KINDRED BIOSCIENCES, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section of this Annual Report for a discussion of important factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis or elsewhere in this Annual Report. 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 targets that have already demonstrated safety and efficacy in humans and to develop therapeutics based on these validated targets for pets, primarily dogs and cats. We believe this approach will lead to shorter development times and higher approval rates than pursuing new, non-validated targets. Our current portfolio includes over 20 product candidates in development, predominantly biologics. We also have state-of-the-art biologics manufacturing capabilities and a broad intellectual property portfolio. Our first product, Mirataz® 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, predominantly biologics, in various stages of development. We believe there are significant unmet medical needs for pets, and that the pet therapeutics segment of the animal health industry is likely to grow substantially as new therapeutics are identified, developed and marketed specifically for pets. Mirataz is the first and only transdermal medication specifically developed and FDA-approved for the management of weight loss in cats. Weight loss is a serious and potentially fatal condition that represents the leading cause of visits to the veterinarian for cats. Mirataz, which is formulated with the proprietary Accusorb™ technology, is applied topically to the cat's inner ear (pinna) once a day, providing a more attractive application route compared to oral administration. The product is classified as a weight gain drug and can be used in cats with various underlying diseases associated with unintended weight loss. Zimeta is the first injectable dipyrone product to receive FDA approval for use in horses. Dipyrone, the active ingredient in Zimeta, is a member of the non-steroidal anti-inflammatory drug (NSAID) class and has a centrally acting mechanism of action on the hypothalamus where fever originates and is regulated. 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 . TheEuropean Commission granted marketing authorization of Mirataz inDecember 2019 .Dechra , which is based in theUnited Kingdom , plans to launch Mirataz in theUK and theEuropean Union in 2021, and intends to conduct the necessary regulatory activities to achieve approvals in other key international markets. 51
--------------------------------------------------------------------------------
Table of Contents
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 most 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 was 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. InDecember 2020 , we entered into a Distribution and Licensing Agreement grantingDechra Veterinary Products, LLC , an exclusive license under our Patents and Marketing Authorizations to promote, market, sell and distribute Zimeta in theU.S. and Canadian territories, through channels of distribution permitted by applicable laws and regulations in the relevant countries forming part of the territory. We are responsible for the performance of the third party manufacturer for Zimeta, including the performance of all of the duties and including but not limited to, timely delivery of product meeting the applicable specifications. In consideration for the exclusive license and manufacturing services to be performed by us,Dechra will pay KindredBio a milestone payment upon achievement of certain sales milestone, a royalty fee and a price per unit of Zimeta. 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 Development Updates
On
KIND-016, Tirnovetmab (Interleukin-31)
InOctober 2018 , we announced positive topline results from our pilot laboratory effectiveness study of tirnovetmab, KIND-016, a fully caninized, high-affinity monoclonal antibody targeting interleukin-31 (IL-31), for the treatment of atopic dermatitis in dogs. In addition, we announced that theU.S. Patent and Trademark Office has issued a patent (Patent No. 10,093,731) for KindredBio's anti-IL31 antibody. InJuly 2019 , we reported positive topline results from a pilot field effectiveness study for our IL-31 antibody that confirmed the results from our pilot laboratory study. The manufacturing scale up process proceeded and the pivotal efficacy study of KIND-016 was initiated inDecember 2020 . Canine atopic dermatitis is an immune-mediated inflammatory skin condition in dogs and is the leading reason owners take their dog to the veterinarian. Atopic dermatitis is a large market, with the leading two products on the market selling over$900 million per year. We are pursuing a multi-pronged approach toward atopic dermatitis, with a portfolio of promising biologics. Our market research tells us there is strong demand for new biological treatments for pruritic dogs, with 70% of veterinarians, and a higher percentage of dermatologists, expressing a need for alternatives to current therapies.
KIND-032
52--------------------------------------------------------------------------------
Table of Contents
InDecember 2019 we announced the outcome of a positive pilot laboratory study of KIND-032, a fully caninized monoclonal antibody targeting interleukin-4 (IL-4) receptor, for the treatment of atopic dermatitis in dogs. In the study, 14 laboratory dogs with clinical signs consistent with atopic dermatitis were dosed with placebo or with KIND-032 at two different doses. The Canine Atopic Dermatitis Extent and Severity Index (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 IL-4 pathway is a key driver of the inflammation that underlies atopic dermatitis and several other allergic diseases. Unlike KIND-025, which binds to IL-4 and IL-13 circulating in blood, KIND-032 binds to the IL-4 receptor on the surface of immune cells. KIND-025 OnMarch 24, 2020 , we announced positive results from our pilot field efficacy study of KIND-025, a canine fusion protein targeting IL-4 and 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. We currently do not have plans to prioritize KIND-025 ahead of our other programs. KIND-030 InAugust 2019 , we announced positive results from our pilot efficacy study of KIND-030, a chimeric, high-affinity monoclonal antibody targeting canine parvovirus (CPV). This was a 12-dog study, of which 4 dogs were treated prophylactically and 2 dogs were treated after establishment of the infection. All treated dogs survived, compared to none in the applicable placebo group. The effect was seen in both prophylaxis setting, as well as in a treatment setting after establishment of infection. 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 is expected to complete in the second quarter of 2021. There is no set review timeline at theUnited States Department of Agriculture Center for Veterinary Biologics . Regulatory approval and review timeline are subject to the typical risks inherent in such a process. CPV is the most significant cause of viral enteritis in dogs, especially puppies, with mortality rates reportedly as high as 91% if untreated. Banfield Medical records report that at least 250,000 dogs are infected with parvoviruses each year, excluding emergency hospitals, shelters, specialty hospitals or undiagnosed cases. While there are vaccines available for CPV, they have to be administered multiple times and many puppies don't receive the vaccine at all, or don't get the complete series. This will not replace the need for vaccination; it may just change the timing of the vaccination post administration. There are currently no approved or unapproved treatments for CPV. Currently, owners spend up to thousands of dollars for supportive care for dogs infected with CPV. 53
--------------------------------------------------------------------------------
Table of Contents
InDecember 2020 , we announced an agreement granting Elanco Animal Health, Inc. ("Elanco") exclusive global rights to KIND-030. Under the terms of the agreement, KindredBio will receive an upfront payment of$500,000 , development milestone payments of up to$16 million upon achievement of certain development, regulatory and manufacturing targets, and sales milestones in an aggregate amount of up to$94 million payable throughout the term of the agreement. Furthermore, royalty payments are to range from the low to high teens. The agreement specifies that KindredBio will supply the licensed product to Elanco, and that Elanco will conduct the necessary regulatory activities to achieve approvals inEurope and other key international markets.
KIND-509
OnDecember 21, 2020 , we announced positive results from the pilot field efficacy study of our monoclonal antibody against tumor necrosis factor alpha (anti-TNF antibody) for canine inflammatory bowel disease (IBD). The study was a randomized, blinded, placebo-controlled pilot effectiveness study that enrolled 10 dogs diagnosed with IBD to assess the efficacy and safety of KindredBio's anti-TNF? antibody over a 4-week treatment period. The primary effectiveness variable for this exploratory study was reduction in Canine Inflammatory Bowel Disease Activity Index (CIBDAI) score, which was assessed at Screening and Days 0, 7, 14, 21 and 28. Complete remission, defined as ? 75% reduction in average post-dose CIBDAI score from baseline, was achieved in 75% of the anti-TNF? group compared to 17% in the placebo group. The treatment effect was early-onset and durable. At Day 7, the first post-dose visit, 75% of the anti-TNF? treated dogs showed ? 75% reduction of CIBDAI score from baseline, compared to 17% in the placebo group. Furthermore, 50% of the anti-TNF? treated dogs achieved and maintained 100% reduction of CIBDAI score from baseline throughout all post-dose visits, whereas none in the placebo group achieved the same result. IBD is a chronic disease of the gastrointestinal tract and can affect dogs at any age, but is more common in middle-aged and older dogs. 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.
KIND-510a
InJanuary 2019 , we announced positive topline results from our pilot field effectiveness study of KIND-510a, a long-acting feline recombinant erythropoietin being developed for the management of non-regenerative anemia in cats. It has been engineered by KindredBio to have a prolonged half-life compared to endogenous erythropoietin, a protein that regulates and stimulates production of red blood cells. The pivotal efficacy study for KIND-510a was initiated in the fourth quarter of 2019. OnNovember 25, 2020 , KindredBio made the decision to suspend the feline recombinant erythropoietin program following an adverse event. Patient safety is paramount to KindredBio. Given the impact of safety profile on the program's commercial value, and amid the continued rapid growth of the canine dermatitis market, the decision was made to redirect resources toward accelerating the Company's programs for canine atopic dermatitis. KindredBio maintains backup programs for its feline recombinant erythropoietin and may seek to develop these at a later date. Anemia is a common condition that is estimated to affect 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, are immunogenic in cats. KIND-511
KIND-511 is an anti-Tumor Necrosis Factor ("anti-TNF") treatment for newborn foals. Sick newborn foals, defined as sepsis score ? 11 or positive blood culture, are challenging, and difficult to treat and result in
54--------------------------------------------------------------------------------
Table of Contents
approximately 50% mortality. We have completed a pilot field study in sick or septic foals to assess safety and efficacy of anti-TNF monoclonal antibody, with positive results. By Kaplan-Meier analysis, the difference in survival between the control and placebo groups was statistically significant (p=0.0293). There is currently no FDA-approved therapy. We have placed this program on indefinite hold to focus on accelerating our late-stage biologic candidates in the canine and feline markets. In addition to the product candidates discussed above, we are in the early stages of development for multiple additional indications, including interleukin antibodies and canine checkpoint inhibitors, with the potential to attain approval for one or more products annually for several years. In all, we have over 20 programs for various indications for dogs and cats.
Equine Product Development Updates
We completed a strategic review of our equine candidates. InDecember 2020 , we entered into a Distribution and Licensing Agreement grantingDechra an exclusive license under our Patents and Marketing Authorizations to promote, market, sell and distribute Zimeta in the US and Canadian territories in return for a royalty on sales and milestone payment upon achievement of a certain sales milestone. We made the decision to discontinue the development of KIND-012 (dipyrone oral gel) and pause the development of KIND-014 to focus on accelerating our late-stage biologic candidates. 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, we have completed construction and commissioning of our biologics manufacturing lines in our manufacturing plant inElwood, Kansas in 2019. TheElwood facility includes approximately 180,000 square feet with clean rooms, utility, equipment, and related quality documentation suitable for biologics and small molecule manufacturing.
Funding
We are a commercial-stage company with two products approved for marketing and sale. We have incurred significant net losses since our inception. We incurred cumulative net losses of$244.9 million throughDecember 31, 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 throughDecember 2019 , we raised approximately$257.4 million in net proceeds, after deducting underwriting discounts and commissions and offering expenses. OnApril 8, 2020 , we entered into an At Market Offering ("ATM") whereby we may offer and sell shares of our common stock from time to time up to$25 million . ThroughDecember 31, 2020 , 59,211 shares were sold through the ATM, for total gross proceeds of approximately$298,000 . Net proceeds, after deducting underwriting discounts and commissions and offering expense, were approximately$201,000 . As ofDecember 31, 2020 , we had cash, cash equivalents and investments in available-for-sale securities of$59.9 million . For the foreseeable future, we expect to continue to incur losses, which will increase significantly from historical levels as we expand our product development activities, seek regulatory approvals for our product candidates and begin to commercialize 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. Arrangements with collaborators or others may require us to relinquish rights to certain of our technologies or product candidates. In addition, we may never successfully complete development of, obtain adequate patent protection for, obtain necessary regulatory approval, or achieve commercial viability for any of our biologic product candidates. If we are not able to raise additional capital on terms acceptable 55
--------------------------------------------------------------------------------
Table of Contents
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.
Financial Overview
Revenues
Our revenues consist of product revenue resulting from the sale of Mirataz for the management of weight loss in cats and Zimeta for the treatment of fever in horses. In addition, our revenues in 2020 also included the sale of our Mirataz asset, partner royalties, contract manufacturing and partner licensing revenue.
Cost of 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. 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 primarily consist of contracted development costs, manufacturing costs, salaries and related expenses for personnel, stock-based compensation expense, regulatory, outside service providers, professional and consulting services, travel costs and materials used in clinical trials and research and development.
We are currently pursuing over 10 indications. We typically use our employee and infrastructure resources across multiple development programs. We track outsourced development costs by development compound but do not allocate personnel or other internal costs related to development to specific programs or development compounds as these expenses are included in personnel costs and other internal costs.
Selling, General and Administrative Expense
Selling, general and administrative expense consists primarily of personnel costs, including salaries, related benefits and stock-based compensation for employees, consultants and directors. Selling, general and administrative expenses also include rent and other facilities costs, conference and sponsorship activities, travel costs, professional fees for legal, accounting and tax, information technology services, business development activities, costs associated with being a public company and other general and commercial business services. As announced in the strategic realignment of our business model onMarch 16, 2020 , KindredBio transitioned to 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. As a result of the sale of our Mirataz asset, our companion animal commercial infrastructure was substantially reduced. Furthermore, the Distribution and Licensing Agreement of Zimeta toDechra resulted in the dismantling our commercial infrastructure.
Interest and Other Income (Expenses), Net
Consist of interest earned on our cash, cash equivalents and short-term investments, interest expenses on our long-term loan and asset disposals.
Income Taxes
As ofDecember 31, 2020 , we had net operating loss carryforwards for federal and state income tax purposes of$211,817,000 and$117,203,000 , respectively, which will begin to expire in fiscal year 2032. The 56
--------------------------------------------------------------------------------
Table of Contents
Federal NOL generated after 2017 of$118,704,000 will carryforward indefinitely and be available to offset up to 80% of future taxable income each year. Our management has evaluated the factors bearing upon the realizability of our deferred tax assets, which are comprised principally of net operating loss carryforwards. Our management concluded that, due to the uncertainty of realizing any tax benefits as ofDecember 31, 2020 , a valuation allowance was necessary to fully offset our deferred tax assets.
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 consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States , orU.S. GAAP. The preparation of our 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. While our significant accounting policies are more fully described in Note 2 of the notes to our consolidated financial statements appearing elsewhere in this document, we believe that the estimates and assumptions involved in the following accounting policies may have the greatest potential impact on our consolidated financial statements. Revenue Recognition Our revenues consist of product revenues resulting from the sale of Mirataz and Zimeta, revenue from the sale of our Mirataz asset, the associated partner royalties, revenue from our contract manufacturing service and partner licensing revenue. In accordance with Accounting Standards Codification ("ASC") 606, we applied the following steps to recognize revenue that reflects the consideration to which we expect to be entitled to receive in exchange for the promised goods or services (See Note 2): 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 the performance obligations 5. Determine the satisfaction of performance obligation
Product Revenue
Our product revenues consist of sales of Mirataz and Zimeta. We account for a contract with a customer when there is a legally enforceable contract between us and our customer, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Our customers could either be distributors who subsequently resell our products to third parties such as veterinarians, clinics or animal hospitals, licensing partners or other third parties.
Revenue from the sale of our Mirataz asset
OnMarch 16, 2020 , we entered into an Asset Purchase Agreement to sell Mirataz toDechra for a cash purchase price of$43 million . OnApril 15, 2020 , we completed the sale of Mirataz toDechra and received payment of$38.7 million on the closing date. The remaining$4.3 million will be paid out of escrow beginning in 12 months assuming no escrow claims. We concluded our accounting treatment of the asset sale toDechra meets the scope of ASC Topic 610-20-15-2, "Gains and Losses from the Derecognition of Nonfinancial Assets". We considered our strategic realignment of our business model whereby we become a biologics-only company focused on accelerating our deep pipeline of late-stage biologics candidates in canine and feline markets. Accordingly, we plan to rely more on a partnership-based model for commercialization strategy whereby pipeline assets are partnered with larger 57
--------------------------------------------------------------------------------
Table of Contents
commercial partners that can maximize product opportunity in return for upfront payment, contingent milestones, and royalties on future sales. Based on the above evaluation in the aggregate, we concluded the proper presentation of the sale of Mirataz to be within operating income as part of revenue. This is presented as a separate line item and described as revenue from asset sale.
Partner Royalties
We recognize royalty revenue in connection with licenses granted under license and development arrangements with partners. Royalties are based upon a percentage of commercial sales of partnered products based on levels of net sales. These sales-based royalties, for which the license was deemed the predominant element to which the royalties relate, are estimated and recognized in the period in which the partners' commercial sales occur. The royalties are generally reported and payable to us within 45 to 60 days of the end of each calendar quarter in which the commercial sales are made. We base our estimates of royalties earned on actual sales information from our partners when available. If actual royalties received are different than amounts estimated, we would adjust the royalty revenue in the period in which the adjustment becomes known.
Contract Manufacturing Revenue
The manufacturing revenue stream generally represents revenue from the manufacturing of customer product(s). Under a manufacturing contract, a quantity of manufacturing runs is ordered and the product is manufactured according to the customer's specifications and typically only one performance obligation is included. Each manufacturing run represents a distinct service that is sold separately and has stand-alone value to the customer. The product(s) are manufactured exclusively for a specific customer and have no alternative use. The customer retains control of their product during the entire manufacturing process and can make changes to the process or specifications at their request. The customer and our project team typically have a timeline on each milestone and duration time. They also have an estimated start and finish date. When the project is moving forward, they constantly change to the actual date to track the project progress. The timing has been shared by both parties. This becomes the most important basis for our revenue recognition. Because of the timing effect of revenue recognition, billings and cash collections can be recorded into three different ways: billed trade receivables, contract assets (unbilled receivables), and contract liabilities (customer deposits and deferred revenue). Contract assets are recorded when our right to consideration is conditioned on something other than the passage of time. Contract assets are reclassified to trade receivables on the balance sheet when our rights become unconditional. Contract liabilities represent customer deposits and deferred revenue billed and/or received in advance of our fulfillment of performance obligations. Contract liabilities convert to revenue as we perform our obligations under the contract.
Partner Licensing Revenue
Partner licensing revenue consists of revenue that compensates us for services
performed, such as formulation, process development, and preparation of
pre-clinical and clinical drug product materials under research and development
arrangements with partners. Revenues related to research and development are
generally recognized as the related services or activities are performed using
the output method and in accordance with the contract terms. To the extent that
the agreements specify services are to be performed on a fixed basis, revenues
are
recognized consistent with the pattern of the work performed. In agreements that
specify milestones, we evaluate whether the milestones are considered probable
of being achieved and estimate the amount to be included in the transaction
price using the most likely amount method. If it is probable that a significant
revenue reversal would not occur, the value of the associated milestone is
recognized at a point in time. Non-refundable milestone payments related to
arrangements under which we have continuing performance obligations would be
deferred and recognized over the period of performance. Milestone payments that
are not within our control, such as submission for approval to regulators by a
partner or approvals from regulators, are not considered probable of being
achieved until those submissions are submitted by the customer or approvals are
received.
Product Returns
58--------------------------------------------------------------------------------
Table of Contents
Consistent with the industry practice, we generally offer customers a limited right of return of damaged or expired product that has been purchased directly from us. Our return policy generally allows customers to receive credit for expired products within 90 days after the product's expiration date. We estimate the amount of our product revenues that may be returned by our customers and record these estimates as a reduction of product revenues in the period the related product revenues are recognized, as well as within accrued liabilities, in the consolidated balance sheets.
Our contract manufacturing customer retains control of their product during the entire manufacturing process and can make changes to the process or specifications at their request. There were no product returns.
Fair Value Measurements
We invest our cash in money market funds, cash deposits and debt instruments of theU.S. government agency securities. In the current market environment, the assessment of the fair value of the debt securities can be difficult and subjective. Accounting Standards Codification, or ASC, 820, "Fair Value Measurements and Disclosure" standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following: Level 1 Quoted prices in active markets for identical assets
or liabilities;
Inputs other than Level 1 that are observable, either directly or indirectly, such
as quoted prices for similar assets or liabilities; quoted prices in markets that
Level 2 are not active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities; and
Unobservable inputs that are supported by little or no market activity and that
Level 3 are significant to the fair value of the assets or liabilities. The determination
of fair value for Level 3 instruments requires the most management judgment and
subjectivity.
Inventories
We value inventory at the lower of cost or net realizable value. We determine
the cost of inventory using the standard-cost method, which approximates actual
cost based on a first-in, first-out method. We analyze our inventory levels
quarterly and write down inventory subject to expire in excess of expected
requirements, or that has a cost basis in excess of its expected net realizable
value. These inventory related costs are recognized as cost of product revenues
on the accompanying consolidated statements of operations. Currently our
inventory consists of finished goods only.
Research and Development
As part of the process of preparing our consolidated financial statements, we
are required to estimate accrued research and development expenses. Examples of
estimated accrued expenses include fees paid to vendors and clinical sites in
connection with our pivotal studies, to CROs in connection with our toxicology
studies, and to contract manufacturers in connection with the production of API
and formulated drug.
We review new and open contracts and communicate with applicable internal and
vendor personnel to identify services that have been performed on our behalf and
estimate the level of service performed and the associated costs incurred for
the service when we have not yet been invoiced or otherwise notified of the
actual cost for accrued expenses. The majority of our service providers invoice
us monthly in arrears for services performed or as milestones are achieved in
relation to our contract manufacturers. We make estimates of our accrued
expenses as of each balance sheet date.
We base our accrued expenses related to pivotal studies on our estimates of the
services received and efforts expended pursuant to contracts with vendors, our
internal resources, and payments to clinical sites based on enrollment
projections. The financial terms of the vendor agreements are subject to
negotiation, vary from contract to contract and may result in uneven payment
flows. Payments under some of these contracts depend on factors such
59--------------------------------------------------------------------------------
Table of Contents
as the successful enrollment of animals and the completion of development milestones. We estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the related expense accrual accordingly on a prospective basis. If we do not identify costs that have been incurred or if we underestimate or overestimate the level of services performed or the costs of these services, our actual expenses could differ from our estimates. To date, we have not made any material adjustments to our estimates of accrued research and development expenses or the level of services performed in any reporting period presented. Stock-Based Compensation We measure stock-based awards at fair value on the date of grant and recognize the corresponding compensation expense of the awards, net of estimated forfeitures, over the requisite service periods, which correspond to the vesting periods of the awards. Generally, we issue stock-based awards with only service-based vesting conditions, and record compensation expense for these awards using the straight-line method. Our intention is to grant stock-based awards with exercise prices equivalent to the fair value of our common stock as of the date of grant. The fair value of each stock-based award is estimated using the Black-Scholes option-pricing model. The expected volatility is based on the historic volatility of our own stock. The expected terms of our awards have been determined utilizing the "simplified" method, since our historical experience for option grants is not relevant to our expectations for recent grants. The risk-free interest rate is determined by reference to theU.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero, based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future. See Note 10 in Notes to Consolidated Financial Statements for further information. Results of Operations The following table summarizes the results of our operations for the periods indicated: 60
--------------------------------------------------------------------------------
Table of Contents
(In thousands, except per share amounts) Years Ended December 31,
2020 2019 2018
Revenues:
Net product revenues $ 878 $ 4,256 $ 1,966
Revenue from asset sale 38,700 - -
Partner royalty revenue 535 - -
Contract manufacturing revenue 1,551 - -
Partner licensing revenue 500 - -
Total revenues 42,164 4,256 1,966
Operating costs and expenses
Cost of product revenues (1) 3,945 587 324
Contract manufacturing costs 681 - -
Research and development 31,281 28,310 26,399
Selling, general and administrative 21,979 37,926 26,499
Restructuring costs 4,246 - -
Total operating costs and expenses 62,132 66,823 53,222
Loss from operations (19,968) (62,567) (51,256)
Interest and other income (expenses), net (1,828) 1,178 1,566
Net loss (21,796) (61,389) (49,690)
Change in unrealized gains or losses on (1) 24 20
available-for-sale securities
Comprehensive loss $ (21,797) Net loss per share attributable to common$ (0.55) $ (1.59) $ (1.60) stockholders, basic and diluted
Weighted-average number of common shares outstanding, 39,289
38,657 31,001
basic and diluted
(1) Includes
Revenues
Our product revenues consist of sale of Mirataz and Zimeta, revenue from the sale of our Mirataz asset, the associated partner royalties, revenue from our contract manufacturing service and partner licensing revenue.
Product revenue
Our product revenues consist of sales of Mirataz and Zimeta. Also included in product sale is revenue derived from co-marketing products for our partners in conjunction with sales of Mirataz and Zimeta. Our net product revenue for the year endedDecember 31, 2020 decreased by 79.4% to$878,000 compared with$4,256,000 for the same period in 2019. The decrease is mainly due our sale of the Mirataz asset toDechra inApril 2020 compared with twelve months of Mirataz product sales in 2019. Net product revenue for Zimeta in 2020 was$27,000 compared with$127,000 in 2019, reflecting a downturn in equine events and transportation as a result of COVID-19. In conjunction with Mirataz and Zimeta, we also recorded$29,000 in revenue derived from co-marketing products for our partners, Butterfly Networks and Astaria Global in 2020.
Our product sale revenue for the year ended
61--------------------------------------------------------------------------------
Table of Contents
sales while Mirataz only became commercial available to veterinarians inthe United States inJuly 2018 . In addition, our second product, Zimeta™ (dipyrone injection) for the control of fever in horses was approved by the FDA and became commercially available inDecember 2019 .
As a result of our licensing agreements with
Revenue from asset sale Our revenue from the Mirataz asset sale toDechra for the year endedDecember 31, 2020 was$38.7 million . The remaining$4.3 million will be paid out of escrow beginning in 12 months assuming no escrow claims. There were no asset sales in 2019 or 2018. Partner royalties
Our partner royalty revenue for the year ended
Contract manufacturing revenue
On
Partner licensing revenue Our partner licensing revenue for the year endedDecember 31, 2020 was$0.5 million due to a non-refundable upfront payment from Elanco for the exclusive global rights to KIND-030. There were no partner licensing revenues in prior years. Cost of Revenues Our cost of product sales for the year endedDecember 31, 2020 increased by 572.1% to$3,945,000 compared with$587,000 for the same period in 2019. 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. The increase is mainly due to the$3.8 million finished goods write-off related to theDechra agreements signed in 2020, the majority of which is related to Mirataz. All remaining Mirataz products not included in the transferred assets toDechra due to the transition to proprietary Dechra brand labelling was written off. Our cost of product sales for the year endedDecember 31, 2019 increased by 81.2% to$587,000 compared with$324,000 for the same period in 2018. 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. The increase reflected a full year of Mirataz product sales in 2019. Our cost of contract manufacturing for the year endedDecember 31, 2020 was$681,000 . 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. We did not have any contract manufacturing costs in prior years.
Concentrations of credit risk
Our revenue was generated entirely from sales within
62--------------------------------------------------------------------------------
Table of Contents
Our accounts receivable from amounts billed for contract manufacturing services in 2020 is derived from one customer. The contract requires 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.
For the year ended
Product returns
Our return policy generally allows customers to receive credit for expired products within 90 days after the product's expiration date. We estimated product return liabilities of 3% for Zimeta of gross revenue using probability-weighted available industry data and data provided by our distributors such as the inventories remaining in the distribution channel. Adjustments will be made in the future if actual results vary from our estimates.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are stated at their carrying values, net of any allowances for doubtful accounts. Accounts receivable consist primarily of amounts due from distributors, our contract manufacturing customer, and licensing partner for which collection is probable based on the customer's intent and ability to pay. Receivables are evaluated for collection probability on a regular basis and an allowance for doubtful accounts is recorded, if necessary. We have no allowance for doubtful accounts as ofDecember 31, 2020 and 2019, as our analysis did not uncover any collection risks. 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.
Research and development expense was as follows for the periods indicated: (In thousands except percentages)
Years Ended December 31, Annual percent change
2020 2019 2018 2020/2019 2019/2018
Payroll and related $ 10,868 $ 12,646 $ 10,204 (14) % 24 %
Consulting 800 2,406 2,360 (67) 2
Field trial costs, including 3,097 4,015 3,915 (23) 3
materials
Biologics development and supplies 7,269 2,526 3,890 188 (35)
Stock-based compensation 1,883 1,848 1,746 2 6
Other 7,364 4,869 4,284 51 14
$ 31,281 $ 28,310 $ 26,399 10 % 7 %
During the year ended
Research and development expenses for the year endedDecember 31, 2020 increased by 10% to$31.3 million compared with$28.3 million for the same period in 2019. The 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 most 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 63
--------------------------------------------------------------------------------
Table of Contents
and administrative expenses. Outsourced research and development expense related to KIND-030, KIND-510a, KIND-014 and other product development programs for the year endedDecember 31, 2020 were$1.3 million ,$0.8 million ,$0.4 million and$0.9 million , respectively. Research and development expenses for the year endedDecember 31, 2019 increased by 7% to$28.3 million compared with$26.4 million for the same period in 2018. Payroll and related expenses increased by$2.4 million due to increase in headcount as we advance our biologics development and manufacturing programs. Higher regulatory and research fees, consulting, depreciation, rent as a result of expanded lab spaces and other facility costs also contributed to the increase in expenses, offset by lower non-GMP production and testing expenses. Outsourced research and development expense related to KIND-014, KIND-012, CAD programs, KIND-510a and other product development programs for the year endedDecember 31, 2019 were$1.7 million ,$0.6 million ,$0.5 million ,$0.4 million and$1.3 million , respectively. We expect research and development expense to decrease for the foreseeable future. While we expect biologics manufacturing expenses to increase due to the manufacture of KIND-016 and KIND-030 antibodies for our pivotal field studies, our excess manpower and capacity allow us to take on some contract manufacturing services thereby subsidizing the cost of our manufacturing facilities. Labor and associated benefits, supplies and facility expenses related to contract manufacturing services are recorded as cost of goods sold and would offset increases in our biologics manufacturing expenses, resulting in a net decrease in research and development expenses. Due to the inherently unpredictable nature of our development, we cannot reasonably estimate or predict the nature, specific timing or estimated costs of the efforts that will be necessary to complete the development of our product candidates. Selling, General and Administrative Expense The composition of general and administrative expense was as follows for the periods indicated: (In thousands except percentages) Years Ended December 31, Annual percent change 2020 2019 2018 2020/2019 2019/2018 Payroll and related$ 6,294 $ 15,385 $ 9,498 (59) % 62 % Consulting, professional and legal 4,115 3,523 3,561 17 (1)
fees
Stock-based compensation 5,704 5,509 4,531 4 22
Corporate and marketing expenses 2,705 5,022 4,420 (46) 14
Other 3,161 8,487 4,489 (63) 89
$ 21,979 $ 37,926 $ 26,499 (42) % 43 %
Selling, general and administrative expenses for the year ended December 31,
2020 decreased by 42% to $22.0 million compared with $37.9 million for the same
period in 2019. The $15.9 million year-over-year decrease was mainly due to the
re-categorization of Kansas plant expenditures as research and development
expenses, and lower payroll and related expenses including marketing expenses as
a result of the elimination of our companion animal sales force. The decrease
was offset by higher legal fees.
Selling, general and administrative expenses for the year ended December 31,
2019 increased by 43% to $37.9 million compared with $26.5 million for the same
period in 2018. Headcount increase was due to the expansion of our commercial
organization and administrative personnel to support the company's growth. Sales
and marketing expenses account for a big component of the increase. Higher
stock-based compensation expense also contributed to the increase.
We expect selling, general and administrative expense to decrease going forward
as a result of our transition to a partnership-focused commercialization
strategy whereby pipeline assets are out-licensed to larger commercial partners
that can maximize product opportunity in return for upfront payment, contingent
milestones, and royalties on future sales.
Restructuring Costs
64--------------------------------------------------------------------------------
Table of Contents
We recorded restructuring charges of approximately$4.2 million for the year endedDecember 31, 2020 . The restructuring charge of approximately$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 most small molecule development. All charges pertaining to this restructuring have been paid. The restructuring charge of approximately$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 not anticipate any further reductions in the foreseeable future. Interest and Other (Expenses) Income, Net (In thousands) Years Ended
2020 2019 2018
Interest and other (expenses) income, net $ (1,828) $ 1,178 $ 1,566
The decrease of approximately $3.0 million in 2020 compared to 2019 was the
result of $1.4 million lower interest income due to lower interest rate and cash
balance. In addition, the change of further impacted by interest expense and
amortization of loan issuance costs of $1.7 million .
The decrease of approximately $388,000 in 2019 compared to 2018 was mainly
caused by the borrowing on a loan, which incurred approximately $461,000 of
interest expenses. In addition, the change was further impacted by disposals of
fixed assets of approximately $212,000 , offset by an increase in interest income
of $339,000 from our investments.
Quarterly Result of Operations
The following table presents selected unaudited quarterly financial data for
each of the quarters in the years ended
65--------------------------------------------------------------------------------
Table of Contents
(In thousands, except per share amounts) 2020 2019 Quarter ended Dec. 31 Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31 Revenues: Net product revenues$ 96 $ 16 $ 163 $ 603 $ 1,401 $ 1,104 $ 1,236 $ 515 Revenue from asset sale - - 38,700 - - - - - Partner royalty revenue 122 255 158 - - - - - Contract manufacturing revenue 233 772 546 - - - - - Partner licensing revenue 500 - - - - - - - Total Revenues 951 1,043 39,567 603 1,401 1,104 1,236 515 Operating costs and expenses Cost of product revenues 336 5 27 3,577 187 139 169 92 Contract manufacturing costs 45 300 336 - - - - - Research and development 7,629 7,387 7,398 8,867 7,134 7,290 6,734 7,152 Selling, general and administrative 3,303 4,698 5,105 8,873 9,578 9,382 9,065 9,901 Restructuring costs - 282 2,288 1,676 - - - - Total operating costs and expenses 11,313 12,672 15,154 22,993 16,899 16,811 15,968 17,145 Profit (loss) from operations (10,362) (11,629) 24,413 (22,390) (15,498) (15,707) (14,732) (16,630) Interest and other income (expense), (536) (554) (367) (371) (236) 414 425 575 net Net profit (loss)$ (10,898) $ (12,183) $ 24,046 $ (22,761) $ (15,734) $ (15,293) $ (14,307) $ (16,055)
Net profit (loss) per share, basic(1)
$ (0.37) $ (0.42) Weighted-average number of common 39,415 39,312 39,240 39,186 38,999 38,940 38,887 37,786 shares outstanding, basic Net profit (loss) per share,$ (0.28) $ (0.31) $ 0.60 $ (0.58) $ (0.40) $ (0.39) $ (0.37) $ (0.42) diluted(1) Weighted-average number of common 39,415 39,312 40,086 39,186 38,999 38,940 38,887 37,786
shares outstanding, diluted
(1) Net profit (loss) per share for each quarter are calculated as a discrete period, the sum of the quarters may not equal the calculated full year amount.
Liquidity and Capital Resources We have incurred losses and negative cash flows from operations since our inception inSeptember 2012 . We incurred net losses of$21.8 million ,$61.4 million and$49.7 million for the years endedDecember 31, 2020 , 2019, and 2018, respectively. These losses have resulted primarily from costs incurred in research and development activities and selling, general and administrative costs associated with our operations. As ofDecember 31, 2020 , we had an accumulated deficit of$244.9 million . From our initial public offering inDecember 2013 throughDecember 2019 , we raised approximately$257.4 million in net proceeds, after deducting underwriting discounts and commissions and offering expenses. InApril 2020 , we entered into an At Market Offering ("ATM") whereby we may offer and sell shares of our common stock from time to time up to$25 million . ThroughDecember 31, 2020 , 59,211 shares were sold through the ATM, for total gross proceeds of approximately$298,000 . Net proceeds, after deducting underwriting discounts and commissions and offering expense, were approximately$201,000 . As ofDecember 31, 2020 , we had cash, cash equivalents and investments in available-for-sale securities of approximately$59.9 million . We believe our cash, cash equivalents and investments along with the net reduction in our workforce, remaining proceeds from the 66
--------------------------------------------------------------------------------
Table of Contents
Mirataz sale, and revenues from royalties, partner licensing and contract
manufacturing will be sufficient to fund our planned operations for at least
another 24 months. In addition, our ATM facility will provide us with access to
additional cash and extend our runway, if required.
The following table shows a summary of our cash flows for the periods set forth
below:
(In thousands) Years Ended December 31,
2020 2019 2018
Cash flows used in operating activities $ (9,857) $ (56,342) $ (45,035)
Cash flows provided by (used in) investing $ 5,773 $ (47,816) $ 16,604
activities
Cash flows (used in) provided by financing $ (282) $ 63,842 $ 49,920
activities
Net cash used in operating activities
During the year ended December 31, 2020 , net cash used in operating activities
was $9.9 million . Our net loss of $21.8 million included non-cash charges
primarily in the form of share-based compensation of $7.6 million , depreciation
expense of $4.7 million , amortization of the debt discount of long-term loan of
$348,000 , Mirataz and Zimeta finished goods write-off of $3.8 million , loss on
disposal of property and equipment of $56,000 , partially offset by discounts and
amortization of premiums on investments of $28,000 . The non-cash charges were
further impacted by changes in operating assets and liabilities that resulted in
approximately $4.5 million of cash used in operating activities.
During the year ended December 31, 2019 , net cash used in operating activities
was $56.3 million . Our net loss of $61.4 million included non-cash charges
primarily in the form of share-based compensation of $7.4 million , depreciation
expense of $2.5 million , amortization of the debt discount of long-term loan of
$84,000 , shares issued for consulting services of $61,000 , and loss on disposal
of property and equipment of $212,000 , partially offset by discounts and
amortization of premiums on investments of $513,000 . The non-cash charges were
partly impacted by changes in operating assets and liabilities that resulted in
approximately $4.7 million of cash provided by operating activities.
During the year ended December 31, 2018 , net cash used in operating activities
was $45.0 million . Our net loss of $49.7 million included non-cash charges
primarily in the form of share-based compensation of $6.3 million , depreciation
expense of $805,000 , loss on disposal of property and equipment of $34,000 ,
partially offset by discount of premiums on investments of $179,000 . The
non-cash charges were partly offset by changes in operating assets and
liabilities that resulted in $2.3 million of cash used in operating activities.
Net cash provided by (used in) investing activities
During the year ended
During the year endedDecember 31, 2019 , net cash used in investing activities was$47.8 million , which resulted from$39.4 million related to purchase of investments, net of the proceeds of sales and maturities of investments, further impacted by$9.7 million in purchases of property and equipment, of which$1.3 million is included in accounts payable and accrued liabilities atDecember 31, 2019 , also positively affected by sale of equipment of$5,000 . During the year endedDecember 31, 2018 , net cash provided by investing activities was$16.6 million , which resulted from$30.3 million related to the proceeds of sales and maturities of investments, net of purchases of investments, offset by$20.1 million in purchases of property and equipment, of which$6.2 million is included in accounts payable and accrued liabilities atDecember 31, 2018 , also positively affected by sale of equipment of$248,000 . 67
--------------------------------------------------------------------------------
Table of Contents
Net cash (used in) provided by financing activities During the year endedDecember 31, 2020 , net cash used in financing activities consisted of approximately$201,000 in net proceeds from the sale of common stock through an ATM and follow-on public offering, and approximately$383,000 from the exercise of stock options and purchase of ESPP shares, offset by payment of$866,000 related to restricted stock awards tax liability on net settlement. During the year endedDecember 31, 2019 , net cash provided by financing activities consisted of approximately$43.1 million in net proceeds from the sale of common stock through an ATM and follow-on public offering, net proceeds of$19.2 million from a loan agreement and approximately$2.0 million from the 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. During the year endedDecember 31, 2018 , net cash provided by net cash provided by financing activities consisted of approximately$49.2 million in net proceeds from the sale of common stock through an ATM and follow-on public offering, and approximately$1.0 million from stock option exercises and purchase of ESPP shares, offset by payment of$247,000 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 studies for our product candidates; and •biologics manufacturing. 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, partner licensing and contract manufacturing will be sufficient to fund our planned operations for at least another 24 months. In addition, 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 out-license, including cost of building internal biologics manufacturing capacity; •the expenses needed to attract and retain skilled personnel; •the costs associated with being a public company; •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 current and future patents, including litigation costs and the outcome of any such litigation.
Contractual Obligations
68--------------------------------------------------------------------------------
Table of Contents
We have non-cancelable operating leases for two office spaces and expanded laboratory space under which we are obligated to make minimum lease payments totaling$4.1 million throughMay 2025 , the timing of which is described in more detail in the notes to the consolidated financial statements. In addition, we have five operating leases for equipment under which we are obligated to make minimum lease payments totaling$81,000 through 2027. Off-Balance Sheet Arrangements 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. 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 ASC Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate. The amendment also permits 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 consolidated financial statements when the standards become effective.
69--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
