KINDRED BIOSCIENCES, INC. 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, the structure, timing and completion of the proposed Merger, any anticipated effects of the announcement, pendency or completion of the Merger on the value of KindredBio's stock for its stockholders, 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 related to 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 and uncertainty about the amount of revenue that we will receive from such agreements; 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 or if such party is unable or unwilling to satisfy its payment obligations under 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; the significant control over our business by our principal stockholders and management; our ability to complete the Merger; the expected timetable for completing the Merger; the effects of disruption caused by the Merger making it more difficult to maintain relationships with employees collaborators customers, vendors and other business partners; the risk that stockholder litigation in connection with the Merger may result in significant costs of defense, indemnification and liability; diversion of management's attention from ongoing business concerns; and other risks and uncertainties that may affect future results. 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, 2020 , which was filed with theSEC onMarch 16, 2021 , 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 28 -------------------------------------------------------------------------------- Table of Contents 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.
Overview
We are a biopharmaceutical company developing innovative biologics focused on saving and improving the lives of pets. Our mission is to bring to 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 dogs and cats. We believe that 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 biologics manufacturing capabilities and a broad intellectual property portfolio. 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, 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. InMarch 2020 , we sold Mirataz toDechra Limited for a cash purchase price of$43 million . 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. OnJune 15, 2021 , we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Elanco Animal Health Incorporated, anIndiana corporation ("Elanco"), andKnight Merger Sub, Inc. , aDelaware corporation and a wholly-owned subsidiary of Elanco. The Merger Agreement provides that, subject to the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with and into KindredBio (the "Merger"), with KindredBio surviving the Merger and becoming a wholly owned subsidiary of Elanco. Upon completion of the Merger, each share of KindredBio common stock that is issued and outstanding immediately prior to the effective time of the Merger (the "Effective Time") (other than certain excluded shares as described in the Merger Agreement) will automatically be converted into the right to receive$9.25 in cash, without interest (the "Merger Consideration"). The Merger Agreement contains representations, warranties and covenants of the parties customary for a transaction of this nature. Among other things, until the earlier of the termination of the Merger Agreement and the Effective Time, KindredBio has agreed to operate its business in all respects within 120 days from the date of the Merger Agreement, and in all material respects thereafter, in the ordinary course consistent with past practice and has agreed to certain other operating covenants, as set forth fully in the Merger Agreement. The Merger Agreement also prohibits KindredBio's solicitation of proposals relating to alternative transactions and restricts KindredBio's ability to participate in any discussions or negotiations with, or furnish nonpublic information to, any third party with respect to any such transaction, subject to certain limited exceptions. The completion of the Merger is subject to the satisfaction or waiver of certain conditions, including (i) requisite approval of the holders of KindredBio common stock; (ii) the absence of any law or order inthe United States or theEuropean Union prohibiting the Merger and (iii) the expiration or earlier termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (which waiting period expired onJuly 30, 2021 ). In addition, each of Elanco's and KindredBio's obligations to complete the Merger is subject to certain other conditions, including (a) the accuracy of the representations and warranties of the other party, subject to the standards set forth in the Merger Agreement, (b) compliance of the other party with its covenants in all material respects; and (c) with respect to Elanco's obligation to complete the Merger, the absence of a material adverse effect with respect to KindredBio.
Additional information about the Merger is set forth in the Company's Definitive
Proxy Statement on Schedule 14A filed with the
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Biologic Product Development Updates
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-31antibody 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 . Enrollment is on-going. 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-039
OnApril 20, 2021 , we unveiled positive results in a new long-acting interleukin (IL)-31 antibody program that integrates our novel half-life extension technology. Results from the pharmacokinetic study of the molecule demonstrated that the fully caninized, high-affinity antibody has up to a three-fold longer half-life compared to tirnovetmab. This extended half-life is expected to allow for up to three-fold longer interval between dosing.
KindredBio's half-life extension technology is intended to reduce dosing frequency, lower doses, and/or reduce cost of goods sold, while increasing patient convenience and compliance.
KIND-032
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 KIND-032 program is proceeding as expected with preparations underway for a pivotal study. 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 20 mm 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 30 -------------------------------------------------------------------------------- Table of Contents 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. InDecember 2020 , we announced an agreement granting Elanco exclusive global rights to KIND-030. Under the terms of the agreement, we received an upfront non-refundable payment of$500,000 , and will receive 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-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. 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. OnApril 28, 2021 , we announced that theUnited States Department of Agriculture (USDA) Center for Veterinary Biologics has accepted efficacy data to support the prophylactic indication for KIND-030. OnJune 2, 2021 we announced positive results from a pivotal efficacy study of KIND-030 in dogs infected by parvovirus. The primary endpoint was survival and the results showed 100% survival in the treated group versus 43% survival in the placebo group. The dogs did not receive any supportive care or other treatments. Results of the pivotal efficacy study for the treatment of established parvovirus infection were filed with theUnited States Department of Agriculture inJune 2021 . This submission is part of the overall project data package required for full approval, along with safety, manufacturing and additional data. Approval of KIND-030 is subject to regulatory risk and timelines, and there is no set review timeline at theUSDA Center for Veterinary Biologics . 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 do not receive the vaccine at all, or do not receive 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.
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 31 -------------------------------------------------------------------------------- Table of Contents 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. 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.
Manufacturing
We have constructed a Good Manufacturing Practice, or GMP, biologics manufacturing plant inBurlingame, CA which is fully commissioned. 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. InMay 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 which will extend our contract manufacturing activities through at least the end of 2021. InSeptember 2019 , we announced we have been selected by theNational Cancer Institute (NCI) as one of three contractors in response to the solicitation for the PREVENT Cancer Preclinical Drug Development Program where we are eligible to provide manufacturing, formulation and analytical serves to meet the needs of the PREVENT pipeline. InFebruary 2021 , we were awarded a$855,000 Task order for contract manufacturing and development work by the NCI. The contract is expected to run for 1 year or until we complete the planned work.
Funding
We are a biopharmaceutical company with two products approved for marketing and sale. OnApril 15, 2020 , we completed the sale of one of the products, Mirataz, toDechra . 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 theU.S. and Canadian territories. We have incurred significant net losses since our inception. We incurred cumulative net losses of$263,723,000 throughJune 30, 2021 . 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 Agreement ("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 . InJanuary 2021 , we sold an additional 1,456,497 shares, for total gross proceeds of approximately$7,059,000 . Net proceeds, after deducting underwriting discounts and commissions and offering expense, were approximately$6,876,000 . OnJanuary 15, 2021 , we entered into an amendment to the ATM. In accordance with the terms of the amended ATM, we may offer and sell shares of our common stock up to$24,366,000 . FromFebruary 3 , 32 -------------------------------------------------------------------------------- Table of Contents 2021 throughJune 30, 2021 , 4,190,985 shares were sold through the amended ATM, for total gross proceeds of approximately$20,466,000 . Net proceeds, after deducting underwriting discounts and commissions and offering expense, were approximately$19,939,000 . OnSeptember 30, 2019 , we entered into a Loan and Security Agreement (the "Loan Agreement") with Solar Capital Ltd., to make available to KindredBio an aggregate principal amount of up to$50 million under the Loan Agreement. The Loan Agreement provides for a term loan commitment of$50 million in three tranches: (1) a$20 million term A loan that was funded onSeptember 30, 2019 ; (2) a$15 million term B loan that was to be funded at our request, subject to certain conditions described in the Loan Agreement being satisfied, no later thanDecember 31, 2020 ; and (3) a$15 million term C loan that was to be funded at our request, subject to certain conditions described in the Loan Agreement being satisfied, on or beforeJune 30, 2021 . Each term loan has a maturity date ofSeptember 30, 2024 . We elected not to draw down on the$15 million term B loan before theDecember 31, 2020 deadline. We also elected not to draw down on the$15 million term C loan before theJune 30, 2021 deadline. Each term loan bears interest at a floating per annum rate equal to the one-month LIBOR rate (with a floor of 2.17%) plus 6.75%. We are permitted to make interest-only payments on each term loan throughOctober 31, 2021 . The entire debt facility will mature onSeptember 30, 2024 . As ofJune 30, 2021 , we had cash, cash equivalents and investments of$74,358,000 . Our sale of Mirataz toDechra was completed onApril 15, 2020 with total gross proceeds of$43 million , of which$38.7 million was received upon closing. Of the remaining$4.3 million ,$2.15 million was received inMay 2021 and the balance$2.15 million will be paid out 18 months after closing date, 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, to the extent permitted by the Merger Agreement. 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. 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, 2020 , which was filed with theSEC onMarch 16, 2021 . 33 -------------------------------------------------------------------------------- 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 is on accelerating our deep pipeline of late-stage biologics candidates in canine and feline markets and strengthening our strategic position by prioritizing our most attractive late stage programs and managing our expenses to best position the company for success. InMay 2020 , we entered into an agreement with Vaxart, Inc. for the manufacture of Vaxart's oral vaccine candidate for COVID-19. InOctober 2020 , we announced the expansion of our manufacturing agreement with Vaxart for COVID-19 and other vaccine candidates. We recorded contract manufacturing revenue based on the percentage completion of specific milestones for the quarter.
In
While our primary focus is on the development of our late-stage biologics candidates, we expect income from contract manufacturing to offset a portion of our operating expenses.
The following table summarizes the results of our operations for the periods indicated (in thousands):
Three months ended June 30, Six months ended June 30,
2021 2020 2021 2020
Revenues:
Net product revenues $ - $ 163 $ 227 $ 766
Partner royalty revenue 250 158 576 158
Contract manufacturing revenue 1,137 546 2,979 546
Revenue from asset sale 2,150 38,700 2,150 38,700
Total revenues 3,537 39,567 5,932 40,170
Operating costs and expenses:
Cost of product revenues (1) - 27 207 3,604
Contract manufacturing costs 639 336 1,022 336
Research and development 5,573 7,398 11,860 16,265
Selling, general and administrative 5,869 5,105 10,553 13,978
Restructuring costs - 2,288 - 3,964
Total operating costs and expenses 12,081 15,154 23,642 38,147
Income (loss) from operations (8,544) 24,413 (17,710) 2,023
Interest and other expenses, net (584) (367) (1,158) (738)
Net income (loss) $ (9,128) $ 24,046
(1) Includes
Revenues
We recorded$3.5 million and$5.9 million in total revenues in the three and six months endedJune 30, 2021 compared with$39.6 million and$40.2 million for the same period in 2020. The decrease in revenue was primarily due to the Mirataz asset sale of$38.7 million in the second quarter of 2020. 34 -------------------------------------------------------------------------------- Table of Contents Our net product revenue was generated entirely from sales withinthe United States . Product revenue was$227,000 for the six months endedJune 30, 2021 , the majority of which was from the sale of remaining Zimeta inventory toDechra as a result of the Distribution and Licensing Agreement with them. No product revenue was recorded in the second quarter of 2021. Revenue of$163,000 and$766,000 for the three and six months endedJune 30, 2020 , respectively, was mainly from Mirataz. Approximately 95% and 75% of our gross product revenues sold were to two and three distributors, respectively. Our partner royalty revenue for the three and six months endedJune 30, 2021 was$250,000 and$576,000 , respectively, resulting mainly fromDechra's net sales of Mirataz. Second quarter sales of Mirataz to distributors were lower quarter-over-quarter amid fluctuations in distributor ordering patterns. Inthe United States , sales of Mirataz from distributors to veterinary clinics were slightly ahead of the first quarter. The product was launched in theEuropean Union andUnited Kingdom at the end of the first quarter. Partner royalty revenue from Mirataz was$158,000 for the second quarter of 2020, which is when we first recorded partner royalty revenue. Our contract manufacturing revenue for the three and six months endedJune 30, 2021 was$1,137,000 and$2,979,000 , respectively. Our contract manufacturing with Vaxart, Inc. for the manufacture of their oral vaccine candidate for COVID-19 generated revenue of$960,000 and$2,760,000 for the three and six months endedJune 30, 2021 , respectively. The NCI contract manufacturing and development work commenced inFebruary 2021 and generated revenue of$177,000 and$219,000 for the same periods in 2021, respectively. The Vaxart contract manufacturing project which started in the second quarter of 2020 resulted in revenue of$546,000 .
In
Our accounts receivable from amounts billed for contract manufacturing services require 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. 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. For the six months endedJune 30, 2021 , cost of Zimeta product sales was$207,000 . The 8.8% gross margin was the result of an agreement to sell excess Zimeta inventory toDechra at an amount close to cost. Cost of product sales for the same period in 2020 was primarily due to the write-off of approximately$3.5 million in obsolete Mirataz inventory.
Contract Manufacturing Costs
Contract manufacturing costs of$639,000 and$1,022,000 for the three and six months endedJune 30, 2021 , respectively, consist primarily of the cost of direct materials, direct labor and overhead costs associated with manufacturing, rent, facility costs and related machinery depreciation. The contract manufacturing costs for Vaxart project were$479,000 and$824,000 for the three and six months endedJune 30, 2021 and contract manufacturing costs for NCI project were$160,000 and$198,000 for the same periods, respectively. Contract manufacturing for Vaxart commenced in the second quarter of 2020 with manufacturing costs of$336,000 .
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.
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Research and development expense was as follows for the periods indicated (in thousands, except for percentages):
Three months ended June 30, % Six months ended June 30, %
2021 2020 Change 2021 2020 Change
Payroll and related $ 2,009 $ 2,805 (28)% $ 4,283 $ 6,622 (35)%
Consulting 279 212 32% 340 376 (10)%
Field trial costs, including
materials 445 509 (13)% 1,334 1,636 (18)%
Biologics development and
supplies 906 1,376 (34)% 1,726 2,791 (38)%
Stock-based compensation 476 509 (6)% 912 1,062 (14)%
Other 1,458 1,987 (27)% 3,265 3,778 (14)%
$ 5,573 $ 7,398 (25)% $ 11,860 $ 16,265 (27)%
During the three and six months ended June 30, 2021 , research and development
expense related primarily to advancing the development of KIND-030, KIND-016 and
other early-stage biologic programs.
Research and development expenses for the three months ended June 30, 2021 ,
decreased by 25% to $5,573,000 compared with $7,398,000 for the same period in
2020. The $1,825,000 decrease was primarily due to lower costs across the board
as a result of prioritizing our most attractive late-stage programs for dogs and
cats and substantially reducing expenses to best position the company for
success. Outsourced research and development expenses related to KIND-030,
KIND-016 and other product development programs for the three months ended June
30, 2021 were $390,000 , $82,000 , and $124,000 , respectively.
Research and development expenses for the six months ended June 30, 2021 ,
decreased by 27% to $11,860,000 compared with $16,265,000 for the same period in
2020. The $4,405,000 decrease was primarily due to lower costs across the board
consistent with our decision to become a biologics-only company, discontinuing
small molecule development in favor of late-stage biologics programs for dogs
and cats. Outsourced research and development expenses related to KIND-030,
KIND-016 and other product development programs for six months ended June 30,
2021 were $1,099,000 , $102,000 , and $256,000 , respectively.
We expect research and development expense to increase for the rest of the year
due to the KIND-016 pivotal study and development of our canine atopic
dermatitis programs. 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.
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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 June 30, % Six months ended June 30, %
2021 2020 Change 2021 2020 Change
Payroll and related $ 873 $ 1,391 (37)% $ 1,893 $ 4,518 (58)%
Consulting, legal and
professional services 2,904 782 271% 3,588 2,536 41%
Stock-based compensation 1,042 1,414 (26)% 3,102 2,925 6%
Corporate and marketing expenses 587 613 (4)% 1,062 1,876 (43)%
Other 463 905 (49)% 908 2,123 (57)%
$ 5,869 $ 5,105 15% $ 10,553 $ 13,978 (25)%
Selling, general and administrative expenses for the three and six months ended
June 30, 2021 increased by 15% to $5,869,000 and decreased by 25% to
$10,553,000 , when compared to the same periods in 2020. The $764,000 increase in
the second quarter of 2021 was mainly due to the legal and professional fees
related to the Merger Agreement with Elanco. The $3,425,000 year-over-year
decrease was mainly due to the elimination of our companion animal sales force.
We expect general and administrative expense to increase in the third quarter
due to merger related expenses but decrease back to a normal level in the fourth
quarter upon the closing of the merger.
Restructuring costs
We did not record any restructuring charges for the three and six months ended
InMarch 2020 , we announced a strategic realignment of our business model whereby KindredBio becomes a biologics-only company focused on accelerating our deep pipeline of late-stage biologics candidates in canine and feline markets, while discontinuing small molecule development for these species. We announced that we planned to rely more on a partnership-based model for 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. Accordingly, the companion animal commercial infrastructure was substantially reduced. In connection with this strategic shift, we eliminated 53 positions, representing about one-third of our current 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. InJune 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 our 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 anticipate any further reductions in our workforce for the foreseeable future. 37
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Interest and Other Expense, Net
(In thousands)
Three months ended June 30, Six months ended June 30,
2021 2020 Change 2021 2020 Change
Interest and other expense, net
The decrease of approximately$420,000 in the six months endedJune 30, 2021 compared to the same period in 2020 was primarily due to$392,000 lower interest income from lower interest rate. 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 ofJune 30, 2021 , 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 throughJune 30, 2021 . As ofJune 30, 2021 , we had an accumulated deficit of$263.7 million . Since inception and throughJune 30, 2021 , we raised approximately$284.4 million in net proceeds. 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 . InJanuary 2021 , we sold another 1,456,497 shares, for total gross proceeds of approximately$7,059,000 . Net proceeds, after deducting underwriting discounts and commissions and offering expense, were approximately$6,876,000 . OnJanuary 15, 2021 , we entered into an amendment to the ATM. In accordance with the terms of the amended ATM, we may offer and sell shares of our common stock up to$24,366,000 . FromFebruary 3, 2021 throughJune 30, 2021 , 4,190,985 shares were sold through the amended ATM, for total gross proceeds of approximately$20,466,000 . Net proceeds, after deducting underwriting discounts and commissions and offering expense, were approximately$19,939,000 . OnSeptember 30, 2019 , we entered into a Loan and Security Agreement (the "Loan Agreement") with Solar Capital Ltd., to make available to KindredBio an aggregate principal amount of up to$50 million under the Loan Agreement. The Loan Agreement provides for a term loan commitment of$50 million in three tranches: (1) a$20 million term A loan that was funded onSeptember 30, 2019 ; (2) a$15 million term B loan that was to be funded at our request no later thanDecember 31, 2020 ; and (3) a$15 million term C loan that was to be funded at our request on or beforeJune 30, 2021 . Each term loan has a maturity date ofSeptember 30, 2024 . We elected not to draw down on the$15 million term B loan beforeDecember 31, 2020 deadline. We also elected not to draw down on the$15 million term C loan beforeJune 30, 2021 deadline. Each term loan bears interest at a floating per annum rate equal to the one-month LIBOR rate (with a floor of 2.17%) plus 6.75%. We are permitted to make interest-only payments on each term loan throughOctober 31, 2021 . The interest-only period can be extended by six months upon our satisfaction of the minimum liquidity requirements described in the Loan Agreement. Cash, cash equivalents and investments was$74.4 million as ofJune 30, 2021 . We believe that our cash, cash equivalents and investments, remaining proceeds from the Mirataz sale, and revenues from royalties and contract manufacturing will be sufficient to fund our planned operations to the fourth quarter of 2023. 38 -------------------------------------------------------------------------------- Table of Contents Cash Flows The following table summarizes our cash flows for the periods set forth below: Six months ended June 30, 2021 2020 (In thousands) Net cash (used in) provided by operating activities$ (12,050) $ 7,124 Net cash provided by investing activities $
20,174
Net cash (used in) provided by operating activities During the six months endedJune 30, 2021 , net cash used in operating activities was$12,050,000 . The net loss of$18,868,000 for the six months endedJune 30, 2021 included non-cash charges of$4,014,000 for stock-based compensation expense,$2,416,000 for depreciation and amortization,$257,000 for amortization of the debt discount of long-term loan, and further impacted by$103,000 for the amortization of discount on marketable securities. Net cash used in operating activities was improved by net changes in operating assets and liabilities of$28,000 . During the six months endedJune 30, 2020 , net cash provided in operating activities was$7,124,000 . The net income of$1,285,000 for the six months endedJune 30, 2020 included non-cash charges of$3,987,000 for stock-based compensation expenses,$2,260,000 for depreciation and amortization,$171,000 for amortization of the debt discount of long-term loan,$3,494,000 for Mirataz finished goods write-off related toDechra asset purchase, and partially offset by$156,000 for the amortization of premium on marketable securities and$17,000 gain on disposal of property and equipment. Net cash used in operating activities was further reduced by net changes in operating assets and liabilities of$3,900,000 . Net cash provided by investing activities During the six months endedJune 30, 2021 , net cash provided by investing activities was$20,174,000 , which resulted from proceeds from sales of investments of$2,996,000 and maturities of marketable securities of$49,386,000 , offset by$31,883,000 related to purchases of marketable securities and$325,000 related to purchases of equipment. During the six months endedJune 30, 2020 , net cash provided by investing activities was$4,196,000 , due to proceeds from maturities of marketable securities of$58,870,000 , offset by the purchases of marketable securities of$51,798,000 and purchases of property and equipment of$2,902,000 . In addition, we also received proceeds of$26,000 from the sale of equipment. Net cash provided by (used in) financing activities During the six months endedJune 30, 2021 , net cash provided by financing activities of$26,971,000 was related to net proceeds of$26,816,000 from the sale of common stock through our ATM, offset by payment of$507,000 related to restricted stock awards and restricted stock units tax liability on net settlement, increased by proceeds of$662,000 from exercises of stock options and purchase of ESPP shares. During the six months endedJune 30, 2020 , net cash used in financing activities of$408,000 was related to proceeds of$261,000 from the purchases of common stock through exercise of stock options and purchase of ESPP shares, offset by payment of$669,000 related to restricted stock awards and restricted stock units 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; 39 -------------------------------------------------------------------------------- Table of Contents •biologic clinical material manufacturing; and •maintain the operations of the biologics manufacturing plant inKansas . We believe that our cash, cash equivalents and investments, remaining proceeds from the Mirataz sale, and revenues from royalties and contract manufacturing will be sufficient to fund our planned operations to the fourth quarter of 2023. 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; •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 two office spaces and expanded laboratory space under which we are obligated to make minimum lease payments totaling$3,641,000 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$69,000 through 2027.
Off-Balance Sheet Arrangements
As of
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. 40 -------------------------------------------------------------------------------- Table of Contents 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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