds. OnSeptember 30, 2019 , we entered into the Loan Agreement with the Lenders. The Lenders have agreed to make available to us an aggregate principal amount of up to$50.0 million under the Loan Agreement. OnSeptember 30, 2019 , we received the first loan tranche of$19.2 million , net of debt issuance costs. An additional$30 million will be available in two tranches at our option, subject to certain conditions. As ofSeptember 30, 2020 , we had cash, cash equivalents and investments of$66.8 million . We believe that our cash, cash equivalents and investments along with the net reduction in our workforce, remaining proceeds from the Mirataz sale, and revenues from royalties and contract manufacturing will be sufficient to fund our planned operations through mid-2022. In addition, the potential additional draw down of$30 million from our Loan Agreement, which is contingent on the achievement of certain milestones, and ourApril 8, 2020 ATM facility will provide us with access to additional cash and extend our runway, if required. Cash Flows The following table summarizes our cash flows for the periods set forth below: Nine months ended September 30, 2020 2019 (In thousands) Net cash used in operating activities$ (3,297) $ (42,647) Net cash provided by (used in) investing activities $ 4,503$ (37,680) Net cash (used in) provided by financing activities $ (578)$ 63,189 Net cash used in operating activities During the nine months endedSeptember 30, 2020 , net cash used in operating activities was$3,297,000 . The net loss of$10,898,000 for the nine months endedSeptember 30, 2020 included non-cash charges of$6,081,000 for stock-based compensation expense,$3,473,000 for depreciation and amortization,$259,000 for amortization of the debt discount of long-term loan,$3,494,000 for Mirataz finished goods write-off related toDechra asset purchase,$54,000 loss on disposal of property and equipment, and partially offset by$113,000 for the amortization of discount on marketable securities. Net cash used in operating activities was further increased by net changes in operating assets and liabilities of$5,647,000 . During the nine months endedSeptember 30, 2019 , net cash used in operating activities was$42,647,000 . The net loss of$45,655,000 for the nine months endedSeptember 30, 2019 included non-cash charges of$5,588,000 for stock-based compensation expenses,$61,000 for shares issued for consulting services,$1,761,000 for depreciation and amortization,$134,000 loss on disposal of property and equipment, and partially offset by$419,000 for the amortization of premium on marketable securities. Net cash used in operating activities was further increased by net changes in operating assets and liabilities of$4,117,000 . 35 -------------------------------------------------------------------------------- Table of Contents Net cash provided by (used in) investing activities During the nine months endedSeptember 30, 2020 , net cash provided by investing activities was$4,503,000 , which resulted from proceeds from maturities of marketable securities of$77,520,000 , offset by$70,059,000 related to purchases of marketable securities and$3,040,000 related to purchases of equipment. In addition, we also received proceeds of$82,000 from the sale of equipment. During the nine months endedSeptember 30, 2019 , net cash used in investing activities was$37,680,000 , due to proceeds from maturities of marketable securities of$55,678,000 and sales of investments of$2,999,000 , offset by the purchases of marketable securities of$89,079,000 and purchases of property and equipment of$7,281,000 . In addition, we also received proceeds of$3,000 from the sale of equipment. Net cash (used in) provided by financing activities During the nine months endedSeptember 30, 2020 , net cash used in financing activities of$578,000 was related to payment of$866,000 related to restricted stock awards and restricted stock units tax liability on net settlement, offset by proceeds of$288,000 from exercises of stock options and purchase of ESPP shares. During the nine months endedSeptember 30, 2019 , net cash provided by financing activities of$63,189,000 was related to net proceeds of$43,125,000 from the sale of common stock from a public offering, net proceeds of$19,189,000 from the loan payable, proceeds of$1,368,000 from the purchases of common stock through exercise of stock options and purchase of ESPP shares, offset by payment of$493,000 related to restricted stock awards tax liability on net settlement. Future Funding Requirements We anticipate that we will continue to incur losses for the next several years due to expenses relating to: •pivotal trials of our product candidates; •toxicology (target animal safety) studies for our product candidates; •biologic clinical material manufacturing; and •maintain the operations of the biologics manufacturing plant inKansas . We believe that our cash, cash equivalents and investments along with the net reduction in our workforce, remaining proceeds from the Mirataz sale, and revenues from royalties and contract manufacturing will be sufficient to fund our planned operations through mid-2022. In addition, the potential additional draw down of$30 million from our Loan Agreement, which is contingent on the achievement of certain milestones, and ourApril 8, 2020 ATM facility will provide us with access to additional cash and extend our runway, if required. However, our operating plan may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other sources, such as strategic collaborations. Such financing may result in dilution to stockholders, imposition of debt covenants and repayment obligations or other restrictions that may affect our business. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Our future capital requirements depend on many factors, including, but not limited to: •the scope, progress, results and costs of researching and developing our current or future product candidates; •the timing of, and the costs involved in, obtaining regulatory approvals for any of our current or future product candidates; •the number and characteristics of the product candidates we pursue; •the cost of manufacturing our current and future product candidates and any products we successfully commercialize, including the cost of internal biologics manufacturing capacity; •the cost of commercialization activities if any of our current or future product candidates are approved for sale, including marketing, sales and distribution costs; •the expenses needed to attract and retain skilled personnel; •the costs associated with being a public company; 36 -------------------------------------------------------------------------------- Table of Contents •our ability to establish and maintain strategic collaborations, licensing or other arrangements and the financial terms of such agreements; and •the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing possible patent claims, including litigation costs and the outcome of any such litigation. Since inception, we have not engaged in the use of any off-balance sheet arrangements, such as structured finance entities, special purpose entities or variable interest entities. Contractual Obligations We have non-cancelable operating leases for laboratory space inBurlingame, California with several amendments to expand the facility. InFebruary 2020 , we further amended non-cancelable operating leases for laboratory space inBurlingame, California for an expansion of an additional 2,260 square feet of laboratory space commencing onMay 1, 2020 and expiring onMay 31, 2025 . The total non-cancellable operating lease for the entire existing laboratory space is 13,736 square feet, expiringMay 31, 2025 . InAugust 2015 , we entered into a new non-cancelable operating lease for 3,126 square feet of office space inSan Diego, California and inJune 2019 , renewed the lease throughFebruary 2025 . Our headquarters office lease for 8,090 square feet of office space inBurlingame, California expiresNovember 30, 2020 . InSeptember 2020 , we renewed our headquarters for only 6,900 square feet of office space for another 3 years, expiringNovember 30, 2023 . InApril 2019 , we signed a short-term lease inBurlingame ("April 2019 lease"), consisting of 1,979 square feet of space throughApril 2020 . InMay 2019 , we signed another lease inBurlingame ("May 2019 lease"), consisting of 1,346 square feet of space throughApril 2022 . In addition, we have five equipment leases expiring through 2027. Under the operating leases we are obligated to make minimum lease payments as ofSeptember 30, 2020 totaling$4,464,000 throughAugust 2027 , the timing of which is described in more detail in the notes to the condensed consolidated financial statements.
Off-Balance Sheet Arrangements
As ofSeptember 30, 2020 , we did not have any material off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. Recently Issued Accounting Pronouncements InMarch 2020 , the FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848)", changes to the interbank offered rates (IBORs), and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR). The amendments provide optional expedients and exceptions for applyingU.S. GAAP to contracts that reference LIBOR expected to be discontinued because of reference rate reform. The expedients and exceptions do not apply to contract modifications made afterDecember 31, 2022 . The following optional expedients are permitted for contracts that are modified because of reference rate reform and that meet certain scope guidance: Modifications of contracts within the scope of Topics 470, Debt, should be accounted for by prospectively adjusting the effective interest rate. The amendments also permit an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. When elected, the optional expedients for contract modifications must be applied consistently for all contracts. It applies to all entities within the scope of the affected accounting guidance and will take effect as ofMarch 12, 2020 throughDecember 31, 2022 . We have one loan contract which references LIBOR rate. We have not modified the contract with our lenders yet. We are currently evaluating the new guidance and have not determined the impact this standard may have on our financial statements.
We do not believe there are any other recently issued standards not yet effective that will have a material impact on our financial statements when the standards become effective.
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